Eastman Chemical Company 2006 Annual Report on Form 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December
31, 2006
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OR
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[
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from ______________ to
______________
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Commission
file number 1-12626
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EASTMAN
CHEMICAL COMPANY
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(Exact
name of registrant as specified in its
charter)
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Delaware
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62-1539359
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
no.)
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200
South Wilcox Drive
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Kingsport,
Tennessee
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37662
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (423)
229-2000
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $0.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
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____________________________________________________________________________________________
PAGE
1 OF
128 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 125
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Yes
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No
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Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act.
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[X]
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Yes
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No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act.
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[X]
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Yes
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No
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Indicate
by check mark whether the registrant (1) has filed all reports required
to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days.
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[X]
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Yes
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No
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of
Regulation S-K is not contained herein, and will not be contained,
to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any
amendment to this Form 10-K.
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[X]
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Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of
the
Exchange Act.
Large
accelerated filer [X] Accelerated filer [ ] Non-accelerated filer
[
]
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Yes
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No
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Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Act).
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[X]
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The
aggregate market value (based upon the closing price on the New York Stock
Exchange on June 30, 2006) of the 83,230,422 shares of common equity held by
nonaffiliates as of December 31, 2006 was approximately $4,494,442,788, using
beneficial ownership rules adopted pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended, to exclude common stock that may be deemed
beneficially owned as of December 31, 2006 by Eastman Chemical Company’s
(“Eastman” or the “Company”) directors and executive officers and charitable
foundation, some of whom might not be held to be affiliates upon judicial
determination. A total of 83,637,623 shares of common stock of the registrant
were outstanding at December 31, 2006.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement relating to the 2007 Annual
Meeting of Stockholders (the "2007 Proxy Statement"), to be filed with the
Securities and Exchange Commission, are incorporated by reference in Part III,
Items 10 to 14 of this Annual Report on Form 10-K (the "Annual Report") as
indicated herein.
FORWARD-LOOKING
STATEMENTS
Certain
statements in this Annual Report are forward-looking in nature as defined in
the
Private Securities Litigation Reform Act of 1995. These statements, and other
written and oral forward-looking statements made by the Company from time to
time, may relate to, among other things, such matters as planned and expected
capacity increases and utilization; anticipated capital spending; expected
depreciation and amortization; environmental matters; legal proceedings;
exposure to, and effects of hedging of, raw material and energy costs and
foreign currencies; global and regional economic, political, and business
conditions; competition; growth opportunities; supply and demand, volume, price,
cost, margin, and sales; earnings, cash flow, dividends, and other expected
financial results and conditions; expectations, strategies, and plans for
individual assets and products, businesses, and segments, as well as for the
whole of Eastman Chemical Company; cash requirements and uses of available
cash;
financing plans; pension expenses and funding; credit ratings; anticipated
restructuring, divestiture, and consolidation activities; cost reduction and
control efforts and targets; integration of acquired businesses; strategic
initiatives and development, production, commercialization, and acceptance
of
new products, services and technologies and related costs; asset, business
and
product portfolio changes; and expected tax rates and net interest
costs.
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. Certain important factors
that could cause actual results to differ materially from those in the
forward-looking statements are included with such forward-looking statements
and
in Part II—Item 7—"Management's Discussion and Analysis of Financial Condition
and Results of Operations—Forward-Looking Statements and Risk Factors" of this
Annual Report on Form 10-K.
TABLE
OF
CONTENTS
PART
I
1.
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Business
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5
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1A.
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Risk
Factors
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23
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1B.
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Unresolved
Staff Comments
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23
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Executive
Officers of the Company
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24 |
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2.
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Properties
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25
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3.
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Legal
Proceedings
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26
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4.
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Submission
of Matters to a Vote of Security Holders
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27
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PART II
5.
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Market
for the Registrant's Common Stock, Related Stockholder Matters and
Issuer
Purchases of Equity Securities
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28
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6.
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Selected
Financial Data
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30
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7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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32
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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66
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8.
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Financial
Statements and Supplementary Data
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67
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9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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119
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9A.
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Controls
and Procedures
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119
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9B.
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Other
Information
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119
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PART
III
10.
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Directors,
Executive Officers and Corporate Governance
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120
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11.
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Executive
Compensation
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120
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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120
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13.
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Certain
Relationships, Related Transactions, and Director
Independence
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121
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14.
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Principal
Accounting Fees and Services
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121
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PART
IV
15.
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Exhibits
and Financial Statement Schedules
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122
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SIGNATURES
PART
I
CORPORATE
OVERVIEW
Eastman
Chemical Company ("Eastman" or the "Company") is a global chemical company
which
manufactures and sells a broad portfolio of chemicals, plastics, and fibers.
Eastman began business in 1920 for the purpose of producing chemicals for
Eastman Kodak Company's photographic business and became a public company,
incorporated in Delaware, as of December 31, 1993. Eastman has 16 manufacturing
sites in 10 countries that supply chemicals, plastics, and fibers products
to
customers throughout the world. The Company's headquarters and largest
manufacturing site are located in Kingsport, Tennessee.
In
2006,
the Company had sales revenue of $7.5 billion, operating earnings of $640
million, and net earnings of $409 million. Earnings per diluted share were
$4.91
in 2006. Included in 2006 operating earnings were accelerated depreciation
related to restructuring decisions of $10 million, asset impairments and
restructuring charges of $101 million and other operating income of $68 million.
The
Company’s products and operations are managed and reported in five operating
segments: the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI")
segment, the Fibers segment, the Performance Chemicals and Intermediates ("PCI")
segment, the Performance Polymers segment and the Specialty Plastics ("SP")
segment. A segment is determined primarily by the customer markets in which
it
sells its products and services. For additional information related to the
Company’s operating segments, see Note 21 "Segment Information" to the Company’s
consolidated financial statements in Part II, Item 8 of this 2006 Annual Report
on Form 10K.
In
addition to the segments, the Company manages certain costs and initiatives
at
the corporate level including certain research and development costs not
allocated to any one operating segment. Coal gasification, including chemicals
from coal, is one of the more significant of these corporate
initiatives.
Eastman's
management believes that the Company is well-positioned for sustained success
both in the near-term and the long-term. Eastman's objective is to leverage
its
heritage of expertise and innovation in acetyl, polyester, and olefins
chemistries to drive growth, meet increasing demand and create new opportunities
for the Company's products in key markets.
· |
The
Company expects continued strong and steady financial performance
from its
solid base of businesses in the Fibers, CASPI and SP segments, and
growth
of the SP segment's business through introduction by Eastman of a
new
family of copolyesters to be commercially available by the end of
2007.
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· |
Through
innovation and strategic actions, Eastman expects to substantially
improve
the profitability of its polyethylene terephthalate ("PET") polymers
business by the second half of
2008.
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· |
By
leveraging its expertise in coal gasification, Eastman expects over
time
to increase the volume of products derived from coal as a raw material
to
approximately 50 percent, from approximately 20 percent, thereby
providing
the Company with a significant cost advantage.
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To
better
focus on its core strengths, the Company divested a portion of its product
portfolio in the fourth quarter 2006. The
Company sold its Batesville, Arkansas manufacturing facility and related assets
in the PCI segment and its polyethylene ("PE") related assets in the Performance
Polymers and CASPI segments. In 2006, these divested product lines had sales
revenue of $811 million and operating earnings of $124 million.
Manufacturing
Streams
As
stated
above, Eastman's objective is to leverage its heritage of expertise and
innovation in acetyl, polyester, and olefins chemistries to drive growth in
key
markets including packaging, tobacco, durable goods, building and construction,
and others. For each of these chemistries, Eastman has developed a combination
of assets and technologies that are operated within three manufacturing
"streams".
· |
In
the acetyl stream, the Company begins with high sulfur coal which
is then
gasified in its coal gasification facility. The resulting synthesis
gas is
converted into a number of chemicals including methanol, methyl acetate,
acetic acid and acetic anhydride. These chemicals are used in products
throughout the Company including acetate tow, acetate yarn and cellulose
esters. The Company's ability to use coal is a competitive advantage
for
raw materials and energy. The Company is investigating opportunities
to
further leverage its coal-based process know-how in a corporate initiative
referred to as "chemicals from coal", with the objective of increasing
product volume derived from coal gasification-based raw materials
versus
crude oil to enable Eastman to achieve lower, more stable costs.
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· |
In
the polyester stream, the Company begins with purchased paraxylene
and
produces purified terephthalic acid ("PTA") and dimethyl terephthalate
("DMT") while most of its polyester competitors start with PTA and
DMT.
The Company also purchases PTA for use at some of its facilities
outside
the U.S. PTA or DMT is then reacted with ethylene glycol, which the
Company both makes and purchases, along with other raw materials
(some of
which the Company makes and are proprietary) to produce PET and
copolyesters. This backward integration of its polyester manufacturing
provides several competitive advantages. For PET, this gives Eastman
a
cost advantage in a commodity market. For copolyester, Eastman adds
a
specialty monomer to provide clear, tough, chemically resistant product
characteristics. As a result, the Company's copolyesters can compete
with
materials such as polycarbonate and acrylic.
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· |
In
the olefins stream, the Company begins primarily with propane and
ethane,
which are then cracked at its facility in Longview, Texas into propylene
and ethylene. The company also purchases propylene for use at its
facilities outside the U.S. The propylene is used in oxo derivative
products, while the ethylene is used in oxo derivatives, acetaldehyde
and
ethylene glycol production and also sold to external
markets.
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The
following chart shows markets and significant Eastman products by segment and
manufacturing stream.
SEGMENT
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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KEY
PRODUCTS, MARKETS AND END USES
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CASPI
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X
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X
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Adhesives
(tape, label, nonwovens), paint and coatings (architectural, automotive,
industrial, and original equipment manufacturing
("OEM"))
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Fibers
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X
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Acetate
tow, apparel, home furnishings, and industrial applications
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PCI
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X
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X
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X
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Agrochemical,
automotive, beverages, nutrition, pharmaceuticals, coatings, medical
devices, toys, photographic and imaging, household products, polymers,
textiles, and consumer and industrials
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Performance
Polymers
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X
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X
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Beverage
and food packaging, custom-care and cosmetic packaging, health care
and
pharmaceutical uses, household products, and industrial packaging
applications
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SP
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X
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X
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Appliances,
store fixtures and displays, building and construction, electronic
packaging, medical devices and packaging, graphic arts, general purpose
packaging, personal care and cosmetics, food and beverage packaging,
performance films, tape and labels, fibers/nonwovens, photographic
and
optical films, and liquid crystal
displays
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Cyclicality
and Seasonality
Certain
segments, particularly the PCI and Performance Polymers segments, are impacted
by the cyclicality of key products and markets, while other segments are more
sensitive to global economic conditions. Supply and demand dynamics determine
profitability at different stages of cycles and global economic conditions
affect the length of each cycle. Despite some sensitivity to global economic
conditions, many of the products in the Fibers, CASPI and SP segments provide
a
more stable foundation of earnings.
The
Company's earnings and cash flows also typically have some seasonal
characteristics. The Company's earnings are typically greater in the second
and
third quarters, while cash from operations is usually greater in the fourth
quarter. Demand for CASPI segment products is typically stronger in the second
and third quarters due to the increased use of coatings products in the building
and construction industries, while demand is typically weaker during the winter
months because of seasonal construction downturns. The PCI segment typically
has
a weaker fourth quarter, due in part to a seasonal downturn in demand for
products used in certain building and construction and agricultural markets.
The
Performance Polymers segment typically has stronger demand for its PET polymers
for beverage container plastics during the second and early third quarters
due
to higher consumption of beverages in the Northern hemisphere, while demand
typically weakens during the late third and fourth quarters.
CASPI
SEGMENT
The
CASPI
segment manufactures liquid vehicles, additives, specialty polymers, and other
raw materials which are integral to the production of paints and coatings,
inks,
adhesives, and other formulated products. The CASPI segment focuses on producing
raw materials rather than finished products in order to develop long-term,
strategic relationships and achieve preferred supplier status with its
customers. Growth in these markets in North America and Europe typically
approximates economic growth in general, due to the wide variety of end uses
for
these applications and dependence on the economic conditions of the markets
for
durable goods, packaged goods, automobiles, and housing. However, higher growth
sub-markets exist within North America and Europe, driven by customers' growing
demands for performance requirements that are protective of the environment
and
meet increasingly stringent government regulation. For example, the coatings
and
adhesives industries are promoting products and technologies designed to reduce
air emissions. Growth in Asia and Latin America is substantially higher than
general economic growth, driven primarily by the increasing government
regulations in industrializing economies.
In
2006,
the CASPI segment had sales revenue of $1.4 billion, which represented 19
percent of Eastman’s total sales. In fourth quarter 2006, the Company sold the
CASPI segment's Epolene
polymer
businesses and related assets in conjunction with the sale of the polyethylene
business. Product lines associated with the divestiture had sales revenue of
$65
million in 2006.
Ø |
Coatings
Additives, Coalescents and
Solvents
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The
additives product lines consist of differentiated and proprietary products,
including cellulosic polymers which enhance the aesthetic appeal and improve
the
performance of industrial and automotive original equipment and refinish
coatings and inks. Coalescents include products such as Texanol
ester
alcohol which improves film formation and durability in architectural latex
paints, and chlorinated polyolefins which promote the adherence of paints and
coatings to plastic substrates. Solvents, which consist of ester, ketone, glycol
ether and alcohol solvents, are used in both paints and inks to maintain the
formulation in liquid form for ease of application. Environmental regulations
that impose limits on the emission of volatile organic compounds and hazardous
air pollutants continue to impact coatings formulations requiring compliant
coatings raw materials. Eastman’s coatings additives, coalescents and solvents
are currently used in compliant coatings. Additional products are under
development to meet the growing demand for waterborne and high solids coatings.
Coatings additives, coalescents and solvents comprised 60 percent of the CASPI
segment’s total sales for 2006.
Ø |
Adhesives
Raw Materials
|
The
adhesives product lines consist of hydrocarbon resins, rosin resins, resin
dispersions, and polymer raw materials. These products are sold to adhesive
formulators and tape and label manufacturers for use as raw materials in hot
melt and pressure sensitive adhesives and as binders in nonwoven products such
as disposable diapers, feminine products, and pre-saturated wipes. Eastman
is
one of the largest manufacturers of hydrogenated gum rosins used in adhesive
and
chewing gum applications. Eastman offers the broadest product portfolio of
raw
materials for the adhesives industry, ranking as the second largest global
tackifier supplier. Adhesives raw materials comprised 40 percent of the CASPI
segment’s total sales for 2006.
The
profitability of the CASPI segment products is sensitive to the global economy,
exchange rates, market trends and broader chemical cycles, particularly the
olefins cycle. The CASPI segment's specialty products, which include coatings
additives, coalescents, and selected hydrocarbon resins, are less sensitive
to
the olefins cycle due to their functional performance attributes. The cyclical
commodity products, which include commodity solvents and polymer raw materials,
are impacted by the olefins cycle. The Company leverages its proprietary
technologies, competitive cost structure and integrated manufacturing facilities
to maintain a strong competitive position throughout such cycles.
· |
Strategy
and Innovation
|
A
key
element of the CASPI segment growth strategy is the continued development of
innovative product offerings, building on proprietary technologies in
high-growth markets and regions that meet customers’ evolving needs and improve
the quality and performance of customers’ end products. Management believes that
its ability to leverage the CASPI segment's broad product line and Eastman's
research and development capabilities makes it uniquely capable of offering
a
broad array of solutions for new and emerging markets. The Company is pursuing
high value incremental expansions of existing CASPI manufacturing assets to
ensure that adequate capacity is available to meet the increasing demand for
the
segment's differentiated products.
The
CASPI
segment is focused on the expansion of the coatings and inks additives and
specialty solvents product offerings into other high-growth areas. These include
market areas with growth due to specific market trends and product developments,
such as high solids and water-based coatings and inks, as well as growth in
geographic areas due to the level and timing of industrial development. The
Company's global manufacturing presence positions the CASPI segment to take
advantage of areas of high industrial growth, particularly in Asia from its
facility in Singapore and joint venture operations in China.
The
CASPI
segment is also focused on the expansion of the adhesives raw materials product
offerings into high-growth markets and regions by leveraging applications
technology and increasing production capacity. The segment expects to take
advantage of growth in demand for specialty hydrocarbon resins through the
25
percent expansion of the Company's hydrogenated hydrocarbon resins manufacturing
capacity in Middelburg, the Netherlands, completed in the fourth quarter 2006,
and through the 30 percent expansion of hydrocarbon resin production capacity
at
Eastman's joint venture operation in Nanjing, China, completed in the second
quarter 2006. Additionally, the CASPI segment has increased profitability within
this group of product lines through cost reduction initiatives and leveraging
of
best manufacturing practices.
The
Company intends to continue to leverage its resources to strengthen its CASPI
segment innovation pipeline through improved market connect and the expanded
use
of proprietary products and technologies. Although CASPI segment sales and
application development are often specialized by end-use markets, developments
in technology may be successfully shared across multiple end-uses and markets.
As
a
result of the variety of end uses for its products, the customer base for the
CASPI segment is broad and diverse. This segment has more than 1,250 customers
around the world, and approximately 80 percent of its sales revenue in 2006
was
attributable to approximately 90 customers. The CASPI segment focuses on
establishing long-term, customer service-oriented relationships with its
strategic customers in order to become their preferred supplier and to leverage
these relationships to pursue sales opportunities in previously underserved
markets and to expand the scope of its value-added services. However, from
time
to time, customers decide to develop products internally or diversify their
sources of supply that had been provided by Eastman's CASPI segment. Growth
in
North American and European markets typically coincides with economic growth
in
general, due to the wide variety of end uses for these applications and their
dependence on the economic conditions of the markets for durable goods, packaged
goods, automobiles, and housing.
Competition
within the CASPI segment's markets varies widely depending on the specific
product or product group. Because of the depth and breadth of its product
offerings, Eastman does not believe any one of its competitors presently offers
all the products it manufactures within the CASPI segment. The Company’s major
competitors in the CASPI segment's markets include larger companies such as
Dow
Chemical Company ("Dow"), BASF and Exxon Mobil Corporation, which may have
greater financial and other resources than Eastman. Additionally, within each
CASPI segment product market the Company competes with other smaller, regionally
focused companies that may have advantages based upon location, local market
knowledge, manufacturing strength in a specific product, or other similar
factors. However, Eastman does not believe that any of its competitors has
a
dominant position within the CASPI segment's markets. The Company believes its
competitive advantages include its level of vertical integration, breadth of
product and technology offerings, low-cost manufacturing position, consistent
product quality, and process and market knowledge. In addition, Eastman attempts
to leverage its strong customer base and long-standing customer relationships
to
promote substantial recurring business, further strengthening its competitive
position.
FIBERS
SEGMENT
· Overview
The
Fibers segment manufactures Estron
acetate
tow and Estrobond
triacetin plasticizers, which are used primarily in cigarette filters;
Estron
natural
and Chromspun
solution-dyed acetate yarns for use in apparel, home furnishings and industrial
fabrics; and acetate flake and acetyl raw materials for other acetate fiber
producers. The Fibers segment is one of the world’s two largest suppliers of
acetate tow and has been a market leader in the manufacture and sale of acetate
tow since it began producing the product in the early 1950s. The Fibers segment
is the world’s largest producer of acetate yarn and has been in this business
for over 75 years. In 2006, the Fibers segment had sales revenue of $910
million, which represented 12 percent of Eastman's total sales.
The
Fibers segment’s long history and experience in the fibers markets are reflected
in its operating expertise, both within the Company and in support of its
customers’ processes. The Fibers segment’s expertise in internal operating
processes allows it to achieve a consistently high level of product quality,
a
differentiating factor in the industry. The Fibers segment's knowledge of the
industry and of customers' processes allows it to assist its customers in
maximizing their processing efficiencies, promoting repeat sales and mutually
beneficial, long-term customer relationships. The Fibers segment’s fully
integrated facilities from coal-based acetyl raw materials through acetate
tow
and yarn allow a reduction in dependence on petrochemicals from third parties.
Management believes the Fibers segment employs the only continuous flake
manufacturing process that can use multiple sources of wood pulp as raw
material. As a result, the segment has qualified all major high-purity wood
pulp
suppliers that make pulp suitable for acetate fibers. Despite the continuing
consolidation of pulp suppliers, the Fibers segment has dependable sources
of
pulp supply. The Fibers segment management believes that these factors combine
to make it an industry leader in reliability of supply and cost
position.
In
addition to the cost advantage of being coal-based, the Fibers segment believes
its competitive strengths include high-quality products, technical expertise,
large scale vertically-integrated processes, reliability of supply, reputation
for excellent technical and commercial customer service, and a strong customer
base characterized by long-term customer relationships. The Fibers segment
is
capitalizing and building on these strengths to improve its strategic position.
The
Fibers segment manufactures acetate tow under the Estron
trademark
according to a wide variety of customer specifications, primarily for use in
the
manufacture of cigarette filters. World-wide demand for acetate tow is expected
to increase by approximately 3 percent per year through 2010.
The
Fibers segment manufactures acetate filament yarn under the Estron
and
Chromspun
trademarks
in a wide variety of specifications. Consisting of pure cellulose acetate,
Estron
acetate
yarn is available in bright and dull luster and is suitable for subsequent
dyeing in the fabric form. Chromspun
acetate
yarn is solution-dyed in the manufacturing process and is available in more
than
20 colors. These products are used in fabrics for apparel, home furnishings,
and
industrial applications. From a retail customer’s perspective, garments
containing acetate yarn are noted for their rich colors, silky feel, supple
drape, breathability, and comfort. World-wide demand for acetate yarn is
expected to continue to be negatively affected by lower-priced substitute
materials.
Ø |
Acetyl
Chemical Products
|
Acetyl
chemicals products sold primarily to other acetate fiber producers include
acetate flake, acetylation-grade acetic acid, and acetic anhydride. In addition,
the Fibers segment markets acetyl-based triacetin plasticizers under the
Estrobond
trademark,
generally for use by cigarette manufacturers as a bonding agent in cigarette
filters.
· |
Strategy
and Innovation
|
In
the
Fibers segment, Eastman is leveraging its strong customer relationships and
knowledge of the industry to identify growth options.
In
September 2006, the Company announced a 60 percent capacity expansion of acetate
tow at its Workington, England site with a targeted completion date in mid-2008.
The location of this site will serve existing customers in Western Europe and
the growing demand in Eastern Europe. The acetate flake for the capacity
expansion will be sourced from existing flake capacity in Kingsport,
Tennessee.
The
Company is also considering the construction of new acetate tow capacity in
Asia, a major growth region. The Company would likely supply acetate flake
for
this expansion from its Kingsport, Tennessee site.
|
Ø
|
Continue
to Capitalize on Fiber Technology
Expertise
|
The
Fibers segment intends to continue to make use of its capabilities in fibers
technology to maintain a strong focus on incremental product and process
improvements, with the goals of meeting customers' evolving needs and improving
the segment's manufacturing process efficiencies.
Ø |
Maintain
Cost-Effective Operations and Consistent Cash Flows and
Earnings
|
The
Fibers segment expects to continue to operate in a cost effective manner,
capitalizing on its scale and vertical integration, and to make further
productivity and efficiency improvements through continued investments in
research and development. The Company plans to reinvest in the Fibers business
to sustain consistently strong earnings and cash flows.
Ø |
Research
and Development
|
Research
and development efforts for the Fibers
segment are primarily focused on incremental process and product improvements,
as well as cost reduction, with the objectives of increasing sales and reducing
costs. Recent achievements have included fiber product advancements that allow
improved processability on customers’ equipment and improved packaging designs.
The Fibers segment also engages in research to assist acetate tow customers
in
the effective use of the segment's products and in the customers’ product
development efforts.
The
customer base in the Fibers segment is relatively concentrated, consisting
of
approximately 175 companies in the tobacco and textile industries, located
in
all regions of the world. The largest 20 customers within the Fibers segment
include multinational as well as regional cigarette producers, fabric
manufacturers and other acetate fiber producers. These top 20 customers
accounted for about 80 percent of the segment’s total sales revenue in 2006. The
segment maintains a strong position in acetate tow imports into China, one
of
the largest and fastest growing markets in the world.
· Competition
Competitors
in the fibers market for acetate tow include one global competitor, Celanese
Corporation ("Celanese"); three multi-regional competitors, Acetate Products
Ltd. ("Acordis"), Rhodia S.A. and Daicel Chemical Industries Ltd ("Daicel").;
and two regional competitors, SK
Chemicals Co. ("SK"), Ltd. and Mitsubishi Rayon Co., Ltd. ("Mitsubishi Rayon").
Some consolidation is ongoing within the acetate fiber industry with the pending
acquisition of Acordis by Celanese. For acetate yarn, major competitors include
three companies that target multi-regional markets, BembergCell, INACSA and
UAB
Korelita, and two regional producers, SK and Mitsubishi Rayon.
In
the
acetate tow market, two major competitors, Celanese and Daicel, have joint
venture capacity in China and expanded their capacity in 2005 and 2006. However,
current global capacity utilization rates are expected to remain high given
the
world-wide growth in demand and the industry structure changes that occurred
in
2005 when a major competitor closed a North American acetate tow production
facility.
Eastman
is the world leader in acetate yarn production, the only acetate yarn producer
vertically integrated in acetate flake production, and the only acetate yarn
producer in North America. The Fibers segment is well positioned to serve this
market due to an in-depth knowledge of end-use markets; careful selection of
a
balanced portfolio of markets, customers, and products; and a highly integrated,
large-scale manufacturing operation. Eastman's reputation for quality and supply
stability gives it a competitive advantage in the market.
PCI
SEGMENT
The
Company’s PCI segment manufactures diversified products that are sold
externally, as well as used internally by other segments. The PCI segment's
earnings are highly dependent on how the Company chooses to optimize the acetyls
stream and the olefins stream. In 2006, the PCI segment had sales revenue of
$1.7 billion, which represented 22 percent of Eastman’s total sales.
In
fourth
quarter 2006, Eastman sold its Batesville, Arkansas manufacturing facility
and
related assets and the specialty organic chemicals product lines in the PCI
segment. Product lines associated with the divestiture had revenue of $111
million in 2006. In addition, as part of the sale of the Performance Polymers
segment's polyethylene business, the Company has agreed to supply ethylene
to
the buyer. These sales of ethylene, which was previously used internally, will
be reported in the PCI segment. The company also expects to begin a staged
phase-out of older cracking units in 2007, with timing dependent in part on
market conditions.
The
PCI
segment offers over 135 products that include intermediates based on oxo and
acetyl chemistries, and performance chemicals. The PCI segment's 2006 sales
revenue was approximately 55 percent olefin-based, 15 percent acetyl-based,
5
percent polymer-based, and 25 percent based on performance and other chemicals.
Approximately
73 percent of the PCI segment's sales revenue is generated in North America.
Sales in all regions are generated through a mix of the Company’s direct sales
force and a network of distributors. The Company's PCI segment is the largest
marketer of acetic anhydride in the United States, an intermediate that is
a
critical component of analgesics and other pharmaceutical and agricultural
products, and is the only U.S. producer of acetaldehyde, a key intermediate
in
the production of vitamins and other specialty products. Eastman manufactures
one of the world's broadest ranges of products derived from oxo aldehydes.
The
PCI segment’s other intermediate products include plasticizers and glycols. Many
of the intermediates products in the PCI segment are priced based on supply
and
demand of substitute and competing products. In order to maintain a competitive
position, the Company strives to operate with a low cost manufacturing base.
The
PCI
segment also manufactures performance chemicals, that are complex organic
molecules such as diketene derivatives, specialty ketones, and specialty
anhydrides for pharmaceutical, fiber, and food and beverage ingredients, which
are typically used in specialty market applications. These specialty products
are typically priced based on the amount of value added rather than supply
and
demand factors.
· |
Strategy
and Innovation
|
To
build
on and maintain its status as a low cost producer, the PCI segment continuously
focuses on cost control, operational efficiency, and capacity utilization to
maximize earnings. Through the PCI segment, the Company maximizes the advantage
of its highly integrated and world-scale manufacturing facilities. For
example, the Kingsport, Tennessee manufacturing facilities allow the PCI segment
to produce acetic anhydride and other acetyl derivatives from coal rather than
natural gas or other petroleum feedstocks. At the Longview, Texas facility,
Eastman's PCI segment uses its proprietary oxo-technology in the world’s largest
single-site, oxo aldehyde manufacturing facility to produce a wide range of
alcohols, esters, and other derivative products utilizing propane and local
ethane supplies, as well as purchased propylene. These integrated facilities,
combined with large scale production processes and a continuous focus on
additional process improvements, allow the PCI segment to remain cost
competitive with, and for some products cost-advantaged over, its competitors.
The
PCI
segment selectively focuses on continuing to develop and access markets with
high-growth potential for the Company’s chemicals. The Company engages in
customer-focused research and development initiatives in order to develop new
PCI products and find additional applications for existing products. The Company
is currently focusing these efforts on applications in the personal care market
and markets using plasticizers.
The
PCI
segment’s products are used in a variety of markets and end uses, including
agrochemical, automotive, beverages, nutrition, pharmaceuticals, coatings,
flooring, medical devices, toys, photographic and imaging, household products,
polymers, textiles, and industrials. The markets for products with market-based
pricing in the PCI segment are cyclical. This cyclicality is caused by periods
of supply and demand imbalance, either when incremental capacity additions
are
not offset by corresponding increases in demand, or when demand exceeds existing
supply. Demand, in turn, is based on general economic conditions, raw material
and energy prices, consumer demand and other factors beyond the Company’s
control. Eastman may be unable to increase or maintain the PCI segment's gross
margins in periods of economic stagnation or downturn, and future PCI segment
results may fluctuate from period to period due to these economic conditions.
The Company believes many of these markets are being positively affected by
the
current olefins upcycle. However, the strength of product-specific olefin
derivative markets will vary widely based upon prevailing supply and demand
conditions.
An
important trend within the PCI segment's markets is a tendency toward increased
regionalization of key markets, especially for acetyls and olefins products,
due
to increased transportation costs. Additionally, the PCI segment is engaged
in
continuous efforts directed toward optimizing product and customer mix.
Approximately 80 percent of the PCI segment’s sales revenue in 2006 was from 100
out of approximately 1,200 customers worldwide.
Historically,
there have been significant barriers to entry for competitors with respect
to a
majority of the PCI segment's products, primarily due to the fact that the
relevant technology has been held by a small number of companies. As this
technology has become more readily available, competition from multinational
chemical manufacturers has intensified. Eastman competes with these and other
producers primarily based on price, as products are interchangeable, but also
on
technology, marketing and services. Eastman’s major competitors in this segment
include large multinational companies such as Dow, Celanese, BASF, and Exxon
Mobil Corporation. While some competitors in PCI's product markets may have
greater financial resources than Eastman, the Company believes it maintains
a
strong competitive position due to the combination of its scale of operations,
breadth of product line, level of integration, and technology leadership.
PERFORMANCE
POLYMERS SEGMENT
In
2006,
the Performance Polymers segment had revenues of $2.6 billion, which represented
36 percent of the Company’s total sales. The segment consisted of two principal
product lines, PET and PE.
In
fourth
quarter 2006, Eastman concluded the sale of its PE business. The PE product
lines were manufactured entirely in the United States and had a relatively
small
market share. The low density polyethylene and linear low density polyethylene
product lines of the PE business accounted for approximately 25 percent of
the
Performance Polymers segment’s sales revenue in 2006.
The
PET
product line competes to a large degree on price in a capital intensive
industry. Profitability is achieved by attaining low cost positions through
technology innovation, manufacturing scale, capacity utilization, access to
reliable and competitive utilities, energy and raw materials, efficient
manufacturing processes and distribution.
The
Company's PET production is vertically integrated back to the raw material
paraxylene for a substantial majority of its capacity. The Performance Polymers
segment's PET product line for the packaging market is the world’s largest based
on capacity share; the most global based on manufacturing sites; and the
broadest based on formula diversity. PET is used in a wide variety of packaging
products including those for carbonated soft drinks, water, juice, personal
care
items, household cleaners, beer and food containers. The Performance Polymers
segment has PET manufacturing sites in the United States, Mexico, Argentina,
Spain, England, and the Netherlands. The Performance Polymers segment competes
primarily in North America, Latin America, and Europe.
In
2007,
the Company will transform the Performance Polymers segment. Through
innovation and strategic actions, Eastman expects to substantially improve
the
operating margin of its PET polymers business to approximately 10 percent by
the
second half of 2008. Through the Company's new facility utilizing
IntegRex
technology in South Carolina, the Company expects to increase PET production
through a combination of new capacity and debottlenecking, partially offset
by
rationalization of higher cost assets. The new facility using
IntegRex
technology will be in full operation in the first quarter of 2007, resulting
in
33 percent of the Company's North American PET capacity being
IntegRex-based
capacity. The segment is also taking strategic actions to address
under-performing PET assets outside the U.S, including entering into an
agreement to sell the San Roque, Spain manufacturing facility.
Additionally, the Performance Polymers segment is evaluating the possible
construction of a second PET
manufacturing facility fully utilizing
IntegRex
technology.
PET
is
used in beverage and food packaging and other applications such as custom-care
and cosmetics packaging, health care and pharmaceutical uses, household
products, and industrial packaging applications. PET offers fast and easy
processing, superb clarity, excellent colorability and color consistency,
durability and strength, impact and chemical resistance, and high heat
stability. Packages made from PET are characterized by their light weight,
high
strength, durability, clarity, low cost, safety, and recyclability. PET
accounted for 75 percent of the sales revenue in the Performance Polymers
segment in 2006.
· |
Strategy
and Innovation
|
The
Performance Polymers segment intends to capitalize on the growth in the PET
industry with timely and efficient capacity additions including debottlenecking
existing production processes, asset expansions, new assets,
contract-manufacturing arrangements, and manufacturing alliances. This growth
strategy will rely on continuous process technology improvements from the
efficient use of research and development, as well as the rationalization of
smaller scale, higher cost PET assets, which could be redirected to the
manufacture of copolyester products.
Production
began in November 2006 at the Company's new PET manufacturing facility utilizing
IntegRex
technology in Columbia, South Carolina. Delivering ParaStar
next
generation PET resins, the facility is expected to be at its full operational
capacity of 350 thousand metric tons during the first quarter of 2007. The
Company is also evaluating the possible construction of a fully integrated
IntegRex
facility
in the United States or elsewhere.
The
Performance Polymers segment expects to continue to provide customers with
innovative new products and incremental improvements in existing products.
Eastman currently maintains the industry’s broadest product offering for PET
polymers including ParaStar next
generation PET resins for carbonated soft drink packaging enabled by
IntegRex
technology, Aqua
polymer
for the water bottle market, Heatwave
polymer
for hotfill markets and Vitiva
polymer
for ultraviolet light sensitive applications.
Ø |
Research
and Development
|
Eastman
directs its research and development programs for the Performance Polymers
segment toward three key objectives:
· |
Lowering
manufacturing costs through process technology innovations and process
improvement efforts;
|
· |
Developing
new products and services in PET polymers that both meet customers'
fitness for use requirements and are protective of the environment
through
applications research and customer feedback;
and
|
· |
Enhancing
product quality by improvement in manufacturing technology and
processes.
|
The
Company's Performance Polymer's research and development efforts have resulted
in significant improvements in manufacturing process efficiencies and are
continuing to yield sustainable competitive advantage. In 2004, after two years
of significant, concentrated research and development efforts, Eastman announced
its new IntegRex
technology, a breakthrough innovation in the integrated manufacturing of
paraxylene to PET resin, specifically designed for packaging applications.
During 2005, research and development efforts further enhanced IntegRex
technology allowing for a debottlenecking of the new plant to provide an
additional 100 thousand metric tons by the middle of 2008 for a total capacity
of 450 thousand metric tons. In
November 2006, the Company announced it was evaluating a second world-class,
fully integrated facility utilizing Integrex
technology.
Enabled
by IntegRex
technology, ParaStar
next
generation PET resins offer Eastman's customers significant advantages in the
performance and delivered cost of their packages, including higher clarity
and
lower energy use in conversion from pellets to containers.
The
largest 43 PET customers within the Performance Polymers segment accounted
for
more than 80 percent of the segment’s continuing product lines' total sales
revenue in 2006. These customers are primarily PET container suppliers to large
volume beverage markets such as carbonated soft drinks, water, and juice, with
strong participation in custom areas such as food, liquor, sport and fruit
beverages, health and beauty aids, and household products. In 2006, the
worldwide market for PET, including containers, film and sheet, was
approximately 11 million metric tons. Demand for PET has grown steadily over
the
past several years, driven by its popularity for recyclable, single-serve
containers and as a substitute for glass and aluminum. PET has already made
significant inroads in soft drink and water bottles, and producers are currently
targeting markets such as hot-fill soups and sauces and containers for beer.
Industry analysts report that PET consumption grew worldwide from 1.0 million
metric tons in 1989 to approximately 11 million metric tons in 2006, a compound
annual growth rate of 15 percent. Global demand for PET is expected to grow
approximately 6 to 8 percent annually over the next several years.
Major
competitors for the Performance Polymers segment include DAK Americas,
Equipolymers, Far Eastern Textiles Ltd., Invista, Mossi & Ghisolfi Group,
Nan Ya Plastics Corporation, Reliance Industries Ltd., and Wellman Inc.
The
strong growth in demand for PET, coupled with ease of access to conventional
manufacturing technology, has resulted in the presence of over 100 significant
resin producers in this market in 2006, up from fewer than 20 in 1995. The
Performance Polymers segment is a global competitor with manufacturing sites
in
North America, Latin America and Western Europe. The level of competition,
however, varies by region. Competition is primarily on the basis of price with
product performance, quality, service, and reliability also being competitive
factors.
Industry
pricing is strongly affected by raw material costs and capacity utilization.
PET
global supply has exceeded demand since 1997 as a result of capacity being
introduced into the market at a rate exceeding that of demand growth. While
the
demand for PET continues to increase steadily, excess capacity, particularly
in
Asia, remains. Excess Asian capacity and related exports are expected to
continue to have an adverse impact on PET pricing worldwide.
SP
SEGMENT
The
SP
segment produces highly specialized copolyesters and cellulosic plastics that
possess differentiated performance properties for value-added end uses such
as
appliances, store fixtures and displays, building and construction, electronic
packaging, medical devices and packaging, graphic arts, general purpose
packaging, personal care and cosmetics packaging, food and beverage packaging,
performance films, tape and labels, fibers/nonwovens, photographic and optical
films, and liquid crystal displays. In 2006, the SP segment had sales revenue
of
$818 million, which represented just over 11 percent of Eastman’s total
sales.
The
SP
segment competes in the market for plastics that meet specific performance
criteria, typically determined on an application-by-application basis. Product
development in the SP segment is dependent upon Eastman’s ability to design
plastics products that achieve performance characteristics specified by its
customers, while providing a better value proposition than alternative materials
such as polycarbonate and acrylic. Increases in market share are gained through
the development of new applications, substitution of plastic for other
materials, and, displacement of other plastic resins in existing applications.
The SP segment produces polyesters, specialty copolyesters, cellulose esters,
and cellulosic plastics. The Company estimates that the market growth for
copolyesters will continue to be higher than general economic growth due to
continued material innovations and displacement opportunities. Eastman believes
that cellulosic materials will grow at the growth rate of the economy in
general, driven by the strong demand for cellulose esters in liquid crystal
displays more than offsetting the decline in legacy photographic
markets.
Eastman’s
specialty copolyesters, which generally are based on Eastman's market leading
supply of cyclohexane dimethanol ("CHDM") modified polymers, typically fill
a
market position between polycarbonates and acrylics. Polycarbonates
traditionally have had some superior performance characteristics, while acrylics
have been less expensive. Specialty copolyesters combine superior performance
with competitive pricing and are being substituted for both polycarbonates
and
acrylics based on their relative performance and pricing.
The
SP
segment also includes cellulosic materials, which have historically been a
steady business with strong operating margins for the Company, and includes
what
Eastman believes is a market-leading position in North American cellulose esters
for tape and film products and cellulose plastics for molding applications.
Eastman has recently commercialized a new family of materials, Visualize
cellulose
esters, for the liquid crystal displays market.
Eastman
has the ability within its SP segment to modify its polymers and plastics to
control and customize their final properties, creating numerous opportunities
for new application development, including the expertise to develop new
materials and new applications starting from the molecular level in the research
laboratory to the final designed application in the customer’s plant. In
addition, the SP segment has a long history of manufacturing excellence with
strong process improvement programs providing continuing cost reduction.
Manufacturing process models and information technology systems support global
manufacturing sites and provide monitoring and information transfer capability
that speed up the innovation process.
· Products
Ø |
Engineering
and Specialty Polymers
|
Engineering
and specialty polymers accounted for approximately 50 percent of the SP
segment’s 2006 sales revenue. These polymers include a broad line of polyesters,
copolyesters, alloys, cellulose flake, and cellulosic plastics that are sold
to
a diverse and highly fragmented customer base in numerous market segments on
a
global basis. Sales in all regions are generated through a mix of the Company’s
direct sales force and a network of distributors. Engineering and specialty
polymers products are sold into three sectors: durable goods (principally
components used in appliances); medical goods (disposable medical devices,
health care equipment and instruments, and pharmaceutical packaging); and
personal care and consumer goods (housewares, cosmetics, eyewear, tools, toys,
and food and beverage packaging).
Engineering
and specialty polymers products are heavily specification-driven. The Company
works with OEM companies to enable product designers to use polymers for a
specified use in their products. Although the average life cycle of many of
these products is shrinking over time, the Company works to identify uses for
the polymers in products that will have multi-year lives. In working with OEM
companies on new consumer product designs, new polymer products are often
developed for use in a particular type of end-use product.
Ø |
Specialty
Film and Sheet
|
Sales
of
specialty film and sheet products represented approximately 30 percent of the
SP
segment’s 2006 revenue. The key end-use markets for specialty film and sheet are
packaging and in-store fixtures and displays. Direct customers are film and
sheet producers, but marketing activities focus downstream through designers,
specifiers, OEMs and brand owners in targeted end-use markets.
In
the
packaging market, specialty film and sheet is sold to end-use markets including
medical and electronic component trays, shrink label films, general purpose
packaging, and multilayer films. Eastman continues to innovate materials
solutions for the packaging market which include high melt strength copolyesters
for handleware applications and modified copolyesters used to produce shrink
packaging labels. Competitive materials in these end-use markets are typically
PET polymers, high density polyethylene, polyvinyl chloride ("PVC") and oriented
polystyrene. Eastman’s primary brands for these markets are Eastar
and
Embrace
copolyesters.
In
the
in-store fixture and display market, Spectar
copolyester is marketed primarily for point of purchase displays including
indoor sign and store fixtures. Eastar
copolyester is marketed into the graphics market. Copolyester use in these
end-use markets is expected to grow above display market rates as a result
of
new business growth. Competitive materials in these end-use markets are
polymethylmethacrylate and polycarbonate.
Ø |
Optical
Films and Fibers
|
Packaging,
film and fiber products, which represented approximately 20 percent of the
SP
segment’s 2006 revenue, include a range of specialty polymer products for
markets such as photographic film, optical film, fibers/nonwovens, tapes/labels
and liquid crystal displays. Customers are typically manufacturers of film
and
fiber products, employing a range of processing technologies, including film
melt extrusion, solvent casting, and fiber extrusion. These films and fibers
products are further converted to produce value-added products, such as
photographic film, liquid crystal displays film, adhesive tape, or nonwoven
articles, which are sold as branded items. Products include cellulose esters,
copolyesters, specialty polyesters and concentrates/additives. Sales of products
that are used as raw materials in traditional photographic markets continue
to
be under pressure due to the conversion of traditional photographic technology
to digital imaging. The SP segment has commercialized a new family of materials,
Visualize
cellulose
esters, for the liquid crystal displays market.
· |
Strategy
and Innovation
|
The
SP
segment is focused on delivering consistent gross margins and reinvesting for
continued growth. Over the past three years, the SP segment has divested certain
non-core businesses, shut-down certain non-integrated manufacturing operations,
and expanded certain integrated facilities. The Company continues to leverage
the advantages of being an integrated polyester manufacturer and will continue
to pursue opportunities within the integrated polyester stream. The SP segment
is taking advantage of the opportunity to utilize rationalized PET assets to
reduce copolyester conversion costs and enhance its ability to market its
products against competitive materials. This opportunity is expected to capture
the synergies of the Performance Polymers segment's integrated structure and
the
SP segment's ability to develop higher value markets. These synergies should
enable the SP segment to reduce costs and expand production, increase the scale
necessary to substitute for competitive materials, and focus on targeted growth
markets. The SP segment continues to pursue growth by investing in marketing,
research and development, and manufacturing to meet the needs of the global
marketplace. For example, the segment is beginning a capital project to increase
copolyester capacity at Eastman's South Carolina site in order to meet expected
growth in global demand. The SP segment is also expanding its Kingsport-based
CHDM capacity to provide additional intermediates to support global market
growth for copolyester products. The SP segment is also investigating options
to
increase capacity for its cellulose ester products to support continued demand
in key markets such as liquid crystal displays.
Eastman
has a broad portfolio of key monomers that can be combined in various ways
to
yield a range of polymers with widely varying properties for different
applications. Development of proprietary technology is currently underway to
enable the SP segment to produce a new family of products that would allow
entry
into applications that have been beyond the reach of the current portfolio
of
copolyester products. This new copolyester innovation is expected to offer
a
combination of chemical and temperature resistance that should enable the SP
segment to create new material solutions in markets and applications that the
SP
segment's current copolyesters have insufficient properties to meet. These
new
applications are estimated to represent 1.5 billion pounds of opportunities
in
markets such as medical, building and construction, durables and personal care.
The SP segment anticipates having commercial product available for these new
applications by the end of 2007.
The
Company competes in market niches requiring polymers with combinations of
clarity, toughness, and chemical resistance. The liquid crystal display market
is a developing growth market for the SP segment. The Company is investing
in
the development of copolyester and cellulosic based product solutions for this
high-growth market, with the objective of becoming a strategic raw material
supplier in the liquid crystal displays market. The SP segment's management
anticipates continued strong growth of Visualize
cellulose
esters.
The
SP
segment develops product enhancements in order to respond to specific market
needs, and expects this to result in increased market penetration for existing
products. Likewise, the introduction of new products will provide access to
previously underserved markets. In addition, the SP segment is focusing on
global growth by investing resources to provide product solutions to customers
in previously underserved regional markets. The SP segment model of innovation
leverages a unique and growing portfolio of cellulosics and specialty
copolyesters, such as Visualize
cellulose
esters for liquid crystal displays, Embrace
copolyesters for shrink films, and Eastar
copolyesters for cosmetics packaging and clear handleware containers.
The
Company is a major supplier of resins to the specialty film and sheet markets.
With Eastman serving less than 10 percent of the global specialty film and
sheet
end-use markets, substantial growth opportunities exist for Eastman. The growth
strategy is to penetrate new market segments or geographies and offer a
substitute for other materials by providing an improved value proposal or design
flexibility that enhances the growth potential of the Company’s customers. One
example is Eastman's technology for Encapsulated Image Layer Technology
("EILT"). EILT deploys patented technology that allows licensees to construct
decorative laminate sheeting using Eastman copolyesters for high value
architectural design applications.
The
customer base in the SP segment is broad and diverse, consisting of over 700
companies worldwide in a variety of industries. Approximately 80 percent of
the
SP segment’s 2006 revenue was attributable to approximately 70 customers. The SP
segment seeks to develop mutually beneficial relationships with its customers
throughout various stages of product life cycles. By doing so, it is better
able
to understand its customers’ needs as those customers develop new products, and
more effectively bring new solutions to market.
Competition
in the SP segment varies as a function of where the products are in their life
cycle. For example, the SP segment's products in the introduction phase of
the
life cycle compete mainly on the basis of performance. As products begin to
advance in the life cycle, and substitute products come into existence, the
basis of competition begins to shift, taking into account factors such as price,
customer service, and brand loyalty. At maturity, where one or more competitors
may have equivalent products in the market, competition is based primarily
on
price. Many large, well-recognized manufacturers produce substitute products
of
different materials, some of which may offer better performance characteristics
than those of the Company's products, and others of which may be offered at
a
lower price.
The
SP
segment has a full array of products moving across the life cycle as described
above. For example, two commonly used plastics materials in the heavy gauge
sheet market are acrylic and polycarbonate. In general, acrylics are lower
in
cost, while polycarbonates provide higher performance at a higher cost.
Eastman’s products capture portions of both markets. Customers of the SP segment
can select from products that offer improved performance over acrylics at a
slightly higher cost, or products that are lower cost than polycarbonates while
still possessing excellent performance properties. In this way, the SP segment
is able to meet the industry need for low-cost, high performance plastics
materials and maintain a significant advantage over its competitors. With regard
to engineering and specialty polymers products, the Company competes in market
areas requiring polymers with combinations of clarity, toughness, and chemical
resistance. Eastman’s primary competitors for engineering and specialty polymers
are companies such as Bayer AG, Lanxess AG, Dow, GE Plastics, Nova Chemicals
Corporation and others, including polycarbonate, acrylic and clear acrylonitrile
butadiene styrene producers in regions outside North America. Specialty film
and
sheet competitors also include polymer companies, such as GE Plastics, Bayer
AG,
Dow, Cyro Industries, Ineos, Atoglas, SK Chemical Industries, and Selenis,
which
sell copolyesters, polycarbonate, acrylic, and/or polyvinyl chloride resins.
Competition for packaging, film and fiber products is primarily from other
producers of polyester and producers of cellulose ester polymers such as Acetati
SpA and Daicel. Competition with other polymers such as acrylic, PVC,
polystyrene, polypropylene and polycarbonate is also significant in several
markets and applications. Channels to customers include corporate accounts,
direct sales, e-commerce, and distributors.
The
SP
segment believes that it maintains competitive advantages over its competitors
throughout the product life cycle. At product introduction, the segment’s
breadth of offerings combined with its research and development capabilities
and
customer service orientation enable it to quickly bring a wide variety of
products to market. As products enter the growth phase of the life cycle, the
SP
segment is able to continue to leverage its product breadth by receiving
revenues from multiple sources, as well as retaining customers from long-term
relationships. As products become price sensitive, the SP segment can take
advantage of Eastman's scale of operations and vertical integration to maintain
a superior product conversion cost position.
The
SP
segment believes it has competitive advantages in copolyester and cellulose
esters plastics. However, new competitors have begun selling copolyester
products in the past few years. These new competitors cannot yet produce the
wide variety of specialty copolyesters offered by the SP segment or offer the
same level of technical assistance. Additionally, the Company is committed
to
investing for growth in SP product lines to support continued market growth
and
maintaining the cost advantages obtained from its scale of operations and
manufacturing expertise. There can be no assurance, however, that the SP segment
will be able to maintain this competitive advantage and if it is unable to
do
so, its results of operations could be adversely affected.
EASTMAN
CHEMICAL COMPANY GENERAL INFORMATION
Sales,
Marketing, and Distribution
The
Company markets products primarily through a global sales organization, which
has a presence in the United States and in over 35 other countries around the
world. Eastman has a number of broad product lines which require a sales and
marketing strategy that is tailored to specific customers in order to deliver
high quality products and high levels of service to all of its customers
worldwide. Technical expertise and process knowledge are critical in determining
the application of products for a particular customer. Through a highly skilled
and specialized sales force that is capable of providing customized business
solutions for each of its five operating segments, Eastman is able to establish
long-term customer relationships and strives to become the preferred supplier
of
specialty chemicals and plastics.
The
Company's products are marketed through a variety of selling channels, with
the
majority of sales being direct and the balance sold primarily through indirect
channels such as distributors. Non-U.S. sales tend to be made more frequently
through distributors than U.S. sales. The Company's customers throughout the
world have the choice of obtaining products and services through Eastman's
website, www.eastman.com,
through
any of its global customer service centers, or through any of Eastman's direct
sales force or independent distributors. Customers who choose to use the
Company’s website can conduct a wide range of business transactions such as
ordering online, accessing account and order status, and obtaining product
and
technical data. Eastman is an industry leader in the implementation and
utilization of e-business technology for marketing and selling products to
customers and was one of the first chemical companies to offer this capability.
Eastman views this as an opportunity to increase supply chain efficiency by
having an enterprise resource-planning platform with connectivity to customers.
These sales and marketing capabilities combine to reduce costs and provide
a
platform for growth opportunities for the Company by providing potential
customers new methods to access Eastman’s products.
The
Company’s products are shipped to customers directly from Eastman's
manufacturing plants as well as from distribution centers worldwide, with the
method of shipment generally determined by the customer.
Sources
and Availability of Raw Materials and Energy
Eastman
purchases a substantial portion, estimated to be approximately 80 percent,
of
its key raw materials and energy through long-term contracts, generally of
three
to five years initial duration with renewal or cancellation options for each
party. Most of those agreements do not require the Company to purchase materials
or energy if its operations are reduced or idle. The cost of raw materials
and
energy is generally based on market price at the time of purchase, although
derivative financial instruments, valued at quoted market prices, have been
utilized to mitigate the impact of short-term market price fluctuations. Key
raw
materials and purchased energy include propane, ethane, paraxylene, ethylene
glycol, PTA, natural gas, coal, cellulose, methanol, electricity, and a wide
variety of precursors for specialty organic chemicals. The Company has multiple
suppliers for most key raw materials and energy and uses quality management
principles, such as the establishment of long-term relationships with suppliers
and on-going performance assessment and benchmarking, as part of the supplier
selection process. When appropriate, the Company purchases raw materials from
a
single source supplier to maximize quality and cost improvements, and has
developed contingency plans that would minimize the impact of any supply
disruptions from single source suppliers.
While
temporary shortages of raw materials and energy may occasionally occur, these
items are generally sufficiently available to cover current and projected
requirements. However, their continuous availability and price are subject
to
unscheduled plant interruptions occurring during periods of high demand, or
due
to domestic or world market and political conditions, changes in government
regulation, natural disasters, war or other outbreak of hostilities. Eastman’s
operations or products have been in the past and may be in the future, at times,
adversely affected by these factors. The Company’s cost of raw materials and
energy as a percent of total cost of operations was estimated to be
approximately 70 percent for 2006, compared with 65 percent in 2005 and 55
percent in 2004.
Capital
Expenditures
Capital
expenditures were $389 million, $343 million, and $248 million for 2006, 2005
and 2004, respectively. The Company expects that 2007 capital spending will
be
up to $450 million which will exceed estimated 2007 depreciation and
amortization of approximately $350 million, including accelerated depreciation
of approximately $50 million, as it funds targeted growth efforts.
Employees
Eastman
employs approximately 11,000 men and women worldwide. Approximately 7 percent
of
the total worldwide labor force is represented by unions, mostly outside the
United States.
Customers
Eastman
has an extensive customer base and, while it is not dependent on any one
customer, loss of certain top customers could adversely affect the Company
until
such business is replaced. The top 100 customers accounted for approximately
65
percent of the Company's 2006 sales revenue.
Intellectual
Property and Trademarks
While
the
Company’s intellectual property portfolio is an important Company asset which it
expands and vigorously protects globally through a combination of patents that
expire at various times, trademarks, copyrights, and trade secrets, neither
its
business as a whole nor any particular segment is materially dependent upon
any
one particular patent, trademark, copyright, or trade secret. As a producer
of a
broad and diverse portfolio of both specialty and commodity chemicals, plastics,
and fibers, Eastman owns over 850 active United States patents and more than
1,500 active foreign patents, expiring at various times over several years,
and
also owns over 3,000 active worldwide trademarks. The Company’s intellectual
property relates to a wide variety of products and processes. With two recent
significant research and development innovations, Eastman continues to actively
protect its intellectual property. In support of the development of the
IntegRex
technology, the Company has filed over 140 patent applications. In support
of
the development of the copolyester innovation products, the Company has filed
over 50 patent applications. Eastman can not assure that a patent will be
granted from every application filed. As the laws of many foreign countries
do
not protect intellectual property to the same extent as the laws of the United
States, Eastman cannot assure that it will be able to adequately protect its
intellectual property assets.
Research
and Development
For
2006,
2005 and 2004, Eastman’s research and development expenses totaled $167 million,
$162 million and $154 million, respectively. Research and development expenses
are expected to decrease slightly in 2007 due to divestitures, partially offset
by increased spending on growth initiatives.
Environmental
Eastman
is subject to laws, regulations, and legal requirements relating to the use,
storage, handling, generation, transportation, emission, discharge, disposal
and
remediation of, and exposure to, hazardous and non-hazardous substances and
wastes in all of the countries in which it does business. These health, safety
and environmental considerations are a priority in the Company’s planning for
all existing and new products and processes. The Health, Safety, Environmental
and Security Committee of Eastman’s Board of Directors reviews the Company's
policies and practices concerning health, safety and the environment and its
processes for complying with related laws and regulations, and monitors related
matters.
The
Company’s policy is to operate its plants and facilities in a manner that
protects the environment and the health and safety of its employees and the
public. The Company intends to continue to make expenditures for environmental
protection and improvements in a timely manner consistent with its policies
and
with the technology available. In some cases, applicable environmental
regulations such as those adopted under the U.S. Clean Air Act and Resource
Conservation and Recovery Act, and related actions of regulatory agencies,
determine the timing and amount of environmental costs incurred by the
Company.
The
Company accrues environmental costs when it is probable that the Company has
incurred a liability and the amount can be reasonably estimated. In some
instances, the amount cannot be reasonably estimated due to insufficient data,
particularly in the nature and timing of the future performance. In these cases,
the liability is monitored until such time that sufficient data exists. With
respect to a contaminated site, the amount accrued
reflects
the Company’s assumptions about remedial requirements at the site, the nature of
the remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties. Changes in the
estimates on which the accruals are based, unanticipated government enforcement
action, or changes in health, safety, environmental, chemical control
regulations, and testing requirements could result in higher or lower
costs.
The
Company's cash expenditures related to environmental protection and improvement
were estimated to be approximately $215 million, $198 million and $184 million
in 2006, 2005 and 2004, respectively. These amounts pertain primarily to
operating costs associated with environmental protection equipment and
facilities, but also include expenditures for construction and development.
The
Company does not expect future environmental capital expenditures arising from
requirements of recently promulgated environmental laws and regulations to
materially increase the Company's planned level of annual capital expenditures
for environmental control facilities.
Other
matters concerning health, safety, and the environment are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II Item 7 and in Notes 1, "Significant Accounting Policies",
and 12, "Environmental Matters", to the Company’s consolidated financial
statements in Part II, Item 8 of this 2006 Annual Report on Form
10-K.
On
January 1, 2007, Eastman’s backlog of firm sales orders was estimated to be
approximately $290 million compared with approximately $295 million at January
1, 2006. All orders are expected to be filled in 2007. The Company manages
its
inventory levels to control the backlog of products depending on customers'
needs. In areas where the Company is the single source of supply, or competitive
forces or customers' needs dictate, the Company may carry additional inventory
to meet customer requirements.
Financial
Information About Geographic Areas
For
revenues and long-lived assets by geographic areas, see Note 21, "Segment
Information", to the Company’s consolidated financial statements in Part II,
Item 8 of this 2006 Annual Report on Form 10-K.
Available
Information - SEC Filings and Corporate Governance
Materials
The
Company makes available free of charge, through the "Investors - SEC Filings"
section of its Internet website (www.eastman.com),
its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably
practicable after electronically filing such material with, or furnishing it
to,
the Securities and Exchange Commission (the "SEC"). Once filed with the SEC,
such documents may be read and/or copied at the SEC’s Public Reference Room at
100 F Street N.E., Washington, D.C. 20549. Information on the operation of
the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
In
addition, the SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers, including
Eastman Chemical Company, that electronically file with the SEC at http://www.sec.gov.
The
Company also makes available free of charge, through the "Investors - Corporate
Governance" section of its internet website (www.eastman.com),
the
Corporate Governance Guidelines of its Board of Directors, the charters of
each
of the committees of the board, and codes of ethics and business conduct for
directors, officers and employees. Such materials are also available in print
upon the written request of any stockholder to Eastman Chemical Company, P.O.
Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor
Relations.
Stockholder
Information
Corporate
Offices Address: See Cover Page to this Form 10-K
Telephone:
877-EMN-INFO (877-366-4636)
Corporate
Website: www.eastman.com
Annual
Meeting:
Toy
F.
Reid Employee Center
Kingsport,
Tennessee
Thursday,
May 3, 2007
11:30
a.m. (ET)
Stock
Exchange Listing:
Eastman
Chemical Company common stock is listed and traded on the New York Stock
Exchange under the ticker symbol "EMN." Most newspaper tables list the Company's
stock as "EmanChem."
Stock
Transfer Agent and Registrar:
Inquiries
and changes to stockholder accounts should be directed to our transfer
agent:
American
Stock Transfer & Trust Company
59
Maiden
Lane
New
York,
NY 10038
In
the
United States: 800-937-5449
Outside
the United States: (1) 212-936-5100 or (1) 718-921-8200
Website:
//www.amstock.com
New
York Stock Exchange and Securities and Exchange Commission
Certifications
In
2006,
the Company submitted to the New York Stock Exchange (the "NYSE") the
certification of the Chief Executive Officer that he was not aware of any
violation by Eastman Chemical Company of the NYSE's corporate governance listing
standards as required by Section 303A.12(a) of the New York Stock Exchange
Listed Company Manual. In addition, the Company has filed with the SEC, as
exhibits to this Form 10-K for the year ended December 31, 2006, the Chief
Executive Officer's and Chief Financial Officer's certifications regarding
the
quality of the Company's public disclosure, disclosure controls and procedures,
and internal controls over financial reporting as required by Section 302 of
the
Sarbanes-Oxley Act of 2002 and related SEC rules.
ITEM
1A. RISK FACTORS
For
identification and discussion of the most significant risks applicable to the
Company and its business, see Part II - Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward-Looking
Statements and Risk Factors" of this 2006 Annual Report on Form
10-K.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
EXECUTIVE
OFFICERS OF THE COMPANY
Certain
information about the Company's executive officers is provided
below:
J.
Brian
Ferguson, age 52, is Chairman of the Board and Chief Executive Officer. Mr.
Ferguson joined the Company in 1977. He was named Vice President, Industry
and
Federal Affairs in 1994, became Managing Director, Greater China in 1996, was
named President, Eastman Chemical Asia Pacific in 1998, became President,
Polymers Group in 1999, became President, Chemicals Group in 2001, and was
elected to his current position in 2002.
James
P.
Rogers, age 55, is President of Eastman Chemical Company and Chemicals &
Fibers Business Group Head. Mr. Rogers was appointed Executive Vice President
of
the Company and President of Eastman Division effective November 2003. Mr.
Rogers joined the Company in 1999 as Senior Vice President and Chief Financial
Officer and in 2002, was also appointed Chief Operations Officer of Eastman
Division. He was appointed to his current position in 2006. Mr. Rogers served
previously as Executive Vice President and Chief Financial Officer of GAF
Materials Corporation ("GAF"). He also served as Executive Vice President,
Finance, of International Specialty Products, Inc., which was spun off from
GAF
in 1997.
Gregory
O. Nelson, age 55, is Executive Vice President and Polymers Business Group
Head.
Dr. Nelson joined Eastman in 1982 as a research chemist and held a number of
positions in the research and development organization. He became Director,
Polymers Research Division in 1995 and was named Vice President, Polymers
Technology in 1997. He was appointed as Chief Technology Officer in 2001 and
named Senior Vice President in 2002. He was appointed to his present position
in
2006.
Mark
Costa, age 40, is Senior Vice President, Corporate Strategy & Marketing.
Prior to joining Eastman on June 1, 2006, Mr. Costa was a senior partner within
Monitor Group's integrated North American and global client service networks.
He
joined Monitor in 1988 and his experience included corporate and business unit
strategies, asset portfolio strategies, innovation and marketing, and channel
strategies across a wide range of industries, including specialty and commodity
chemicals, electricity, natural gas and truck/auto manufacturing.
Theresa
K. Lee, age 54, is Senior Vice President, Chief Legal Officer and Corporate
Secretary. Ms. Lee joined Eastman as a staff attorney in 1987, served as
Assistant General Counsel for the health, safety, and environmental legal staff
from 1993 to 1995, and served as Assistant General Counsel for the corporate
legal staff from 1995 until her appointment as Vice President, Associate General
Counsel and Secretary in 1997. She became Vice President, General Counsel,
and
Corporate Secretary of Eastman in 2000 and was appointed to her current position
in 2002.
Richard
A. Lorraine, age 61, joined Eastman in November 2003 as Senior Vice President
and Chief Financial Officer. Mr. Lorraine served as Executive Vice President
and
Chief Financial Officer of Occidental Chemical Corporation from 1995 until
2003,
and at ITT Automotive Group as President of the Aftermarket Group from 1990
to
1995 and Vice President and Chief Financial Officer from 1985 to 1990. Mr.
Lorraine started his career with Westinghouse Electric Corporation, where he
held various financial positions.
Ronald
C.
Lindsay, age 48, is Senior Vice President and Chief Technology Officer. He
joined Eastman in 1980 and held a number of positions in manufacturing and
business organizations. In 2003, Mr. Lindsay was appointed Vice President and
General Manager of the Intermediates Business Organization and in 2005 he became
Vice President, Performance Chemicals Business. He was appointed to his current
position in April 2006.
Norris
P.
Sneed, age 51, is Senior Vice President, Human Resources, Communications and
Public Affairs. Mr. Sneed joined the Company in 1979 as a chemical engineer.
In
1989, he was assigned to Eastman’s Arkansas Operations where he was
superintendent for different manufacturing and new business development
departments. In 1997, he served as assistant to the Chief Executive Officer.
He
was named managing director for Eastman’s Argentina operations in 1999, Vice
President of Organization Effectiveness in 2001, and was appointed to his
current position in June 2003.
Curtis
E.
Espeland, age 42, is Vice President, Finance, and Chief Accounting Officer.
Mr.
Espeland joined Eastman in 1996, and has served in various financial management
positions, including Controller; Director of Corporate Planning and Forecasting;
Director of Financial Services, Asia Pacific; and Director of Internal Auditing.
He has served as the Company's Chief Accounting Officer since December 2002.
Prior to joining Eastman, Mr. Espeland was an audit and business advisory
manager with Arthur Andersen LLP.
PROPERTIES
At
December 31, 2006, Eastman operated 16 manufacturing sites in 10 countries.
Utilization of these facilities may vary with product mix and economic,
seasonal, and other business conditions, but, except as indicated below, none
of
the principal plants are substantially idle. The Company's plants, including
approved expansions, generally have sufficient capacity for existing needs
and
expected near-term growth. These plants are generally well maintained, in good
operating condition, and suitable and adequate for their use. Unless otherwise
indicated, all of the properties are owned. The locations and general character
of the major manufacturing facilities are:
|
Segment
using manufacturing facility
|
Location
|
CASPI
|
PCI
|
SP
|
Performance
Polymers
|
Fibers
|
|
|
|
|
|
|
USA
|
|
|
|
|
|
Jefferson,
Pennsylvania
|
x
|
|
|
|
|
Columbia,
South Carolina
|
|
|
x
|
x
|
|
Kingsport,
Tennessee
|
x
|
x
|
x
|
x
|
x
|
Longview,
Texas
|
x
|
x
|
|
|
|
Franklin,
Virginia*
|
x
|
|
|
|
|
Europe
|
|
|
|
|
|
Workington,
England
|
|
|
|
x
|
x
|
Middelburg,
the Netherlands
|
x
|
|
|
|
|
Rotterdam,
the Netherlands*
|
|
|
|
x
|
|
San
Roque, Spain***
|
|
|
|
x
|
|
Llangefni,
Wales
|
|
x
|
|
|
|
Asia
Pacific
|
|
|
|
|
|
Kuantan,
Malaysia*
|
|
|
x
|
|
|
Jurong
Island, Singapore*
|
x
|
x
|
|
|
|
Zibo
City, China**
|
x
|
x
|
|
|
|
Latin
America
Zarate,
Argentina
|
|
|
|
x
|
|
Cosoleacaque,
Mexico
|
|
|
|
x
|
|
Uruapan,
Mexico
|
x
|
|
|
|
|
* indicates
a location that Eastman leases from a third party.
** Eastman
holds a 51 percent share in the joint venture Qilu Eastman Specialty Chemical
Ltd.
*** In
first
quarter 2007, the Company entered
into an agreement to sell this
manufacturing site.
In
addition, Eastman has a 50 percent interest in Primester, a joint venture that
manufactures cellulose acetate at Eastman's Kingsport, Tennessee plant. The
production of cellulose acetate is an intermediate step in the manufacture
of
acetate tow and other cellulose acetate based products. The Company also has
a
50 percent interest in a manufacturing facility in Nanjing, China. The Nanjing
facility produces Eastotac
hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and
sealants. Eastotac
hydrocarbon resins are also used to produce hot melt adhesives for packaging
applications in addition to glue sticks, tapes, labels, and other adhesive
applications.
Eastman
has distribution facilities at all of its plant sites. In addition, the Company
owns or leases over 100 stand-alone distribution facilities in the United States
and 17 other countries. Corporate headquarters are in Kingsport, Tennessee.
The
Company's regional headquarters are in Miami, Florida; Capelle
aan den Ijssel,
the Netherlands; Zug, Switzerland; Singapore; and Kingsport, Tennessee.
Technical service is provided to the Company's customers from technical service
centers in Kingsport, Tennessee; Kirkby, England; Shanghai, China and Singapore.
Customer service centers are located in Kingsport, Tennessee; Capelle aan den
Ijssel, the Netherlands; Miami, Florida; and Singapore.
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. In each case, the Company prevailed at the
trial court, and in each case, the plaintiff appealed the trial court's
decision. In one case, the appeal is still pending. In the other case, the
court
of appeals overturned the trial court's decision and ruled that the plaintiff
could amend and re-file its complaint with the trial court. The Company has
appealed this court of appeals decision to the state supreme court. In each
case
the Company intends to continue to vigorously defend its position.
Asbestos
Litigation
Over
the
years, Eastman has been named as a defendant, along with numerous other
defendants, in lawsuits in various state courts in which plaintiffs have alleged
injury due to exposure to asbestos at Eastman’s manufacturing sites. More
recently, certain plaintiffs have claimed exposure to an asbestos-containing
plastic, which Eastman manufactured in limited amounts between the mid-1960’s
and the early 1970’s.
To
date,
the Company has obtained dismissals or settlements of its asbestos-related
lawsuits with no material effect on its financial condition, results of
operations or cash flows, and over the past several years, has substantially
reduced its number of pending asbestos-related claims. The Company has also
obtained insurance coverage that applies to a portion of certain of the
Company’s defense costs and payments of settlements or judgments in connection
with asbestos-related lawsuits.
Based
on
an ongoing evaluation, the Company believes that the resolution of its pending
asbestos claims will not have a material impact on the Company’s financial
condition, results of operations, or cash flows, although these matters could
result in the Company being subject to monetary damages, costs or expenses,
and
charges against earnings in particular periods.
Middelburg
(Netherlands) Environmental Proceeding
In
June
2005, Eastman Chemical Middelburg, B.V., a wholly owned subsidiary of the
Company, (the "Subsidiary") received a summons from the Middelburg (Netherlands)
District Court Office to appear before the economic magistrate of that District
and respond to allegations that the Subsidiary's manufacturing facility in
Middelburg 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 as a result of the alleged
violations. A hearing in this matter took place on July 28, 2005, at which
time
the magistrate bifurcated the proceeding into two phases: a compliance phase
and
an economic benefit phase. With respect to the compliance phase, the magistrate
levied a fine of less than $100,000. With respect to the economic benefit phase,
where the prosecutor proposed a penalty in excess of $100,000, the district
court in November 2006 assessed against the Subsidiary a penalty of less than
$100,000. The prosecutor has appealed this ruling, and the appeal is pending.
This disclosure is made pursuant to SEC Regulation S-K, Item 103, Instruction
5.C., which requires disclosure of administrative proceedings commenced under
environmental laws that involve governmental authorities as parties and
potential monetary sanctions in excess of $100,000. The Company believes
that the ultimate resolution of this proceeding will not have a
material impact on the Company’s financial condition, results of operations, or
cash flows.
Jefferson
(Pennsylvania) Environmental Proceeding
In
December 2005, Eastman Chemical Resins, Inc., a wholly-owned subsidiary of
the
Company (the "ECR Subsidiary"), received a Notice of Violation ("NOV") from
the
United States Environmental Protection Agency's Region III Office ("EPA")
alleging that the ECR Subsidiary's West Elizabeth, Jefferson Borough, Allegheny
County, Pennsylvania manufacturing operation (the "Jefferson Facility") violated
certain federally enforceable local air quality regulations and certain
provisions in a number of air quality-related permits. The NOV did not assess
a
civil penalty and EPA has to date not proposed any specific civil penalty
amount. In October 2006, EPA referred the matter to the United States Department
of Justice's Environmental Enforcement Section ("DOJ"). Company representatives
met with EPA and DOJ in November, 2006 and subsequent to that meeting the
Company determined that it is not reasonably likely that any civil penalty
assessed by the EPA and DOJ will be less than $100,000. While the Company
intends to vigorously defend against these allegations, this disclosure is
made
pursuant to
SEC
Regulation S-K, Item 103, Instruction 5.C.,
which
requires disclosure of administrative proceedings commenced under environmental
laws that involve governmental authorities as parties and potential monetary
sanctions in excess of $100,000. The Company believes that the ultimate
resolution of this proceeding will not have a material impact on the Company's
financial condition, results of operations, or cash flows.
There
were no matters submitted to a vote of the Company's stockholders during the
fourth quarter of 2006.
PART
II
(a)
Eastman Chemical Company's ("Eastman" or the "Company") common stock is traded
on the New York Stock Exchange ("NYSE") under the symbol "EMN". The following
table presents the high and low sales prices of the common stock on the NYSE
and
the cash dividends per share declared by the Company's Board of Directors for
each quarterly period of 2006 and 2005.
|
High
|
|
Low
|
|
Cash
Dividends Declared
|
2006
|
First
Quarter
|
$
|
53.83
|
$
|
47.30
|
$
|
0.44
|
|
Second
Quarter
|
58.15
|
|
50.00
|
|
0.44
|
|
Third
Quarter
|
54.69
|
|
48.72
|
|
0.44
|
|
Fourth
Quarter
|
61.29
|
|
53.62
|
|
0.44
|
2005
|
First
Quarter
|
$
|
61.80
|
$
|
50.48
|
$
|
0.44
|
|
Second
Quarter
|
60.80
|
|
47.40
|
|
0.44
|
|
Third
Quarter
|
58.38
|
|
44.10
|
|
0.44
|
|
Fourth
Quarter
|
56.77
|
|
45.34
|
|
0.44
|
As
of
December 31, 2006, there were 83,637,623 shares of the Company's common stock
issued and outstanding, which shares were held by 29,190 stockholders of record.
These shares include 106,771 shares held by the Company's charitable foundation.
The Company has declared a cash dividend of $0.44 per share during the first
quarter of 2007. Quarterly dividends on common stock, if declared by the
Company's Board of Directors, are usually paid on or about the first business
day of the month following the end of each quarter. The payment of dividends
is
a business decision made by the Board of Directors from time to time based
on
the Company's earnings, financial position and prospects, and such other
considerations as the Board considers relevant. Accordingly, while management
currently expects that the Company will continue to pay the quarterly cash
dividend, its dividend practice may change at any time.
During
the fourth quarter of 2006, the Board of Directors of the Company redeemed
all
of the outstanding preferred stock purchase rights issuable pursuant to the
Stockholder Protection Rights Agreement and terminated the Stockholder
Protection Rights Agreement.
See
Part
III, Item 12 — “Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters—Securities Authorized for Issuance Under Equity
Compensation Plans” of this 2006 Annual Report on Form 10-K for the Information
required by Item 201(d) of Regulation S-K.
(b)
Not
applicable
(c)
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Period
|
Total
Number
of
Shares
Purchased
(1)
|
|
Average
Price Paid Per Share
(2)
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
(3)
|
|
Approximate
Dollar
Value
(in Millions) that May Yet Be Purchased Under the Plans or Programs
(3)
|
October
1- 31, 2006
|
59,526
|
$
|
60.48
|
|
0
|
|
|
November
1-30, 2006
|
44,517
|
$
|
58.87
|
|
0
|
|
|
December
1-31, 2006
|
8,107
|
$
|
58.03
|
|
0
|
|
|
Total
|
112,150
|
|
|
|
0
|
$
|
288
|
|
(1)
|
Shares
surrendered to the Company by employees to satisfy individual tax
withholding obligations upon vesting of previously issued shares
of
restricted common stock and shares surrendered by employees as payment
to
the Company of the purchase price for shares of common stock under
the
terms of previously granted stock options. Shares are not part of
any
Company repurchase plan.
|
|
(2)
|
Average
price paid per share reflects the weighted average of the closing
price of
Eastman common stock on the business days the shares were surrendered
by
the employee stockholders.
|
|
(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.
On
February 20, 2007, the Board of Directors cancelled its prior
authorization for stock repurchases dated February 4, 1999 and approved
a
new authorization for the repurchase of up to $300 million of the
Company's outstanding common stock at such times, in such amounts,
and on
such terms, as determined to be in the best interests of the Company.
Repurchased shares may be used for such purposes or otherwise applied
in
such a manner as determined to be in the best interests of the Company.
For
additional information, see Note 14, "Stockholders' Equity", to the
Company’s consolidated financial statements in Part II, Item 8 of this
2006 Annual Report on Form 10-K.
|
Summary
of Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
7,450
|
$
|
7,059
|
$
|
6,580
|
$
|
5,800
|
$
|
5,320
|
Operating
earnings (loss)
|
|
640
|
|
757
|
|
175
|
|
(267)
|
|
208
|
Earnings
(loss) before cumulative effect of change in accounting
principles
|
|
409
|
|
557
|
|
170
|
|
(273)
|
|
79
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principles, net
|
|
--
|
|
--
|
|
--
|
|
3
|
|
(18)
|
Net
earnings (loss)
|
$
|
409
|
$ |
557
|
$ |
170
|
$
|
(270)
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share before
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principles
|
$
|
4.98
|
$
|
6.90
|
$
|
2.20
|
$
|
(3.54)
|
$
|
1.02
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principles, net
|
|
--
|
|
--
|
|
--
|
|
0.04
|
|
(0.23)
|
Net
earnings (loss) per share
|
$
|
4.98
|
$
|
6.90
|
$
|
2.20
|
$
|
(3.50)
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share before
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principles
|
$
|
4.91
|
$
|
6.81
|
$
|
2.18
|
$
|
(3.54)
|
$
|
1.02
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principles, net
|
|
--
|
|
--
|
|
--
|
|
0.04
|
|
(0.23)
|
Net
earnings (loss) per share
|
$
|
4.91
|
$
|
6.81
|
$
|
2.18
|
$
|
(3.50)
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Financial Position Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
$
|
2,422
|
$
|
1,924
|
$
|
1,768
|
$
|
2,010
|
$
|
1,547
|
Net
properties
|
|
3,069
|
|
3,162
|
|
3,192
|
|
3,419
|
|
3,753
|
Total
assets
|
|
6,173
|
|
5,773
|
|
5,839
|
|
6,244
|
|
6,287
|
Current
liabilities
|
|
1,059
|
|
1,051
|
|
1,099
|
|
1,477
|
|
1,247
|
Long-term
borrowings
|
|
1,589
|
|
1,621
|
|
2,061
|
|
2,089
|
|
2,054
|
Total
liabilities
|
|
4,144
|
|
4,161
|
|
4,655
|
|
5,201
|
|
5,016
|
Total
stockholders’ equity
|
|
2,029
|
|
1,612
|
|
1,184
|
|
1,043
|
|
1,271
|
Dividends
declared per share
|
|
1.76
|
|
1.76
|
|
1.76
|
|
1.76
|
|
1.76
|
Effective
January 1, 2003, the Company’s method of accounting for environmental closure
and post-closure costs changed as a result of the adoption of Statement of
Accounting Standards ("SFAS") No. 143, “Accounting for Asset Retirement
Obligations.” If the provisions of SFAS No. 143 had been in effect in prior
years, the impact on the Company’s financial results would have been immaterial.
For additional information see Note 12, "Environmental Matters", to the
Company’s consolidated financial statements in Part II, Item 8 of the 2005
Annual Report on Form 10-K.
On
July
31, 2004, the Company completed the sale of certain businesses, product lines
and related assets within the Coatings, Adhesives, Specialty Polymers and Inks
("CASPI") segment. For more information regarding the impact of this divestiture
on financial results, refer to the CASPI segment discussion of Part II, Item
7 -
"Management Discussion and Analysis" of this 2006 Annual Report on Form
10-K.
In
second
quarter 2005, the Company completed the sale of its equity investment in
Genencor International, Inc. ("Genencor"). For
more
information, refer to
Note 5,
"Equity Investments and Other Noncurrent Assets and Liabilities", to the
Company's consolidated financial statements in Part II, Item 8 of this 2006
Annual Report on Form 10-K.
In
second
quarter 2005, the Company completed the early repayment of $500 million of
its
outstanding long-term bonds. For
more
information, refer to Note 8, "Early Extinguishment of Debt", to the Company's
consolidated financial statements in Part II, Item 8 of this 2006 Annual Report
on Form 10-K.
In
fourth
quarter 2006, the Company completed the sale of its Batesville, Arkansas
manufacturing facility and related assets and specialty organic chemicals
product lines in the Performance Chemicals and Intermediates segment and the
sale of its polyethylene and Epolene
polymer
businesses and related assets located at the Longview, Texas site and the
Company's ethylene pipeline. The polyethylene assets and product lines were
in
the Performance Polymers segment, while the Epolene
assets
and product lines were in the CASPI segment. For more information regarding
the
impact of these divestitures on financial results, refer to the segment
discussions of Part II, Item 7 - "Management Discussion and Analysis" and Part
II, Item 8 - "Notes the Audited Consolidated Financial Statements" - Note 24,
"Divestitures" of this 2006 Annual Report on Form 10-K.
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM
|
Page
|
|
|
Critical
Accounting Policies
|
33
|
|
|
2006
Overview
|
36
|
|
|
Results
of Operations
|
|
Summary
of Consolidated Results - 2006 Compared with 2005
|
37
|
Summary
by Operating Segment
|
40
|
Summary
by Customer Location - 2006 Compared with 2005
|
46
|
Summary
of Consolidated Results - 2005 Compared with 2004
|
47
|
Summary
by Operating Segment
|
50
|
Summary
by Customer Location - 2005 Compared with 2004
|
53
|
|
|
Liquidity,
Capital Resources, and Other Financial Information
|
54
|
|
|
Environmental
|
59
|
|
|
Inflation
|
60
|
|
|
Recently
Issued Accounting Standards
|
60
|
|
|
Outlook
|
62
|
|
|
Forward-Looking
Statements and Risk Factors
|
63
|
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the consolidated financial statements for Eastman
Chemical Company ("Eastman" or the "Company"), which have been prepared in
accordance with accounting principles generally accepted in the United States,
and should be read in conjunction with the Company's consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. All references
to earnings per share contained in this report are diluted earnings per share
unless otherwise noted.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
CRITICAL
ACCOUNTING POLICIES
In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States, the Company’s management
must make decisions which impact the reported amounts and the related
disclosures. Such decisions include the selection of the appropriate accounting
principles to be applied and assumptions on which to base estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going 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 described below 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.
Allowances
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company believes, based on historical results, the likelihood of actual
write-offs having a material impact on financial results or earnings per share
is low. However, if one of the Company’s key customers were to file for
bankruptcy, or otherwise be unable to make its required payments, or there
was a
significant continued slowdown in the economy, the Company could be forced
to
increase its allowances. This could result in a material charge to earnings.
For
trade receivables of $698 million and $595 million at December 31, 2006 and
2005, respectively, the Company’s allowances were $16 million and $20 million,
respectively.
Impairment
of Long-Lived Assets
The
Company evaluates the carrying value of long-lived assets, including
definite-lived intangible assets, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Such events and
circumstances include, but are not limited to, significant decreases in the
market value of the asset, adverse change in the extent or manner in which
the
asset is being used, significant changes in business climate, or current or
projected cash flow losses associated with the use of the assets. The carrying
value of a long-lived asset is considered impaired when the total projected
undiscounted cash flows from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long-lived asset.
For
long-lived assets to be held and used, fair value of fixed (tangible) assets
and
definite-lived intangible assets is determined primarily using either the
projected cash flows discounted at a rate commensurate with the risk involved
or
an appraisal. For long-lived assets to be disposed of by sale or other than
by
sale, fair value is determined in a similar manner, except that fair values
are
reduced for disposal costs.
The
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets," require that goodwill and
indefinite-lived intangible assets be tested at least annually for impairment
and require reporting units to be identified for the purpose of assessing
potential future impairments of goodwill. The carrying value of goodwill and
indefinite lived intangibles is considered impaired when their fair value,
as
established by appraisal or based on undiscounted future cash flows of certain
related products, is less than their carrying value. The Company conducts its
annual testing of goodwill and indefinite-lived intangible assets for impairment
in the third quarter of each year, unless events warrant more frequent
testing.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
As
the
Company’s assumptions related to long-lived assets are subject to change,
additional write-downs may be required in the future. If estimates of fair
value
less costs to sell are revised, the carrying amount of the related asset is
adjusted, resulting in a charge to earnings. The Company recorded fixed
(tangible) asset impairments of $55 million and definite-lived intangible asset
impairments of $1 million during 2006. The Company recorded fixed (tangible)
asset impairments of $9 million and definite-lived intangible asset impairments
of $3 million during 2005.
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can
be
reasonably estimated. When a single amount cannot be reasonably estimated but
the cost can be estimated within a range, the Company accrues the minimum
amount. This undiscounted accrued amount reflects the Company’s assumptions
about remediation requirements at the contaminated site, the nature of the
remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties. Changes in the
estimates on which the accruals are based, unanticipated government enforcement
action, or changes in health, safety, environmental, and chemical control
regulations and testing requirements could result in higher or lower costs.
Estimated future environmental expenditures for remediation costs range from
the
minimum or best estimate of $18 million to the maximum of $32 million at
December 31, 2006.
In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations,"
the
Company also establishes reserves for closure/postclosure costs associated
with
the environmental and other assets it maintains. Environmental assets, as
defined in SFAS No. 143, include but are not limited to waste management units,
such as landfills, water treatment facilities, and ash ponds. When these types
of assets are constructed or installed, a reserve is established for the future
costs anticipated to be associated with the retirement or closure of the asset
based on an expected life of the environmental assets and the applicable
regulatory closure requirements. These future expenses are charged into earnings
over the estimated useful life of the assets. Currently, the Company estimates
the useful life of each individual asset is up to 50 years. If the Company
changes its estimate of the asset retirement obligation costs or its estimate
of
the useful lives of these assets,
expenses to be charged into earnings could increase or decrease.
In
accordance with Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” ("FIN 47"), the Company also monitors conditional
obligations and will record reserves associated with them when and to the extent
that more detailed information becomes available concerning applicable
retirement costs.
The
Company’s reserve for environmental contingencies was $47 million and $51
million at December 31, 2006 and 2005, respectively, representing the minimum
or
best estimate for remediation costs and, for asset retirement obligation costs,
the best estimate of the amount accrued to date over the regulated assets'
estimated useful lives.
United
States Pension and Other Post-employment Benefits
The
Company maintains defined benefit pension plans that provide eligible employees
with retirement benefits. Additionally, Eastman provides life insurance and
health care benefits for eligible retirees and health care benefits for
retirees’ eligible survivors. The costs and obligations related to these
benefits reflect the Company’s assumptions related to general economic
conditions (particularly interest rates) and expected return on plan assets.
At
December 31, 2006, the Company assumed a discount rate of 5.86 percent and
an
expected return on assets of 9 percent. The cost of providing plan benefits
also
depends on demographic assumptions including retirements, mortality, turnover,
and plan participation.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
following table illustrates the sensitivity to a change in the expected return
on assets and assumed discount rate for U.S. pension plan and other
postretirement welfare plans:
Change
in
Assumption
|
Impact
on
2007
Pre-tax U.S.
Benefits
Expense
|
Impact
on
December
31, 2006
Projected
Benefit Obligation for U.S. Pension Plan
|
Impact
on
December
31, 2006
Benefit
Obligation for Other U.S. Postretirement Plans
|
|
|
|
|
25
basis point
decrease
in discount
rate
|
+$5
Million
|
+$49
Million
|
+$21
Million
|
|
|
|
|
25
basis point
increase
in discount
rate
|
-$5
Million
|
-$46
Million
|
-$21
Million
|
|
|
|
|
25
basis point
decrease
in expected return on assets
|
+$3
Million
|
No
Impact
|
N/A
|
|
|
|
|
25
basis point
increase
in expected
return
on assets
|
-$3
Million
|
No
Impact
|
N/A
|
The
expected return on assets and assumed discount rate used to calculate the
Company’s pension and other post-employment benefit obligations are established
each December 31. The expected return on assets is based upon the long-term
expected returns in the markets in which the pension trust invests its funds,
primarily the domestic, international, and private equities markets. The actual
return on assets has exceeded the expected return for the last 3 years. The
assumed discount rate is based upon a portfolio of high-grade corporate bonds,
which are used to develop a yield curve. This yield curve is applied to the
expected durations of the pension and post-employment benefit obligations.
A
1
percent increase or decrease in the health care trend would have had no material
impact.
If
actual
experience differs from these assumptions, the difference is recorded as an
unrecognized actuarial gain (loss) and then amortized into earnings over a
period of time, which may cause the expense related to providing these benefits
to increase or decrease. The charges applied to earnings in 2006, 2005, and
2004
due to the amortization of these unrecognized actuarial losses, largely due
to
actual experience versus assumptions of discount rates, were $54 million, $56
million, and $44 million, respectively.
The
Company does not anticipate that a change in pension and other post-employment
obligations caused by a change in the assumed discount rate will impact the
cash
contributions to be made to the pension plans during 2007. However, an after-tax
charge or credit will be recorded directly to accumulated other comprehensive
income (loss), a component of stockholders’ equity, as of December 31, 2007 for
the impact on the pension’s projected benefit obligation of the change in
interest rates, if any. While the amount of the change in these obligations
does
not correspond directly to cash funding requirements, it is an indication of
the
amount the Company will be required to contribute to the plans in future years.
The amount and timing of such cash contributions is dependent upon interest
rates, actual returns on plan assets, retirement, attrition rates of employees,
and other factors. For further information regarding pension and other
post-employment obligations, see Note 10, "Retirement Plans", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2006 Annual Report
on Form 10-K.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Litigation
and Contingent Liabilities
From
time
to time, the Company and its operations are parties to or targets of lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which
are
handled and defended in the ordinary course of business. The Company accrues
a
liability for such matters when it is probable that a liability has been
incurred and the amount can be reasonably estimated. When a single amount cannot
be reasonably estimated but the cost can be estimated within a range, the
Company accrues the minimum amount. The Company expenses legal costs, including
those expected to be incurred in connection with a loss contingency, as
incurred. The Company believes the amounts reserved are adequate for such
pending matters; however, results of operations could be affected by significant
litigation adverse to the Company.
Income
Taxes
The
Company records deferred tax assets and liabilities based on temporary
differences between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates expected to be in effect for the year
in
which the differences are expected to reverse. The ability to realize the
deferred tax assets is evaluated through the forecasting of taxable income
using
historical and projected future operating results, the reversal of existing
temporary differences, and the availability of tax planning strategies.
Valuation allowances are recorded to reduce deferred tax assets when it is
more
likely than not that a tax benefit will not be realized. In the event that
the
actual outcome of future tax consequences differs from our estimates and
assumptions, the resulting change to the provision for income taxes could have
a
material adverse impact on the consolidated results of operations and statement
of financial position. As of December 31, 2006, a valuation allowance of $130
million has been provided against the deferred tax assets.
2006
OVERVIEW
The
Company generated sales revenue of $7.5 billion for full year 2006, which was
the highest in the Company's history and a 6 percent increase over 2005.
Operating
earnings were $640 million in 2006, a decline of $117 million compared with
2005. These results reflect continued strong earnings from the Company's broad
base of businesses, with the decline substantially due to lower results in
the
Performance Polymers segment. During 2006, the Company was impacted by $400
million higher raw material and energy costs. Most of the Company's
businesses were able to offset these costs with higher selling prices, higher
volumes and lower operating costs. However, the Performance Polymers segment
had
lower selling prices, particularly for polyethylene
terephthalate ("PET")
polymers, in spite of higher raw material costs, due to lower industry capacity
utilization rates.
The
Company continued to evaluate its portfolio of businesses and product lines
to
better focus on its core strengths and improve overall profitability. As a
result of the strategic decisions made, operating earnings were negatively
impacted by $10 million of accelerated depreciation and $101 million in asset
impairment and restructuring charges. These charges were partially offset by
$68
million of other operating income from the sale of its polyethylene ("PE")
business and related assets and the sale of its Batesville, Arkansas
manufacturing facility and related assets. In 2006, these divested product
lines
had sales revenue of $811 million and operating earnings of $124 million.
Operating earnings in 2005 included asset impairments and restructuring charges
were $33 million and other operating income was $2 million.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
addition to achieving the above results, Eastman continued to progress on its
overall growth objectives and announced its plans to improve the performance
of
its PET polymer product lines in the Performance Polymers segment. These efforts
included:
· |
the
start-up of the Company's 350 thousand metric tons new PET facility
using
IntegRex
technology in Columbia, South Carolina which is expected to be at
full
production by the end of the first quarter of
2007;
|
· |
plans
to debottleneck the IntegRex
technology facility for an additional 100 thousand metric tons of
capacity, to be completed in early 2008;
|
· |
rationalizing
350 thousand metric tons of existing capacity in North America, to
be
completed by mid-2008;
|
· |
plans
to expand its acetate tow capacity in Workington, England in the
Fibers
segment;
|
· |
continuing
development of a new family of copolyesters in the Specialty Plastics
("SP") segment to be commercialized in 2007; and
|
· |
furthering
the advancement of its coal gasification
efforts.
|
The
Company is also considering various strategic options for its underperforming
PET manufacturing facilities outside the United States that could lead to
further restructuring, divestiture, or consolidation of product lines in the
Performance Polymers segment to improve profitability. In first quarter 2007,
the Company entered
into an agreement to sell the San Roque, Spain manufacturing
facility.
Net
earnings for 2006 were $409 million versus 2005 net earnings of $557 million.
Included in 2005
results were a $111 million gain, net of tax, on the sale of the Company's
equity investment in Genencor International, Inc. ("Genencor") and early debt
retirement costs of $28 million, net of tax.
The
Company generated $609 million in cash from operating activities during 2006,
a
decrease of $160 million compared to 2005. The decline was due primarily to
higher net earnings in 2005 compared with 2006 and an increase of $128 million
in working capital in 2006, partially offset by lower pension contributions
in
the current year.
RESULTS
OF OPERATIONS
SUMMARY
OF CONSOLIDATED RESULTS - 2006 COMPARED WITH 2005
The
Company’s results of operations as presented in the Company’s consolidated
financial statements in Part II, Item 8 of this 2006 Annual Report on Form
10-K
are summarized and analyzed below:
|
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
7,450
|
$
|
7,059
|
|
6
%
|
|
2
%
|
|
5
%
|
|
(1)
%
|
|
--
%
|
Sales
revenue for 2006 increased compared with 2005 primarily due to higher selling
prices in response to both higher raw material and energy costs and continued
strong economic conditions.
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Gross
Profit
|
$
|
1,277
|
$
|
1,404
|
|
(9)
%
|
As
a percentage of sales
|
|
17.1%
|
|
19.9%
|
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Gross
profit and gross profit as a percentage of sales for 2006 decreased,
particularly in the Performance Polymers segment, compared with 2005 primarily
due to increased raw material and energy costs and operational disruptions
that
were partially offset by higher selling prices. In 2006, raw material and energy
costs increased by approximately $400 million compared to the prior year,
compared to a selling price increase of $323 million. In
addition, 2006 included $10 million of accelerated depreciation related
to previously disclosed restructuring decisions in association with cracking
units in Longview, Texas, and higher cost PET polymer assets in Columbia, South
Carolina, which are scheduled for shutdown.
In 2007,
accelerated depreciation will be approximately $50 million related to these
assets.
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses ("SG&A")
|
$
|
437
|
$
|
454
|
|
(4)
%
|
Research
and Development Expenses ("R&D")
|
|
167
|
|
162
|
|
3
%
|
|
$
|
604
|
$
|
616
|
|
(2)
%
|
As
a percentage of sales
|
|
8.1%
|
|
8.7%
|
|
|
SG&A
expenses in 2006 decreased compared to 2005 primarily due to lower incentive
compensation expense in 2006, which included compensation expense recorded
under
SFAS No. 123 Revised December 2004 ("SFAS No. 123(R)"), "Share-Based Payment".
For more information concerning SFAS No. 123(R), see Note 15, "Share Based
Compensation Plans and Awards", to the Company’s consolidated financial
statements in Part II, Item 8 of this 2006 Annual Report on Form
10-K.
R&D
expenses for 2006 increased compared with 2005 primarily due to increased
spending on growth initiatives, particularly in the SP segment, which more
than
offset lower expenses in the Performance Polymers segment.
Asset
Impairments and Restructuring Charges, Net
Asset
impairments and restructuring charges totaled $101 million and $33 million
during 2006 and 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
16, "Asset Impairments and Restructuring Charges, Net", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2006 Annual Report
on Form 10-K.
Other
Operating Income
Other
operating income for 2006 reflects a gain of $75 million on the sale of the
Company's PE and Epolene
polymer
businesses, related assets, and the Company's ethylene pipeline and charges
of
approximately $7 million related to the sale of the Company's Batesville,
Arkansas manufacturing facility and its related assets and product lines. For
more information concerning divestitures, see Note 24, "Divestitures", to the
Company’s consolidated financial statements in Part II, Item 8 of this 2006
Annual Report on Form 10-K.
Other
operating income for 2005 reflects a $2 million gain related to the 2004
divestiture of certain businesses and product lines within the Coatings,
Adhesives, Specialty Polymers and Inks ("CASPI") segment.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Interest
Expense, Net
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Gross
interest costs
|
$
|
112
|
$
|
118
|
|
|
Less:
capitalized interest
|
|
7
|
|
5
|
|
|
Interest
expense
|
|
105
|
|
113
|
|
(7)
%
|
Interest
income
|
|
25
|
|
13
|
|
|
Interest
expense, net
|
$
|
80
|
$
|
100
|
|
(20)
%
|
Lower
gross interest costs for 2006 compared to 2005 reflected lower average
borrowings that more than offset higher average interest rates.
Higher
interest income for 2006 compared to 2005 reflected
higher invested cash balances as well as higher average interest rates,
resulting in lower net interest expense.
For
2007,
the Company expects net interest expense to decrease compared with 2006
primarily due to higher interest income, driven by higher invested cash
balances.
Income
from Equity Investment in Genencor
For
2005,
income from equity investment in Genencor includes the
Company's portion of earnings from its equity investment in Genencor. In 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 purchased debt was $500
million.
Other
(Income) Charges, net
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Other
income
|
$
|
(24)
|
$
|
(11)
|
$
|
(13)
|
Other
charges
|
|
8
|
|
12
|
|
(4)
|
Other
(income) charges, net
|
$
|
(16)
|
$
|
1
|
$
|
(15)
|
Included
in other income are the Company’s portion of net earnings from its equity
investments (excluding Genencor); gains on the sale of certain technology
business venture investments, royalty income, net gains on foreign exchange
transactions and other non-operating income, related to Holston
Defense Corporation ("HDC"). Included in other charges are net losses on foreign
exchange transactions, the Company’s portion of losses from its equity
investments (excluding Genencor); 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
Included
in 2006 other income is a $12 million gain related
to a favorable award from the U.S. Department of the Army regarding a request
for reimbursement for post-employment benefits being provided to retirees of
HDC, a wholly owned subsidiary. This gain reflected a portion of the
unrecognized gain resulting from the award that will be amortized into earnings
over future periods. For
additional information, see
Note
10, "Retirement Plans", to the Company’s consolidated financial statements in
Part II, Item 8 of this 2006 Annual Report on Form 10-K.
Provision
for Income Taxes
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
167
|
$
|
226
|
|
(26)
%
|
Effective
tax rate
|
|
29
%
|
|
29
%
|
|
|
The
2006
effective tax rate reflects the Company's tax rate on reported operating
earnings before income tax, excluding discrete items, of 33 percent. The
effective tax rate was impacted by $25 million of deferred tax benefit resulting
from the reversal of capital loss carryforward valuation reserves and $11
million of deferred tax benefit resulting from the reversal of foreign net
operating loss valuation reserves.
The
2005
effective tax rate reflects the Company's tax rate on reported operating
earnings before income tax, excluding discrete items, of 35 percent. The
effective tax rate was impacted by $13 million of deferred tax benefit resulting
from the reversal of capital loss carryforward valuation reserves, $14 million
of tax benefit resulting from the change in reserves for tax contingencies
due
to the favorable resolution of prior periods' tax contingencies and a $11
million charge resulting from the repatriation of $321 million of foreign
earnings and capital pursuant to provisions of the American Jobs Creation Act
of
2004.
The
Company expects its effective tax rate in 2007 will be approximately 35
percent.
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
2006
|
|
2005
|
|
|
|
|
|
Net
earnings
|
$
|
409
|
$
|
557
|
Earnings
per share
|
|
|
|
|
Basic
|
$
|
4.98
|
$
|
6.90
|
Diluted
|
|
4.91
|
|
6.81
|
|
|
|
|
|
SUMMARY
BY OPERATING SEGMENT
The
Company’s products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the
Performance Chemicals and Intermediates ("PCI") segment, the 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 and analysis of the results of the Company’s operating
segments, see
Note
21, "Segment Information", to the Company’s consolidated financial statements in
Part II, Item 8 of this 2006 Annual Report on Form 10-K and Exhibits 99.01to
this Annual Report.
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 R&D expenses not identifiable to an operating segment are not included
in segment operating results for either of the periods presented and are shown
in Note 21, "Segment Information", to the Company's consolidated financial
statements in Part II, Item 8 of this 2006 Annual Report on Form 10-K as "other"
revenues and operating losses.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
fourth
quarter 2006, certain product lines were transferred from the PCI segment to
the
Performance Polymers segment. During 2005 and 2004, these amounts were included
within the PCI segment. Accordingly, the prior year's amounts for sales and
operating earnings have been adjusted to retrospectively apply these changes
to
all periods presented.
CASPI
Segment
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
1,421
|
$
|
1,299
|
$
|
122
|
|
9
%
|
|
Volume
effect
|
|
|
|
|
|
|
|
|
6
|
|
--
%
|
|
Price
effect
|
|
|
|
|
|
|
|
|
115
|
|
9
%
|
|
Product
mix effect
|
|
|
|
|
|
|
|
|
4
|
|
--
%
|
|
Exchange
rate effect
|
|
|
|
|
|
|
(3)
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
|
|
229
|
|
228
|
|
1
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
13
|
|
4
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
|
|
--
|
|
(2)
|
|
2
|
|
|
Sales
revenue increased $122 million in 2006 compared to 2005 due to an increase
in
selling prices in response to higher raw material and energy costs.
Operating
earnings increased $1 million for 2006 compared to 2005 including increased
asset impairments and restructuring charges. Asset impairments and restructuring
charges of $13 million for 2006 related to previously closed manufacturing
facilities and severance related to a voluntary reduction in force. Asset
impairments and restructuring charges of $4 million for 2005 related primarily
to previously closed manufacturing facilities. These charges are more fully
described in Note 16, "Impairments and Restructuring Charges", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2006 Annual Report
on Form 10-K. Excluding these items, operating earnings increased due to an
increase in selling prices that more than offset higher raw material and energy
costs, and favorable product mix that resulted from higher sales volume for
specialty coatings.
In
November 2006, the Company sold the CASPI segment's Epolene
polymer
businesses and related assets. CASPI sales revenue and operating earnings
attributed to the divested businesses were $65 million and $3 million,
respectively, for 2006.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Fibers
Segment
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
910
|
$
|
869
|
$
|
41
|
|
5
%
|
|
Volume
effect
|
|
|
|
|
|
|
|
|
17
|
|
2
%
|
|
Price
effect
|
|
|
|
|
|
|
|
|
55
|
|
6
%
|
|
Product
mix effect
|
|
|
|
|
|
|
|
|
(31)
|
|
(3)
%
|
|
Exchange
rate effect
|
|
|
|
|
|
|
|
|
--
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
|
|
226
|
|
216
|
|
10
|
|
5
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
2
|
|
--
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Sales
revenue increased $41 million in 2006 compared to 2005 primarily due to higher
selling prices and higher sales volume that were partially offset by an
unfavorable shift in product mix. 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. The increased sales volume and shift in product mix
were due to strong demand for acetyl chemical products attributed to
strengthened global acetate tow demand.
Operating
earnings for 2006 compared to 2005 increased $10 million as higher selling
prices and increased sales volume more than offset higher raw material and
energy costs. Asset impairment and restructuring charges of $2 million in 2006
related primarily to severance due to a voluntary reduction in force.
The
Company believes that acetate tow has modest growth potential in future years
and has been evaluating growth options in Europe and Asia. In the third quarter
2006, the Company announced plans to add capacity and expand production of
Estron
acetate
tow in Europe at its Workington, England facility. The Company continues to
evaluate options for growth in Asia.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
PCI
Segment
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
1,659
|
$
|
1,560
|
$
|
99
|
|
6
%
|
|
Volume
effect
|
|
|
|
|
|
|
|
|
1
|
|
--
%
|
|
Price
effect
|
|
|
|
|
|
|
|
|
118
|
|
7
%
|
|
Product
mix effect
|
|
|
|
|
|
|
|
|
(19)
|
|
(1)
%
|
|
Exchange
rate effect
|
|
|
|
|
|
|
|
|
(1)
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
|
|
132
|
|
143
|
|
(11)
|
|
(8)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
|
2
|
|
--
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
20
|
|
11
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating charges
|
|
|
|
|
7
|
|
--
|
|
7
|
|
|
Sales
revenue for 2006 compared to 2005 increased $99 million primarily due to higher
selling prices, particularly in the intermediates product lines, in response
to
increases in raw material and energy costs.
Operating
earnings for 2006 included asset impairments and restructuring charges of $20
million primarily related to the divestiture of the PCI segment's Batesville,
Arkansas manufacturing facility and related assets and specialty organic
chemicals product lines completed in the fourth quarter 2006 and to severance
related to a voluntary reduction in force. The 2006 operating earnings also
included $2
million of
accelerated depreciation for cracking units at the Company's Longview, Texas
facility and $7 million of other operating charges related to the above
mentioned divestiture. Excluding
those items, operating earnings increased compared with 2005 as higher selling
prices more than offset higher raw material and energy costs. PCI sales revenue
and operating loss attributed to the divested product lines were $111 million
and $15 million, respectively, for 2006. The 2005 operating earnings included
$11 million in asset impairments and restructuring charges for previously
impaired sites and $10 million of operating earnings from the achievement of
certain milestones under an acetyls technology licensing agreement.
In
addition, as part of the transition agreement pertaining to the PE divestiture,
the Company will supply ethylene to the buyer. The supply of ethylene to the
buyer, which was formerly used internally, will be reported in the PCI segment.
The Company also expects to begin a staged phase-out of older cracking units
in
2007, with timing dependent in part on market conditions.
Performance
Polymers Segment
|
|
|
Change
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
Total
sales
|
$
|
2,642
|
$
|
2,586
|
$
|
56
|
|
2
%
|
Sales
- divested product lines
|
635
|
|
618
|
|
17
|
|
3
%
|
Sales
- continuing product lines
|
2,007
|
|
1,968
|
|
39
|
|
2
%
|
|
|
|
|
|
|
|
|
|
|
Volume
effect
|
|
|
|
|
41
|
|
1
%
|
|
Price
effect
|
|
|
|
|
2
|
|
--
%
|
|
Product
mix effect
|
|
|
|
|
8
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
5
|
|
--
%
|
|
|
|
|
|
|
|
|
Total
operating earnings
|
54
|
|
176
|
|
(122)
|
|
(69)
%
|
Operating
earnings - divested product lines (1)
|
136
|
|
75
|
|
61
|
|
81
%
|
Operating
earnings - continuing product lines
|
(82)
|
|
101
|
|
(183)
|
|
>
(100)%
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
7
|
|
--
|
|
7
|
|
|
Accelerated
depreciation - divested product lines (1)
|
--
|
|
--
|
|
--
|
|
|
Accelerated
depreciation - continuing product lines
|
7
|
|
--
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
46
|
|
--
|
|
46
|
|
|
Asset
impairments and restructuring charges, net - divested product lines
(1)
|
--
|
|
--
|
|
--
|
|
|
Asset
impairments and restructuring charges, net - continuing product
lines
|
46
|
|
--
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
(75)
|
|
--
|
|
(75)
|
|
|
Other
operating income - divested product lines (1)
|
(75)
|
|
--
|
|
(75)
|
|
|
Other
operating income - continuing product lines
|
--
|
|
--
|
|
--
|
|
|
(1)
Includes
allocated costs consistent with the Company’s historical practices, some of
which may remain and could be reallocated to the remainder of the segment and
other segments.
In
fourth
quarter 2006, the Company completed the divestiture of the Performance Polymer
segment's PE businesses and related assets located at the Longview, Texas site
and the Company's ethylene pipeline.
Sales
revenue increased $56 million for 2006 compared to 2005 primarily due to higher
sales volume, particularly for PET polymers in Latin America, mostly offset
by
lower sales volume for PET polymers in North America attributed to lower
industry capacity utilization rates. Excluding
the divested product lines, sales revenue increased $39 million.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings decreased $122 million for 2006 compared to 2005 primarily due to
higher and continued volatile raw material and energy costs, lower selling
prices for PET polymers globally, increased asset impairments and restructuring
charges and increased accelerated depreciation more than offsetting other
operating income and increased sales volume. Asset impairments and restructuring
charges of $46 million for 2006 were primarily related to the shutdown of a
research and development Kingsport, Tennessee pilot plant, discontinued
production of cyclohexane dimethanol ("CHDM") modified polymers in San Roque,
Spain and severance related to a reduction in force in the U.S. and Spain.
CHDM,
an internal intermediate product primarily used in copolyester and PET
production, was discontinued in San Roque, Spain to gain operational
efficiencies at other facilities. These charges are more fully described in
Note
16, "Impairments and Restructuring Charges", to the Company's consolidated
financial statements in Part II, Item 8 of this 2006 Annual Report on Form
10-K.
Accelerated depreciation of $7 million for 2006 related to previously disclosed
restructuring decisions in association with cracking units in Longview, Texas,
and higher cost PET polymer intermediates assets in Columbia, South Carolina,
which are scheduled for shutdown. Other operating income for 2006 reflects
a
gain of $75 million on the above mentioned divestiture. Excluding the divested
product lines, operating earnings decreased $183 million.
Production
began in November 2006 at the Company's new PET manufacturing facility utilizing
IntegRex
technology in Columbia, South Carolina. Manufacturing ParaStar
next
generation PET resins, the Company expects the facility to be at its full
operational capacity of 350 thousand metric tons during the first quarter of
2007. The
Company is evaluating the construction of a PET facility using the full
IntegRex
technology in the U.S. or elsewhere and utilizing further refinements to
IntegRex
technology.
The
Company is continuing to evaluate its strategic and operational options related
to certain underperforming PET assets to improve profitability of the segment.
In first quarter 2007, the Company entered into an agreement to sell the San
Roque, Spain manufacturing facility.
SP
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
818
|
$
|
718
|
$
|
100
|
|
14
%
|
|
Volume
effect
|
|
|
|
|
|
81
|
|
11
%
|
|
Price
effect
|
|
|
|
|
|
34
|
|
5
%
|
|
Product
mix effect
|
|
|
|
|
|
(11)
|
|
(1)
%
|
|
Exchange
rate effect
|
|
|
|
|
|
(4)
|
|
(1)
%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
46
|
|
64
|
|
(18)
|
|
(28)
%
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation
|
|
1
|
|
--
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
16
|
|
--
|
|
16
|
|
|
Sales
revenue for 2006 increased $100 million compared to 2005 due primarily to
increased sales volume and higher selling prices. The increased sales volume
was
primarily attributed to 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings for 2006 declined $18 million
compared with 2005 primarily due to asset impairment and restructuring charges,
increased expenditures related to growth initiatives and higher raw material
and
energy costs slightly more than offsetting increased sales volume and higher
selling prices. Asset
impairment and restructuring charges of $16 million in 2006 were related to
the
discontinued production of CHDM, an internal intermediate product primarily
used
in copolyester and PET production, in San Roque, Spain to gain operational
efficiencies at other facilities. Accelerated depreciation of $1 million for
2006 related primarily to South Carolina operations.
SUMMARY
BY CUSTOMER LOCATION - 2006 COMPARED WITH 2005
Sales
Revenue
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
4,223
|
$
|
4,098
|
|
3
%
|
|
(1)
%
|
|
5
%
|
|
(1)
%
|
|
--
%
|
Europe,
Middle East, and Africa
|
|
1,436
|
|
1,344
|
|
7
%
|
|
3
%
|
|
4
%
|
|
--
%
|
|
--
%
|
Asia
Pacific
|
|
941
|
|
930
|
|
1
%
|
|
(4)
%
|
|
8
%
|
|
(2)
%
|
|
(1)
%
|
Latin
America
|
|
850
|
|
687
|
|
24
%
|
|
25
%
|
|
(2)
%
|
|
1
%
|
|
--
%
|
|
$
|
7,450
|
$
|
7,059
|
|
6
%
|
|
2
%
|
|
5
%
|
|
(1)
%
|
|
--
%
|
Sales
revenue in the United States and Canada increased primarily due to higher
selling prices, particularly in the PCI segment, which had a $78 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, the Middle East and Africa increased primarily due to higher
selling prices, particularly in the CASPI segment, and higher
volumes particularly
in the Performance
Polymer segment. The
higher selling prices were primarily in response to increases in raw material
and energy costs.
Sales
revenue in Asia Pacific increased primarily due to higher selling prices,
partially offset by lower sales volume and changes in mix. Higher selling
prices, particularly in the Fibers segment, had a $76 million positive impact
on
sales revenue. Lower sales volume and negative mix, particularly for the Fibers
segment, had a $61 million negative impact on sales revenue.
Sales
revenue in Latin America increased primarily due to higher sales volume,
particularly in the Performance Polymers segment.
With
a
substantial portion of sales to customers outside the United States, Eastman
is
subject to the risks associated with operating in international markets. To
mitigate its exchange rate risks, the Company frequently seeks to negotiate
payment terms in U.S. dollars and euros. In addition, where it deems such
actions advisable, the Company engages in foreign currency hedging transactions
and requires letters of credit and prepayment for shipments where its assessment
of individual customer and country risks indicates their use is appropriate.
For
more information on these practices see Note 9 to the Company’s consolidated
financial statements in Part II, Item 8 of this 2006 Annual Report on Form
10-K
and Part II, Item 7A--"Quantitative and Qualitative Disclosures About Market
Risk."
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
OF CONSOLIDATED RESULTS - 2005 COMPARED WITH 2004
|
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
7,059
|
$
|
6,580
|
|
7
%
|
|
(7)
%
|
|
15
%
|
|
(1)
%
|
|
--
%
|
Sales
revenue for 2005 increased compared with 2004 primarily due to increased selling
prices of approximately $1 billion throughout the Company that more than offset
a decrease in volume resulting from divested businesses and product lines in
2004. The increase in selling prices was primarily in response to an increase
in
raw material and energy costs and the Company’s efforts to improve
profitability.
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
Gross
Profit
|
$
|
1,404
|
$
|
978
|
|
44
%
|
As
a percentage of sales
|
|
19.9
%
|
|
14.9
%
|
|
|
Gross
profit for 2005 increased compared with 2004 primarily due to the following
factors:
· |
increased
selling prices across all segments, primarily in response to higher
raw
material and energy costs which increased more than $500
million;
|
· |
a
continued focus on more profitable businesses and product
lines;
and
|
· |
cost
reduction programs.
|
The
above
items more than offset higher raw material and energy costs primarily
attributable to paraxylene, propane, natural gas, coal and ethylene
glycol.
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
|
$
|
454
|
$
|
450
|
|
1
%
|
Research
and Development Expenses
|
|
162
|
|
154
|
|
5
%
|
|
$
|
616
|
$
|
604
|
|
2
%
|
As
a percentage of sales
|
|
8.7%
|
|
9.2%
|
|
|
SG&A
costs for 2005 increased slightly compared with 2004 due primarily to higher
incentive compensation expense resulting from improved Company performance
and
higher bad debt expense, which more than offset decreases resulting from the
previous divestiture of certain businesses and product lines within the CASPI
segment and the shutdown of operations at Cendian.
R&D
expenses for 2005 increased compared with 2004 primarily due to
expenditures on growth initiatives in the SP segment and corporate R&D,
which more than offset decreases resulting from the previous divestiture of
certain businesses and product lines within the CASPI segment.
Impairments
and Restructuring Charges, Net
Impairments
and restructuring charges totaled $33 million during 2005, consisting of
non-cash asset impairments of $12 million and restructuring charges of $21
million. During 2004, these charges totaled $206 million, consisting of non-cash
asset impairments of $140 million and restructuring charges of $66 million.
For
more
information regarding asset impairments and restructuring charges, see
Note
16, "Impairments and Restructuring Charges", to the Company’s consolidated
financial statements in Part II, Item 8 of this 2006 Annual Report on Form
10-K.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Other
Operating Income
Other
operating income of $2 million for 2005 included a $2 million gain associated
with a change in estimates for contingencies related to the 2004 divestiture
of
certain businesses and product lines within the CASPI segment. Other operating
income of $7 million in 2004 resulted from the sale of Ariel Research
Corporation ("Ariel").
Operating
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
Operating
earnings
|
$
|
757
|
$
|
175
|
$
|
>100%
|
Operating
earnings for 2005 increased $582 million. Key
factors in the improved results, aided by strong economic growth,
were:
· |
increased
selling prices throughout the Company of approximately $1 billion
in
response to increasing raw material and energy
costs;
|
· |
lower
asset impairment and restructuring charges of $33 million in 2005
compared
to $206 million in 2004;
|
· |
completion
of previously announced restructuring, divestiture and consolidation
actions in 2004;
|
· |
a
continued focus on more profitable businesses and product lines across
the
Company's portfolio of businesses, including acetyl, olefins, and
polyester stream optimization; and
|
· |
continued
cost reduction efforts.
|
The
above
items more than offset an estimated $500 million increase in raw materials
and
energy costs and $33 million in asset impairments and restructuring charges.
Interest
Expense, Net
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
Gross
interest costs
|
$
|
118
|
$
|
126
|
|
|
Less:
capitalized interest
|
|
5
|
|
3
|
|
|
Interest
expense
|
|
113
|
|
123
|
|
(9)
%
|
Interest
income
|
|
13
|
|
8
|
|
|
Interest
expense, net
|
$
|
100
|
$
|
115
|
|
(14)
%
|
Lower
gross interest costs for 2005 compared to 2004 reflected lower average debt
levels primarily due to the early extinguishment of debt in second quarter
2005,
partially offset by higher average interest rates.
Higher
interest income for 2005 compared to 2004 reflected higher invested cash
balances as well as higher average interest rates, resulting in lower net
interest expense.
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. In 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 purchased debt was $500
million.
Other
(Income) Charges, net
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
Change
|
Other
income
|
$
|
(11)
|
$
|
(10)
|
$
|
(1)
|
Other
charges
|
|
12
|
|
20
|
|
(8)
|
Other
(income) charges, net
|
$
|
1
|
$
|
10
|
$
|
(9)
|
Included
in other income are the Company’s portion of earnings from its equity
investments (excluding Genencor); 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
(excluding Genencor); write-downs to fair value of certain technology business
venture investments due to other than temporary declines in value and fees
on
securitized receivables.
Provision
(Benefit) for Income Taxes
(Dollars
in millions)
|
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
$
|
226
|
$
|
(106)
|
|
>
100 %
|
Effective
tax rate
|
|
29%
|
|
N/A
|
|
|
The
2005
effective tax rate was impacted by $13 million of deferred tax benefit resulting
from the reversal of capital loss carryforward valuation reserves, $14 million
of tax benefit resulting from the change in reserves for tax contingencies
due
to the favorable resolution of prior periods' tax contingencies and a $11
million charge resulting from the repatriation of $321 million of foreign
earnings and capital pursuant to provisions of the American Jobs Creation Act
of
2004. Excluding discrete items, the effective tax rate would have been 35
percent.
The
2004
effective tax rate was impacted by $90 million of deferred tax benefits
resulting from the expected utilization of a capital loss resulting from the
sale of certain businesses and product lines and related assets in the CASPI
segment and $26 million of tax benefit resulting from the favorable resolution
of a prior year capital loss refund claim. In addition, the effective tax rate
for 2004 was impacted by the treatment of asset impairments and restructuring
charges resulting in lower expected tax benefits in certain jurisdictions.
Net
Earnings
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
2005
|
|
2004
|
|
|
|
|
|
Net
earnings
|
$
|
557
|
$
|
170
|
Earnings
per share
|
|
|
|
|
Basic
|
$
|
6.90
|
$
|
2.20
|
Diluted
|
|
6.81
|
|
2.18
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
BY OPERATING SEGMENT
CASPI
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Product Lines
|
|
Continuing
Product Lines(1)
|
|
|
|
|
|
|
Change
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,299
|
$
|
1,554
|
$
|
(255)
|
|
(16)
%
|
$
|
1,113
|
$
|
186
|
|
17
%
|
|
Volume
effect
|
|
|
|
|
|
(464)
|
|
(30)
%
|
|
|
|
(23)
|
|
(2)
%
|
|
Price
effect
|
|
|
|
|
|
192
|
|
13
%
|
|
|
|
192
|
|
18
%
|
|
Product
mix effect
|
|
|
|
|
|
13
|
|
1
%
|
|
|
|
13
|
|
1%
|
|
Exchange
rate effect
|
|
|
|
|
|
4
|
|
--
%
|
|
|
|
4
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
228
|
|
64
|
|
164
|
|
>100
%
|
|
152
|
|
76
|
|
50
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and
restructuring
charges, net
|
|
4
|
|
81
|
|
(77)
|
|
|
|
9
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
2
|
|
--
|
|
2
|
|
>100
%
|
|
--
|
|
2
|
|
>100
%
|
(1)
These
businesses and product lines exclude acrylate ester monomers, composites
(unsaturated polyester resins), inks and graphic arts raw materials, liquid
resins, powder resins and textile chemicals divested on July 31, 2004 as well
as
other restructuring, divestiture and consolidation activities that the Company
has completed related to these businesses and product lines.
The
decrease in sales revenue of $255 million was due to lower sales volume
resulting from the aforementioned sale of certain businesses and product lines
within the segment. Sales revenue for continuing product lines increased $186
million, with selling prices positively impacting revenues 18 percent, driven
by
cyclical commodity products.
The
increase in operating earnings was the result of increased selling prices that
more than offset higher raw material costs; lower asset impairment and
restructuring charges; an increased focus on more profitable businesses and
product lines, including the aforementioned sale of certain businesses and
product lines within the segment; improved gross profit margins, particularly
for cyclical commodity product lines; and the impact of cost reduction
efforts.
Operating
earnings for 2005 and 2004 were reduced by asset impairments and restructuring
charges totaling approximately $4 million and $81 million, respectively. These
charges are more fully described in Note 16, "Asset Impairments and
Restructuring Charges, Net", in the Company’s consolidated financial statements
in Part II, Item 8 of this 2006 Annual Report on Form 10-K. Operating earnings
for 2005 included $2 million of other operating income related to a change
in
estimates for contingencies associated with the aforementioned sale of certain
businesses and product lines within the segment.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Fibers
Segment
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
869
|
$
|
731
|
$
|
138
|
|
19
%
|
|
Volume
effect
|
|
|
|
|
|
|
|
|
51
|
|
7
%
|
|
Price
effect
|
|
|
|
|
|
|
|
|
76
|
|
11
%
|
|
Product
mix effect
|
|
|
|
|
|
|
|
|
10
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
|
|
|
|
1
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
|
|
216
|
|
155
|
|
61
|
|
39
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
revenue increased $138 million due to higher selling prices and increased sales
volume. The higher sales volume was attributed to stronger demand for acetate
tow, primarily in China, due to higher cigarette production volumes, a trend
towards longer cigarette filters and substitution of acetate tow for
polypropylene in cigarette filters. Demand for acetate tow in Eastern Europe
increased due to increased cigarette production volumes. Market share for
acetate yarn increased due to the exit of a major competitor from the acetate
yarn market.
Operating
earnings increased due to higher sales volumes and increased selling prices
that
more than offset higher raw material and energy costs.
In
2005,
a major global competitor exited the acetate filament yarn market. As a direct
result, Eastman became the world leader in acetate yarn production, the only
acetate yarn producer vertically integrated in acetate flake production, and
the
only acetate yarn producer in North America. The yarn market tightened
significantly as the competitor's yarn inventory was consumed in the world
marketplace, and world prices for acetate yarn increased to profitable levels
during late 2005.
PCI
Segment
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
1,560
|
$
|
1,304
|
$
|
256
|
|
20
%
|
|
Volume
effect
|
|
|
|
|
|
|
|
|
40
|
|
4
%
|
|
Price
effect
|
|
|
|
|
|
|
|
|
244
|
|
18
%
|
|
Product
mix effect
|
|
|
|
|
|
|
|
|
(30)
|
|
(2)
%
|
|
Exchange
rate effect
|
|
|
|
|
|
|
|
|
2
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
|
|
143
|
|
4
|
|
139
|
|
>100
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
11
|
|
38
|
|
(27)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in sales revenue of $256 million was primarily due to higher selling
prices which had a positive impact on revenues of $244 million, and higher
sales
volumes, which had a positive impact on revenues of $40 million. Selling prices
and sales volume were higher particularly in the intermediates product lines
in
response to significant increases in raw material and energy costs, an upturn
in
the olefins cycle, and improved market conditions in acetyl product lines.
The
sales volume increase was also attributed to long-term arrangements with key
customers and increased production capacity.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
increase in operating earnings of $139 million was primarily due to increases
in
selling prices and ongoing cost reduction efforts that more than offset higher
raw material and energy costs. Operating earnings for 2005 included $10 million
of operating earnings from the achievement of certain milestones under an
acetyls technology licensing agreement. Operating earnings for 2005 also
included $11 million in asset impairments and restructuring charges for
previously impaired sites. Operating earnings for 2004 included $38 million
in
asset impairments related to assets at the Company's Batesville, Arkansas and
Longview, Texas facilities, as well as severance charges.
Performance
Polymers Segment
|
|
|
Change
|
(Dollars
in millions)
|
2005
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
Total
sales
|
$
|
2,586
|
$
|
2,226
|
$
|
360
|
|
16
%
|
Sales
- divested product lines
|
618
|
|
511
|
|
107
|
|
21
%
|
Sales
- continuing product lines
|
1,968
|
|
1,715
|
|
253
|
|
15
%
|
|
|
|
|
|
|
|
|
|
|
Volume
effect
|
|
|
|
|
(73)
|
|
(4)
%
|
|
Price
effect
|
|
|
|
|
424
|
|
19
%
|
|
Product
mix effect
|
|
|
|
|
(4)
|
|
--
%
|
|
Exchange
rate effect
|
|
|
|
|
13
|
|
1
%
|
|
|
|
|
|
|
|
|
Total
operating earnings
|
176
|
|
25
|
|
151
|
|
>
100 %
|
Operating
earnings - divested product lines (1)
|
75
|
|
33
|
|
42
|
|
>
100 %
|
Operating
earnings - continuing product lines
|
101
|
|
(8)
|
|
109
|
|
>
100 %
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
--
|
|
13
|
|
(13)
|
|
|
(1)
Includes
allocated costs consistent with the Company’s historical practices, some of
which may remain and could be reallocated to the remainder of the segment and
other segments.
In
December 2006, the Company completed the sale of the Performance Polymer
segment's PE businesses and related assets located at the Longview, Texas site
and the Company's ethylene pipeline.
The
increase in sales revenue of $360 million was primarily due to increased
selling prices, which had a positive impact of $424 million. The increased
selling prices were mainly the result of efforts to offset higher raw material
and energy costs. The lower sales volume was attributed to several factors:
the
effects of higher and volatile raw material and energy costs in North America
due to the Gulf Coast hurricanes, including the impact of lower raw material
costs for Asian producers of PET polymers to North America and customers working
down inventories; and low PET polymers industry operating rates in Europe and
Latin America due to a combination of lower than expected demand and
overcapacity in southern and eastern Europe and Asian imports in South America.
Excluding the divested product lines, sales revenue increased $253
million.
Operating
earnings increased as higher selling prices and reduced costs attributed to
ongoing cost reduction efforts more than offset higher raw material and energy
costs, resulting in improved margins, primarily in the PE markets and North
American PET markets, prior to the Gulf Coast hurricanes. Operating earnings
for
2004 were also reduced by asset impairments and restructuring charges of $13
million related to severance. Excluding the divested product lines, operating
earnings increased $109 million.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
SP
Segment
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
718
|
$
|
644
|
$
|
74
|
|
12
%
|
|
Volume
effect
|
|
|
|
|
|
|
|
|
(2)
|
|
--
%
|
|
Price
effect
|
|
|
|
|
|
|
|
|
75
|
|
12
%
|
|
Product
mix effect
|
|
|
|
|
|
|
|
|
(1)
|
|
--
%
|
|
Exchange
rate effect
|
|
|
|
|
|
|
|
|
2
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
|
|
64
|
|
13
|
|
51
|
|
>100
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
--
|
|
53
|
|
(53)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
revenue increased $74 million due to higher selling prices, which had a positive
impact of $75 million. Despite higher sales volume for copolyester product
lines, particularly for consumer and medical goods, overall sales volume
declined primarily due to the lower sales volume of acetate used in photographic
film.
Operating
earnings increased by $51 million compared to 2004 due to lower asset
impairments and restructuring charges, higher selling prices, improved product
mix, and ongoing cost reduction efforts partially offset by higher raw material
and energy costs, and expenditures related to growth initiatives. Operating
earnings for 2004 included asset impairments and restructuring charges of $53
million related primarily to the closure of the Hartlepool, United Kingdom
manufacturing facility, as well as severance charges.
SUMMARY
BY CUSTOMER LOCATION - 2005 COMPARED WITH 2004
Sales
Revenue
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
4,098
|
$
|
3,723
|
|
10
%
|
|
(5)
%
|
|
19
%
|
|
(4)
%
|
|
--
%
|
Europe,
Middle East, and Africa
|
|
1,344
|
|
1,467
|
|
(8)
%
|
|
(15)
%
|
|
5
%
|
|
1
%
|
|
1
%
|
Asia
Pacific
|
|
930
|
|
785
|
|
18
%
|
|
4
%
|
|
12
%
|
|
2
%
|
|
--
%
|
Latin
America
|
|
687
|
|
605
|
|
14
%
|
|
(8)
%
|
|
20
%
|
|
1
%
|
|
1%
|
|
$
|
7,059
|
$
|
6,580
|
|
7
%
|
|
(7)
%
|
|
15
%
|
|
(1)
%
|
|
--
%
|
Sales
revenue in the United States and Canada increased primarily due to higher
selling prices, particularly for the Polymers, PCI, and CASPI segments, which
had a $723 million positive impact on sales revenue. The higher selling prices
mostly related to sales of PET polymers, PE, intermediates chemicals, and other
cyclical commodity product lines and were primarily in response to increases
in
raw material and energy costs and high industry-wide capacity utilization.
Lower
overall sales volumes had a $208 million negative impact on sales revenue and
were primarily due to the impact of the restructuring, divestiture, and
consolidation activities in the CASPI segment, partially offset by significantly
higher sales volumes in the PCI segment. The Cendian shutdown was reflected
in
product
mix which had a $140 million negative impact on sales revenue.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue in Europe, the Middle East and Africa decreased primarily due to lower
sales volumes, mainly the result of the impact of the restructuring,
divestiture, and consolidation activities in the CASPI segment, which had a
$224
million negative impact on sales revenue. Higher selling prices, particularly
for PET polymers, had a $77 million positive impact on sales
revenue.
Sales
revenue in Asia Pacific increased primarily due to higher overall selling prices
across all segments which had a $92 million positive impact on sales revenue.
Higher sales volumes, particularly for the Fibers segment, had a $34 million
positive impact on sales revenue.
Sales
revenue in Latin America increased primarily due to higher selling prices,
partially offset by lower sales volume. Higher selling prices, particularly
for
PET polymers, had a $119 million positive impact on sales revenue. Lower sales
volume, particularly for PET polymers and PE, had a $49 million negative impact
on sales revenue.
LIQUIDITY,
CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION
Cash
Flows
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
$
|
609
|
$
|
769
|
$
|
494
|
Investing
activities
|
|
(94)
|
|
(18)
|
|
(148)
|
Financing
activities
|
|
(101)
|
|
(547)
|
|
(579)
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
1
|
|
(5)
|
|
--
|
Net
change in cash and cash equivalents
|
$
|
415
|
$
|
199
|
$
|
(233)
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
939
|
$
|
524
|
$
|
325
|
Cash
provided by operating activities decreased $160 million in 2006 compared with
2005 primarily due to an increase in working capital requirements and a decrease
in earnings, partially offset by lower current year cash contributions to its
U.S. defined benefit pension plan. In 2006, the Company's working capital
requirements increased, primarily due to a higher mix of sales in Latin America
and Europe, where customer credit terms are longer as compared to North America.
The Company contributed $75 million and $165 million to its U.S. defined benefit
pension plan in 2006 and 2005, respectively.
Cash
provided by operating activities increased $275 million in 2005 compared with
2004 primarily as a result of a significant increase in earnings and a decrease
in working capital requirements, partially offset by $165 million in
contributions to its U.S. defined benefit pension plan. The decrease in working
capital requirements related primarily to accounts receivable, largely the
result of improved collection performance which more than offset the increase
in
sales, partially offset by an increase in inventories. The Company made $3
million in contributions to its U.S. defined benefit pension plan in
2004.
Cash
used
in investing activities totaled $94 million and $18 million in 2006 and 2005,
respectively. In 2006, the Company received $74 million in proceeds from the
sale of its Batesville, Arkansas manufacturing facility and related assets
and
the specialty organic chemicals product lines and $235 million in proceeds
from
the sale of PE and Epolene
polymer
businesses and related assets located at the Longview, Texas site and the
Company's ethylene pipeline. For more information concerning divestitures,
see
Note 24, "Divestitures", to the Company’s consolidated financial statements in
Part II, Item 8 of this 2006 Annual Report on Form 10-K. In 2005, the Company
received $417 million net cash proceeds from the sale of its equity investment
in Genencor. Capital spending of $389 million and $343 million in 2006 and
2005,
respectively, included expenditures related to the construction of the new
PET
facility utilizing IntegRex
technology.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Cash
used
in investing activities decreased $130 million in 2005 compared with 2004
largely due to $417 million in net proceeds from the sale of the Company's
investment in Genencor in the second quarter 2005. In addition, in the second
quarter 2005, the Company received payment for the $50 million note it received
in the sale of certain businesses and product lines in the CASPI segment.
In
2004,
the Company received $115 million in net cash proceeds associated with such
sale, as well as $12 million in proceeds from the sale of Ariel. In
the
fourth quarter 2005, the Company provided a line of credit up to $125 million
to
Primester, a joint venture in which Eastman has a 50 percent interest, which
Primester fully utilized to repay its third-party borrowings, which had
previously been guaranteed by Eastman. In addition, the
Company used an additional $95 million for additions to properties and equipment
in 2005 as compared with 2004.
Cash
used
in financing activities in 2006 totaled $101 million and included a decrease
in
credit facility and other borrowings, including bank overdrafts, of $50 million,
offset by cash received from stock option exercises of $83 million.
Cash
used
in financing activities in 2005 totaled $547 million and included the Company's
early repayment of $500 million of its outstanding long-term debt, and a
decrease in credit facility and other borrowings, including bank overdrafts,
of
$150 million, offset by cash received from stock option exercises of $98
million. See
Note
8, "Early Extinguishment of Debt", to the Company’s consolidated financial
statements in Part II, Item 8 of this 2006 Annual Report on Form 10-K
for
information regarding the early extinguishment of debt. In addition, the Company
borrowed $191 million from a new credit facility in the fourth quarter 2005,
the
proceeds of which
provided
a significant part of the funding for the repatriation of undistributed foreign
earnings under the provisions of the American Jobs Creation Act.
Cash
used
in financing activities in 2004 totaled $579 million and reflects the January
2004 repayment of $500 million of 6 3/8% notes and a decrease in commercial
paper, credit facility, and other borrowings, including bank overdrafts, of
$19
million, offset by cash from stock option exercises of $77 million.
The
payment of dividends is also reflected in financing activities in all
periods.
Liquidity
At
December 31, 2006, the Company had credit facilities with various U.S. and
foreign banks totaling approximately $885 million. These credit facilities
consist of a $700 million revolving credit facility (the "Credit Facility")
expiring in April 2011, as well as a 140 million Euro credit facility ("Euro
Facility") which expires in December 2011. Both credit facilities have options
for two one-year extensions, and the first extension option for the Euro
Facility has been exercised. 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. At December 31, 2006, the Company’s credit facility borrowings
totaled $185 million at an effective
interest
rate of 4.00 percent. At December 31, 2005, the Company's credit facility
borrowings were $214 million at a weighted-average interest rate of 3.01
percent.
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, see Note 7, "Borrowings", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2006 Annual Report
on Form 10-K.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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.
In
the
second quarter 2005, Eastman completed the sale of its equity interest in
Genencor for approximately $417 million in net cash proceeds after tax. This
action, combined with strong operating results, allowed the Company to complete
the early repayment of $500 million of its outstanding debt in second quarter
2005, further strengthening its financial position.
During
2006, the Company contributed $75 million to its U.S. defined benefit pension
plan. In first quarter 2007, the Company completed a planned $100 million
contribution to its U.S. defined benefit pension plan.
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 $389 million, $343 million, and $248 million for 2006, 2005,
and 2004, respectively. The increase of $46 million in 2006 compared with 2005
was primarily due to spending on the expansion of CHDM capacity, as well as
other growth initiatives. The Company expects that 2007 capital spending will
be
up to $450 million which will exceed estimated 2007 depreciation and
amortization of approximately
$350 million,
including accelerated depreciation of $50 million. In 2007, the Company will
continue to pursue projects including an
acetate tow expansion in England, a copolyester intermediates expansion, make
enhancements to benefit the PET facilities in South Carolina, utilizing
IntegRex
technology,
and other growth initiatives.
Other
Commitments
At
December 31, 2006, the Company’s obligations related to notes and debentures
totaled approximately $1.4 billion to be paid over a period of approximately
20
years. Other borrowings, related primarily to credit facility borrowings,
totaled approximately $200 million.
The
Company had various purchase obligations at December 31, 2006 totaling
approximately $2.1 billion over a period of approximately 15 years for
materials, supplies and energy incident to the ordinary conduct of business.
The
Company also had various lease commitments for property and equipment under
cancelable, noncancelable, and month-to-month operating leases totaling
approximately $200 million over a period of several years. Of the total lease
commitments, approximately 12 percent relate to machinery and equipment,
including computer and communications equipment and production equipment;
approximately 50 percent relate to real property, including office space,
storage facilities and land; and approximately 38 percent relate to
railcars.
In
addition, the Company had other liabilities at December 31, 2006 totaling
approximately $1.4 billion related primarily to pension, retiree medical, other
post-employment obligations and environmental reserves.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
obligations described above are summarized in the following table:
(Dollars
in Millions)
|
|
Payments
Due from
|
Period
|
|
Notes
and Debentures
|
|
Credit
Facility Borrowings and Other
|
|
Interest
Payable
|
|
Purchase
Obligations
|
|
Operating
Leases
|
|
Other
Liabilities (a)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
$
|
--
|
$
|
3
|
$
|
107
|
$
|
373
|
$
|
45
|
$
|
158
|
$
|
686
|
2008
|
|
72
|
|
--
|
|
106
|
|
363
|
|
30
|
|
71
|
|
642
|
2009
|
|
--
|
|
13
|
|
106
|
|
349
|
|
25
|
|
67
|
|
560
|
2010
|
|
--
|
|
--
|
|
104
|
|
312
|
|
20
|
|
66
|
|
502
|
2011
|
|
2
|
|
185
|
|
104
|
|
199
|
|
17
|
|
61
|
|
568
|
2012
and beyond
|
|
1,317
|
|
--
|
|
1,052
|
|
507
|
|
64
|
|
955
|
|
3,895
|
Total
|
$
|
1,391
|
$
|
201
|
$
|
1,579
|
$
|
2,103
|
$
|
201
|
$
|
1,378
|
$
|
6,853
|
(a)
Amounts represent the current estimated cash payments to be made by the Company
primarily for pension and other post-employment benefits in the periods
indicated. The amount and timing of such payments is dependent upon interest
rates, health care trends, actual returns on plan assets, retirement and
attrition rates of employees, continuation or modification of the benefit plans,
and other factors. Such factors can significantly impact the amount and timing
of any future contributions by the Company.
Purchase
obligations increased approximately $360 million at December 31, 2006 compared
to December 31, 2005 due primarily to increased raw material prices.
Off
Balance Sheet and Other Financing Arrangements
If
certain operating leases are terminated by the Company, it guarantees a portion
of the residual value loss, if any, incurred by the lessors in disposing of
the
related assets. Under these operating leases, the residual value guarantees
at
December 31, 2006 totaled $113 million and consisted primarily of leases for
railcars, company aircraft, and other equipment. Leases
with guarantee amounts totaling $2 million, $27 million, and $84 million will
expire in 2007, 2008, and 2012, respectively. The
Company believes, based on current facts and circumstances, that the likelihood
of a material payment pursuant to such guarantees is remote.
As
described in Note 5, "Equity Investments and Other Noncurrent Assets and
Liabilities", to the Company’s consolidated financial statements in Part II,
Item 8 of this 2006 Annual Report on Form 10-K, Eastman has a 50 percent
interest in and serves as the operating partner in Primester, a joint venture
which manufactures cellulose acetate at the Company's Kingsport, Tennessee
plant. 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 pay the principal amount of the joint
venture's third-party borrowings, previously guaranteed by Eastman.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
As
described in Note 11, "Commitments", to the Company’s consolidated financial
statements in Part II, Item 8 of this 2006 Annual Report on Form 10-K, Eastman
entered into an agreement in 1999 that allows it to generate cash by reducing
its working capital through the sale of undivided interests in certain domestic
trade accounts receivable under a planned continuous sale program to a third
party. Under this agreement, receivables sold to the third party totaled $200
million at December 31, 2006 and 2005. Undivided interests in designated
receivable pools were sold to the purchaser with recourse limited to the
purchased interest in the receivable pools.
The
Company did not have any other material relationships with unconsolidated
entities or financial partnerships, including special purpose entities, for
the
purpose of facilitating off-balance sheet arrangements with contractually narrow
or limited purposes. Thus, Eastman is not materially exposed to any financing,
liquidity, market, or credit risk related to the above or any other such
relationships.
The
Company has evaluated material relationships including the guarantees related
to
the third-party borrowings of joint ventures described above and has concluded
that the entities are not Variable Interest Entities (“VIEs”) or, in the case of
Primester, the Company is not the primary beneficiary of the VIE. As such,
in
accordance with Financial
Accounting Standards Board ("FASB")
Interpretation
Number 46, "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 December 31, 2006. These potential VIEs are joint ventures from which the
Company has purchased raw materials and utilities for several years and
purchases approximately $60 million of raw materials and utilities on an annual
basis. The Company has no equity interest in these entities and has confirmed
that one party to each of these joint ventures does consolidate the potential
VIE. However, due to competitive and other reasons, the Company has not been
able to obtain the necessary financial information to determine whether the
entities are VIEs, and if one or both are VIEs, whether or not the Company
is
the primary beneficiary.
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.
See
Note
10, "Retirement Plans", to the Company's consolidated financial statements
in
Part II, Item 8 of this 2006 Annual Report on Form 10-K for off-balance sheet
post-employment benefit obligations.
Treasury
Stock Transactions
The
Company was authorized to repurchase up to $400 million of its common stock.
No
shares of Eastman common stock were repurchased by the Company during 2006,
2005
or 2004 under a Company repurchase plan. A total of 2,746,869 shares of common
stock at a cost of approximately $112 million, or an average price of
approximately $41 per share, have been repurchased under the authorization.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes.
On
February 20, 2007, the Board of Directors cancelled its prior authorization
for
stock repurchases dated February 4, 1999 and approved a new authorization for
the repurchase of up to $300 million of the Company's outstanding common stock
at such times, in such amounts, and on such terms, as determined to be in the
best interests of the Company. Repurchased shares may be used for such purposes
or otherwise applied in such a manner as determined to be in the best interests
of the Company.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Dividends
The
Company declared quarterly cash dividends of $0.44 per share for a total of
$1.76 per share in 2006, 2005, and 2004, respectively.
Preferred
Stock Purchase Rights
During
the fourth quarter of 2006, the Board of Directors of the Company redeemed
all
of the outstanding preferred stock purchase rights issuable pursuant to the
Stockholder Protection Rights Agreement and terminated the Stockholder
Protection Rights Agreement. The payment of $0.01 per share of common stock
was
made January 2, 2007.
ENVIRONMENTAL
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes of which
the treatment, storage, transportation, and disposal 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. Adequate reserves for environmental
contingencies have been established in accordance with Eastman’s policies as
described in Note 1, "Significant Accounting Policies", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2006 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 accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can
be
reasonably estimated. When
a
single amount cannot be reasonably estimated but the cost can be estimated
within a range, the Company accrues the minimum amount. This undiscounted
accrued amount reflects the Company’s assumptions about remediation requirements
at the contaminated site, the nature of the remedy, the outcome of discussions
with regulatory agencies and other potentially responsible parties at
multi-party sites, and the number and financial viability of other potentially
responsible parties. Changes in the estimates on which the accruals are based,
unanticipated government enforcement action, or changes in health, safety,
environmental, and chemical control regulations and testing requirements could
result in higher or lower costs. Estimated future environmental expenditures
for
remediation costs range from the minimum or best estimate of $18 million to
the
maximum of $32 million at December 31, 2006.
In
addition to remediation activities, the Company establishes reserves for
closure/postclosure costs associated with the environmental assets it maintains.
Environmental assets include but are not limited to waste management units,
such
as landfills, water treatment facilities, and ash ponds. When these types of
assets are constructed or installed, a reserve is established for the
anticipated future costs associated with the closure of the asset based on
its
expected life and the applicable regulatory
closure requirements. These future expenses are charged into earnings over
the
estimated useful life of the assets.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
March
2005, the FASB issued Interpretation No 47, "Accounting for Conditional Asset
Retirement Obligations" ("
FIN
47"), which was effective for the Company on December 31, 2005. FIN 47 requires
an entity to recognize a liability for a conditional asset retirement obligation
when incurred if the liability can be reasonably estimated. The Interpretation
also clarifies that the term Conditional Asset Retirement Obligation ("CARO")
refers to a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that
may or may not be within the control of the entity. FIN 47 also clarifies when
an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The Company performed a thorough
examination of various asset categories. Although it may have CAROs
at
certain of its facilities, including, but not limited to, the potential for
asbestos abatement activities, the Company is unable to determine potential
settlement dates to be used in fair value calculations for estimating these
obligations as a result of an absence of plans or expectations to undertake
a
major renovation or demolition project that would require the removal of
asbestos. The Company continues to monitor these conditional obligations, as
well as any new ones that may develop, and will record reserves associated
with
them when and to the extent that more detailed information becomes available
concerning applicable retirement costs. The
recorded obligations did not have a material impact on its consolidated
financial position, results of operations and cash flows.
Reserves
related to environmental assets accounted for approximately 60 percent of the
total environmental reserve at December 31, 2006. Currently, the Company’s
environmental assets are expected to be no longer useable at different times
over the next 50 years. If the Company were to invest in numerous new
environmental assets, or, these assets were to require closure a significant
number of years before the Company anticipated they would, the amortization
on
them would increase, and could have a material negative impact on the Company’s
financial condition and results of operations. The Company views the likelihood
of this occurrence to be remote, and does not anticipate, based on its past
experience with this type of planned remediation, that an additional accrual
related to environmental assets will be necessary.
INFLATION
In
recent
years, general economic inflation has not had a material adverse impact on
Eastman's costs. The cost of raw materials is generally based on market price,
although derivative financial instruments were utilized, as appropriate, to
mitigate short-term market price fluctuations. For additional information see
Note 9, "Fair Value of Financial Instruments", to the Company’s consolidated
financial statements in Part II, Item 8 of this 2006 Annual Report on Form
10-K.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
February 2006, the 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF 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 does not expect
the
adoption of FIN 48 to have a material effect on its consolidated financial
position, liquidity, or results of operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
addresses the measurement of fair value by companies when they are required
to
use a fair value measure for recognition or disclosure purposes under GAAP.
SFAS
No. 157 provides a common definition of fair value to be used throughout GAAP
which is intended to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. SFAS No. 157 will
be
effective for an entity's financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect SFAS
No.
157 will have on its consolidated financial position, liquidity, or results
of
operations.
In
September 2006, the FASB issued Staff Position No. AUG AIR-1 ("FSP No. AUG
AIR-1") which addresses the accounting for planned major maintenance activities.
FSP No. AUG AIR-1 amends certain provisions in the American Institute of
Certified Public Accountants ("AICPA") Industry Audit Guide and APB Opinion
No.
28, "Interim Financial Reporting". Four alternative methods of accounting for
planned major maintenance activities were permitted: direct expense, built-in
overhaul, deferral, and accrual ("accrue-in-advance"). This FSP prohibits the
use of the accrue-in-advance method of accounting for planned major maintenance
activities because it results in the recognition of a liability in a period
prior to the occurrence of the transaction or event obligating the entity.
FSP
No. AUG AIR-1 is effective for an entity's financial statements issued for
fiscal years beginning after December 15, 2006. The Company does not utilize
the
accrue-in-advance method of accounting and therefore expects this FSP to have
no
impact on its consolidated financial position, liquidity, or results of
operations.
In
February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value at specified
election dates. Upon adoption, an entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings
at
each subsequent reporting date. Most of the provisions apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," applies
to
all entities with available for sale and trading securities. SFAS No. 159 will
be effective as of the beginning of an entity's first fiscal year that begins
after November 15, 2007. The Company is currently evaluating the effect SFAS
No.
159 will have on its consolidated financial position, liquidity, or results
of
operations.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
OUTLOOK
For
2007,
the Company expects:
· |
strong
volumes will be maintained due to continued economic strength, continued
substitution of Eastman products for other materials, and new applications
for existing products;
|
· |
the
volatility of raw material and energy costs will continue and the
Company
will continue to pursue pricing strategies and ongoing cost control
initiatives to offset the effects on gross
profit;
|
· |
a
staged phase-out of older cracking units and a planned shutdown of
higher
cost PET assets in South Carolina will continue in 2007, resulting
in
accelerated depreciation in 2007 of approximately $50 million;
|
· |
to
increase volumes in the PCI segment due to the transition agreement
pertaining to the polyethylene divestiture; the Company will supply
ethylene to the buyer, allowing both companies to optimize the value
of
their respective olefin businesses under various market
conditions;
|
· |
to
contribute $100 million to the Company’s U.S. defined benefit pension
plan, all of which was contributed in the first quarter of
2007;
|
· |
net
interest expense to decrease compared with 2006 primarily due to
higher
interest income, driven by higher invested cash
balances;
|
· |
the
effective tax rate to be approximately 35
percent;
|
· |
that
acetate tow will have modest growth potential in future years and;
therefore, expects to continue to evaluate growth options in Asia;
|
· |
to
aggressively take action to improve the performance of its PET product
lines in the Performance Polymers segment, including starting up
the
Company's new PET facility utilizing IntegRex
technology in Columbia, South Carolina, debottlenecking the new PET
facility utilizing IntegRex
technology for an additional 100 thousand metric tons of capacity,
rationalizing 350 thousand metric tons of existing capacity in North
America, entering into an agreement to sell the Spain PET manufacturing
facility, and considering other strategic options for its underperforming
PET manufacturing facilities outside the United States, which may
lead to
further restructuring and asset impairment charges;
|
· |
capital
expenditures to increase to up to $450 million and exceed estimated
depreciation and amortization of approximately $350 million, including
accelerated depreciation of $50 million; in 2007, the Company plans
to pursue expansion of acetate tow and copolyester
intermediates, make enhancements to benefit the PET facilities in
South Carolina, utilizing IntegRex
technology,
and pursue growth initiatives; and
|
· |
priorities
for use of available cash will be to pay the quarterly cash dividend,
fund
targeted growth initiatives and defined benefit pension plans, and
repurchase shares.
|
See
“Forward-Looking Statements and Risk Factors" below.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS AND RISK FACTORS
The
expectations under "Outlook" and certain other statements in this Annual Report
on Form 10-K may be forward-looking in nature as defined in the Private
Securities Litigation Reform Act of 1995. These statements and other written
and
oral forward-looking statements made by the Company from time to time may relate
to, among other things, such matters as planned and expected capacity increases
and utilization; anticipated capital spending; expected depreciation and
amortization; environmental matters; legal proceedings; exposure to, and effects
of hedging of, raw material and energy costs, foreign currencies and interest
rates; global and regional economic, political, and business conditions;
competition; growth opportunities; supply and demand, volume, price, cost,
margin, and sales; earnings, cash flow, dividends and other expected financial
results and conditions; expectations, strategies, and plans for individual
assets and products, businesses and segments as well as for the whole of Eastman
Chemical Company; cash requirements and uses of available cash; financing plans;
pension expenses and funding; credit ratings; anticipated restructuring,
divestiture, and consolidation activities; cost reduction and control efforts
and targets; integration of acquired businesses; strategic initiatives and
development, production, commercialization, and acceptance of new products,
services and technologies and related costs; asset, business and product
portfolio changes; and expected tax rates and net interest costs.
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 and energy
commodities for its operations and utilizes risk management tools,
including hedging, as appropriate, to mitigate short-term market
fluctuations in raw material and energy 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
terrorism 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 and energy commodities,
or breakdown or degradation of transportation infrastructure used
for
delivery of strategic raw materials and energy commodities, could
affect
availability and costs of raw materials and energy
commodities.
|
· |
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, war or other outbreak
of
hostilities or terrorism, and breakdown or degradation of transportation
infrastructure. Eastman’s operations or products may, at times, be
adversely affected by these factors.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
· |
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, pandemic illnesses, changes in laws
or
regulations, war or other outbreak of hostilities or terrorism, 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, and breakdown or degradation
of
transportation infrastructure used for delivery of raw materials
and
energy supplies to the Company and for delivery of the Company's
products
to customers, 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,
pandemic illnesses, changes in laws or regulations, war or other
outbreak
of hostilities or terrorism or other political factors in any of
the
countries or regions in which the Company operates or does business,
or
breakdown or degradation of transportation infrastructure used for
delivery of raw materials and energy supplies to the Company and
for
delivery of the Company's products to customers, 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.
|
· |
The
Company's competitive position has recently been adversely impacted
by low
cost competitors in certain regions and customers developing internal
or
alternative sources of supply.
|
· |
The
Company has efforts underway to exploit growth opportunities in certain
core businesses by developing new products and technologies, expanding
into new markets, and tailoring product offerings to customer needs.
Current examples include IntegRex
technology and new PET polymers products and copolyester product
innovations 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 or that large capital projects
for such growth efforts can be completed within the time or at the
costs
projected due, among other things, to demand for and availability
of
construction materials and labor.
|
· |
The
Company has made, and intends to continue making, strategic investments,
including IntegRex
technology
and coal gasification, 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, improve Eastman's raw materials and energy cost and
supply
position, and 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 or that large capital projects
for
such growth efforts can be completed within the time or at the costs
projected due, among other things, to demand for and availability
of
construction materials and labor.
|
· |
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.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND 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.
|
· |
Due
to the Company's global sales, earnings, and asset profile, it is
exposed
to volatility in foreign currency exchange rates and interest rates.
The
Company may use derivative financial instruments, including swaps,
options
and forwards, to mitigate the impact of changes in exchange rates
and
interest rates on its financial results. However, there can be no
assurance that these efforts will be successful and operating results
could be affected by significant adverse changes in currency exchange
rates or interest rates.
|
The
foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure, including
that
under "Outlook" and "Forward-Looking Statements and Risk Factors," and other
forward-looking statements and related disclosures made by the Company in this
Annual Report on Form 10-K and elsewhere from time to time, represents
management's best judgment as of the date the information is given. The Company
does not undertake responsibility for updating any of such information, whether
as a result of new information, future events, or otherwise, except as required
by law. Investors are advised, however, to consult any further public Company
disclosures (such as in filings with the Securities and Exchange Commission
or
in Company press releases) on related subjects.
The
Company is exposed to changes in financial market conditions in the normal
course of its business due to its use of certain financial instruments as well
as transacting in various foreign currencies and funding foreign operations.
To
mitigate the Company's exposure to these market risks, Eastman has established
policies, procedures, and internal processes governing its management of
financial market risks and the use of financial instruments to manage its
exposure to such risks.
The
Company determines its market risk utilizing sensitivity analysis, which
measures the potential losses in fair value resulting from one or more selected
hypothetical changes in interest rates, foreign currency exchange rates, and/or
commodity prices.
The
Company is exposed to changes in interest rates primarily as a result of its
borrowing activities, which include long-term borrowings used to maintain
liquidity and to fund its business operations and capital requirements.
Currently, these borrowings are predominately U.S. dollar denominated. The
nature and amount of the Company's long-term and short-term debt may vary as
a
result of future business requirements, market conditions, and other factors.
For purposes of calculating the market risks associated with the fair value
of
interest-rate-sensitive instruments, the Company uses a one percent absolute
shift in interest rates. For 2006 and 2005, the market risks associated with
the
fair value of interest-rate-sensitive instruments, assuming an instantaneous
absolute shift in interest rates of 1 percent were approximately $126 million
and $134 million, respectively. This exposure is primarily related to long-term
debt with fixed interest rates.
The
Company's operating cash flows and borrowings denominated in foreign currencies
are exposed to changes in foreign currency exchange rates. The Company
continually evaluates its foreign currency exposure based on current market
conditions and the locations in which the Company conducts business. In order
to
mitigate the effect of foreign currency risk, the Company enters into currency
options to hedge probable anticipated but not yet committed export sales and
purchase transactions expected within no more than five years and denominated
in
foreign currencies and forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. The gains and losses on these
contracts offset changes in the value of related exposures. It is the Company's
policy to enter into foreign currency transactions only to the extent considered
necessary to meet its objectives as stated above. The Company does not enter
into foreign currency transactions for speculative purposes. For 2006, the
market risks associated with borrowings denominated in foreign currencies
assuming a 10 percent adverse move in the U.S. dollar relative to each foreign
currency was approximately $20 million and an additional $2.0 million for each
additional one percentage point adverse change in foreign currency rates.
Furthermore, since the Company utilizes currency-sensitive derivative
instruments for hedging anticipated foreign currency transactions, a loss in
fair value for those instruments is generally offset by increases in the value
of the underlying anticipated transactions.
The
Company is exposed to fluctuations in market prices for certain of its major
raw
materials and energy. To mitigate short-term fluctuations in market prices
for
certain commodities, principally propane and natural gas, the Company enters
into forwards and options contracts. For 2006 and 2005, the market risks
associated with forwards and options for feedstock and natural gas assuming
an
instantaneous parallel shift in the underlying commodity price of 10 percent
were $6 million and $2 million, respectively, and an additional $0.5 million
for
each one percentage point move in closing prices thereafter for both
periods.
ITEM
|
Page
|
|
|
Management's
Responsibility for Financial Statements
|
68
|
|
|
Report
of Independent Registered Public Accounting Firm
|
69
|
|
|
Consolidated
Statements of Earnings, Comprehensive Income and Retained
Earnings
|
71
|
|
|
Consolidated
Statements of Financial Position
|
72
|
|
|
Consolidated
Statements of Cash Flows
|
73
|
|
|
Notes
to Consolidated Financial Statements
|
|
Note
1. Significant Accounting Policies
|
74
|
Note
2. Inventories
|
80
|
Note
3. Properties and Accumulated Depreciation
|
80
|
Note
4. Goodwill and Other Intangible Assets
|
81
|
Note
5. Equity Investments and Other Noncurrent Assets and
Liabilities
|
81
|
Note
6. Payables and Other Current Liabilities
|
82
|
Note
7. Borrowings
|
82
|
Note
8. Early Extinguishment of Debt
|
83
|
Note
9. Fair Value of Financial Instruments
|
83
|
Note
10. Retirement Plans
|
85
|
Note
11. Commitments
|
92
|
Note
12. Environmental Matters
|
94
|
Note
13. Legal Matters
|
95
|
Note
14. Stockholders' Equity
|
96
|
Note
15. Share-Based Compensation Plans and Awards
|
98
|
Note
16. Asset Impairments and Restructuring Charges, Net
|
103
|
Note
17. Other Operating Income
|
106
|
Note
18. Other (Income) Charges, Net
|
107
|
Note
19. Income Taxes
|
107
|
Note
20. Supplemental Cash Flow Information
|
110
|
Note
21. Segment Information
|
110
|
Note
22. Quarterly Sales and Earnings Data - Unaudited
|
114
|
Note
23. Recently Issued Accounting Standards
|
115
|
Note
24. Divestitures
|
116
|
Note
25. Reserve Rollforward
|
117
|
Note
26. Subsequent Events
|
118
|
Management
is responsible for the preparation and integrity of the accompanying
consolidated financial statements of Eastman appearing on pages 71 through
118
Eastman has prepared these consolidated financial statements in accordance
with
accounting principles generally accepted in the United States, and the
statements of necessity include some amounts that are based on management's
best
estimates and judgments.
Eastman's
accounting systems include extensive internal controls designed to provide
reasonable assurance of the reliability of its financial records and the proper
safeguarding and use of its assets. Such controls are based on established
policies and procedures, are implemented by trained, skilled personnel with
an
appropriate segregation of duties, and are monitored through a comprehensive
internal audit program. The Company's policies and procedures prescribe that
the
Company and all employees are to maintain the highest ethical standards and
that
its business practices throughout the world are to be conducted in a manner
that
is above reproach.
The
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, who were responsible
for
conducting their audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Their report is included
herein.
The
Board
of Directors exercises its responsibility for these financial statements through
its Audit Committee, which consists entirely of non-management Board members.
The independent registered public accounting firm and internal auditors have
full and free access to the Audit Committee. The Audit Committee meets
periodically with PricewaterhouseCoopers LLP and Eastman's director of internal
auditing, both privately and with management present, to discuss accounting,
auditing, policies and procedures, internal controls, and financial reporting
matters.
/s/
J. Brian Ferguson
|
|
/s/
Richard A. Lorraine
|
J.
Brian Ferguson
|
|
Richard
A. Lorraine
|
Chairman
of the Board and
|
|
Senior
Vice President and
|
Chief
Executive Officer
|
|
Chief
Financial Officer
|
|
|
|
February
28, 2007
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Eastman
Chemical Company:
We
have
completed integrated audits of Eastman Chemical Company’s consolidated financial
statements and of its internal control over financial reporting as of December
31, 2006, in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements
In
our
opinion, the consolidated financial statements listed in
the
index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Eastman Chemical Company and its subsidiaries at December
31, 2006 and 2005, and the results of their operations and their cash flows
for
each of the three years in the period ended December 31, 2006 in conformity
with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits. We conducted our audits of these statements in accordance with
the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
As
discussed in Note 10 to the consolidated financial statements, the Company
changed the manner in which it accounts for defined-benefit pension and other
postretirement plans as of December 31, 2006 and as discussed in Note 15 to
the
consolidated financial statements, the Company changed the manner in which
it
accounts for share-based payment as of January 1, 2006.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management’s Report on
Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2006 based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Philadelphia,
Pennsylvania
February
28, 2007
CONSOLIDATED
STATEMENTS OF EARNINGS,
COMPREHENSIVE
INCOME and RETAINED EARNINGS
|
|
For
years ended December 31,
|
(Dollars
in millions, except per share amounts)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Sales
|
$
|
7,450
|
$
|
7,059
|
$
|
6,580
|
Cost
of sales
|
|
6,173
|
|
5,655
|
|
5,602
|
Gross
profit
|
|
1,277
|
|
1,404
|
|
978
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
437
|
|
454
|
|
450
|
Research
and development expenses
|
|
167
|
|
162
|
|
154
|
Asset
impairments and restructuring charges, net
|
|
101
|
|
33
|
|
206
|
Other
operating income
|
|
(68)
|
|
(2)
|
|
(7)
|
Operating
earnings
|
|
640
|
|
757
|
|
175
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
80
|
|
100
|
|
115
|
Income
from equity investment in Genencor
|
|
--
|
|
(173)
|
|
(14)
|
Early
debt extinguishment costs
|
|
--
|
|
46
|
|
--
|
Other
(income) charges, net
|
|
(16)
|
|
1
|
|
10
|
Earnings
before income taxes
|
|
576
|
|
783
|
|
64
|
Provision
(benefit) for income taxes
|
|
167
|
|
226
|
|
(106)
|
Net
earnings
|
$
|
409
|
$
|
557
|
$
|
170
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
Basic
|
$
|
4.98
|
$
|
6.90
|
$
|
2.20
|
|
|
|
|
|
|
|
Diluted
|
$
|
4.91
|
$
|
6.81
|
$
|
2.18
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
Net
earnings
|
$
|
409
|
$
|
557
|
$
|
170
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
Change
in cumulative translation adjustment
|
|
60
|
|
(94)
|
|
36
|
Change
in pension liability, net of tax
|
|
48
|
|
(7)
|
|
(6)
|
Change
in unrealized gains (losses) on derivative instruments, net of
tax
|
|
(1)
|
|
3
|
|
(12)
|
Change
in unrealized gains on investments, net of tax
|
|
--
|
|
1
|
|
--
|
Total
other comprehensive income (loss)
|
|
107
|
|
(97)
|
|
18
|
Comprehensive
income
|
$
|
516
|
$
|
460
|
$
|
188
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
|
|
Retained
earnings at beginning of period
|
$
|
1,923
|
$
|
1,509
|
$
|
1,476
|
Net
earnings
|
|
409
|
|
557
|
|
170
|
Cash
dividends declared
|
|
(146)
|
|
(143)
|
|
(137)
|
Retained
earnings at end of period
|
$
|
2,186
|
$
|
1,923
|
$
|
1,509
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
(Dollars
in millions, except per share amounts)
|
|
December
31,
|
Assets
|
|
2006
|
|
2005
|
Current
assets
|
|
|
|
|
Cash
and cash equivalents
|
$
|
939
|
$
|
524
|
Trade
receivables, net of allowance of $16 and $20
|
|
682
|
|
575
|
Miscellaneous
receivables
|
|
72
|
|
81
|
Inventories
|
|
682
|
|
671
|
Other
current assets
|
|
47
|
|
73
|
Total
current assets
|
|
2,422
|
|
1,924
|
|
|
|
|
|
Properties
|
|
|
|
|
Properties
and equipment at cost
|
|
8,844
|
|
9,597
|
Less:
Accumulated depreciation
|
|
5,775
|
|
6,435
|
Net
properties
|
|
3,069
|
|
3,162
|
|
|
|
|
|
Goodwill
|
|
314
|
|
312
|
Other
noncurrent assets
|
|
368
|
|
375
|
Total
assets
|
$
|
6,173
|
$
|
5,773
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Payables
and other current liabilities
|
$
|
1,056
|
$
|
1,047
|
Borrowings
due within one year
|
|
3
|
|
4
|
Total
current liabilities
|
|
1,059
|
|
1,051
|
|
|
|
|
|
Long-term
borrowings
|
|
1,589
|
|
1,621
|
Deferred
income tax liabilities
|
|
269
|
|
317
|
Post-employment
obligations
|
|
1,084
|
|
1,017
|
Other
long-term liabilities
|
|
143
|
|
155
|
Total
liabilities
|
|
4,144
|
|
4,161
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
Common
stock ($0.01 par value- 350,000,000 shares authorized; shares
issued
- 91,579,294 and 89,566,115 at December 31, 2006 and 2005,
respectively)
|
|
1
|
|
1
|
Additional
paid-in capital
|
|
448
|
|
320
|
Retained
earnings
|
|
2,186
|
|
1,923
|
Accumulated
other comprehensive loss
|
|
(174)
|
|
(200)
|
|
|
2,461
|
|
2,044
|
Less:
Treasury stock at cost (8,048,442 and 8,034,901 shares at December
31,
2006 and 2005, respectively)
|
|
432
|
|
432
|
|
|
|
|
|
Total
stockholders’ equity
|
|
2,029
|
|
1,612
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
|
6,173
|
$
|
5,773
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
years ended December 31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
earnings
|
$
|
409
|
$
|
557
|
$
|
170
|
|
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
308
|
|
304
|
|
322
|
Asset
impairments
|
|
62
|
|
12
|
|
140
|
Gains
on sale of assets
|
|
(74)
|
|
--
|
|
(8)
|
Income
from equity investment in Genencor
|
|
--
|
|
(173)
|
|
(14)
|
Early
debt extinguishment costs
|
|
--
|
|
46
|
|
--
|
Provision
(benefit) for deferred income taxes
|
|
7
|
|
115
|
|
(136)
|
Changes
in operating assets and liabilities, net of effect of acquisitions
and
divestitures:
|
|
|
|
|
|
|
(Increase)
decrease in trade receivables
|
|
(82)
|
|
60
|
|
(133)
|
(Increase)
decrease in inventories
|
|
(99)
|
|
(110)
|
|
18
|
Increase
(decrease) in trade payables
|
|
53
|
|
71
|
|
49
|
Increase
(decrease) in liabilities for employee benefits and incentive
pay
|
|
(44)
|
|
(63)
|
|
71
|
Other
items, net
|
|
69
|
|
(50)
|
|
15
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
609
|
|
769
|
|
494
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
Additions
to properties and equipment
|
|
(389)
|
|
(343)
|
|
(248)
|
Proceeds
from sale of assets
|
|
322
|
|
50
|
|
127
|
Proceeds
from sale of equity investment in Genencor, net
|
|
--
|
|
417
|
|
--
|
Loan
to joint venture
|
|
--
|
|
(125)
|
|
--
|
Additions
to capitalized software
|
|
(16)
|
|
(11)
|
|
(14)
|
Other
items, net
|
|
(11)
|
|
(6)
|
|
(13)
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(94)
|
|
(18)
|
|
(148)
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
Net
decrease in commercial paper, credit facility, and other
borrowings
|
|
(50)
|
|
(150)
|
|
(19)
|
Proceeds
from long-term borrowings
|
|
--
|
|
189
|
|
--
|
Repayment
of long-term borrowings
|
|
--
|
|
(544)
|
|
(500)
|
Dividends
paid to stockholders
|
|
(144)
|
|
(142)
|
|
(137)
|
Proceeds
from stock option exercises and other items
|
|
93
|
|
100
|
|
77
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
(101)
|
|
(547)
|
|
(579)
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
1
|
|
(5)
|
|
--
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
415
|
|
199
|
|
(233)
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
524
|
|
325
|
|
558
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
939
|
$
|
524
|
$
|
325
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. |
SIGNIFICANT
ACCOUNTING POLICIES
|
Financial
Statement Presentation
The
consolidated financial statements of Eastman Chemical Company and subsidiaries
("Eastman" or the "Company") 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 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.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash, time deposits, and readily marketable securities
with maturities of three months or less at the purchase date.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The allowances are based on the number of days an individual receivable is
delinquent and management’s regular assessment of the financial condition of the
Company’s customers. The Company considers that a receivable is delinquent if it
is unpaid after the terms of the related invoice have expired. The Company
evaluates the allowance based on a monthly assessment of the aged receivables.
Write-offs are recorded at the time a customer receivable is deemed
uncollectible.
Inventories
Inventories
are valued at the lower of cost or market. The Company determines the cost
of
most raw materials, work in process, and finished goods inventories in the
United States by the last-in, first-out ("LIFO") method. The cost of all other
inventories, including inventories outside the United States, is determined
by
the average cost method, which approximates the first-in, first-out ("FIFO")
method. The Company writes-down its inventories for estimated obsolescence
or
unmarketable inventory equal to the difference between the carrying value of
inventory and the estimated market value based upon assumptions about future
demand and market conditions.
Properties
The
Company records properties at cost. Maintenance and repairs are charged to
earnings; replacements and betterments are capitalized. When Eastman retires
or
otherwise disposes of assets, it removes the cost of such assets and related
accumulated depreciation from the accounts. The Company records any profit
or
loss on retirement or other disposition in earnings. Asset impairments are
reflected as increases in accumulated depreciation.
Depreciation
Depreciation
expense is calculated based on historical cost and the estimated useful lives
of
the assets (buildings and building equipment 20 to 50 years; machinery and
equipment 3 to 33 years), generally using the straight-line method. Accelerated
depreciation is reported when the estimated useful life is shortened and
continues to be reported in Cost of Goods Sold.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Computer
Software Costs
Capitalized
software costs are amortized primarily on a straight-line basis over three
years, the expected useful life of such assets, beginning when the software
project is substantially complete and placed in service. Capitalized software
in
2006, 2005 and 2004 was approximately $17 million, $11 million, and $14 million,
respectively. During those same periods, approximately $13 million, $16 million,
and $18 million, respectively, of previously capitalized costs were amortized.
At December 31, 2006 and 2005, the unamortized capitalized software costs were
$28 million and $24 million, respectively. Capitalized software costs are
reflected in other noncurrent assets.
Impairment
of Long Lived Assets
The
Company evaluates the carrying value of long-lived assets, including
definite-lived intangible assets, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Such events and
circumstances include, but are not limited to, significant decreases in the
market value of the asset, adverse change in the extent or manner in which
the
asset is being used, significant changes in business climate, or current or
projected cash flow losses associated with the use of the assets. The carrying
value of a long-lived asset is considered impaired when the total projected
undiscounted cash flows from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long-lived asset.
For
long-lived assets to be held and used, fair value of fixed (tangible) assets
and
definite-lived intangible assets is determined primarily using either the
projected cash flows discounted at a rate commensurate with the risk involved
or
an appraisal. For long-lived assets to be disposed of by sale or other than
by
sale, fair value is determined in a similar manner, except that fair values
are
reduced for disposal costs.
The
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets," require that goodwill and
indefinite-lived intangible assets be tested at least annually for impairment
and require reporting units to be identified for the purpose of assessing
potential future impairments of goodwill. The carrying value of goodwill and
indefinite lived intangibles is considered impaired when their fair value,
as
established by appraisal or based on undiscounted future cash flows of certain
related products, is less than their carrying value. The Company conducts its
annual testing of goodwill and indefinite-lived intangible assets for impairment
in the third quarter of each year, unless events warrant more frequent
testing.
Investments
The
consolidated financial statements include the accounts in which the Company
is a
primary beneficiary of a variable interest entity, if applicable, or the
accounts of the Company and all its subsidiaries in which a controlling interest
is maintained. For those consolidated subsidiaries in which the Company’s
ownership is less than 100 percent, the interests of the other stockholders
are
included in other long-term liabilities.
Investments
in affiliates over which the Company has significant influence but not a
controlling interest are carried on the equity basis. Under the equity method
of
accounting, these investments are included in other noncurrent assets. The
Company includes its share of earnings and losses of such investments in other
income and charges and its share of other comprehensive income (loss) in the
appropriate component of other accumulated comprehensive income (loss) in
stockholders’ equity.
Marketable
securities held by the Company, currently common or preferred stock, are deemed
by management to be available-for-sale and are reported at fair value, with
net
unrealized gains or losses reported as a component of other accumulated
comprehensive income (loss) in stockholders' equity. Realized gains and losses
are included in earnings and are derived using the specific identification
method for determining the cost of securities. The Company includes these
investments in other noncurrent assets.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other
equity investments, for which fair values are not readily determinable, are
carried at historical cost and are included in other noncurrent
assets.
The
Company records an investment impairment charge when it believes an investment,
accounted for by the Company as a marketable security or recorded at historical
cost, has experienced a decline in value that is other than
temporary.
Pension
and Other Post-employment Benefits
The
Company maintains defined benefit plans that provide eligible employees with
retirement benefits. Additionally, Eastman provides life insurance and health
care benefits for eligible retirees and health care benefits for retirees’
eligible survivors. The costs and obligations related to these benefits reflect
the Company’s assumptions related to general economic conditions (particularly
interest rates), expected return on plan assets, rate of compensation increase
for employees, and health care cost trends. The cost of providing plan benefits
depends on demographic assumptions including retirements, mortality, turnover,
and plan participation.
In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 158, "Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans", which changes the accounting for pension and other
postretirement benefit plans. This Standard was adopted by Eastman for the
year
ended December 31, 2006. For
additional information, see Note 10, "Retirement Plans".
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can
be
reasonably estimated. When a single amount cannot be reasonably estimated but
the cost can be estimated within a range, the Company accrues the minimum
amount. This undiscounted accrued amount reflects the Company’s assumptions
about remediation requirements at the contaminated site, the nature of the
remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties. Changes in the
estimates on which the accruals are based, unanticipated government enforcement
action, or changes in health, safety, environmental, and chemical control
regulations and testing requirements could result in higher or lower
costs.
The
Company also establishes reserves for closure/postclosure costs associated
with
the environmental and other assets it maintains. Environmental assets include
but are not limited to waste management units, such as landfills, water
treatment facilities, and ash ponds. When these types of assets are constructed
or installed, a reserve is established for the future costs anticipated to
be
associated with the closure of the site based
on
an expected life of the environmental assets and the applicable regulatory
closure requirements. These expenses are charged into earnings over the
estimated useful life of the assets. Currently,
the Company estimates the useful life of each individual asset up to 50 years.
If the Company changes its estimate of the asset retirement obligation costs
or
its estimate of the useful lives of these assets, the expenses to be charged
into earnings could increase or decrease.
In
accordance with Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” ("FIN 47"), the Company also monitors conditional
obligations and will record reserves associated with them when and to the extent
that more detailed information becomes available concerning applicable
retirement costs.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accruals
for environmental liabilities are included in other long-term liabilities and
exclude claims for recoveries from insurance companies or other third parties.
Environmental costs are capitalized if they extend the life of the related
property, increase its capacity, and/or mitigate or prevent future
contamination. The cost of operating and maintaining environmental control
facilities is charged to expense.
The
Company's cash expenditures related to environmental protection and improvement
were estimated to be approximately $215 million, $198 million and $184 million
in 2006, 2005 and 2004, respectively. These amounts pertain primarily to
operating costs associated with environmental protection equipment and
facilities, but also include expenditures for construction and development.
The
Company does not expect future environmental capital expenditures arising from
requirements of recently promulgated environmental laws and regulations to
materially increase the Company's planned level of annual capital expenditures
for environmental control facilities.
For
additional information see
Note
12, "Environmental Matters" and
Note
25, "Reserve Rollforwards".
Derivative
Financial Instruments
Derivative
financial instruments are used by the Company in the management of its exposures
to fluctuations in foreign currency, raw materials and energy costs, and
interest rates. Such instruments are used to mitigate the risk that changes
in
exchange rates or raw materials and energy costs will adversely affect the
eventual dollar cash flows resulting from the hedged transactions.
The
Company enters into currency options forwards to hedge probable
anticipated, but not yet probable committed, export sales and purchase
transactions expected within no more than five years and denominated in foreign
currencies (principally the Euro, British pound, the Japanese yen and the
Canadian dollar) and forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. To mitigate short-term
fluctuations in market prices for propane and natural gas (major raw materials
and energy used in the manufacturing process), the Company enters into forwards
and options contracts. From time to time, the Company also utilizes interest
rate derivative instruments, primarily swaps, to hedge the Company's exposure
to
movements in interest rates.
The
Company's qualifying forwards and options contracts are accounted for as hedges
because the derivative instruments are designated and effective as hedges and
reduce the Company's exposure to identified risks. Gains and losses resulting
from effective hedges of existing assets, liabilities, firm commitments, or
anticipated transactions are deferred and recognized when the offsetting gains
and losses are recognized on the related hedged items and are reported as a
component of operating earnings.
Deferred
currency option premiums are generally included in other assets. The related
obligation for payment is generally included in other liabilities and is paid
in
the period in which the options are exercised or expire.
Litigation
and Contingent Liabilities
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
accrues a liability for such matters when it is probable that a liability has
been incurred and the amount can be reasonably estimated. When a single amount
cannot be reasonably estimated but the cost can be estimated within a range,
the
Company accrues the minimum amount. The Company expenses legal costs, including
those expected to be incurred in connection with a loss contingency, as
incurred.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue
Recognition and Customer Incentives
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price to the customer
is fixed or determinable, and collectability is reasonably assured.
The
Company records estimated obligations for customer programs and incentive
offerings, which consist primarily of revenue or volume-based amounts that
a
customer must achieve over a specified period of time, as a reduction of revenue
to each underlying revenue transaction as the customer progresses toward
reaching goals specified in incentive agreements. These estimates are based
on a
combination of forecast of customer sales and actual sales volumes and revenues
against established goals, the customer’s current level of purchases, and
Eastman’s knowledge of customer purchasing habits, and industry pricing
practice. The incentive payment rate may be variable, based upon the customer
reaching higher sales volume or revenue levels over a specified period of time
in order to receive an agreed upon incentive payment.
Shipping
and Handling Fees and Costs
Shipping
and handling fees related to sales transactions are billed to customers and
are
recorded as sales revenue. Shipping and handling costs incurred are recorded
in
cost of sales.
Restructuring
of Operations
The
Company records restructuring charges incurred in connection with consolidation
of operations, exited business lines, or shutdowns of specific sites that are
expected to be substantially completed within a reasonable amount of time.
Share-based
Compensation
Effective
January 1, 2006, the Company implemented SFAS No. 123(Revised 2004),
"Share-Based Payment" ("SFAS No. 123(R)") and related interpretations and began
recognizing compensation expense in the financial statements for stock options
based upon the grant-date fair value over the substantive vesting period. Prior
to January 1, 2006, the Company applied Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations, as permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB Opinion No. 25, no compensation expense was recognized
in the financial statements for employee stock options granted at an exercise
price equal to the market value of the underlying common stock at the date
of
grant. For additional information, see Note 15, "Share-Based Compensation
Plans."
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
accordance with the 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 comparable effect on net
earnings and earnings per share as formerly provided under SFAS No. 123 for
2005
and 2004:
(In
millions, except per share amounts)
|
|
2005
|
|
2004
|
|
|
|
|
|
Net
earnings, as reported
|
|
$
|
557
|
$
|
170
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense included in net earnings,
as
reported
|
|
|
11
|
|
5
|
|
|
|
|
|
|
Deduct:
Total additional stock-based employee compensation cost, net of tax,
that
would have been included in net earnings under fair value
method
|
|
|
14
|
|
10
|
Pro
forma net earnings
|
|
$
|
554
|
$
|
165
|
|
|
|
|
|
|
Basic
earnings per share
|
As
reported
|
|
$6.90
|
|
$2.20
|
|
Pro
forma
|
|
$6.85
|
|
$2.13
|
|
|
|
|
|
|
Diluted
earnings per share
|
As
reported
|
|
$6.81
|
|
$2.18
|
|
Pro
forma
|
|
$6.78
|
|
$2.12
|
Compensated
Absences
The
Company accrues compensated absences and related benefits as current charges
to
earnings in the period earned.
Research
and Development
All
costs
identified as research and development costs are charged to expense when
incurred with the exception of third-party reimbursed and government-funded
research and development. Expenses for third-party reimbursed and
government-funded research and development are deferred until reimbursement
is
received to ensure appropriate matching of revenue and expense, provided
specific criteria are met.
Other
Income and Other Charges
Included
in other income and other charges are results from equity investments, gains
on
the sale of certain technology business venture investments, royalty income,
gains or losses on foreign exchange transactions, write-downs to fair value
of
certain technology business venture investments due to other than temporary
declines in value, certain litigation costs, fees on securitized receivables,
other non-operating income and other miscellaneous items.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company’s assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Provision has been made for income taxes on unremitted earnings of subsidiaries
and affiliates, except for subsidiaries in which earnings are deemed to be
permanently reinvested.
Reclassifications
The
Company has retrospectively applied certain 2005 and 2004 amounts to conform
to
the 2006 presentation. For additional information, see Note 21, "Segment
Information."
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
At
FIFO or average cost (approximates current cost)
|
|
|
|
|
Finished
goods
|
$
|
660
|
$
|
664
|
Work
in process
|
|
206
|
|
207
|
Raw
materials and supplies
|
|
280
|
|
247
|
Total
inventories
|
|
1,146
|
|
1,118
|
LIFO
Reserve
|
|
(464)
|
|
(447)
|
Total
inventories
|
$
|
682
|
$
|
671
|
Inventories
valued on the LIFO method were approximately 65 percent of total inventories
in
each of the periods.
3. |
PROPERTIES
AND ACCUMULATED
DEPRECIATION
|
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
Properties
|
|
|
|
|
Land
|
$
|
42
|
$
|
42
|
Buildings
and building equipment
|
|
824
|
|
861
|
Machinery
and equipment
|
|
7,819
|
|
8,495
|
Construction
in progress
|
|
159
|
|
199
|
Properties
and equipment at cost
|
$
|
8,844
|
$
|
9,597
|
Less:
Accumulated depreciation
|
|
5,775
|
|
6,435
|
|
|
|
|
|
Net
properties
|
$
|
3,069
|
$
|
3,162
|
Cumulative
construction-period interest of $311 million and $352 million, reduced by
accumulated depreciation of $294 million and $287 million, is included in cost
of properties at December 31, 2006 and 2005, respectively.
Interest
capitalized during 2006, 2005 and 2004 was $7 million, $5 million, and $3
million, respectively.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Depreciation
expense was $294 million, $287 million, and $302 million for 2006, 2005 and
2004, respectively. The year 2006
included $10 million of accelerated depreciation related to previously disclosed
restructuring decisions in association with cracking units in Longview, Texas,
and higher cost polyethylene terephthalate ("PET") polymer intermediates assets
in Columbia, South Carolina, which are scheduled for shutdown.
Deductions
in 2006 include the sale of certain product lines and related assets in the
Performance Chemicals and Intermediates ("PCI"), the Performance Polymers and
the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segments.
4. |
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Intangible
assets include developed technology, customer lists, patents and patent
licenses, and trademarks with a net book value of $17 million in 2006 and $23
million in 2005. During
2006, the Company recorded approximately $6 million in intangible asset
impairments related to patents associated with abandoned businesses. Other
intangible assets are included in other noncurrent assets on the balance sheet.
Changes
in the carrying amount of goodwill follow:
(Dollars
in millions)
|
|
CASPI
Segment
|
|
Other
Segments
|
|
Total
Eastman Chemical
|
|
|
|
|
|
|
|
Reported
balance at December 31, 2004
|
$
|
308
|
$
|
6
|
$
|
314
|
Currency
translation adjustments
|
|
(2)
|
|
--
|
|
(2)
|
Reported
balance at December 31, 2005
|
|
306
|
|
6
|
|
312
|
Currency
translation adjustments
|
|
2
|
|
--
|
|
2
|
Reported
balance at December 31, 2006
|
$
|
308
|
$
|
6
|
$
|
314
|
5. |
EQUITY
INVESTMENTS AND OTHER NONCURRENT ASSETS AND
LIABILTIES
|
Eastman
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 at December 31, 2006 and December 31, 2005 was approximately $87 million
and $86 million, 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 December 31, 2006 and 2005, the Company’s investment in Nanjing was
approximately $5 million.
On
April
21, 2005, the Company completed the sale of its equity investment in 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.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. |
PAYABLES
AND OTHER CURRENT
LIABILITIES
|
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Trade
creditors
|
$
|
581
|
$
|
534
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
|
126
|
|
154
|
Accrued
taxes
|
|
59
|
|
49
|
Post-employment
obligations
|
|
63
|
|
134
|
Interest
payable
|
|
31
|
|
31
|
Bank
overdrafts
|
|
11
|
|
10
|
Other
|
|
185
|
|
135
|
Total
|
$
|
1,056
|
$
|
1,047
|
The
current portion of post-employment obligations is an estimate of current year
payments in excess of plan assets.
|
December
31,
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
|
|
|
Borrowings
consisted of:
|
|
|
|
3
1/4% notes due 2008
|
$
|
72
|
$
|
72
|
6.30%
notes due 2018
|
182
|
|
185
|
7%
notes due 2012
|
141
|
|
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
|
185
|
|
214
|
Other
|
18
|
|
18
|
Total
borrowings
|
1,592
|
|
1,625
|
Borrowings
due within one year
|
(3)
|
|
(4)
|
Long-term
borrowings
|
$
|
1,589
|
$
|
1,621
|
At
December 31, 2006, the Company had credit facilities with various U.S. and
foreign banks totaling approximately $885 million. These credit facilities
consist of a $700 million revolving credit facility (the "Credit Facility")
expiring in April 2011, as well as a 140 million Euro credit facility ("Euro
Facility") which expires in December 2011. Both credit facilities have options
for two one-year extensions, and the first extension option for the Euro
Facility has been exercised.
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. At December 31, 2006,
the
Company’s credit facility borrowings totaled $185 million at an
effective interest
rate of 4.00 percent. At December 31, 2005, the Company's credit facility
borrowings were $214 million at a weighted-average interest rate of 3.01
percent.
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.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 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 to convert the notes from fixed rate to variable rate borrowings. The
average variable interest rate on the 7% notes was 7.89 percent
and 7.22 percent for December 31, 2006 and December 31, 2005, respectively.
The
average variable interest rate on the 6.30% notes was 6.30 percent
and 5.63 percent for December 31, 2006 and December 31, 2005,
respectively.
8. |
EARLY
EXTINGUISHMENT OF DEBT
|
In
the
second quarter 2005, the Company completed the early repayment of $500 million
of its outstanding long-term bonds 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 purchased 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
|
9. |
FAIR
VALUE OF FINANCIAL
INSTRUMENTS
|
|
|
December
31, 2006
|
|
December
31, 2005
|
(Dollars
in millions)
|
|
Recorded
Amount
|
|
Fair
Value
|
|
Recorded
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
$
|
1,589
|
$
|
1,715
|
$
|
1,621
|
$
|
1,770
|
The
fair
value for fixed-rate borrowings is based on current interest rates for
comparable securities. The Company's floating-rate borrowings approximate fair
value.
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 the
broker.
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.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Currency
Rate Hedging
The
Company manufactures and sells its products in a number of countries throughout
the world and, as a result, is exposed to movements in foreign currency exchange
rates. To manage the volatility relating to these exposures, the Company nets
the exposures on a consolidated basis to take advantage of natural offsets.
To
manage the remaining exposure, the Company enters into currency options
forwards
to hedge probable anticipated, but not yet probable committed, export sales
and
purchase transactions expected within no more than five years and denominated
in
foreign currencies (principally the Euro, British pound, the Japanese yen and
the Canadian dollar) and forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. These
contracts are designated as cash flow hedges. The mark-to-market gains or losses
on qualifying hedges are included in accumulated other comprehensive income
(loss) to the extent effective, and reclassified into sales in the period during
which the hedged transaction affects earnings.
Raw
Material and Energy Hedging
Raw
materials and energy sources used by the Company are subject to price volatility
caused by weather, supply conditions, economic variables and other unpredictable
factors. To mitigate short-term fluctuations in market prices for propane and
natural gas, the Company enters into forwards and options contracts. These
contracts are designated as cash flow hedges. The mark-to-market gains or losses
on qualifying hedges are included in accumulated other comprehensive income
(loss) to the extent effective, and reclassified into cost of sales in the
period during which the hedged transaction affects earnings.
Interest
Rate Hedging
The
Company's policy is to manage interest cost using a mix of fixed and variable
rate debt. To manage this mix in a cost-efficient manner, the Company enters
into interest rate swaps in which the Company agrees to exchange the difference
between fixed and variable interest amounts calculated by reference to an agreed
upon notional principal amount. These swaps are designated to hedge the fair
value of underlying debt obligations with the interest rate differential
reflected as an adjustment to interest expense over the life of the swaps.
As
these instruments are 100 percent effective, there is no impact on earnings
due
to hedge ineffectiveness.
From
time
to time, the Company also utilizes interest rate derivative instruments,
primarily swaps, to hedge the Company’s exposure to movements in interest rates
on anticipated debt offerings. These instruments are designated as cash flow
hedges and are typically 100 percent effective. As a result, there is no current
impact on earnings due to hedge ineffectiveness. The mark-to-market gains or
losses on these hedges are included in accumulated other comprehensive income
(loss) to the extent effective, and are reclassified into interest expense
over
the period of the related debt instruments.
At
December 31, 2006, mark-to-market losses from raw material, currency, energy
and
certain interest rate hedges that were included in accumulated other
comprehensive income (loss) totaled approximately $7 million. If
realized, substantially all of these losses will be reclassified into
earnings during the next 12 months. The mark-to-market gains or losses on
non-qualifying, excluded and ineffective portions of hedges are immediately
recognized in cost of sales or other income and charges. Such amounts had a
negative $1 million impact on earnings during 2006.
At
December 31, 2005, mark-to-market losses from raw material, currency, energy
and
certain interest rate hedges that were included in accumulated other
comprehensive income (loss) totaled approximately $5 million. If
realized, substantially all of these losses will be reclassified into
earnings during the next 12 months. The mark-to-market gains or losses on
non-qualifying, excluded and ineffective portions of hedges are immediately
recognized in cost of sales or other income and charges. Such amounts had a
negative $6 million impact on earnings during 2005.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Eastman
maintains defined benefit plans that provide eligible employees with retirement
benefits. Prior to 2000, benefits were calculated using a defined benefit
formula based on age, years of service, and the employee’s final average
compensation as defined in the plans. Effective January 1, 2000, the Company's
U.S. defined benefit pension plan, the Eastman Retirement Assistance Plan,
was
amended. Employees' accrued pension benefits earned prior to January 1, 2000
are
calculated based on previous plan provisions using the employee's age, years
of
service and final average compensation as defined in the plans. The amended
defined benefit pension plan uses a pension equity formula based on age, years
of service and final average compensation to calculate an employee's retirement
benefits from January 1, 2000 forward. Benefits payable will be the combined
pre-2000 and post-1999 benefits.
Benefits
are paid to employees from trust funds. Contributions to the plan are made
as
permitted by laws and regulations. The pension trust fund does not directly
own
any of the Company’s common stock.
Pension
coverage for employees of Eastman's international operations is provided, to
the
extent deemed appropriate, through separate plans. The Company systematically
provides for obligations under such plans by depositing funds with trustees,
under insurance policies or by book reserves.
Eastman
has adopted the provisions of SFAS No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement
No. 87, 88, 106, and 132 (R)" ("SFAS No. 158"), as of December 31, 2006. The
table below summarizes the incremental effects of SFAS No. 158 adoption on
the
individual line items in the Statement of Financial Position at December 31,
2006 for defined benefit retirement plans.
December
31,
2006
|
(Dollars
in millions)
|
|
Pre-SFAS
No.
158
|
|
Adjustment
to initially apply FAS 158
|
|
Post
SFAS
No.
158 Adjustment
|
|
|
|
|
|
|
|
Intangible
Asset
|
|
21
|
|
(21)
|
|
--
|
Deferred
tax asset
|
|
119
|
|
42
|
|
161
|
Accrued
pension liability
|
|
(241)
|
|
(105)
|
|
(346)
|
Accumulated
Other Comprehensive Loss, net of tax
|
|
(207)
|
|
(84)
|
|
(291)
|
|
|
|
|
|
|
|
Below
is
a summary balance sheet of the change in plan assets during 2006 and 2005,
the
funded status of the plans, amounts recognized in the Statements of Financial
Position, and a summary of benefit costs.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
assumptions used to develop the projected benefit obligation for the Company's
significant defined benefit pension plans are also provided in the following
tables.
Summary
Balance Sheet
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Change
in projected benefit obligation:
|
|
|
|
|
Benefit
obligation, beginning of year
|
$
|
1,477
|
$
|
1,382
|
Service
cost
|
|
44
|
|
43
|
Interest
cost
|
|
82
|
|
80
|
Actuarial
loss
|
|
12
|
|
77
|
Plan
amendments and other
|
|
71
|
|
7
|
Effect
of currency exchange
|
|
26
|
|
(23)
|
Benefits
paid
|
|
(119)
|
|
(89)
|
Benefit
obligation, end of year
|
$
|
1,593
|
$
|
1,477
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
Fair
value of plan assets, beginning of year
|
$
|
1,054
|
$
|
878
|
Actual
return on plan assets
|
|
162
|
|
100
|
Plan
amendments and other
|
|
46
|
|
--
|
Effect
of currency exchange
|
|
17
|
|
(14)
|
Company
contributions
|
|
87
|
|
177
|
Benefits
paid
|
|
(119)
|
|
(87)
|
Fair
value of plan assets, end of year
|
$
|
1,247
|
$
|
1,054
|
|
|
|
|
|
Funded
Status at end of year
|
$
|
(346)
|
$
|
(423)
|
Unrecognized
actuarial loss
|
|
|
|
555
|
Unrecognized
prior service credit
|
|
|
|
(46)
|
Net
amount recognized, end of year
|
|
|
$
|
86
|
|
|
|
|
|
Amounts
recognized in the Statements of Financial Position consist
of:
|
|
|
|
|
Current
liability
|
$
|
(3)
|
$
|
|
Noncurrent
liability
|
|
(343)
|
|
|
Prepaid
benefit cost
|
|
|
|
105
|
Intangible
assets
|
|
|
|
15
|
Accrued
benefit cost
|
|
|
|
(19)
|
Additional
minimum liability
|
|
|
|
(417)
|
Accumulated
other comprehensive loss
|
|
|
|
402
|
Net
amount recognized, end of year
|
$
|
(346)
|
$
|
86
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income consist
of:
|
|
|
|
|
Net
actuarial loss (gain)
|
$
|
462
|
|
|
Prior
service costs (credit)
|
|
(10)
|
|
|
Accumulated
other comprehensive loss
|
$
|
452
|
|
|
|
|
|
|
|
The
accumulated benefit obligation basis at the end of 2006 and 2005 was $1,489
million and $1,388 million, respectively.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of the components of net periodic benefit cost recognized for Eastman's
significant defined benefit pension plans follows:
Summary
of Benefit Costs and Other Amounts Recognized in Other Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
Service
cost
|
$
|
44
|
$
|
43
|
$
|
41
|
Interest
cost
|
|
82
|
|
80
|
|
82
|
Expected
return on assets
|
|
(88)
|
|
(79)
|
|
(82)
|
Curtailment
charge
|
|
--
|
|
--
|
|
2
|
Amortization
of:
|
|
|
|
|
|
|
Prior
service credit
|
|
(10)
|
|
(9)
|
|
(10)
|
Actuarial
loss
|
|
39
|
|
36
|
|
27
|
Net
periodic benefit cost
|
$
|
67
|
$
|
71
|
$
|
60
|
|
|
|
|
|
|
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income
|
|
|
|
|
|
|
Actuarial
loss
|
$
|
39
|
$
|
36
|
$
|
27
|
Prior
service credit
|
|
(10)
|
|
(10)
|
|
(10)
|
Total
|
$
|
29
|
$
|
26
|
$
|
17
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine benefit obligations for years ended
December
31:
|
|
|
|
|
|
Discount
rate
|
5.66%
|
|
5.51%
|
|
5.67%
|
Expected
return on assets
|
8.53%
|
|
8.59%
|
|
8.65%
|
Rate
of compensation increase
|
3.78%
|
|
3.75%
|
|
3.78%
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine net periodic pension cost for years
ended
December 31:
|
|
|
|
|
|
Discount
rate
|
5.51%
|
|
5.67%
|
|
6.18%
|
Expected
return on assets
|
8.59%
|
|
8.65%
|
|
8.88%
|
Rate
of compensation increase
|
3.75%
|
|
3.78%
|
|
3.77%
|
|
|
|
|
|
|
The
fair
value of plan assets for domestic plans at December 31, 2006 and 2005 was $1,052
million and $939 million, respectively, while the fair value of plan assets
at
December 31, 2006 and 2005 for non-U.S. plans was $195 million and $115 million,
respectively. At December 31, 2006 and 2005, the expected long-term rate of
return on the U.S. plan assets was 9 percent, while the expected long-term
rate
of return on non-U.S. plan assets was 5.24 percent and 5.75 percent at December
31, 2006 and 2005, respectively. The target allocation for the Company’s U.S.
pension plan for 2007 and the asset allocation at December 31, 2006 and 2005,
by
asset category, is as follows:
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
Target
Allocation for 2007
|
Plan
Assets at December 31, 2006
|
Plan
Assets at December 31, 2005
|
Asset
category
|
|
|
|
|
|
|
|
Equity
securities
|
69%
|
75%
|
78%
|
Debt
securities
|
10%
|
8%
|
9%
|
Real
estate
|
5%
|
5%
|
3%
|
Other
investments
|
16%
|
12%
|
10%
|
Total
|
100%
|
100%
|
100%
|
The
asset
allocation for the Company’s non-U.S. pension plans at December 31, 2006 and
2005, and the target allocation for 2007, by asset category, is as
follows:
|
Target
Allocation for 2007
|
Plan
Assets at December 31, 2006
|
Plan
Assets at December 31, 2005
|
Asset
category
|
|
|
|
|
|
|
|
Equity
securities
|
24%
|
24%
|
49%
|
Debt
securities
|
37%
|
37%
|
45%
|
Real
estate
|
--
|
--
|
5%
|
Other
investments
|
39%
|
39%
|
1%
|
Total
|
100%
|
100%
|
100%
|
The
Company’s investment strategy for its defined benefit pension plans is to
maximize long-term rate of return on plan assets within an acceptable level
of
risk in order to minimize the cost of providing pension benefits. The investment
policy establishes a target allocation range for each asset class and the fund
is managed within those ranges. The plans use a number of investment approaches
including equity, real estate, and fixed income funds in which the underlying
securities are marketable in order to achieve this target allocation. The U.S.
plan also invests in private equity and other funds.
The
expected rate of return was determined by modeling the expected long-term rates
of return for broad categories of investments held by the plan against a number
of various potential economic scenarios.
The
Company funded its U.S. defined benefit plan for 2007 by $100 million in January
2007.
Benefits
expected to be paid from pension plans are as follows:
(Dollars
in millions)
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012-2016
|
US
plan
|
$90
|
$96
|
$96
|
$99
|
$103
|
$627
|
International
plans
|
$6
|
$6
|
$6
|
$6
|
$6
|
$35
|
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.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. Allocated shares in the ESOP totaled
1,721,199; 1,980,906; and 2,210,590 shares as of December 31, 2006, 2005 and
2004, respectively. Dividends on shares held by the EIP/ESOP are charged to
retained earnings. All shares held by the EIP/ESOP are treated as outstanding
in
computing earnings per share.
In
July
2006, the Company amended 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 also be eligible for the 5 percent contribution
to the ESOP as described above.
Charges
for domestic contributions to the EIP/ESOP were $35 million, $33 million, and
$34 million for 2006, 2005 and 2004, respectively.
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. Similar benefits are also provided to retirees of Holston Defense
Corporation (“HDC”), a wholly-owned subsidiary of the Company that, prior to
January 1, 1999, operated a government-owned ammunitions plant. HDC’s contract
with the Department of Army (“DOA”) provided for reimbursement of allowable
costs incurred by HDC including certain postretirement welfare costs, for as
long as HDC operated the plant. After the contract was terminated at the end
of
1998, the Army did not contribute further to these costs. The Company pursued
extraordinary relief from the DOA and was granted an award effective in the
fourth quarter in the amount of $95 million. This award was for reimbursement
of
the described costs and other previously expensed post-retirement benefit costs.
The Company began recognizing the impact of the reimbursement in fourth quarter
2006 by recording an unrecognized gain and amortizing the gain into earnings
over a period of time. Included
in 2006 other income is a $12 million gain reflecting
a portion of the unrecognized gain resulting from the award.
Eastman
has adopted the provisions of SFAS No. 158 as of December 31, 2006 for its
postretirement welfare plans with the implementation having an immaterial
impact.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
Below
is
a summary balance sheet of the change in plan assets during 2006 and 2005,
the
funded status of the plans, amounts recognized in the Statements of Financial
Position, and a summary of benefit costs.
Summary
Balance Sheet
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
Benefit
obligation, beginning of year
|
$
|
779
|
$
|
795
|
Service
cost
|
|
8
|
|
8
|
Interest
cost
|
|
41
|
|
43
|
Plan
participants’ contributions
|
|
18
|
|
12
|
Actuarial
(gain) loss
|
|
(57)
|
|
(23)
|
Benefits
paid
|
|
(58)
|
|
(56)
|
Benefit
obligation, end of year
|
$
|
731
|
$
|
779
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
Fair
value of plan assets, beginning of year
|
$
|
6
|
$
|
13
|
Actual
return on plan assets
|
|
1
|
|
--
|
Company
contributions
|
|
34
|
|
37
|
Third
party contributions
|
|
95
|
|
--
|
Reserve
for third party contributions
|
|
(39)
|
|
--
|
Plan
participants’ contributions
|
|
18
|
|
12
|
Benefits
paid
|
|
(58)
|
|
(56)
|
Fair
value of plan assets, end of year
|
$
|
57
|
$
|
6
|
|
|
|
|
|
Funded
status
|
$
|
(674)
|
$
|
(773)
|
Unrecognized
actuarial loss
|
|
|
|
325
|
Unrecognized
prior service credit
|
|
|
|
(235)
|
Funded
status at end of year
|
|
|
$
|
(683)
|
|
|
|
|
|
Amounts
recognized in the Statements of Financial Position consist
of:
|
|
|
|
|
Current
liabilities
|
$
|
(38)
|
$
|
(34)
|
Non-current
liabilities
|
|
(636)
|
|
(649)
|
Net
amount recognized, end of year
|
$
|
(674)
|
$
|
(683)
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive
income
|
|
|
|
|
Actuarial
(gain) loss
|
$
|
206
|
|
|
Prior
service (credit) cost
|
|
(211)
|
|
|
Accumulated
other comprehensive income
|
$
|
(5)
|
|
|
|
|
|
|
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
net
periodic postretirement benefit cost follows:
Summary
of Benefit Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
Service
cost
|
$
|
8
|
$
|
8
|
$
|
7
|
Interest
cost
|
|
41
|
|
43
|
|
52
|
Expected
return on assets
|
|
--
|
|
--
|
|
(1)
|
Curtailment
gain
|
|
--
|
|
--
|
|
(3)
|
Other
|
|
(12)
|
|
--
|
|
--
|
Amortization
of:
|
|
|
|
|
|
|
Prior
service credit
|
|
(22)
|
|
(23)
|
|
(15)
|
Actuarial
loss
|
|
15
|
|
20
|
|
17
|
Net
periodic benefit cost
|
$
|
30
|
$
|
48
|
$
|
57
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine end of year benefit obligations:
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Discount
rate
|
5.86%
|
|
5.62%
|
|
5.75%
|
Rate
of compensation increase
|
3.75%
|
|
3.75%
|
|
3.75%
|
Health
care cost trend
|
|
|
|
|
|
Initial
|
9.00%
|
|
8.00%
|
|
9.00%
|
Decreasing
to ultimate trend of
|
5.00%
|
|
5.00%
|
|
5.00%
|
in
year
|
2011
|
|
2009
|
|
2009
|
Weighted-average
assumptions used to determine end of year net benefit cost:
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Discount
rate
|
5.62%
|
|
5.75%
|
|
6.25%
|
Rate
of compensation increase
|
3.75%
|
|
3.75%
|
|
3.75%
|
Health
care cost trend
|
|
|
|
|
|
Initial
|
8.00%
|
|
9.00%
|
|
10.00%
|
Decreasing
to ultimate trend of
|
5.00%
|
|
5.00%
|
|
5.00%
|
in
year
|
2009
|
|
2009
|
|
2009
|
Benefits
expected to be paid for post-employment obligations are as follows:
(Dollars
in millions)
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012-2016
|
U.S
plans
|
$43
|
$43
|
$43
|
$43
|
$44
|
$236
|
|
|
|
|
|
|
|
A
9
percent rate of increase in per capita cost of covered health care benefits
is
assumed for 2007. The rate is assumed to decrease gradually to 5 percent for
2011 and remain at that level thereafter. A 1 percent increase or decrease
in
health care trend would have had no material impact on the 2006 service and
interest costs or the 2006 benefit obligation, because the Company's
contributions for benefits are fixed.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
During
the second quarter 2004, the Company announced an amendment to its U.S. health
and dental benefit plans such that future health and dental benefits to certain
retirees will be fixed at a certain contribution amount, not to be increased.
As
a result, the Company remeasured these plans as of June 1, 2004 resulting in
a
reduction of the Company’s benefit obligation by approximately $240 million. The
discount rate used at the time of the remeasurement was adjusted from 6.25
percent at December 31, 2003 to 6.50 percent at June 1, 2004 based on increases
in interest rates.
In
May,
2004, the FASB issued FASB Staff Position ("FSP") 106-2, providing final
guidance on accounting for the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (the "Act"). Under the provisions of FSP 106-2, the
Company determined that its health care plans were not actuarially equivalent
to
Medicare Part D. In January, 2005, the Centers for Medicare and Medicaid
Services released final regulations implementing the Act. The Company has
determined that, although its plans are believed to be actuarially equivalent
and eligible for certain subsidies under the most recent regulations,
implementation of these regulations will have an immaterial impact on its
overall financial condition, results of operations, and cash flows and therefore
are not reflected in the above amounts.
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.
Purchase
Obligations and Lease Commitments
At
December 31, 2006, the Company had various purchase obligations totaling
approximately $2.1 billion over a period of approximately 15 years for
materials, supplies, and energy incident to the ordinary conduct of business.
The Company also had various lease commitments for property and equipment under
cancelable, noncancelable, and month-to-month operating leases totaling
approximately $201 million over a period of several years. Of the total lease
commitments, approximately 12 percent relate to machinery and equipment,
including computer and communications equipment and production equipment;
approximately 50 percent relate to real property, including office space,
storage facilities and land; and approximately 38 percent relate to railcars.
Rental expense, net of sublease income, was approximately $62 million, $64
million, and $65 million in 2006, 2005 and 2004, respectively.
The
obligations described above are summarized in the following table:
(Dollars
in Millions)
|
|
Payments
Due For
|
Period
|
|
Notes
and Debentures
|
|
Credit
Facility Borrowings and Other
|
|
Interest
Payable
|
|
Purchase
Obligations
|
|
Operating
Leases
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
$
|
|
$
|
3
|
$
|
107
|
$
|
373
|
$
|
45
|
$
|
528
|
2008
|
|
72
|
|
--
|
|
106
|
|
363
|
|
30
|
|
571
|
2009
|
|
|
|
13
|
|
105
|
|
349
|
|
25
|
|
492
|
2010
|
|
--
|
|
--
|
|
104
|
|
312
|
|
20
|
|
436
|
2011
|
|
2
|
|
185
|
|
104
|
|
199
|
|
17
|
|
507
|
2012
and beyond
|
|
1,317
|
|
--
|
|
1,053
|
|
507
|
|
64
|
|
2,941
|
Total
|
$
|
1,391
|
$
|
201
|
$
|
1,579
|
$
|
2,103
|
$
|
201
|
$
|
5,475
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounts
Receivable Securitization Program
In
1999,
the Company entered into an agreement that allows the Company to sell certain
domestic accounts receivable under a planned continuous sale program to a third
party. The agreement permits the sale of undivided interests in domestic trade
accounts receivable. Receivables sold to the third party totaled $200 million
at
December 31, 2006 and December 31, 2005. Undivided interests in designated
receivable pools were sold to the purchaser with recourse limited to the
purchased interest in the receivable pools. Average monthly proceeds from
collections reinvested in the continuous sale program were approximately $321
million and $292 million in 2006 and 2005, respectively.
Guarantees
In
November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,” an interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” 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. Disclosures about each group of
similar guarantees are provided below.
Residual
Value 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
December 31, 2006 totaled $113 million and consisted primarily of leases for
railcars, company aircraft, and other equipment. Leases
with guarantee amounts totaling $2 million, $27 million, and $84 million will
expire in 2007, 2008, and 2012, respectively. The
Company believes, based on current facts and circumstances, that the likelihood
of a material payment pursuant to such guarantees is remote.
Other
Guarantees
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.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Variable
Interest Entities
The
Company has evaluated material relationships including the guarantees related
to
the third-party borrowings of joint ventures described above and has concluded
that the entities are not Variable Interest Entities (“VIEs”) or, in the case of
Primester, a joint venture that manufactures cellulose acetate at the Company's
Kingsport, Tennessee plant, the Company is not the primary beneficiary of the
VIE. As such, in accordance with FASB
Interpretation
Number 46, "Consolidation of Variable Interest Entities" ("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 December 31, 2006. These potential VIEs are joint ventures from
which the Company has purchased raw materials and utilities for several years
and purchases approximately $60 million of raw materials and utilities on an
annual basis. The Company has no equity interest in these entities and has
confirmed that one party to each of these joint ventures does consolidate the
potential VIE. However, due to competitive and other reasons, the Company has
not been able to obtain the necessary financial information to determine whether
the entities are VIEs, and if one or both are VIEs, whether or not the Company
is the primary beneficiary.
12. |
ENVIRONMENTAL
MATTERS
|
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP"), by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be required
to
incur costs for environmental remediation and closure and postclosure under
the
federal Resource Conservation and Recovery Act. Reserves for environmental
contingencies have been established in accordance with Eastman’s policies
described in Note 1, "Significant Accounting Policies". Because of expected
sharing of costs, the availability of legal defenses, and the Company’s
preliminary assessment of actions that may be required, management does not
believe that the Company's liability for these environmental matters,
individually or in the aggregate, will be material to the Company’s consolidated
financial position, results of operations or cash flows. The Company’s reserve
for environmental contingencies was $47 million and $51 million at December
31,
2006 and 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 $18 million to the maximum of $32 million at December 31, 2006
and
the minimum or best estimate of $21 million to the maximum of $42 million at
December 31, 2005.
The
following table summarizes the activity in the Company's accrued obligations
for
environmental matters for the years ended December 31, 2006 and
2005:
Accrued
Obligations for Environmental Matters
(in
millions)
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
|
|
Beginning
environmental liability
|
$
|
51
|
$
|
56
|
|
|
|
|
|
Liabilities
incurred in current period
|
|
7
|
|
1
|
Liabilities
settled in current period
|
|
(14)
|
|
(5)
|
Accretion
expense
|
|
2
|
|
2
|
Revisions
to estimated cash flow
|
|
1
|
|
(3)
|
|
|
|
|
|
Ending
environmental liability
|
$
|
47
|
$
|
51
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As
part
of the divestitures of the Arkansas facility and the PE product lines,
environmental liabilities of approximately $6 million were settled.
For
additional information, refer to Note 25, "Reserve Rollforwards".
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. In each case, the Company prevailed at the
trial court, and in each case, the plaintiff appealed the trial court's
decision. In one case, the appeal is still pending. In the other case, the
court
of appeals overturned the trial court's decision and ruled that the plaintiff
could amend and re-file its complaint with the trial court. The Company has
appealed this court of appeals decision to the state supreme court. In each
case
the Company intends to continue to vigorously defend its position.
Asbestos
Litigation
Over
the
years, Eastman has been named as a defendant, along with numerous other
defendants, in lawsuits in various state courts in which plaintiffs have alleged
injury due to exposure to asbestos at Eastman’s manufacturing sites. More
recently, certain plaintiffs have claimed exposure to an asbestos-containing
plastic, which Eastman manufactured in limited amounts between the mid-1960’s
and the early 1970’s.
To
date,
the Company has obtained dismissals or settlements of its asbestos-related
lawsuits with no material effect on its financial condition, results of
operations or cash flows, and over the past several years, has substantially
reduced its number of pending asbestos-related claims. The Company has also
obtained insurance coverage that applies to a portion of certain of the
Company’s defense costs and payments of settlements or judgments in connection
with asbestos-related lawsuits.
Based
on
an ongoing evaluation, the Company believes that the resolution of its pending
asbestos claims will not have a material impact on the Company’s financial
condition, results of operations, or cash flows, although these matters could
result in the Company being subject to monetary damages, costs or expenses,
and
charges against earnings in particular periods.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A
reconciliation of the changes in stockholders’ equity for 2004, 2005, and 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 January 1, 2004
|
1
|
122
|
1,476
|
(121)
|
(435)
|
1,043
|
|
|
|
|
|
|
|
Net
Earnings
|
--
|
--
|
170
|
--
|
--
|
170
|
Cash
Dividends(2)
|
--
|
--
|
(137)
|
--
|
--
|
(137)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
18
|
--
|
18
|
Stock
Option Exercises and other Items
(1)
|
--
|
88
|
--
|
--
|
2
|
90
|
Balance
at December 31, 2004
|
1
|
210
|
1,509
|
(103)
|
(433)
|
1,184
|
|
|
|
|
|
|
|
Net
Earnings
|
--
|
--
|
557
|
--
|
--
|
557
|
Cash
Dividends(2)
|
--
|
--
|
(143)
|
--
|
--
|
(143)
|
Other
Comprehensive Loss
|
--
|
--
|
--
|
(97)
|
--
|
(97)
|
Stock
Option Exercises and other Items
(1)
|
--
|
110
|
--
|
--
|
1
|
111
|
Balance
at December 31, 2005
|
1
|
320
|
1,923
|
(200)
|
(432)
|
1,612
|
|
|
|
|
|
|
|
Net
Earnings
|
--
|
--
|
409
|
--
|
--
|
409
|
Cash
Dividends(2)
|
--
|
--
|
(146)
|
--
|
--
|
(146)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
107
|
--
|
107
|
Effect
of FAS 158 adoption
|
--
|
--
|
--
|
(81)
|
--
|
(81)
|
Stock
Option Exercises and other Items (1)(3)
|
--
|
128
|
--
|
--
|
--
|
128
|
Balance
at December 31, 2006
|
1
|
448
|
2,186
|
(174)
|
(432)
|
2,029
|
(1)
The tax
benefits relating to the difference between the amounts deductible for federal
income taxes over the amounts charged to income for book value purposes have
been credited to paid-in capital.
(2) Includes
cash dividends paid and dividends declared but unpaid. Also includes the
redemption of the outstanding preferred stock purchase rights.
(3)
Includes
the fair value of equity share-based awards recognized under SFAS No.
123(R).
The
Company is authorized to issue 400 million shares of all classes of stock,
of
which 50 million may be preferred stock, par value $0.01 per share, and 350
million may be common stock, par value $0.01 per share. The Company declared
dividends of $1.76 per share in each of 2006, 2005 and 2004.
The
Company established a benefit security trust in 1997 to provide a degree of
financial security for unfunded obligations under certain plans and contributed
to the trust a warrant to purchase up to 1 million shares of common stock of
the
Company for par value. The warrant, which remains outstanding, is exercisable
by
the trustee if the Company does not meet certain funding obligations, which
obligations would be triggered by certain occurrences, including a change in
control or potential change in control, as defined, or failure by the Company
to
meet its payment obligations under covered unfunded plans. Such warrant is
excluded from the computation of diluted earnings per share because the
conditions upon which the warrant becomes exercisable have not been
met.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
additions to paid-in capital for 2005 and 2004 are primarily the result of
stock
option exercises by employees. Effective January 1, 2006, this includes
exercises and recognition of compensation expense of equity awards determined
under SFAS No. 123(R).
The
Company was authorized to repurchase up to $400 million of its common stock
under a February 4, 1999, authorization by the Board of Directors. No shares
of
Eastman common stock were repurchased by the Company under this authorization
during 2006, 2005, and 2004. A
total
of 2,746,869 shares of common stock at a cost of approximately $112 million,
or
an average price of approximately $41 per share, have been repurchased under
the
authorization. Repurchased
shares under this authorization may be used to meet common stock requirements
for compensation and benefit plans and other corporate purposes.
On
February 20, 2007, the Board of Directors cancelled its prior authorization
for
stock repurchases and approved a new authorization for the repurchase of up
to
$300 million of the Company's outstanding common stock at such times, in such
amounts, and on such terms, as determined to be in the best interests of the
Company. Repurchased shares may be used for such purposes or otherwise applied
in such a manner as determined to be in the best interests of the
Company.
The
Company's charitable foundation held the following shares of the Company's
common stock at December 31 of each year and are reported in treasury stock:
106,771 shares for 2006 and 2005 and 122,725 shares for 2004.
During
the fourth quarter of 2006, the Board of Directors of the Company redeemed
all
of the outstanding preferred stock purchase rights issuable pursuant to the
Stockholder Protection Rights Agreement and terminated the Stockholder
Protection Rights Agreement. The payment of $0.01 per share of common stock
was
recorded in dividends payable at December 31, 2006 and was paid January 2,
2007.
For
2006,
2005, and 2004, the weighted average number of common shares outstanding used
to
compute basic earnings per share was 82.1 million, 80.7 million, and 77.6
million, respectively, and for diluted earnings per share was 83.2 million,
81.8
million, and 78.3 million, respectively, reflecting the effect of dilutive
options outstanding. Excluded from the 2006 calculation were shares underlying
options to purchase 2,157,703 shares of common stock at a range of prices from
$53.94 to $63.25, because the exercise price of the options was greater than
the
average market price of the underlying common shares. Excluded from the 2005
calculation were shares underlying options to purchase 878,442 shares of common
stock at a range of prices from $54.25 to $67.50, because the exercise price
of
the options was greater than the average market price of the underlying common
shares. Excluded from the 2004 calculation were shares underlying options to
purchase 5,667,339 shares of common stock at a range of prices from $45.44
to
$67.50, because the exercise price of the options was greater than the average
market price of the underlying common shares.
Shares
of common stock issued (1)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
89,566,115
|
|
87,257,499
|
|
85,296,460
|
Issued
for employee compensation and benefit plans
|
|
2,013,326
|
|
2,308,616
|
|
1,961,039
|
Balance
at end of year
|
|
91,579,441
|
|
89,566,115
|
|
87,257,499
|
|
|
|
|
|
|
|
(1)
Includes shares held in treasury.
|
|
|
|
|
|
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars
in millions)
|
Cumulative
Translation Adjustment
$
|
Unfunded
Additional
Minimum
Pension Liability
$
|
Unrecognized
Loss and Prior Service Cost, net of taxes
$
|
Unrealized
Gains (Losses) on Cash Flow Hedges
$
|
Unrealized
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
|
60
|
48
|
--
|
(1)
|
--
|
107
|
Pre-SFAS
No. 158 balance at December 31, 2006
|
121
|
(207)
|
--
|
(6)
|
(1)
|
(93)
|
Adjustments
to apply SFAS No. 158
|
--
|
207
|
(288)
|
--
|
--
|
(81)
|
Balance
at December 31, 2006
|
121
|
--
|
(288)
|
(6)
|
(1)
|
(174)
|
Except
for cumulative translation adjustment, amounts of other comprehensive income
(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.
15. |
SHARE-BASED
COMPENSATION PLANS AND
AWARDS
|
2002
Omnibus Long-Term Compensation Plan
Eastman's
2002 Omnibus Long-Term Compensation Plan provides for grants to employees of
nonqualified stock options, incentive stock options, tandem and freestanding
stock appreciation rights (“SAR’s”), performance shares and various other stock
and stock-based awards. The 2002 Omnibus Plan provides that options can be
granted through May 2, 2007, for the purchase of Eastman common stock at an
option price not less than 100 percent of the per share fair market value on
the
date of the stock option's grant. There is a maximum of 7.5 million shares
of
common stock available for option grants and other awards during the term of
the
2002 Omnibus Plan.
Director
Long-Term Compensation Plan
Eastman's
2002 Director Long-Term Compensation Plan provides for grants of nonqualified
stock options and restricted shares to nonemployee members of the Board of
Directors. Shares of restricted stock are granted upon the first day of the
directors' initial term of service and nonqualified stock options and shares
of
restricted stock are granted each year following the annual meeting of
stockholders. The 2002 Director Plan provides that options can be granted
through the later of May 1, 2007, or the date of the annual meeting of
stockholders in 2007 for the purchase of Eastman common stock at an option
price
not less than the stock's fair market value on the date of the grant.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Adoption
of SFAS No. 123(R)
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 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. Under the
requirements of APB No. 25, the Company was required to recognize compensation
cost for share-based awards when the employee or non-employee director paid
an
amount to acquire the awarded shares that was less than the closing 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, substantially all of which were
awarded at the closing market price of the Company's common stock on the date
of
grant. Effective with adoption of SFAS No. 123(R), compensation expense related
to stock option awards are recognized in the financial statements at their
fair
value.
The
Company 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 to be recognized in the financial statements
based upon their grant date 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 of implementation 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.
In
November 2005, the FASB also issued FSP No. 123(R) - 3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards." The
FSP provides an elective alternative transition method to the prescribed method
in SFAS No. 123(R) for calculating the pool of excess tax benefits available
to
absorb tax deficiencies recognized subsequent to the adoption of SFAS No.
123(R). The Company determined it did not have all the data necessary to compute
the pool of excess tax benefits as described in SFAS No 123(R) and has elected
to follow the alternative method prescribed under SFAS No. 123(R) - 3. Based
upon the alternative method, the Company does not have a pool of excess tax
benefits at December 31, 2005 to offset tax shortfalls and, consequently, will
record them as current period income tax expense.
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. 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
withhold or accept back shares awarded necessary to cover the income taxes
of
employee participants. Shares of non-employee directors are not withheld or
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 of their awards.
For
2006,
2005 and 2004, total share-based compensation expense (before tax) of
approximately $29 million, $22 million and $16 million, respectively, was
recognized in selling, general and administrative expense in the consolidated
statement of earnings, comprehensive income, and retained earnings for all
share-based awards of which approximately $17 million, $5 million and $8
million, respectively, related to stock options. SFAS No. 123(R) requires that
compensation expense is recognized over the substantive vesting period, which
may be a shorter time period than the stated vesting period. For example, SFAS
No. 123(R) requires compensation expense to be recognized by the retirement
eligibility date for option participants who are retirement eligible on the
grant date or before the stated vesting period. Approximately $8 million of
2006
option compensation expense is recognized due to retirement eligibility
preceding the requisite vesting period.
NOTES
TO
THE AUDITED 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 annual option grant is
usually awarded to eligible employees in the fourth quarter of each year, if
and
when granted by the Compensation and Management Development Committee of the
Board of Directors, and occasional individual grants are awarded to eligible
employees throughout the year. Option awards have an exercise price equal to
the
closing price of the Company's stock on the date of grant. The term of options
is ten years with vesting periods that vary up to three years. Vesting usually
occurs ratably or at the end of the vesting period. SFAS No. 123(R) requires
that stock option awards be valued at fair value determined by market price,
if
actively traded in a public market or, if not, calculated using an option
pricing financial model. The fair value of the Company's 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.
The
weighted average assumptions used in the determination of fair value for stock
options awarded in 2006, 2005 and 2004 are provided in the table below:
Assumptions
|
2006
|
2005
|
2004
|
|
|
|
|
Expected
volatility rate
|
21.40%
|
22.90%
|
28.00%
|
Expected
dividend yield
|
3.24%
|
3.29%
|
3.80%
|
Average
risk-free interest rate
|
4.62%
|
4.48%
|
3.46%
|
Expected
forfeiture rate
|
0.75%
|
Actual
|
Actual
|
Expected
term years
|
4.40
|
5.00
|
6.00
|
Prior
to
adoption of SFAS No. 123(R), the Company calculated the expected term of stock
options of six years. Effective with the fourth quarter 2005 annual option
award, the Company analyzed historical annual grant transactions over a ten
year
period comprising exercises, post-vesting cancellations and expirations to
determine the expected term. The Company expects to execute this analysis each
year preceding the annual option grant to ensure that all assumptions based
upon
internal data reflect the most reasonable expectations for fair value
determination. The weighted average expected term of 4.4 years for 2006 reflects
the impact of this annual analysis and the weighting of option swap and reload
grants which may have much shorter expected terms than new option grants.
The
volatility rate of grants is derived from historical 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.
For
the
periods presented above, the expected dividend yield is derived by mathematical
formula which uses the expected Company annual dividend amount over the expected
term divided by the fair market value of the Company's common stock at the
grant
date.
The
average risk-free interest rate is derived from United States Department of
Treasury published interest rates of daily yield curves for the same time period
as the expected term.
Prior
to
adoption of SFAS No. 123(R), the Company did not estimate forfeitures and
recognized them as they occurred for proforma disclosure of share-based
compensation expense. With adoption of SFAS No. 123(R), estimated forfeitures
must be considered in recording share-based compensation expense. 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
historically range from 0.75 percent to 10.0 percent with the estimated
forfeitures for options at 0.75 percent.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of the activity of the Company's stock option awards for 2006, 2005 and 2004
are
presented below:
|
2006
|
|
2005
|
|
2004
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
6,616,800
|
$
|
48
|
|
8,155,100
|
$
|
47
|
|
10,338,100
|
$
|
45
|
Granted
|
1,481,300
|
|
61
|
|
1,275,700
|
|
54
|
|
1,051,500
|
|
45
|
Exercised
|
(2,001,800)
|
|
45
|
|
(2,342,600)
|
|
43
|
|
(1,954,200)
|
|
41
|
Cancelled,
forfeited or expired
|
(229,400)
|
|
56
|
|
(471,400)
|
|
64
|
|
(1,280,300)
|
|
44
|
Outstanding
at end of year
|
5,866,900
|
$
|
52
|
|
6,616,800
|
$
|
48
|
|
8,155,100
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
3,385,100
|
|
|
|
4,688,000
|
|
|
|
6,091,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for grant at end of year
|
1,244,900
|
|
|
|
2,954,500
|
|
|
|
4,503,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table provides the remaining contractual term and weighted average
exercise prices of stock options outstanding and exercisable at December 31,
2006:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range
of Exercise Prices
|
|
Number
Outstanding at 12/31/06
|
|
Weighted-Average
Remaining Contractual Life (Years)
|
|
Weighted-Average
Exercise Price
|
|
Number
Exercisable at 12/31/06
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$30-42
|
|
347,400
|
|
5.7
|
$
|
31
|
|
344,000
|
$
|
31
|
$43-46
|
|
673,000
|
|
4.9
|
|
45
|
|
532,800
|
|
45
|
$47-49
|
|
1,489,600
|
|
5.6
|
|
48
|
|
1,304,500
|
|
48
|
$50-64
|
|
3,356,900
|
|
7.5
|
|
58
|
|
1,203,800
|
|
57
|
|
|
5,866,900
|
|
6.6
|
$
|
52
|
|
3,385,100
|
$
|
49
|
The
range
of exercise prices of options outstanding at December 31, 2006 is approximately
$30 to $64 per share.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
summary of option activity as of December 31, 2006 and changes during the year
then ended is presented below:
Stock
Options
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (years)
|
|
Aggregate
Intrinsic Value(1)
|
Outstanding
at 12/31/2005
|
6,616,800
|
$
|
48
|
|
|
|
Grants
|
1,481,300
|
$
|
61
|
|
|
|
Exercises
|
(2,001,800)
|
$
|
45
|
|
|
|
Cancelled/Forfeited/Expired
|
(229,400)
|
$
|
56
|
|
|
|
Outstanding
at 12/31/2006
|
5,866,900
|
$
|
52
|
6.6
|
$
|
42,227,341
|
Exercisable
at 12/31/2006
|
3,385,100
|
$
|
49
|
4.8
|
$
|
34,844,570
|
(1)
Intrinsic value is the amount by which the market price of the stock at December
31, 2006 exceeds the exercise price of the option.
The
weighted average fair value of options granted during 2006, 2005 and 2004 were
$10.57, $10.26 and $9.36, respectively. The total intrinsic value of options
exercised during the years ended December 31, 2006, 2005 and 2004, was $27
million, $33 million and $20 million, respectively. Cash proceeds received
from
option exercises in 2006 total $83 million with a related tax benefit of $10
million. The total fair value of shares vested during the years ended December
31, 2006, 2005 and 2004 was $9 million, $9 million and $15 million,
respectively.
A
summary
of the status of the Company's nonvested options as of December 31, 2006 and
changes during the year then ended is presented below:
Nonvested
Options
|
Number
of Options
|
|
Weighted-Average
Grant Date Fair Value
|
Nonvested
at January 1, 2006
|
1,928,900
|
$
|
9.80
|
Granted
|
1,481,300
|
$
|
10.57
|
Vested
|
(917,000)
|
$
|
8.78
|
Forfeited
|
(11,400)
|
$
|
9.33
|
Nonvested
Options at December 31, 2006
|
2,481,800
|
$
|
10.39
|
For
options unvested at December 31, 2006, approximately $15 million in compensation
expense will be recognized over three years.
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 actual return on capital compared to a target
return on capital and total shareholder return compared to a peer group ranking
by total shareholder return. The recognized compensation cost before tax for
these other share-based awards in the years ended December 31, 2006, 2005 and
2004 is approximately $12 million, $17 million and $7 million, respectively.
The
unrecognized compensation expense before tax for these same awards at December
31, 2006 is $13 million and will be recognized over a period of approximately
three years.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
16. |
ASSET
IMPAIRMENTS AND RESTRUCTURING CHARGES,
NET
|
Impairments
and restructuring charges totaled $101 million during 2006, consisting of
non-cash asset impairments of $62 million and restructuring charges of $39
million. Impairments and restructuring charges totaled $33 million during 2005,
consisting of non-cash asset impairments of $12 million and restructuring
charges of $21 million. Impairments
and restructuring charges totaled $206 million during 2004, consisting of
non-cash asset impairments of $140 million and restructuring charges of $66
million.
The
following table summarizes the 2006, 2005 and 2004 charges:
(Dollars
in millions)
|
2006
|
2005
|
2004
|
CASPI:
|
|
|
|
Fixed
asset impairments
|
$6
|
$--
|
$57
|
Intangible
asset impairments
|
--
|
--
|
6
|
Severance
charges
|
4
|
--
|
12
|
Site
closure and restructuring costs
|
3
|
4
|
6
|
|
|
|
|
Fibers:
|
|
|
|
Severance
charges
|
2
|
--
|
--
|
|
|
|
|
PCI:
|
|
|
|
Fixed
asset impairments
|
10
|
8
|
27
|
Severance
charges
|
6
|
3
|
10
|
Site
closure and restructuring costs
|
4
|
--
|
1
|
|
|
|
|
Performance
Polymers:
|
|
|
|
Fixed
asset impairments
|
30
|
--
|
--
|
Severance
charges
|
16
|
--
|
13
|
Site
closure and restructuring costs
|
--
|
|
|
|
|
|
|
Specialty
Plastics (“SP”):
|
|
|
|
Fixed
asset impairments
|
12
|
--
|
41
|
Severance
charges
|
4
|
--
|
10
|
Site
closure and restructuring costs
|
--
|
--
|
2
|
|
|
|
|
Other:
|
|
|
|
Fixed
asset impairments
|
3
|
1
|
9
|
Intangible
asset impairments
|
1
|
3
|
--
|
Severance
costs
|
--
|
--
|
8
|
Site
closure and restructuring costs
|
--
|
14
|
4
|
|
|
|
|
Total
Eastman Chemical Company
|
|
|
|
Fixed
asset impairments
|
$
61
|
$
9
|
$
134
|
Intangible
asset impairments
|
1
|
3
|
6
|
Severance
charges
|
32
|
3
|
53
|
Site
closure and restructuring costs
|
7
|
18
|
13
|
Total
Eastman Chemical Company
|
$
101
|
$33
|
$
206
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
2006
In
the
fourth quarter 2006, the Company recorded asset impairments and restructuring
charges of $78 million, consisting of non-cash impairments of $42 million and
restructuring charges of $36 million; and other operating income of $68 million.
The asset impairments consisted of approximately $20 million related to the
previously reported shutdown of the cyclohexane dimethanol ("CHDM")
manufacturing assets in San Roque, Spain, utilized in the SP and the Performance
Polymers segments and $22 million primarily related to the shutdown of a
research and development pilot plant in the Performance Polymers segment. The
decisions to shutdown the San Roque, Spain site to gain operational efficiencies
at other facilities and to shutdown the research and development pilot plant
were made in fourth quarter 2006. The restructuring charges consisted of $33
million of estimated severance primarily related to work force reductions and
$3
million of other charges.
In
the
third quarter 2006, asset impairments and restructuring charges totaled $13
million. During the third quarter 2006, the Company classified the Batesville,
Arkansas manufacturing facility as an asset group held for sale and recorded
a
related $11 million impairment charge to reduce the recorded book value of
the
assets to the contracted sales price.
In
the
second quarter 2006, asset impairments and restructuring charges totaled $3
million, relating primarily to previously closed manufacturing
facilities.
In
the
first quarter 2006, asset impairments and restructuring charges totaled $7
million, relating primarily to the divestiture of a previously closed
manufacturing facility.
2005
During
2005, the Company recorded $33 million in restructuring charges. These charges
consist of approximately $8 million of fixed asset impairments related to the
Company's PCI manufacturing facilities outside the United States, $14 million
in
restructuring charges related to the shutdown of Cendian Corporation
("Cendian"), the Company's logistics subsidiary, $4 million of fixed and
intangible asset impairments related to the Company's other category, $3 million
in severance charges related to the separation of approximately 90 employees
at
the Company's Batesville, Arkansas manufacturing facility, and $4 million in
site closure costs related to the previously announced closures of certain
manufacturing facilities.
2004
In
the
fourth quarter 2004, the Company recorded restructuring charges of approximately
$18 million, consisting of asset impairments of $9 million and site closure
and
other restructuring charges of $9 million. The non-cash asset impairments relate
to the adjustment to fair value of assets at Cendian, impacting the other
category, resulting from a decision to reintegrate Cendian’s logistics
activities. In addition, the Company recognized restructuring charges of $9
million primarily related to actual and expected severance of Cendian and other
employees, as well as site closure charges primarily related to previously
announced manufacturing plant closures.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
the
third quarter 2004, the Company recognized restructuring charges of
approximately $42 million, including asset impairments of approximately $28
million, for assets at the Company’s Batesville, Arkansas and Longview, Texas
manufacturing facilities. These impairments primarily related to certain fixed
assets in the performance chemicals product lines in the PCI segment that
management decided to rationalize due to increased foreign competition. Also
in
third quarter, the CASPI segment incurred
approximately $2 million in site closure charges primarily related to previously
announced manufacturing plant closures, while the other category recognized
approximately $4 million in severance and restructuring charges related to
the
reorganization of Cendian. Severance charges of $2 million, $3 million, $2
million, and $1 million were also recognized in the CASPI, PCI, SP, and Polymers
segments, respectively. These charges resulted from the Company's voluntary
termination program as well as ongoing cost reduction efforts.
In
the
second quarter 2004, the Company recognized $79 million in restructuring
charges, including asset impairments of $62 million related to assets held
for
sale. The assets were part of the Company’s sale of certain businesses and
product lines within the CASPI segment, which was completed July 31, 2004.
Those
product lines include: certain acrylic monomers; composites (unsaturated
polyester resins); inks and graphic arts raw materials; liquid resins; powder
resins; and textile chemicals. The charges reflect adjustment of the recorded
values of these assets to the expected sales proceeds. Also in second quarter
2004, the Company recognized an additional $4 million of site closure costs
related primarily to previously announced manufacturing plant closures. These
charges had an impact of approximately $2 million each to the CASPI and SP
segments. Severance charges of $5 million, $4 million, $2 million, and $1
million were also recognized in the CASPI, PCI, SP, and Polymers segments,
respectively, and $1 million in the other category. These charges resulted
from
the Company's voluntary termination program as well as ongoing cost reduction
efforts.
In
the
first quarter 2004, the Company recognized $67 million in restructuring charges,
including approximately $40 million of asset impairments and $5 million of
severance charges primarily related to the closure of its copolyester
manufacturing facility in Hartlepool, United Kingdom. The decision to close
the
Hartlepool site, which manufactured products that are within the Company’s SP
segment’s product lines, was made in order to consolidate production at other
sites to create a more integrated and efficient global manufacturing structure.
Accordingly, the carrying value of the manufacturing fixed assets was written
down to fair value as established by appraisal and available market data. In
addition, the Company recognized $1 million of fixed asset impairments and
$1
million of site closure costs related to additional impairments within the
CASPI
reorganization and changes in estimates for previously accrued amounts.
Severance charges of $4 million, $3 million, $1 million, and $11 million were
also recognized in the CASPI, PCI, SP, and Polymers segments, respectively,
and
$1 million in the other category as a result of ongoing cost reduction
efforts.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes the charges and changes in estimates described above,
other asset impairments and restructuring charges, the non-cash reductions
attributable to asset impairments, and the cash reductions in shutdown reserves
for severance costs and site closure costs paid:
(Dollars
in millions)
|
|
Balance
at
January
1, 2004
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges
|
$
|
--
|
$
|
140
|
$
|
(140)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
10
|
|
53
|
|
--
|
|
(37)
|
|
26
|
Site
closure and restructuring costs
|
|
5
|
|
13
|
|
--
|
|
(9)
|
|
9
|
Total
|
$
|
15
|
$
|
206
|
$
|
(140)
|
$
|
(46)
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
January
1, 2005
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges
|
$
|
--
|
$
|
12
|
$
|
(12)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
26
|
|
3
|
|
--
|
|
(26)
|
|
3
|
Site
closure and 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
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges
|
$
|
--
|
$
|
62
|
$
|
(62)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
3
|
|
32
|
|
--
|
|
(1)
|
|
34
|
Site
closure and restructuring costs
|
|
7
|
|
7
|
|
--
|
|
--
|
|
14
|
Total
|
$
|
10
|
$
|
101
|
$
|
(62)
|
$
|
(1)
|
$
|
48
|
A
majority of all severance and site closure costs are expected to be applied
to
the reserves within one year.
Actual
and probable separations totaled approximately 400 employees during 2006. As
of
the end of 2006, no separations accrued for were completed. Actual and probable
separations totaled approximately 90 employees during 2005. As of the end of
2005, substantially all separations accrued for were completed. Actual and
probable separations totaled approximately 1,200 employees during 2004. As
of
the end of 2004, substantially all separations accrued for were completed.
17. |
OTHER
OPERATING INCOME
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Other
operating income
|
$
|
(68)
|
$
|
(2)
|
$
|
(7)
|
Other
operating income for 2006 reflects a gain of $75 million on the sale of the
Company's polyethylene ("PE") and Epolene
polymer
businesses, related assets, and the Company's ethylene pipeline and charges
of
approximately $7 million related to the sale of the Company's Batesville,
Arkansas manufacturing facility and related assets and product lines. For
additional information, see Note 24, "Divestitures".
Other
operating income for 2005 primarily reflects a gain associated with a change
in
estimates for contingencies related to the 2004 divestiture of certain
businesses and product lines
within
the CASPI segment.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other
operating income for 2004 totaled approximately $7 million resulting from a
gain
on the sale of Ariel Research Corporation (“Ariel”) in the fourth quarter.
18. |
OTHER
(INCOME) CHARGES, NET
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Other
income
|
$
|
(24)
|
$
|
(11)
|
$
|
(10)
|
Other
charges
|
|
8
|
|
12
|
|
20
|
Other
(income) charges, net
|
$
|
(16)
|
$
|
1
|
$
|
10
|
Included
in other income are the Company’s portion of earnings from its equity
investments (excluding Genencor); gains on the sale of certain technology
business venture investments, royalty income, net gains on foreign exchange
transactions, and other non-operating income, including HDC. See Note 10,
"Retirement Plans", for additional information regarding HDC. Included in other
charges are net losses on foreign exchange transactions, the Company’s portion
of losses from its equity investments (excluding Genencor), write-downs to
fair
value of certain technology business venture investments due to other than
temporary declines in value, and fees on securitized receivables.
Components
of earnings (loss) before income taxes and the provision (benefit) for U.S.
and
other income taxes follow:
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Earnings
(loss) before income taxes
|
|
|
|
|
|
|
United
States
|
$
|
602
|
$
|
698
|
$
|
65
|
Outside
the United States
|
|
(26)
|
|
85
|
|
(1)
|
Total
|
$
|
576
|
$
|
783
|
$
|
64
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
|
|
|
|
United
States
|
|
|
|
|
|
|
Current
|
$
|
136
|
$
|
80
|
$
|
16
|
Deferred
|
|
22
|
|
112
|
|
(128)
|
Outside
the United States
|
|
|
|
|
|
|
Current
|
|
7
|
|
25
|
|
8
|
Deferred
|
|
(16)
|
|
(6)
|
|
(8)
|
State
and other
|
|
|
|
|
|
|
Current
|
|
17
|
|
6
|
|
6
|
Deferred
|
|
1
|
|
9
|
|
--
|
Total
|
$
|
167
|
$
|
226
|
$
|
(106)
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following represents the deferred tax charge (benefit) recorded as a component
of accumulated other comprehensive income (loss) in stockholders’
equity.
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Minimum
pension liability
|
$
|
(9)
|
$
|
4
|
$
|
2
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) on derivative instruments
|
|
(1)
|
|
(1)
|
|
7
|
Total
|
$
|
(10)
|
$
|
3
|
$
|
9
|
Differences
between the provision (benefit) for income taxes and income taxes computed
using
the U.S. federal statutory income tax rate follow:
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Amount
computed using the statutory rate
|
$
|
201
|
$
|
275
|
$
|
23
|
State
income taxes, net
|
|
12
|
|
5
|
|
(1)
|
Foreign
rate variance
|
|
4
|
|
(4)
|
|
4
|
Extraterritorial
income exclusion
|
|
(9)
|
|
(12)
|
|
(10)
|
Domestic
manufacturing deduction
|
|
(4)
|
|
(5)
|
|
--
|
ESOP
dividend payout
|
|
(2)
|
|
(2)
|
|
(2)
|
Capital
loss benefits
|
|
(25)
|
|
(13)
|
|
(116)
|
Change
in reserves for tax contingencies
|
|
(3)
|
|
(14)
|
|
(2)
|
Net
operating loss benefits
|
|
(11)
|
|
--
|
|
--
|
Donation
of intangibles
|
|
--
|
|
(12)
|
|
(2)
|
Other
|
|
4
|
|
8
|
|
--
|
Provision
(benefit) for income taxes
|
$
|
167
|
$
|
226
|
$
|
(106)
|
The
2006
effective tax rate was impacted by a net of $25 million of deferred tax benefit
resulting from the reversal of capital loss carryforward valuation reserves
and
$11 million of deferred tax benefit resulting from the reversal of foreign
net
operating loss valuation reserves.
The
2005
effective tax rate was impacted by a $11 million tax charge resulting from
the
repatriation of $321 million of foreign earnings and capital pursuant to
provisions of the American Jobs Creation Act of 2004 ("Jobs Act"). The Jobs
Act
created a temporary incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85 percent dividends received deduction
for
certain dividends from controlled foreign corporations.
The
2004
effective tax rate was impacted by $90 million of deferred tax benefits
resulting from the expected utilization of a capital loss resulting from the
sale of certain businesses and product lines and related assets in the CASPI
segment and $26 million of tax benefit resulting from the favorable resolution
of a prior year capital loss refund claim.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
significant components of deferred tax assets and liabilities
follow:
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
Post-employment
obligations
|
$
|
416
|
$
|
412
|
Net
operating loss carry forwards
|
|
115
|
|
130
|
Capital
loss carry forwards
|
|
47
|
|
93
|
Other
|
|
136
|
|
123
|
Total
deferred tax assets
|
|
714
|
|
758
|
Less
valuation allowance
|
|
(130)
|
|
(197)
|
Deferred
tax assets less valuation allowance
|
$
|
584
|
$
|
561
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
Depreciation
|
$
|
(
722)
|
$
|
(
692)
|
Inventory
reserves
|
|
(50)
|
|
(42)
|
Other
|
|
--
|
|
(66)
|
Total
deferred tax liabilities
|
$
|
(772)
|
$
|
(800)
|
|
|
|
|
|
Net
deferred tax liabilities
|
$
|
(188)
|
$
|
(239)
|
|
|
|
|
|
As
recorded in the Consolidated Statements of Financial
Position:
|
|
|
|
|
Other
current assets
|
$
|
11
|
$
|
39
|
Other
noncurrent assets
|
|
83
|
|
45
|
Payables
and other current liabilities
|
|
(13)
|
|
(6)
|
Deferred
income tax liabilities
|
|
(269)
|
|
(317)
|
Net
deferred tax liabilities
|
$
|
(188)
|
$
|
(239)
|
Unremitted
earnings of subsidiaries outside the United States, considered to be reinvested
indefinitely, totaled $275 million at December 31, 2006. It is not practicable
to determine the deferred tax liability for temporary differences related to
those unremitted earnings.
For
certain consolidated foreign subsidiaries, income and losses directly flow
through to taxable income in the United States. These entities are also subject
to taxation in the foreign tax jurisdictions. Net operating loss carryforwards
exist to offset future taxable income in foreign tax jurisdictions and valuation
allowances are provided to reduce deferred related tax assets if it is more
likely than not that this benefit will not be realized. Changes in the estimated
realizable amount of deferred tax assets associated with net operating losses
for these entities could result in changes in the deferred tax asset valuation
allowance in the foreign tax jurisdiction. At the same time, because these
entities are also subject to tax in the United States, a deferred tax liability
for the expected future taxable income will be established concurrently.
Therefore, the impact of any reversal of valuation allowances on consolidated
income tax expense will only be to the extent that there are differences between
the United States statutory tax rate and the tax rate in the foreign
jurisdiction. A valuation allowance of $74 million at December 31, 2006, has
been provided against the deferred tax asset resulting from these operating
loss
carryforwards.
At
December 31, 2006, foreign net operating loss carryforwards totaled $413
million. Of this total, $285 million will expire in 3 to 15 years; and $128
million will never expire.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Amounts
due to and from tax authorities as recorded in the Consolidated Statements
of
Financial Position:
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Payables
and other current liabilities
|
$
|
25
|
$
|
9
|
Other
long-term liabilities
|
|
20
|
|
32
|
Total
income taxes payable
|
$
|
45
|
$
|
41
|
20. |
SUPPLEMENTAL
CASH FLOW INFORMATION
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes is as follows:
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
$
|
105
|
$
|
126
|
$
|
135
|
Income
taxes paid (received)
|
|
157
|
|
138
|
|
(3)
|
Derivative
financial instruments and related gains and losses are included in cash flows
from operating activities.
Non-cash
portion of earnings from the Company’s equity investments were $2 million and
$15 million for 2005 and 2004, respectively. There were no non-cash portions
of
earnings from the Company's equity investments in 2006.
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the
PCI
segment, the Performance Polymers segment and the SP segment.
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.
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.
The
CASPI
segment manufactures raw materials, additives and specialty polymers, primarily
for the paints and coatings, inks, and adhesives markets. The CASPI segment's
products consist of liquid vehicles, coatings additives, and hydrocarbon resins
and rosins and rosin esters. Liquid vehicles, such as ester, ketone and alcohol
solvents, maintain the binders in liquid form for ease of application. Coatings
additives, such as cellulosic polymers, Texanol
ester
alcohol and chlorinated polyolefins, enhance the rheological, film formation
and
adhesion properties of paints, coatings and inks. Hydrocarbon resins and rosins
and rosin esters are used in adhesive, ink, and polymers compounding
applications. Additional products are developed in response to, or in
anticipation of, new applications where the Company believes significant value
can be achieved. On November 30, 2006, the
Company sold its Epolene
polymer
businesses and related assets located at the Longview, Texas site.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Fibers segment manufactures Estron
acetate
tow and Estrobond
triacetin plasticizers which are used primarily in cigarette filters;
Estron
and
Chromspun
acetate
yarns for use in apparel, home furnishings and industrial fabrics; acetate
flake
for use by other acetate tow producers; and acetyl chemicals.
The
PCI
segment manufactures diversified products that are used in a variety of markets
and industrial and consumer applications, including chemicals for agricultural
intermediates, fibers, food and beverage ingredients, photographic chemicals,
pharmaceutical intermediates, polymer compounding and chemical manufacturing
intermediates. In fourth quarter 2006, the
Company sold its Batesville, Arkansas manufacturing facility and related assets
and the specialty organic chemicals product lines.
The
Performance Polymers segment manufactures and supplies PET polymers for use
primarily in beverage and food packaging, including carbonated soft drinks,
water, juices, sports drinks, beer and food containers that are suitable for
both conventional and microwave oven use. The Performance Polymers segment
also
manufactured low-density PE and linear low-density PE, which were used primarily
in extrusion coating, film and molding applications. These PE product lines
were
divested in fourth quarter, 2006 along with related
assets and the Company's ethylene pipeline.
The
SP
segment’s key products include engineering and specialty polymers, specialty
film and sheet products, and packaging film and fiber products. Included in
these are highly specialized copolyesters and cellulosic plastics that possess
unique performance properties for value-added end uses such as appliances,
store
fixtures and displays, building and construction, electronic packaging, medical
packaging, personal care and cosmetics, performance films, tape and labels,
fiber, photographic and optical film, graphic arts, and general
packaging.
In
fourth
quarter 2006, certain product lines were transferred from the PCI segment to
the
Performance Polymers segment. During 2005 and 2004, these amounts were included
within the PCI segment. Accordingly, the prior year's amounts for sales and
operating earnings have been adjusted to retrospectively apply these changes
to
all periods presented.
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
Sales
by Segment
|
|
|
|
|
|
|
CASPI
|
$
|
1,421
|
$
|
1,299
|
$
|
1,554
|
Fibers
|
|
910
|
|
869
|
|
731
|
PCI
|
|
1,659
|
|
1,560
|
|
1,304
|
Performance
Polymers
|
|
2,642
|
|
2,586
|
|
2,226
|
SP
|
|
818
|
|
718
|
|
644
|
Total
Sales by Segment
|
|
7,450
|
|
7,032
|
|
6,459
|
Other
|
|
--
|
|
27
|
|
121
|
|
|
|
|
|
|
|
Total
Sales
|
$
|
7,450
|
$
|
7,059
|
$
|
6,580
|
|
|
|
|
|
|
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
Operating
Earnings (Loss) (1)
|
|
|
|
|
|
|
CASPI
|
$
|
229
|
$
|
228
|
$
|
64
|
Fibers
|
|
226
|
|
216
|
|
155
|
PCI
|
|
132
|
|
143
|
|
4
|
Performance
Polymers
|
|
54
|
|
176
|
|
25
|
SP
|
|
46
|
|
64
|
|
13
|
Total
Operating Earnings by Segment
|
|
687
|
|
827
|
|
261
|
Other
|
|
(47)
|
|
(70)
|
|
(86)
|
|
|
|
|
|
|
|
Total
Operating Earnings
|
$
|
640
|
$
|
757
|
$
|
175
|
(1)
Operating
earnings (loss) for the following segments include asset impairments and
restructuring charges: CASPI includes $13 million, $4 million and $81 million
in
2006, 2005 and 2004, respectively, for previously closed manufacturing
facilities and severance; Fibers includes $2 million in 2006 related to
severance; PCI includes $20 million, $11 million, and $38 million in 2006,
2005
and 2004, respectively, related to the Arkansas facility and severance charges;
Performance Polymers includes $46 million and $13 million in 2006 and 2004
related to the PE divestiture and severance charges; SP includes $16 million
and
$53 million in 2006 and 2004, respectively, related to the discontinued
production of CHDM in Spain, a previously closed manufacturing facility and
severance charges; and Other includes $4 million, $18 million and $21 million
in
2006, 2005 and 2004, respectively primarily for Cendian's shutdown of its
business activities. 2006 operating earnings in the PCI Performance Polymers
and
SP segments also include $2 million, $7 million and $1 million, respectively,
in
accelerated depreciation related to crackers at the Company's Longview, Texas
facility and assets in Columbia, South Carolina.
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
Assets
by Segment (1)
|
|
|
|
|
|
|
CASPI
|
$
|
1,078
|
$
|
1,009
|
$
|
1,031
|
Fibers
|
|
651
|
|
678
|
|
678
|
PCI
|
|
926
|
|
872
|
|
876
|
Performance
Polymers
|
|
1,480
|
|
1,575
|
|
1,614
|
SP
|
|
599
|
|
574
|
|
550
|
Total
Assets by Segment
|
|
4,734
|
|
4,708
|
|
4,749
|
Other
|
|
13
|
|
13
|
|
13
|
Corporate
Assets
|
|
1,426
|
|
1,052
|
|
1,077
|
|
|
|
|
|
|
|
Total
Assets
|
$
|
6,173
|
$
|
5,773
|
$
|
5,839
|
|
|
|
|
|
|
|
(1) |
Assets
managed by the Chief Operating Decision Maker include accounts receivable,
inventory, fixed assets and goodwill.
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
Depreciation
Expense by Segment
|
|
|
|
|
|
|
CASPI
|
$
|
54
|
$
|
55
|
$
|
57
|
Fibers
|
|
41
|
|
35
|
|
39
|
PCI
|
|
59
|
|
76
|
|
87
|
Performance
Polymers
|
|
93
|
|
74
|
|
72
|
SP
|
|
47
|
|
47
|
|
43
|
Total
Depreciation Expense by Segment
|
|
294
|
|
287
|
|
298
|
Other
|
|
--
|
|
--
|
|
4
|
|
|
|
|
|
|
|
Total
Depreciation Expense
|
$
|
294
|
$
|
287
|
$
|
302
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
Capital
Expenditures by Segment
|
|
|
|
|
|
|
CASPI
|
$
|
60
|
$
|
46
|
$
|
50
|
Fibers
|
|
44
|
|
28
|
|
14
|
PCI
|
|
66
|
|
63
|
|
65
|
Performance
Polymers
|
|
125
|
|
137
|
|
67
|
SP
|
|
94
|
|
67
|
|
36
|
Total
Capital Expenditures by Segment
|
|
389
|
|
341
|
|
232
|
Other
|
|
--
|
|
2
|
|
16
|
|
|
|
|
|
|
|
Total
Capital Expenditures
|
$
|
389
|
$
|
343
|
$
|
248
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2004
|
Geographic
Information
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
United
States
|
$
|
4,039
|
$
|
3,886
|
$
|
3,456
|
All
foreign countries
|
|
3,411
|
|
3,173
|
|
3,124
|
Total
|
$
|
7,450
|
$
|
7,059
|
$
|
6,580
|
|
|
|
|
|
|
|
Long-Lived
Assets, Net
|
|
|
|
|
|
|
United
States
|
$
|
2,407
|
$
|
2,508
|
$
|
2,481
|
All
foreign countries
|
|
662
|
|
654
|
|
711
|
Total
|
$
|
3,069
|
$
|
3,162
|
$
|
3,192
|
|
|
|
|
|
|
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
22. |
QUARTERLY
SALES AND EARNINGS DATA -
UNAUDITED
|
(Dollars
in millions, except per share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter(2)
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,803
|
$
|
1,929
|
$
|
1,966
|
$
|
1,752
|
Gross
profit
|
|
331
|
|
350
|
|
316
|
|
280
|
Asset
impairment and restructuring charges
|
|
7
|
|
3
|
|
13
|
|
78
|
Net
earnings
|
|
105
|
|
114
|
|
95
|
|
95
|
|
|
|
|
|
|
|
|
|
Net
earnings per share (1)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.28
|
$
|
1.39
|
$
|
1.16
|
$
|
1.14
|
Diluted
|
$
|
1.27
|
$
|
1.37
|
$
|
1.15
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,762
|
$
|
1,752
|
$
|
1,816
|
$
|
1,729
|
Gross
profit
|
|
399
|
|
374
|
|
352
|
|
279
|
Asset
impairment and restructuring charges
|
|
9
|
|
10
|
|
4
|
|
10
|
Net
earnings (loss)
|
|
162
|
|
206
|
|
123
|
|
66
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share (1)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.04
|
$
|
2.55
|
$
|
1.51
|
$
|
0.81
|
Diluted
|
$
|
2.00
|
$
|
2.51
|
$
|
1.50
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
(1)
Each
quarter is calculated as a discrete period; the sum of the four quarters may
not
equal the calculated full-year amount.
(2)
In
fourth quarter, the Company completed the sale of its Batesville, Arkansas
manufacturing site and related businesses and its PE and Epolene
polymer
businesses, related assets and ethylene pipeline located at Longview, Texas.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
23. |
RECENTLY
ISSUED ACCOUNTING
STANDARDS
|
In
February 2006, the 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 does not expect
the
adoption of FIN 48 to have a material effect on its consolidated financial
position, liquidity, or results of operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
addresses the measurement of fair value by companies when they are required
to
use a fair value measure for recognition or disclosure purposes under GAAP.
SFAS
No. 157 provides a common definition of fair value to be used throughout GAAP
which is intended to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. SFAS No. 157 will
be
effective for an entity's financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect SFAS
No.
157 will have on its consolidated financial position, liquidity, or results
of
operations.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
September 2006, the FASB issued Staff Position No. AUG AIR-1 ("FSP No. AUG
AIR-1") which addresses the accounting for planned major maintenance activities.
FSP No. AUG AIR-1 amends certain provisions in the American Institute of
Certified Public Accountants ("AICPA") Industry Audit Guide and APB Opinion
No.
28, "Interim Financial Reporting". Four alternative methods of accounting for
planned major maintenance activities were permitted: direct expense, built-in
overhaul, deferral, and accrual ("accrue-in-advance"). This FSP prohibits the
use of the accrue-in-advance method of accounting for planned major maintenance
activities because it results in the recognition of a liability in a period
prior to the occurrence of the transaction or event obligating the entity.
FSP
No. AUG AIR-1 is effective for an entity's financial statements issued for
fiscal years beginning after December 15, 2006. The Company does not utilize
the
accrue-in-advance method of accounting and therefore expects this FSP to have
no
impact on its consolidated financial position, liquidity, or results of
operations.
In
February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value at specified
election dates. Upon adoption, an entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings
at
each subsequent reporting date. Most of the provisions apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," applies
to
all entities with available for sale and trading securities. SFAS No. 159 will
be effective as of the beginning of an entity's first fiscal year that begins
after November 15, 2007. The Company is currently evaluating the effect SFAS
No.
159 will have on its consolidated financial position, liquidity, or results
of
operations.
Certain
Businesses and Product Lines and Related Assets in CASPI, PCI, and Performance
Polymers Segments
On
October 31, 2006, the Company sold its Batesville, Arkansas manufacturing
facility and related assets and the specialty organic chemicals product lines
in
the PCI segment for net proceeds of approximately $74 million and an earn-out
provision based on biodiesel sales over the next three years. The Company also
retained approximately $9 million of accounts receivable related to these
businesses and product lines. The final purchase price is subject to change
based upon working capital adjustments. The Company will continue to produce
certain products for the buyer under ongoing supply agreements and purchase
certain products from the buyer under ongoing purchase agreements with terms
up
to five years. In addition, the Company indemnified the buyer against certain
liabilities primarily related to taxes, legal matters, environmental matters,
and other representations and warranties. As of December 31, 2006, the Company
has recorded a $7 million loss related to this transaction. Changes in estimates
will be reflected in future periods.
On
November 30, 2006, the Company sold its
PE
and Epolene
polymer
businesses and related assets located at the Longview, Texas site and the
Company's ethylene pipeline
in the
CASPI and Performance Polymers segments for net proceeds of approximately $235
million. The Company also retained approximately $83 million of accounts
receivable related to these businesses and product lines. The final purchase
price is subject to change based upon working capital adjustments. The Company
will continue to produce certain products for the buyer under ongoing supply
agreements and purchase certain products from the buyer under ongoing purchase
agreements with terms up to ninety-nine years. As part of these agreements,
the
Company also expects to begin a staged phase-out of older cracking units in
2007, with timing dependent in part on market conditions, resulting in
accelerated depreciation and environmental closure obligations. In addition,
the
Company indemnified the buyer against certain liabilities primarily related
to
taxes, legal matters, environmental matters, and other representations and
warranties. As of December 31, 2006, the Company has recorded a gain of $75
million related to this transaction. However, changes in estimates will be
reflected in future periods.
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Valuation
and Qualifying Accounts
|
|
|
|
Additions
|
|
|
|
|
(Dollars
in millions)
|
|
Balance
at January 1, 2004
|
|
Charged
to Cost and Expense
|
|
Charged
to Other Accounts
|
|
Deductions
|
|
Balance
at December 31, 2004
|
Reserve
for:
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns
|
$
|
28
|
$
|
4
|
$
|
--
|
$
|
17
|
$
|
15
|
LIFO
Inventory
|
|
288
|
|
67
|
|
--
|
|
--
|
|
355
|
Environmental
contingencies
|
|
61
|
|
--
|
|
--
|
|
5
|
|
56
|
Deferred
tax valuation allowance
|
|
175
|
|
39
|
|
7
|
|
--
|
|
221
|
|
$
|
552
|
$
|
110
|
$
|
7
|
$
|
22
|
$
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2005
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for:
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns
|
$
|
15
|
$
|
9
|
$
|
--
|
$
|
4
|
$
|
20
|
LIFO
Inventory
|
|
355
|
|
92
|
|
--
|
|
--
|
|
447
|
Environmental
contingencies
|
|
56
|
|
4
|
|
--
|
|
9
|
|
51
|
Deferred
tax valuation allowance
|
|
221
|
|
(21)
|
|
(3)
|
|
--
|
|
197
|
|
$
|
647
|
$
|
84
|
$
|
(3)
|
$
|
13
|
$
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2006
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for:
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns
|
$
|
20
|
$
|
(3)
|
$
|
--
|
$
|
2
|
$
|
15
|
LIFO
Inventory
|
|
447
|
|
17
|
|
--
|
|
--
|
|
464
|
Environmental
contingencies
|
|
51
|
|
10
|
|
--
|
|
14
|
|
47
|
Deferred
tax valuation allowance
|
|
197
|
|
(67)
|
|
--
|
|
--
|
|
130
|
|
$
|
715
|
$
|
(43)
|
$
|
--
|
$
|
16
|
$
|
656
|
|
|
|
|
|
|
|
|
|
|
|
NOTES
TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
first
quarter 2007, the Company entered
into an agreement to sell the San Roque, Spain manufacturing
facility.
The
agreement impacts approximately $40 million of fixed assets and could
lead to non-cash impairment charges in the first quarter of 2007. In addition,
this agreement could result in restructuring charges, which would result in
future cash expenditures. The restructuring charges are not expected to exceed
$10 million. Management expects the underlying costs of and charges related
to
this decision to be reported as asset impairment and restructuring charges
during the first quarter of 2007.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
Eastman
Chemical Company ("Eastman" or "The Company") maintains a set of disclosure
controls and procedures designed to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported, within the time periods specified in Securities and Exchange
Commission rules and forms. An evaluation was carried out under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company’s disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective as of December 31, 2006.
Management’s
Report on Internal Control Over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s CEO and
CFO to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s financial statements for external
purposes in accordance with U.S. generally accepted accounting
principles.
The
Company’s internal control over financial reporting includes policies and
procedures that:
Pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets of the Company;
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and the
directors of the Company; and
Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the Company’s financial statements.
Management
has assessed the effectiveness of its internal control over financial reporting
as of December 31, 2006 based on the framework established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on this assessment, management has determined that the Company’s
internal control over financial reporting was effective as of December 31,
2006.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
which appears herein.
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 fourth quarter of 2006 that has materially affected, or
is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM
9B. OTHER
INFORMATION
None.
PART
III
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors" to (but not including) the subheading "Information
About the Board of Directors and Corporate Governance" and under the subheading
"Board Committees--Audit Committee" (except for the material under the
subheading "Board Committees--Audit Committee--Audit Committee Report", which
is
not incorporated by reference herein)., each as included and to be
filed in the 2007 Proxy Statement, is incorporated by reference herein in
response to this Item. Certain information concerning executive officers
of the Company is set forth under the heading "Executive Officers of the
Company" in Part I of this Annual Report.
The
Company has adopted a Code of Ethics and Business Conduct applicable to the
Chief Executive Officer, the Chief Financial Officer and the Controller of
the
Company. See “Part I - Item 1. Business - Available Information - SEC Filings
and Corporate Governance Materials”.
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors—Board Committees - Compensation and Management
Development Committee - Compensation Committee Report", under the subheading
"Director Compensation" and under the heading "Executive Compensation", each
as
included and to be filed in the 2007 Proxy Statement, is incorporated by
reference herein in response to this Item.
The
material under the headings "Stock Ownership of Directors and Executive
Officers--Common Stock" and "Principal Stockholders " as included and to be
filed in the 2007 definitive Proxy Statement is incorporated by reference herein
in response to this Item.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity
Compensation Plans Approved by Stockholders
Stockholders
approved the Company’s 1994, 1997, and 2002 Omnibus Long-Term Compensation
Plans; the 1994, 1999, and 2002 Director Long-Term Compensation Plans; and
the
1996 Non-Employee Director Stock Option Plan. Although stock and stock-based
awards are still outstanding under the 1994 and 1997 Omnibus Long-Term
Compensation Plans, as well as the 1994 and 1999 Director Long-Term Compensation
Plans, no new shares are available under these plans for future grants.
Equity
Compensation Plans Not Approved by Stockholders
Stockholders
have approved all compensation plans under which shares of Eastman common stock
may be issued.
Summary
Equity Compensation Plan Information Table
The
following table sets forth certain information as of December 31, 2006 with
respect to compensation plans under which shares of Eastman common stock may
be
issued.
Plan
Category
|
|
Number
of Securities to be Issued upon Exercise of Outstanding Options
(a)
|
|
Weighted-Average
Exercise Price of Outstanding Options
(b)
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities reflected in Column (a))
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders
|
|
5,866,900
|
(1)
|
$52
|
|
1,244,900
|
(2)
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by stockholders
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
5,866,900
|
|
$52
|
|
1,244,900
|
|
(1)
Represents
shares of common stock issuable upon exercise of outstanding options granted
under Eastman Chemical Company’s 1994, 1997, and 2002 Omnibus Long-Term
Compensation Plans; the 1994, 1999, and 2002 Director Long-Term Compensation
Plans; and the 1996 Non-Employee Director Stock Option Plan.
(2)
Shares
of
common stock available for future grants under the Company’s 2002 Omnibus
Long-Term Compensation Plan, the 2002 Director Long-Term Compensation Plan,
and
the 1996 Non-Employee Director Stock Option Plan.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors ", subheadings "Director Independence " and
"Transactions with Directors, Executive Officers, and Related Persons", each
as
included and to be filed in the 2007 Proxy Statement, is incorporated by
reference herein in response to this Item.
The
information concerning amounts billed for professional services rendered by
the
principal accountant and pre-approval of such services by the Audit Committee
of
the Company’s Board of Directors under the heading "Item 2 - Ratification of
Appointment of Independent Accountants" as included and to be filed in the
2007 Proxy Statement is incorporated by reference herein in response to
this Item.
PART
IV
|
|
|
|
Page
|
(a)
|
1.
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
|
|
Management's
Responsibility for Financial Statements
|
|
68
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
69
|
|
|
|
|
|
|
|
Consolidated
Statements of Earnings, Comprehensive Income, and Retained
Earnings
|
|
71
|
|
|
|
|
|
|
|
Consolidated
Statements of Financial Position
|
|
72
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
73
|
|
|
|
|
|
|
|
Notes
to Company’s Consolidated Financial Statements
|
|
74
|
|
|
|
|
|
|
2.
|
Exhibits
filed as part of this report are listed in the Exhibit Index beginning
at
page 125
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
The
Exhibit Index and required Exhibits to this report are included beginning
at page 125
|
|
|
|
|
|
|
Pursuant
to the requirements of Section 13 or 15(d) 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
|
|
|
|
|
|
|
By:
|
/s/
J. Brian Ferguson |
|
J.
Brian Ferguson
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
Date:
|
February
28, 2007
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
PRINCIPAL
EXECUTIVE OFFICER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
J. Brian Ferguson |
|
Chairman
of the Board of Directors
|
|
February
28, 2007
|
J.
Brian Ferguson
|
|
and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRINCIPAL
FINANCIAL OFFICER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Richard A. Lorraine |
|
Senior
Vice President and
|
|
February
28, 2007
|
Richard
A. Lorraine
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRINCIPAL
ACCOUNTING OFFICER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Curtis E. Espeland |
|
Vice
President, Finance and
|
|
February
28, 2007
|
Curtis
E. Espeland
|
|
Chief
Accounting Officer
|
|
|
|
|
|
|
|
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
DIRECTORS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael P. Connors
|
|
Director
|
|
February
28, 2007
|
Michael
P. Connors
|
|
|
|
|
|
|
|
|
|
/s/
Stephan R. Demeritt
|
|
Director
|
|
February
28, 2007
|
Stephen
R. Demeritt
|
|
|
|
|
|
|
|
|
|
/s/
Donald W. Griffin
|
|
Director
|
|
February
28, 2007
|
Donald
W. Griffin
|
|
|
|
|
|
|
|
|
|
/s/
Robert M. Hernandez
|
|
Director
|
|
February
28, 2007
|
Robert
M. Hernandez
|
|
|
|
|
|
|
|
|
|
/s/
Renee J. Hornbaker
|
|
Director
|
|
February
28, 2007
|
Renẻe
J. Hornbaker
|
|
|
|
|
|
|
|
|
|
/s/
Lewis M. Kling
|
|
Director
|
|
February
28, 2007
|
Lewis
M. Kling
|
|
|
|
|
|
|
|
|
|
/s/
Howard L. Lance
|
|
Director
|
|
February
28, 2007
|
Howard
L. Lance
|
|
|
|
|
|
|
|
|
|
/s/
Thomas H. McLain
|
|
Director
|
|
February
28, 2007
|
Thomas
H. McLain
|
|
|
|
|
|
|
|
|
|
/s/
David W. Raisbeck
|
|
Director
|
|
February
28, 2007
|
David
W. Raisbeck
|
|
|
|
|
|
|
|
|
|
/s/
Peter M. Wood
|
|
Director
|
|
February
28, 2007
|
|
|
|
|
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
3.01
|
|
Amended
and Restated Certificate of Incorporation of Eastman Chemical Company,
as
amended (incorporated herein 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 October
4,
2006 (incorporated herein by referenced to Exhibit 3.02 to Eastman
Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006 (the “September 30, 2006 10-Q”)
|
|
|
|
|
|
|
|
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
|
|
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"))
|
|
|
|
|
|
|
|
4.03
|
|
Form
of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K)
|
|
|
|
|
|
|
|
4.04
|
|
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"))
|
|
|
|
|
|
|
|
4.05
|
|
Form
of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference
to Exhibit 4(b) to the June 8-K)
|
|
|
|
|
|
|
|
4.06
|
|
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"))
|
|
|
|
|
|
|
|
4.07
|
|
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)
|
|
|
|
|
|
|
|
4.08
|
|
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)
|
|
|
|
|
|
|
|
4.09
|
|
$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
|
|
|
|
|
|
|
|
4.10
|
|
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 (incorporated herein by reference to Exhibit 4.11
to
Eastman Chemical Company's Quarterly Report on Form 10-Q for the
quarter
ended June 30, 2006)
|
|
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
4.11
|
|
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)
|
|
|
|
|
|
|
|
4.12
|
|
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)
|
|
|
|
|
|
|
|
10.01*
|
|
1996
Non-Employee Director Stock Option Plan (incorporated herein by reference
to Exhibit 10.02 to Eastman Chemical Company's Quarterly Report on
Form
10-Q for the quarter ended September 30, 1996)
|
|
|
|
|
|
|
|
10.02*
|
|
Employment
Agreement between Eastman Chemical Company and James P. Rogers
(incorporated herein by reference to Exhibit 10.02 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999)
|
|
|
|
|
|
|
|
10.03*
|
|
Eastman
Excess Retirement Income Plan, amended and restated effective January
1,
2002 (incorporated herein by reference to Exhibit 10.10 to Eastman
Chemical Company's Annual Report on Form 10-K for the year ended
December
31, 2001, (the "2001 10-K"))
|
|
|
|
|
|
|
|
10.04*
|
|
Form
of Executive Severance Agreements (incorporated herein by reference
to
Exhibit 99.01 to Eastman Chemical Company's Current Report on Form
8-K
dated December 5, 2005)
|
|
|
|
|
|
|
|
10.05*
|
|
Eastman
Unfunded Retirement Income Plan, amended and restated effective January
1,
2002 (incorporated herein by reference to Exhibit 10.11 to the 2001
10-K)
|
|
|
|
|
|
|
|
10.06*
|
|
2002
Omnibus Long-Term Compensation Plan (incorporated herein by reference
to
Appendix A to Eastman Chemical Company’s 2002 Annual Meeting Proxy
Statement)
|
|
|
|
|
|
|
|
10.07*
|
|
2002
Director Long-Term Compensation Plan, as amended (incorporated herein
by
reference to Appendix A to Eastman Chemical Company’s 2002 Annual Meeting
Proxy Statement)
|
|
|
|
|
|
|
|
10.08*
|
|
Amended
and Restated Eastman Chemical Company Benefit Security Trust dated
January
2, 2002 (incorporated herein by reference to Exhibit 10.04 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter
ended
September 30, 2002, (the "September 30, 2002 10-Q")
|
|
|
|
|
|
|
|
10.09*
|
|
Amended
and Restated Warrant to Purchase Shares of Common Stock of Eastman
Chemical Company, dated January 2, 2002 (incorporated herein by reference
to Exhibit 10.02 to the September 30, 2002 10-Q)
|
|
|
|
|
|
|
|
10.10*
|
|
Amended
and Restated Registration Rights Agreement, dated January 2, 2002
(incorporated herein by reference to Exhibit 10.03 to the September
30,
2002 10-Q)
|
|
|
|
|
|
|
|
10.11*
|
|
Notice
of Restricted Stock Granted October 7, 2002 (incorporated herein
by
reference to Exhibit 10.01 to the September 30, 2002 10-Q)
|
|
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
10.12*
|
|
Amended
and Restated Eastman Executive Deferred Compensation Plan (incorporated
herein by referenced to Exhibit 10.05 to Eastman Chemical Company’s Annual
Report on Form 10-K for the year ended December 31, 2002)
|
|
|
|
|
|
|
|
10.13*
|
|
Amended
Director Deferred Compensation Plan (incorporated herein by reference
to
Exhibit 10.02 to Eastman Chemical Company’s Annual Report on Form 10-K for
the year ended December 31, 2002)
|
|
|
|
|
|
|
|
10.14*
|
|
Eastman
Unit Performance Plan as amended and restated January 1, 2004
(incorporated herein by reference to Exhibit 10.09 to Eastman Chemical
Company's Annual Report on Form 10-K for the year ended December
31, 2003
(the "2003 10-K"))
|
|
|
|
|
|
|
|
10.15*
|
|
Form
of Indemnification Agreements with Directors and Executive Officers
(incorporated herein by reference to Exhibit 10.25 to the 2003
10-K)
|
|
|
|
|
|
|
|
10.16*
|
|
Form
of Performance Share Awards to Executive Officers (2004-2006 Performance
Period) (incorporated herein by reference to Exhibit 10.33 to the
2003
10-K)
|
|
|
|
|
|
|
|
10.17*
|
|
Form
of Performance Share Awards to Executive Officers (2005 - 2007 Performance
Period) (incorporated herein by reference to Exhibit 10.02 to the
September 30, 2004 10-Q)
|
|
|
|
|
|
|
|
10.18*
|
|
Form
of Performance Share Awards to Executive Officers (2006 - 2008 Performance
Period) (incorporated herein by reference to Exhibit 10.04 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter
ended
September 30, 2005)
|
|
|
|
|
|
|
|
10.19*
|
|
Unit
Performance Plan ("UPP") performance measures and goals, specific
target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool
if the
performance goals are attained, and the eligibility criteria for
employee
participation in the UPP, for the 2006 performance year (incorporated
herein by reference to Eastman Chemical Company’s Current Report on Form
8-K dated December 6, 2005)
|
|
|
|
|
|
|
|
10.20*
|
|
Employment
Agreement between Eastman Chemical Company and Mark J. Costa dated
May 4,
2006 (incorporated herein by reference to Exhibit 10.01 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter
ended
June 30, 2006 (the "June 30, 2006 10-Q")
|
|
|
|
|
|
|
|
10.21*
|
|
Notice
of Restricted Stock Awarded to Mark J. Costa on June 1, 2006 (incorporated
herein by reference to Exhibit 10.02 to the June 30, 2006
10-Q)
|
|
|
|
|
|
|
|
10.22*
|
|
Notice
of Stock Option Granted to Mark J. Costa on June 1, 2006 (incorporated
herein by reference to Exhibit 10.03 to the June 30, 2006
10-Q)
|
|
|
|
|
|
|
|
10.23*
|
|
Form
of Award Notice for Stock Options Granted to Executive Officers
(incorporated herein by reference to Exhibit 10.01 to the September
30,
2006 10-Q)
|
|
|
|
|
|
|
|
10.24*
|
|
Form
of Award Notice for Stock Option Granted to Mark J. Costa, Senior
Vice-President, Corporate Strategy and Marketing (incorporated herein
by
reference to Exhibit 10.02 to the September 30, 2006 10-Q)
|
|
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
10.25*
|
|
Form
of Performance Share Awards to Executive Officers (2007 - 2009 Performance
Period) (incorporated herein by reference to Exhibit 10.03 to the
September 30, 2006 10-Q)
|
|
|
|
|
|
|
|
10.26*
|
|
Form
of Performance Share Award to Mark J. Costa, Senior Vice-President,
Corporate Strategy and Marketing (2007-2009 Performance Period)
(incorporated herein by reference to Exhibit 10.04 to the September
30,
2006 10-Q)
|
|
|
|
|
|
|
|
10.27*
|
|
Unit
Performance Plan ("UPP") performance measures and goals, specific
target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool
if the
performance goals are attained, and the eligibility criteria for
employee
participation in the UPP, for the 2007 performance year (incorporated
herein by reference to Eastman Chemical Company’s Current Report on Form
8-K dated December 7, 2006)
|
|
|
|
|
|
|
|
12.01
|
|
Statement
re: Computation of Ratios of Earnings (Loss) to Fixed
Charges
|
|
129
|
|
|
|
|
|
21.01
|
|
Subsidiaries
of the Company
|
|
130
- 132
|
|
|
|
|
|
23.01
|
|
Consent
of Independent Registered Public Accounting Firm
|
|
133
|
|
|
|
|
|
31.01
|
|
Rule
13a - 14(a) Certification by J. Brian Ferguson, Chairman of the Board
and
Chief Executive Officer, for the year ended December 31,
2006
|
|
134
|
|
|
|
|
|
31.02
|
|
Rule
13a - 14(a) Certification by Richard A. Lorraine, Senior Vice President
and Chief Financial Officer, for the year ended December 31,
2006
|
|
135
|
|
|
|
|
|
32.01
|
|
Section
1350 Certification by J. Brian Ferguson, Chairman of the Board and
Chief
Executive Officer, for the year ended December 31, 2006
|
|
136
|
|
|
|
|
|
32.02
|
|
Section
1350 Certification by Richard A. Lorraine, Senior Vice President
and Chief
Financial Officer, for the year ended December 31, 2006
|
|
137
|
|
|
|
|
|
99.01
|
|
Eastman
Chemical Company detail of sales revenue
|
|
138
|
|
|
|
|
|
*
Management
contract or compensatory plan or arrangement filed pursuant to Item
601(b)
(10) (iii) of Regulation S-K.
|
128