Form 10-Q First Quarter 2007
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
|
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended March 31, 2007
|
|
OR
|
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the transition period from ______________ to
______________
|
Commission
file number 1-12626
|
EASTMAN
CHEMICAL COMPANY
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
62-1539359
|
(State
or other jurisdiction of
|
|
(I.R.S.
employer
|
incorporation
or organization)
|
|
identification
no.)
|
|
|
|
200
South Wilcox Drive
|
|
|
Kingsport,
Tennessee
|
|
37660
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant’s
telephone number, including area code: (423)
229-2000
|
Indicate
by check mark whether the registrant (1) has filed all reports required
to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days.
YES
[X] NO [ ]
|
|
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (check one);
Large
accelerated filer [X] Accelerated filer [ ] Non-accelerated filer
[
]
|
|
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act) YES [ ] NO
[X]
|
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Class
|
Number
of Shares Outstanding at March 31, 2007
|
Common
Stock, par value $0.01 per share
|
|
84,128,383
|
|
|
|
--------------------------------------------------------------------------------------------------------------------------------
PAGE
1 OF 43 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 42
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
1.
|
Financial
Statements
|
|
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
|
2.
|
|
21
|
|
|
|
3.
|
|
38
|
|
|
|
4.
|
|
38
|
PART
II. OTHER INFORMATION
SIGNATURES
|
|
|
|
First
Three Months
|
(Dollars
in millions, except per share amounts)
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
1,795
|
$
|
1,803
|
Cost
of sales
|
|
|
|
|
|
1,502
|
|
1,472
|
Gross
profit
|
|
|
|
|
|
293
|
|
331
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
101
|
|
98
|
Research
and development expenses
|
|
|
|
|
|
36
|
|
42
|
Asset
impairments and restructuring charges, net
|
|
|
|
|
|
21
|
|
7
|
Operating
earnings
|
|
|
|
|
|
135
|
|
184
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
|
|
|
18
|
|
20
|
Other
(income) charges, net
|
|
|
|
|
|
(3)
|
|
(1)
|
Earnings
before income taxes
|
|
|
|
|
|
120
|
|
165
|
Provision
for income taxes
|
|
|
|
|
|
43
|
|
60
|
Net
earnings
|
|
|
|
|
$
|
77
|
$
|
105
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
0.92
|
$
|
1.28
|
Diluted
|
|
|
|
|
$
|
0.91
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
|
|
$
|
77
|
$
|
105
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Change
in cumulative translation adjustment
|
|
|
|
|
|
(3)
|
|
17
|
Change
in unrecognized loss and prior service cost,
net of tax
|
|
|
|
|
|
2
|
|
--
|
Change
in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
(1)
|
|
--
|
Change
in unrealized gains (losses) on derivative instruments, net of
tax
|
|
|
|
|
|
7
|
|
3
|
Total
other comprehensive income (loss)
|
|
|
|
|
|
5
|
|
20
|
Comprehensive
income
|
|
|
|
|
$
|
82
|
$
|
125
|
|
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of period
|
|
|
|
|
$
|
2,186
|
$
|
1,923
|
Net
earnings
|
|
|
|
|
|
77
|
|
105
|
Cash
dividends declared
|
|
|
|
|
|
(37)
|
|
(36)
|
Adoption
of accounting standards
|
|
|
|
|
|
8
|
|
--
|
Retained
earnings at end of period
|
|
|
|
|
$
|
2,234
|
$
|
1,992
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
March
31,
|
|
December
31,
|
(Dollars
in millions, except per share amounts)
|
|
2007
|
|
2006
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash
and cash equivalents
|
$
|
833
|
$
|
939
|
Trade
receivables, net of allowance of $16 and $20
|
|
704
|
|
682
|
Miscellaneous
receivables
|
|
84
|
|
72
|
Inventories
|
|
665
|
|
682
|
Other
current assets
|
|
75
|
|
47
|
Current
assets held for sale
|
|
21
|
|
--
|
Total
current assets
|
|
2,382
|
|
2,422
|
|
|
|
|
|
Properties
|
|
|
|
|
Properties
and equipment at cost
|
|
8,733
|
|
8,844
|
Less:
Accumulated depreciation
|
|
5,739
|
|
5,775
|
Net
properties
|
|
2,994
|
|
3,069
|
|
|
|
|
|
Goodwill
|
|
314
|
|
314
|
Other
noncurrent assets
|
|
380
|
|
368
|
Noncurrent
assets held for sale
|
|
46
|
|
--
|
Total
assets
|
$
|
6,116
|
$
|
6,173
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Payables
and other current liabilities
|
$
|
991
|
$
|
1,056
|
Borrowings
due within one year
|
|
--
|
|
3
|
Current
liabilities related to assets held for sale
|
|
2
|
|
--
|
Total
current liabilities
|
|
993
|
|
1,059
|
|
|
|
|
|
Long-term
borrowings
|
|
1,595
|
|
1,589
|
Deferred
income tax liabilities
|
|
291
|
|
269
|
Post-employment
obligations
|
|
977
|
|
1,084
|
Other
long-term liabilities
|
|
145
|
|
143
|
Long-term
liabilities related to assets held for sale
|
|
10
|
|
--
|
Total
liabilities
|
|
4,011
|
|
4,144
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
Common
stock ($0.01 par value - 350,000,000 shares authorized; shares issued
-
92,631,025 and 91,579,294 for 2007 and 2006, respectively)
|
|
1
|
|
1
|
Additional
paid-in capital
|
|
504
|
|
448
|
Retained
earnings
|
|
2,234
|
|
2,186
|
Accumulated
other comprehensive loss
|
|
(169)
|
|
(174)
|
|
|
2,570
|
|
2,461
|
Less:
Treasury stock at cost (8,609,413 shares for 2007 and 8,048,442 shares
for
2006)
|
|
465
|
|
432
|
|
|
|
|
|
Total
stockholders’ equity
|
|
2,105
|
|
2,029
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
|
6,116
|
$
|
6,173
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
First
Three Months
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
Net
earnings
|
$
|
77
|
$
|
105
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net cash provided by (used in) operating
activities:
|
|
|
|
|
Depreciation
and amortization
|
|
84
|
|
74
|
Asset
impairments
|
|
22
|
|
6
|
Provision
(benefit) for deferred income taxes
|
|
(15)
|
|
22
|
Changes
in operating assets and liabilities:
|
|
|
|
|
(Increase)
decrease in receivables
|
|
(29)
|
|
(55)
|
(Increase)
decrease in inventories
|
|
15
|
|
(9)
|
Increase
(decrease) in trade payables
|
|
(80)
|
|
(36)
|
Increase
(decrease) in liabilities for employee benefits and incentive
pay
|
|
(165)
|
|
(82)
|
Other
items, net
|
|
25
|
|
12
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
(66)
|
|
37
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
Additions
to properties and equipment
|
|
(86)
|
|
(78)
|
Proceeds
from sale of assets and investments
|
|
(2)
|
|
7
|
Additions
to capitalized software
|
|
(3)
|
|
(4)
|
Other
items, net
|
|
--
|
|
(1)
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
(91)
|
|
(76)
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
Net
increase (decrease) in commercial paper, credit facility and other
borrowings
|
|
73
|
|
35
|
Dividends
paid to stockholders
|
|
(38)
|
|
(36)
|
Treasury
stock purchases
|
|
(33)
|
|
--
|
Proceeds
from stock option exercises and other items
|
|
49
|
|
1
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
51
|
|
--
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
--
|
|
--
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
(
106)
|
|
(39)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
939
|
|
524
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
833
|
$
|
485
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ITEM
|
Page
|
|
|
|
7
|
|
7
|
|
8
|
|
8
|
|
9
|
|
9
|
|
10
|
|
11
|
|
12
|
|
12
|
|
13
|
|
14
|
|
15
|
|
15
|
|
17
|
|
19
|
|
19
|
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited consolidated financial statements have been prepared
by
Eastman Chemical Company (the "Company" or "Eastman") in accordance and
consistent with the accounting policies stated in the Company's 2006 Annual
Report on Form 10-K, except as described in Note 5 to the Company's unaudited
financial statements in this Form 10-Q, and should be read in conjunction with
the consolidated financial statements in Part II, Item 8 of the Company’s 2006
Annual Report on Form 10-K. The Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 48,
Accounting for Uncertainty in Income Taxes ("FIN
48"),
on
January 1, 2007. In the opinion of the Company, all normal recurring adjustments
necessary for a fair presentation have been included in the unaudited
consolidated financial statements. The unaudited consolidated financial
statements are prepared in conformity with generally accepted accounting
principles ("GAAP") in the United States and, of necessity, include some amounts
that are based upon management estimates and judgments. Future actual results
could differ from such current estimates. The unaudited consolidated financial
statements include assets, liabilities, revenues and expenses of all
majority-owned subsidiaries and joint ventures. Eastman accounts for other
joint
ventures and investments in minority-owned companies where it exercises
significant influence on the equity basis. Intercompany transactions and
balances are eliminated in consolidation.
The
Company has reclassified certain 2006 amounts to conform to the 2007
presentation including the reclassification of segment sales and operating
earnings. For additional information, see Note 15 to the Company's unaudited
consolidated financial statements.
During
the first quarter 2007, Eastman entered into an agreement for the sale of
Eastman Chemical Iberia, S.A., located in San Roque, Spain. The sale includes
Eastman's polyethylene
terephthalate ("PET")
polymers manufacturing assets in Spain and the related polyester resins
business. The terms of the sales agreement have been met and the Company expects
the sale to be completed in the second quarter of 2007. The Company also
recorded an impairment charge and site closure costs of $21 million resulting
from the expected sale. See Note 7 to the Company's unaudited consolidated
financial statements for additional information.
|
|
March
31,
|
(Dollars
in millions)
|
|
2007
|
Current
assets
|
|
|
Miscellaneous
receivables
|
$
|
2
|
Trade
receivables, net
|
|
10
|
Inventories
|
|
9
|
Total
current assets
|
|
21
|
|
|
|
Non-current
assets
|
|
|
Properties
and Equipment, net
|
|
40
|
Deferred
tax asset
|
|
4
|
Other
non-current assets
|
|
2
|
Total
non-current assets
|
|
46
|
Total
assets
|
$
|
67
|
|
|
|
Current
liabilities
|
|
|
Payables
and other current liabilities, net
|
$
|
2
|
Total
current liabilities
|
|
2
|
|
|
|
Long-term
liabilities
|
|
|
Deferred
income tax liabilities
|
|
7
|
Other
long term liabilities
|
|
3
|
Total
long-term liabilities
|
|
10
|
Total
liabilities
|
$
|
12
|
|
|
|
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
migration of certain customer sales to other Eastman operating facilities
precludes the Company from reporting the assets, businesses and product lines
as
discontinued operations per Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
|
March
31,
|
|
December
31,
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
|
|
|
At
FIFO or average cost (approximates current cost)
|
|
|
|
Finished
goods
|
$
|
635
|
$
|
660
|
Work
in process
|
197
|
|
206
|
Raw
materials and supplies
|
306
|
|
280
|
Total
inventories
|
1,138
|
|
1,146
|
LIFO
Reserve
|
(464)
|
|
(464)
|
Inventories
before assets held for sale
|
|
674
|
|
682
|
Inventories
related to assets held for sale (1)
|
|
(9)
|
|
--
|
Total
inventories
|
$
|
665
|
$
|
682
|
(1) |
For
more information regarding assets held for sale, see Note 2 to the
Company's unaudited consolidated financial statements.
|
Inventories
valued on the LIFO method were approximately 70% as of March 31, 2007 and 65%
as
of December 31, 2006 of total inventories.
4. |
PAYABLES
AND OTHER CURRENT
LIABILITIES
|
|
|
March
31,
|
|
December
31,
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Trade
creditors
|
$
|
502
|
$
|
581
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
|
83
|
|
126
|
Accrued
taxes
|
|
85
|
|
59
|
Post-employment
obligations
|
|
55
|
|
63
|
Interest
payable
|
|
26
|
|
31
|
Bank
overdrafts
|
|
85
|
|
11
|
Other
|
|
157
|
|
185
|
Payables
and other current liabilities before assets held for sale
|
|
993
|
|
1,056
|
Current
liabilities related to assets held for sale (1)
|
|
(2)
|
|
--
|
Total
payables and other current liabilities
|
$
|
991
|
$
|
1,056
|
(1)
For
more
information regarding assets held for sale, see Note 2 to the Company's
unaudited consolidated financial statements.
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5.
|
PROVISION
FOR INCOME TAXES
|
|
First
Quarter
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
43
|
$
|
60
|
|
(28)%
|
Effective
tax rate
|
|
36
%
|
|
36
%
|
|
|
The
first
quarter 2007 and 2006 effective tax rates reflect the Company's expected tax
rate on reported operating earnings before income tax, excluding discrete items,
of approximately 35 percent.
The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the
implementation of FIN 48 and reliance on the proposed FASB Staff Position No.
FIN 48-a, "Definition
of Settlement in FASB Interpretation No. 48,"
the
Company recognized an approximately $3 million decrease in the liability for
unrecognized tax benefits, which was accounted for as a $8 million increase
to
the January 1, 2007 balance of retained earnings and a $5 million decrease
in
long-term deferred tax liabilities. After the above decrease, the liability
for
unrecognized tax benefits was approximately $31 million, of which $26 million
would, if recognized, impact the Company's effective tax rate.
Interest
and penalties, net, related to unrecognized tax benefits are recorded as a
component of income tax expense. As of January 1, 2007 the company had accrued
approximately $3 million for interest, net of tax benefit and had no accrual
for
tax penalties. During the quarter ending March 31, 2007 the Company recognized
an immaterial amount of interest associated with unrecognized tax benefits.
The
Company or one of its subsidiaries files tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few exceptions,
the Company is no longer subject to U.S. federal, state and local, or non-U.S.
income tax examinations by tax authorities for years before 2001. It is
reasonably possible that within the next 12 months the Company will recognize
approximately $2 million of unrecognized tax benefits as a result of the
expiration of the relevant statute of limitations.
|
|
March
31,
|
|
December
31,
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Borrowings
consisted of:
|
|
|
|
|
3
1/4% notes due 2008
|
$
|
72
|
$
|
72
|
7%
notes due 2012
|
|
142
|
|
141
|
6.30%
notes due 2018
|
|
182
|
|
182
|
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
|
|
187
|
|
185
|
Other
|
|
18
|
|
18
|
Total
borrowings
|
|
1,595
|
|
1,592
|
Borrowings
due within one year
|
|
--
|
|
(3)
|
Long-term
borrowings
|
$
|
1,595
|
$
|
1,589
|
At
March
31, 2007, the Company has credit facilities with various U.S. and non-U.S.
banks
totaling approximately $890 million. These credit facilities consist of a $700
million revolving credit facility (the "Credit Facility"), expiring in April
2012, and a 140 million euro credit facility which expires in December 2011.
Both of these credit facilities have options for a one year extension.
Borrowings under these credit facilities are subject to interest at varying
spreads above quoted market rates. These credit facilities require facility
fees
on the total commitment that are based on Eastman's credit rating. In addition,
these credit facilities contain a number of covenants and events of default,
including the maintenance of certain financial ratios. The Company's combined
credit facility borrowings at March 31, 2007 and December 31, 2006 were $187
million and $185 million at weighted average interest rates of 4.21 percent
and
4.00 percent, respectively.
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 2012, any commercial paper borrowings supported
by the Credit Facility are classified as long-term borrowings because the
Company has the ability to refinance such borrowings on a long-term basis.
At
March
31, 2007 and December 31, 2006, the Company had outstanding interest rate swaps
associated with the entire outstanding principle of the 7% notes due in 2012
and
$150 million of the outstanding principle of the 6.30% notes due in 2018. The
average variable interest rate on the 7% notes was 7.84 percent and 7.89 percent
for March 31, 2007 and December 31, 2006, respectively. The average variable
interest rate on the 6.30% notes was 6.25 percent and 6.30 percent for March
31,
2007 and December 31, 2006, respectively.
7. |
ASSET
IMPAIRMENTS AND RESTRUCTURING CHARGES, NET
|
In
the
first quarter 2007, asset impairments and restructuring charges totaled
$21million, relating primarily to the impairment of assets of the San Roque,
Spain PET manufacturing facility which are currently reported as held for
sale. See Note 2 to the Company's unaudited consolidated financial
statements for additional information.
The
Company has impaired the assets of the PET manufacturing facility to adjust
the
asset values to the sales amounts less cost to sell. This impairment is
partially offset by the reversal of the $5 million severance accrual related
to
the fourth quarter 2006 shut down of the cyclohexane dimethanol ("CHDM")
manufacturing facility, located adjacent to the PET manufacturing facility.
This
severance accural was assumed by the buyer as part of the sale of the San
Roque, Spain PET manufacturing facility, relieving the company of the severance
liability.
In
the
first quarter 2006, asset impairments and restructuring charges totaled $7
million, relating primarily to the divestiture of a previously closed
manufacturing facility.
Changes
in Reserves for Asset Impairments, Restructuring Charges, and Severance
Charges
The
following table summarizes the beginning reserves, charges to and changes in
estimates to the reserves as described above, and the cash and non-cash
reductions to the reserves attributable to asset impairments and the cash
payments for severance and site closure costs for the full year 2006 and the
first quarter 2007:
(Dollars
in millions)
|
|
Balance
at
January
1, 2006
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
charges
|
$
|
--
|
$
|
62
|
$
|
(62)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
3
|
|
32
|
|
--
|
|
(1)
|
|
34
|
Site
closure and other restructuring costs
|
|
7
|
|
7
|
|
--
|
|
--
|
|
14
|
Total
|
$
|
10
|
$
|
101
|
$
|
(62)
|
$
|
(1)
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
January
1, 2007
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
charges
|
$
|
--
|
$
|
22
|
$
|
(22)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
34
|
|
(5)
|
|
--
|
|
(2)
|
|
27
|
Site
closure and other restructuring costs
|
|
14
|
|
4
|
|
--
|
|
--
|
|
18
|
Total
|
$
|
48
|
$
|
21
|
$
|
(22)
|
$
|
(2)
|
$
|
45
|
A
majority of the remaining severance and site closure costs is expected to be
applied to the reserves within one year.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
8. |
PENSION
AND OTHER POST-EMPLOYMENT
BENEFITS
|
DEFINED
BENEFIT PENSION PLANS
Eastman
maintains defined benefit plans that provide eligible employees with retirement
benefits. Costs recognized for these benefits are recorded using estimated
amounts, which may change as actual costs derived for the year are
determined.
Below
is
a summary of the components of net periodic benefit cost recognized for
Eastman's significant defined benefit pension plans:
Summary
of Components of Net Periodic Benefit Costs
|
|
|
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Service
cost
|
$
|
11
|
$
|
11
|
Interest
cost
|
|
21
|
|
20
|
Expected
return on assets
|
|
(25)
|
|
(21)
|
Amortization
of:
|
|
|
|
|
Prior
service credit
|
|
(2)
|
|
(2)
|
Actuarial
loss
|
|
9
|
|
9
|
Net
periodic benefit cost
|
$
|
14
|
$
|
17
|
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 did not impact net periodic benefit cost in 2006 and had
minimal impact on the financial statements in first quarter 2007.
The
Company has contributed $100 million to its U.S. defined benefit plans during
first quarter 2007.
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 DOA 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 2006 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.
In
general, Eastman provides those benefits to retirees eligible under the
Company's U.S. defined benefit pension plans. A few of the Company's non-U.S.
operations have supplemental health benefit plans for certain retirees, the
cost
of which is not significant to the Company. Costs recognized for these benefits
are recorded using estimated amounts, which may change as actual costs derived
for the year are determined. Below is a summary of the components of net
periodic benefit cost recognized for the Company’s U.S. plans:
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary
of Components of Net Periodic Benefit Costs
|
|
|
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Service
cost
|
$
|
2
|
$
|
2
|
Interest
cost
|
|
11
|
|
11
|
Expected
return on assets
|
|
(1)
|
|
--
|
Amortization
of:
|
|
|
|
|
Prior
service credit
|
|
(6)
|
|
(6)
|
Actuarial
loss
|
|
3
|
|
4
|
Net
periodic benefit cost
|
$
|
9
|
$
|
11
|
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 had minimal impact on the financial
statements in first quarter 2007.
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP"), by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be required
to
incur costs for environmental remediation and closure and postclosure under
the
federal Resource Conservation and Recovery Act. Reserves for environmental
contingencies have been established in accordance with Eastman’s policies
described in Note 1, "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 $46 million and $47 million at March 31,
2007 and December 31, 2006, 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 March
31, 2007 and December 31, 2006.
Purchasing
Obligations and Lease Commitments
At
March
31, 2007, the Company had various purchase obligations totaling approximately
$2.2 billion over a period of approximately 15 years for materials, supplies,
and energy incident to the ordinary conduct of business. The Company also had
various lease commitments for property and equipment under cancelable,
non-cancelable, and month-to-month operating leases totaling approximately
$200
million over a period of several years. Of the total lease commitments,
approximately 15 percent relate to machinery and equipment, including computer
and communications equipment and production equipment; approximately 50 percent
relate to real property, including office space, storage facilities and land;
and approximately 35 percent relate to vehicles, primarily railcars.
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounts
Receivable Securitization Program
In
1999,
the Company entered into an agreement that allows the Company to sell certain
domestic accounts receivable under a planned continuous sale program to a third
party. The agreement permits the sale of undivided interests in domestic trade
accounts receivable. Receivables sold to the third party totaled $200 million
at
March 31, 2007 and December 31, 2006. 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 $293
million and $320 million in the first quarter 2007 and 2006, respectively.
Guarantees
Interpretation
No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), clarifies
the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to
the guarantor’s accounting for, and disclosure of, the issuance of certain types
of guarantees. If certain operating leases are terminated by the Company, it
guarantees a portion of the residual value loss, if any, incurred by the lessors
in disposing of the related assets. Under these operating leases, the residual
value guarantees at March 31, 2007 totaled
$122 million and consisted primarily of leases for railcars, aircraft, and
other
equipment. The Company believes, based on current facts and circumstances,
that
a material payment pursuant to such guarantees is remote. Leases with guarantee
amounts totaling $3 million, $27 million, and $92 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.
Variable
Interest Entities
The
Company has evaluated material relationships and has concluded that the legal
entities involved with these material relationships are not Variable Interest
Entities ("VIEs") or, in the case of Primester, a joint venture that
manufactures cellulose acetate at its Kingsport, Tennessee plant, the Company
is
not the primary beneficiary of the VIE. As such, in accordance with
Interpretation No. 46R "Consolidation of Variable Interest Entities" ("FIN
46R"), the Company is not required to consolidate these entities. In addition,
the Company has evaluated long-term purchase obligations with two entities
that
may be VIEs at March 31, 2007. These potential VIEs are joint ventures from
which the Company has purchased raw materials and utilities for several years
and purchases approximately $70 million of raw materials and utilities on an
annual basis. The Company has no equity interest in these entities and has
confirmed that one party to each of these joint ventures does consolidate the
potential VIE. However, due to competitive and other reasons, the Company has
not been able to obtain the necessary financial information to determine whether
the entities are VIEs, and if one or both are VIEs, whether or not the Company
is the primary beneficiary.
11. |
DERIVATIVE
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
|
Hedging
Programs
Financial
instruments held as part of the hedging programs discussed below are recorded
at
fair value based upon comparable market transactions as quoted by
brokers.
The
Company is exposed to market risk, such as changes in currency exchange rates,
raw material and energy costs and interest rates. The Company uses various
derivative financial instruments pursuant to the Company's hedging policies
to
mitigate these market risk factors and their effect on the cash flows of the
underlying transactions. Designation is performed on a specific exposure basis
to support hedge accounting. The changes in fair value of these hedging
instruments are offset in part or in whole by corresponding changes in the
cash
flows of the underlying exposures being hedged. The Company does not hold or
issue derivative financial instruments for trading purposes. For further
information, see Note 9 to the consolidated financial statements in Part II,
Item 8 of the Company's 2006 Annual Report on Form 10-K.
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At
March
31, 2007, mark-to-market gains from raw material and energy, currency and
certain interest rate hedges that were included in accumulated other
comprehensive income totaled approximately $1 million. If realized,
approximately $1 million in losses will be reclassified into earnings during
the
next 12 months. The mark-to-market gains or losses on non-qualifying, excluded
and ineffective portions of hedges are immediately recognized in cost of sales
or other income and charges. Such amounts did not have a material impact on
earnings during the first quarter of 2007.
A
reconciliation of the changes in stockholders’ equity for the first three months
2007 is provided below:
(Dollars
in millions)
|
Common
Stock at Par Value
$
|
Paid-in
Capital
$
|
Retained
Earnings
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
Treasury
Stock at Cost
$
|
Total
Stockholders' Equity
$
|
Balance
at December 31, 2006
|
1
|
448
|
2,186
|
(174)
|
(432)
|
2,029
|
|
|
|
|
|
|
|
Net
Earnings
|
--
|
--
|
77
|
--
|
--
|
77
|
Cash
Dividends Declared (2)
|
--
|
--
|
(37)
|
--
|
--
|
(37)
|
Effect
of FIN 48 Adoption
|
--
|
--
|
8
|
--
|
--
|
8
|
Other
Comprehensive Income
|
--
|
--
|
--
|
5
|
--
|
5
|
Stock
Option Exercises and Other Items (1)(3)
|
--
|
56
|
--
|
--
|
--
|
56
|
Stock
Repurchases
|
--
|
--
|
--
|
--
|
(33)
|
(33)
|
Balance
at March 31, 2007
|
1
|
504
|
2,234
|
(169)
|
(465)
|
2,105
|
(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.
(3)
Includes
the fair value of equity share-based awards recognized under SFAS
No.
123 Revised December 2004 ("SFAS No. 123(R)"), "Share-Based Payment".
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars
in millions)
|
Cumulative
Translation Adjustment
$
|
Unfunded
Additional
Minimum
Pension Liability
$
|
Unrecognized
Loss and Prior Service Cost
$
|
Unrealized
Gains (Losses) on Cash Flow Hedges
$
|
Unrealized
Losses on Investments
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
Balance
at December 31, 2005
|
61
|
(255)
|
--
|
(5)
|
(1)
|
(200)
|
Period
change
|
60
|
48
|
--
|
(1)
|
--
|
107
|
Pre-SFAS
No. 158 (1)
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)
|
Period
change
|
(3)
|
--
|
2
|
7
|
(1)
|
5
|
Balance
at March 31, 2007
|
118
|
--
|
(286)
|
1
|
(2)
|
(169)
|
(1)
|
SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plants" ("SFAS No. 158")
|
Except
for cumulative translation adjustment, amounts of other comprehensive loss
are
presented net of applicable taxes. Because cumulative translation adjustment
is
considered a component of permanently invested unremitted earnings of
subsidiaries outside the United States, no taxes are provided on such
amounts.
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
13.
|
EARNINGS
AND DIVIDENDS PER SHARE
|
|
First
Quarter
|
|
2007
|
|
2006
|
|
|
|
|
Shares
used for earnings per share calculation (in millions):
|
|
|
|
Basic
|
83.9
|
|
81.5
|
Diluted
|
85.0
|
|
82.4
|
In
the
first quarter 2006, common shares underlying options to purchase 2,613,813
shares of common stock at a range of prices from $51.25 to $67.50 were excluded
from the computation of diluted earnings per share because the option exercise
prices were greater than the average market price of the common shares during
those periods.
The
Company declared cash dividends of $0.44 per share in the first quarter 2007
and
2006.
14. |
SHARE-BASED
COMPENSATION AWARDS
|
On
January 1, 2006, the Company adopted SFAS
No.
123(R) using
the
"modified prospective" method that requires compensation expense (based upon
fair value) of all employee and non-employee director share-based compensation
awards to be recognized in the financial statements. The Company is authorized
by the Board of Directors under the 2002 Omnibus Long-Term Compensation Plan
and
2002 Director Long-Term Compensation Plan to provide grants to employees and
non-employee members of the Board of Directors.
Additional information regarding SFAS No. 123(R) and share-based compensation
plans may be found in Note 15 to the consolidated financial statements in Part
II, Item 8 of the Company's 2006 Annual Report on Form 10-K.
In
the
first quarter 2007 and first quarter 2006, approximately $6 million and $5
million, respectively, of compensation expense before tax was recognized in
selling, general and administrative expense in the earnings statement for all
share-based awards. The impact on first quarter 2007 net earnings of $4 million
is net of a $2 million credit to deferred tax expense for recognition of
deferred tax assets. The impact on first quarter 2006 net earnings of $3 million
is net of a $2 million credit to deferred tax expense for recognition of
deferred tax assets.
Stock
Option Awards
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. The fair value of options cannot be determined by market value
as they are not traded in an open market. Accordingly, a financial pricing
model
is utilized to determine fair value. The Company utilizes the Black Scholes
Merton model which relies on certain assumptions to estimate an option's fair
value. The assumptions used to estimate the fair value of option awards during
first quarter 2007 are determined in accordance with the criteria described
in
Note 15 to the consolidated financial statements in Part II, Item 8 of the
Company's 2006 Annual Report on Form 10-K.
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following tables provide a reconciliation of option activity for the first
quarter 2007 and 2006:
Stock
Options
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (years)
|
|
Aggregate
Intrinsic Value(1)
|
Outstanding
at 12/31/2006
|
5,866,905
|
$
|
52.11
|
|
|
|
Grants
|
66,200
|
$
|
59.07
|
|
|
|
Exercises
|
(880,843)
|
$
|
49.93
|
|
$
|
10,640,682
|
Cancelled/Forfeited/Expired
|
(6,434)
|
$
|
57.54
|
|
|
|
Outstanding
at 3/31/2007
|
5,045,828
|
$
|
52.58
|
6.9
|
$
|
53,956,324
|
Exercisable
at 3/31/2007
|
2,507,636
|
$
|
48.68
|
4.9
|
$
|
36,747,522
|
|
|
|
|
|
|
|
Outstanding
at 12/31/2005
|
6,616,803
|
$
|
48.26
|
|
|
|
Grants
|
0
|
$
|
0.00
|
|
|
|
Exercises
|
(24,712)
|
$
|
37.94
|
|
$
|
327,860
|
Cancelled/Forfeited/Expired
|
(9,300)
|
$
|
45.09
|
|
|
|
Outstanding
at 3/31/2006
|
6,582,791
|
$
|
48.31
|
5.8
|
$
|
29,161,942
|
Exercisable
at 3/31/2006
|
4,659,784
|
$
|
47.55
|
4.5
|
$
|
24,238,926
|
(1)
Intrinsic value is the amount by which the market price of the stock or the
market price at the exercise date underlying the option exceeds the exercise
price of the option.
The
weighted average assumptions relevant to options granted in the first quarter
2007 are identified in the table below. The Company did not grant any options
in
the first quarter 2006.
Assumptions
|
First
Quarter 2007
|
|
|
Exercise
Price
|
$59.07
|
Expected
term years
|
4.50
|
Expected
volatility rate
|
21.02%
|
Expected
dividend yield
|
3.23%
|
Average
risk-free interest rate
|
4.55%
|
Expected
forfeiture rate
|
0.75%
|
A
total
of 2,538,192 options are unvested at March 31, 2007 for which $13 million in
compensation expense will be recognized over 3 years. A total of 1,923,007
options were unvested at March 31, 2006. Cash proceeds from the exercise of
options in the first quarter 2007 and first quarter 2006 total approximately
$44
million and $1 million, respectively, with a related tax benefit of
approximately $4 million and $0.1 million, respectively.
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other
Share-Based Compensation Awards
In
addition to stock option awards, the Company has long-term performance stock
awards, restricted stock awards and stock appreciation rights. The long-term
performance awards are based upon return on capital and total shareholder
return. The recognized compensation cost before tax for these other share-based
awards in the first quarter 2007 and first quarter 2006 is approximately $4
million and $3 million, respectively. The unrecognized compensation cost before
tax for these same awards total approximately $28 million at March 31, 2007
and
will be recognized through 2010.
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the Coatings, Adhesives, Specialty Polymers
and Inks ("CASPI") segment, the Fibers segment, the Performance Chemicals and
Intermediates ("PCI") segment, the Performance Polymers segment and the
Specialty
Plastics
("SP")
segment.
For
additional information concerning the
Company's segments' businesses and products, refer to Note 21 to the
consolidated financial statements in Part II, Item 8 of the Company's 2006
Annual Report on Form 10-K.
Revenues
and research and development and other expenses not identifiable to an operating
segment are not included in segment operating results for either of the periods
presented and are shown in the tables below as "other" revenues and operating
losses.
In
fourth
quarter 2006, certain product lines were transferred from the PCI segment to
the
Performance Polymers segment. Accordingly, the prior year's amounts for sales
and operating earnings have been adjusted to retrospectively apply these changes
to all periods presented.
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
Sales
by Segment
|
|
|
|
|
CASPI
|
$
|
345
|
$
|
349
|
Fibers
|
|
234
|
|
230
|
PCI
|
|
498
|
|
392
|
Performance
Polymers
|
|
506
|
|
645
|
SP
|
|
212
|
|
187
|
Total
Sales by Segment
|
|
1,795
|
|
1,803
|
Other
|
|
--
|
|
--
|
|
|
|
|
|
Total
Sales
|
$
|
1,795
|
$
|
1,803
|
|
|
|
|
|
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Operating
Earnings (Loss) (1)
|
|
|
|
|
CASPI
(1)
|
$
|
65
|
$
|
55
|
Fibers
|
|
59
|
|
66
|
PCI
(1)
|
|
54
|
|
41
|
Performance
Polymers (1)
|
|
(51)
|
|
17
|
SP
|
|
18
|
|
18
|
Total
Operating Earnings by Segment
|
|
145
|
|
197
|
Other
|
|
(10)
|
|
(13)
|
|
|
|
|
|
Total
Operating Earnings
|
$
|
135
|
$
|
184
|
(1) |
Operating
earnings (loss) for the following segments include asset impairments
and
restructuring charges: CASPI includes $7 million in first quarter
2006
relating primarily to the divestiture of a previously closed manufacturing
facility and Performance Polymers includes $21 million in the first
quarter of 2007 relating primarily to the impairment of the Spain
assets
that are assets held for sale. Operating earnings (loss) for the
first
quarter 2007 in the PCI and Performance Polymers segments also include
$7
million and $7 million, respectively, in accelerated depreciation
related
to cracking units at the Company's Longview, Texas facility and polymer
assets in Columbia, South Carolina.
|
|
|
March
31,
|
|
December
31,
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Assets
by Segment (1)
|
|
|
|
|
CASPI
|
$
|
1,094
|
$
|
1,078
|
Fibers
|
|
646
|
|
651
|
PCI
|
|
962
|
|
926
|
Performance
Polymers
|
|
1,353
|
|
1,480
|
SP
|
|
602
|
|
599
|
Total
Assets by Segment
|
|
4,657
|
|
4,734
|
Other
|
|
13
|
|
13
|
Corporate
Assets
|
|
1,379
|
|
1,426
|
|
|
|
|
|
Total
Assets Before Assets Held for Sale
|
|
6,049
|
|
6,173
|
Assets
Held for Sale (2)
|
|
67
|
|
--
|
|
|
|
|
|
Total
Assets
|
$
|
6,116
|
$
|
6,173
|
(1) |
Assets
managed by segments include accounts receivable, inventory, fixed
assets
and goodwill.
|
(2) |
For
more information regarding assets held for sale, see Note 2 to the
Company's unaudited consolidated financial statements.
|
NOTES
TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
General
From
time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which
are
being handled and defended in the ordinary course of business. While the Company
is unable to predict the outcome of these matters, it does not believe, based
upon currently available facts, that the ultimate resolution of any such pending
matters, including the sorbates litigation and the asbestos litigation
(described below), will have a material adverse effect on its overall financial
condition, results of operations or cash flows. However, adverse developments
could negatively impact earnings or cash flows in a particular future period.
Sorbates
Litigation
Two
civil
cases relating to sorbates remain. 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.
17. |
RECENTLY
ISSUED ACCOUNTING
STANDARDS
|
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," ("SFAS
No. 157") 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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") 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.
ITEM
|
Page
|
|
|
|
21
|
|
|
|
22
|
|
|
|
22
|
|
|
|
23
|
|
|
|
25
|
|
|
|
30
|
|
|
|
30
|
|
|
|
34
|
|
|
|
34
|
|
|
|
35
|
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's audited consolidated
financial statements, including related notes, and Management’s Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's 2006 Annual Report on Form 10-K, and the Company's unaudited
consolidated financial statements, including related notes, included elsewhere
in this report. All references to earnings per share contained in this report
are diluted earnings per share unless otherwise noted.
In
preparing the consolidated financial statements in conformity with generally
accepted accounting principles ("GAAP") in the United States, Eastman
Chemical Company's (the "Company" or "Eastman")
management must make decisions which impact the reported amounts and the related
disclosures. Such decisions include the selection of the appropriate accounting
principles to be applied and assumptions on which to base estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related
to
allowances for doubtful accounts, impairment of assets, environmental costs,
U.S. pension and other post-employment benefits, litigation and contingent
liabilities, and income taxes. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company’s management
believes the critical accounting policies listed
and described in Part II, Item 7 of the Company's 2006 Annual Report on Form
10-K
are the
most important to the fair presentation of the Company’s financial condition and
results. These policies require management’s more significant judgments and
estimates in the preparation of the Company’s consolidated financial
statements.
This
Management's Discussion and Analysis includes the following non-GAAP financial
measures and accompanying reconciliations to the most directly comparable GAAP
financial measures:
· |
Company
and segment sales excluding contract ethylene sales under a transition
agreement related to the previous divestiture of the polyethylene
("PE")
product lines;
|
· |
Company
gross profit, operating earnings and net earnings excluding accelerated
depreciation costs and asset impairments and restructuring charges;
and
|
· |
Segment
operating earnings excluding accelerated depreciation costs and asset
impairments and restructuring charges.
|
Eastman's
management believes that sales from contract ethylene sales under the transition
agreement related to the previous divestiture of the PE product lines do not
reflect the continuing and expected future business performance of the
Performance Chemicals and Intermediates ("PCI") segment. In addition, management
believes that corporate and segment earnings should be considered both with
and
without accelerated depreciation costs and asset impairments and restructuring
charges for evaluation and analysis of ongoing business performance. However,
management believes that these items are indicative of results of continuous
efforts to reduce costs and of actions to improve the profitability of the
Company. Management believes that investors can better evaluate and analyze
historical and future business trends if they also consider the reported
corporate and segment results, respectively, without the identified items.
Management utilizes corporate and segment results including and excluding the
identified items in the measures it uses to evaluate business performance and
in
determining certain performance-based compensation. These measures, excluding
the identified items, are not recognized in accordance with GAAP and should
not
be viewed as alternatives to the GAAP measures of performance.
In
addition, the Company has chosen separately to present on a GAAP basis in this
Management's Discussion and Analysis certain financial measures for the Company
and certain segments with and without sales, costs, and charges attributable
to
recently divested product lines.
The
Company generated sales revenue of $1.8 billion for the first quarter 2007
and
the first quarter 2006. Excluding the results of divested product lines and
contract ethylene sales, sales revenue increased by 10 percent. Operating
earnings were $135 million in first quarter 2007, a 27 percent decrease compared
with first quarter 2006. Excluding accelerated depreciation from first quarter
2007 and asset impairments and restructuring charges from both first quarter
2007 and 2006, operating earnings were $170 million in first quarter 2007
compared with $191 million in first quarter 2006. The Company's broad base
of
businesses continues to have strong results, with the decline primarily due
to
lower operating results in the Performance Polymers segment.
As
a
result of strategic decisions related to the Performance Polymers and PCI
segments, operating earnings in first quarter 2007 were negatively impacted
by
$14 million of accelerated depreciation and $21 million in asset impairment
and
restructuring charges. Operating earnings in first quarter 2006 were negatively
impacted by $7 million in asset impairment and restructuring
charges.
Net
earnings for first quarter 2007 were $77 million versus first quarter 2006
net
earnings of $105 million. Excluding accelerated depreciation and asset
impairment and restructuring charges, net earnings were $102 million and $112
million, respectively.
The
Company used $66 million in cash in operating activities during first quarter
2007 compared to $37 million provided by operating activities in the first
quarter 2006. The difference was due primarily to higher current year pension
contributions and lower net earnings. The Company contributed $100 million
and
$20 million to its U.S. defined benefit pension plans in the first quarter
2007
and 2006, respectively. The Company does not plan to make additional
contributions to its U.S. defined benefit plans in 2007.
In
addition to achieving the above results, Eastman continued to progress on its
overall growth objectives and actions to improve the performance of its
polyethylene terephthalate ("PET") polymer product lines in the Performance
Polymers segment. These actions included the start-up of the Company's new
350
thousand metric tons PET facility using IntegRex
technology in Columbia, South Carolina which was fully operational in the first
quarter of 2007.
In the
first quarter 2007, the Company repurchased shares under the authorized
repurchase plan totaling $33 million.
In
fourth
quarter 2006, the Company sold its Batesville, Arkansas manufacturing facility
and related assets in the PCI segment and its PE and Epolene
polymer
businesses and related assets of
the
Performance Polymers and Coatings, Adhesives, Specialty Polymers, and Inks
("CASPI") segments.
For the
first quarter of 2006, sales revenue of $228 million and operating earnings
of
$26 million were attributed to these divested product lines. As part of the
PE
divestiture, the Company entered into a transition agreement for contract
ethylene sales, which is reflected in the PCI segment in first quarter 2007.
The
Company continues to evaluate its portfolio of businesses and product lines
to
better focus on its core strengths and improve overall profitability.
The
Company is considering strategic options for its underperforming PET
manufacturing facilities outside the United States that could lead to further
restructuring, divestiture, or consolidation in the Performance Polymers segment
to improve profitability. In first quarter 2007, the Company entered
into an agreement to sell the San Roque, Spain PET manufacturing
facility.
|
First
Quarter
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,795
|
$
|
1,803
|
|
--
%
|
|
(2)
%
|
|
(1)
%
|
|
1
%
|
|
2
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- contract ethylene sales
|
|
70
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Sales
- divested product lines
|
|
--
|
|
228
|
|
|
|
|
|
|
|
|
|
|
Sales
- continuing product lines
|
|
1,725
|
|
1,575
|
|
10
%
|
|
5
%
|
|
2
%
|
|
1
%
|
|
2
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
revenue in first quarter 2007 compared to the first quarter 2006 decreased
$8
million. Sales revenue in the first quarter 2007 included $70 million of revenue
from contract ethylene sales under
the
transition agreement resulting from the divestiture of the Performance Polymers
segment's PE business in the fourth quarter 2006. Sales
revenue in first quarter 2006 included $228 million of revenue from divested
product lines. Excluding divested product lines and contract ethylene sales,
revenues increased 10 percent primarily due to higher sales volume, particularly
in the PCI and Specialty Plastics ("SP") segments, and higher selling
prices.
|
First
Quarter
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
Gross
Profit
|
$
|
293
|
$
|
331
|
|
(11)
%
|
As
a percentage of sales
|
|
16.3
%
|
|
18.4
%
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
|
14
|
|
--
|
|
|
|
|
|
|
|
|
|
Gross
Profit excluding accelerated depreciation
|
|
307
|
|
331
|
|
(7)
%
|
As
a percentage of sales
|
|
17.0
%
|
|
18.4
%
|
|
|
Gross
profit and gross profit as a percentage of sales for first quarter 2007
decreased compared to the first quarter 2006, particularly
in the Performance Polymers segment. In addition, first quarter 2007
included accelerated depreciation of $14 million resulting
from the scheduled shutdown of the cracking units in Longview, Texas and of
higher cost PET polymer assets in Columbia, South Carolina.
The
Company's first quarter 2007 raw material and energy costs increased by
approximately $50 million compared with first quarter 2006.
|
First
Quarter
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
|
$
|
101
|
$
|
98
|
|
3
%
|
Research
and Development Expenses
|
|
36
|
|
42
|
|
(14)
%
|
|
$
|
137
|
$
|
140
|
|
(2)
%
|
As
a percentage of sales
|
|
7.6
%
|
|
7.8
%
|
|
|
Research
and development ("R&D") expenses decreased $6 million in first quarter 2007
compared to first quarter 2006 primarily due to lower expenses in the
Performance Polymers segment resulting from the commercialization of
ParaStar
next
generation PET resins using
IntegRex technology.
Asset
impairments and restructuring charges, net, totaled $21 million for the first
quarter 2007 compared to $7 million in the first quarter 2006. 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 the PCI and
Performance Polymers segment discussions and Note 7 to the Company's unaudited
consolidated financial statements.
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
Operating
earnings
|
$
|
135
|
$
|
184
|
|
(27)
%
|
Accelerated
depreciation included in cost of goods sold
|
|
14
|
|
--
|
|
|
Asset
impairments and restructuring charges
|
|
21
|
|
7
|
|
|
Operating
earnings excluding accelerated depreciation and asset impairment
and
restructuring charges
|
$
|
170
|
$
|
191
|
|
(11)
%
|
|
First
Quarter
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
Gross
interest costs
|
$
|
29
|
$
|
28
|
|
|
Less:
Capitalized interest
|
|
1
|
|
2
|
|
|
Interest
expense
|
|
28
|
|
26
|
|
8
%
|
Interest
income
|
|
10
|
|
6
|
|
|
Interest
expense, net
|
$
|
18
|
$
|
20
|
|
(10)
%
|
|
|
|
|
|
|
Gross
interest costs for the first quarter 2007 were higher compared to the first
quarter 2006 due to higher average interest rates.
For
2007,
the Company expects net interest expense to decrease compared to 2006 due to
higher interest income, anticipated lower average borrowings and increased
capitalized interest.
|
First
Quarter
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
|
|
|
Other
income
|
$
|
(6)
|
$
|
(3)
|
Other
charges
|
3
|
|
2
|
Other
(income) charges, net
|
$
|
(3)
|
$
|
(1)
|
Included
in other income are the Company’s portion of earnings from its equity
investments, net gains on foreign exchange transactions, and other non-operating
income related to Holston Defense Corporation's post-retirement benefits.
Included in other charges are net losses on foreign exchange transactions and
fees on securitized receivables.
|
First
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
43
|
$
|
60
|
|
28%
|
Effective
tax rate
|
|
36
%
|
|
36
%
|
|
|
The
first
quarter 2007 and 2006 effective tax rates reflect the Company's normal tax
rate
on reported
operating earnings before income tax, excluding discrete items,
of
approximately 35 percent.
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
Net
earnings
|
$
|
77
|
$
|
105
|
|
(27)
%
|
Accelerated
depreciation included in cost of goods sold, net of tax
|
|
9
|
|
--
|
|
|
Asset
impairments and restructuring charges, net of tax
|
|
16
|
|
7
|
|
|
Net
earnings excluding accelerated depreciation and asset impairment
and
restructuring charges, net of tax
|
$
|
102
|
$
|
112
|
|
(9)
%
|
Revenues
and R&D and other expenses not identifiable to an operating segment are not
included in segment operating results for either of the periods presented and
are shown in Note 15, "Segment Information", as "other" revenues and operating
losses in this Form 10-Q.
In
fourth
quarter 2006, certain product lines were transferred from the PCI segment to
the
Performance Polymers segment. Accordingly, the prior year's amounts for sales
and operating earnings have been adjusted to retrospectively apply these changes
to all periods presented.
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
345
|
$
|
349
|
$
|
(4)
|
|
(1)%
|
Volume
effect
|
|
|
|
|
|
(27)
|
|
(8)%
|
Price
effect
|
|
|
|
|
|
16
|
|
5
%
|
Product
mix effect
|
|
|
|
|
|
--
|
|
--
%
|
Exchange
rate effect
|
|
|
|
|
|
7
|
|
2
%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
65
|
|
55
|
|
10
|
|
18
%
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
--
|
|
7
|
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding asset impairments and restructuring charges,
net
|
|
65
|
|
62
|
|
3
|
|
5
%
|
Sales
revenue decreased $4 million in first quarter 2007 compared to first quarter
2006. Excluding Epolene
product
lines divested in fourth quarter 2006, sales revenue increased due to an
increase in selling prices in response to higher raw material and energy costs,
partially offset by lower sales volume in certain adhesives
products.
Excluding
asset impairments and restructuring charges of $7 million for the first quarter
2006, operating earnings increased $3 million for first quarter 2007 compared
to
first quarter 2006
as
higher selling prices more than offset higher raw material and energy costs
and
lower sales volume. Asset
impairments and restructuring charges were related to previously closed
manufacturing facilities.
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
234
|
$
|
230
|
$
|
4
|
|
2
%
|
Volume
effect
|
|
|
|
|
|
(10)
|
|
(4)%
|
Price
effect
|
|
|
|
|
|
8
|
|
4
%
|
Product
mix effect
|
|
|
|
|
|
5
|
|
2
%
|
Exchange
rate effect
|
|
|
|
|
|
1
|
|
--%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
59
|
|
66
|
|
(7)
|
|
(11)%
|
|
|
|
|
|
|
|
|
|
Sales
revenue increased $4 million in first quarter 2007 compared to first quarter
2006 due to higher selling prices and a favorable shift in product mix offset
by
lower sales volume. Selling prices increased in response to higher raw material
and energy costs, while the lower sales volume was attributed to customer buying
patterns in acetate yarn and acetyl chemicals product lines.
Operating
earnings decreased $7 million for first quarter 2007 compared to first quarter
2006 primarily due to lower sales volume in acetyl chemicals and acetate yarn
product lines and higher raw material and energy costs, particularly for wood
pulp and methanol.
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
498
|
$
|
392
|
$
|
106
|
|
27
%
|
Volume
effect
|
|
|
|
|
|
133
|
|
34
%
|
Price
effect
|
|
|
|
|
|
(53)
|
|
(14)
%
|
Product
mix effect
|
|
|
|
|
|
23
|
|
6
%
|
Exchange
rate effect
|
|
|
|
|
|
3
|
|
1
%
|
|
|
|
|
|
|
|
|
|
Sales
- contract ethylene sales
|
|
70
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- divested product lines
|
|
--
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- continuing product lines
|
|
428
|
|
362
|
|
66
|
|
18
%
|
Volume
effect
|
|
|
|
|
|
50
|
|
13
%
|
Price
effect
|
|
|
|
|
|
6
|
|
2
%
|
Product
mix effect
|
|
|
|
|
|
7
|
|
2
%
|
Exchange
rate effect
|
|
|
|
|
|
3
|
|
1
%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
54
|
|
41
|
|
13
|
|
32
%
|
Operating
earnings - divested product lines (1)
|
|
--
|
|
2
|
|
(2)
|
|
|
Operating
earnings - continuing product lines
|
|
54
|
|
39
|
|
15
|
|
38
%
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
|
7
|
|
--
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding accelerated depreciation
|
|
61
|
|
41
|
|
20
|
|
49
%
|
Operating
earnings excluding accelerated depreciation - divested product lines
(1)
|
|
--
|
|
2
|
|
(2)
|
|
|
Operating
earnings excluding accelerated depreciation- continuing product
lines
|
|
61
|
|
39
|
|
22
|
|
56
%
|
(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.
Sales
revenue increased $106 million in first quarter 2007 compared to first quarter
2006 primarily due to contract ethylene sales under the transition agreement
resulting from the divestiture of the Performance Polymers segment's PE business
in the fourth quarter 2006. These sales were $70 million in first quarter 2007.
Excluding the contract ethylene sales, sales revenue increased due to an
increase in sales volume and higher selling prices. The higher sales volume
and
increased selling prices were attributed to strong demand, primarily for
olefin-based derivative products in Asia Pacific and the United
States.
Excluding
accelerated depreciation of $7 million, operating earnings increased $20 million
for first quarter 2007 compared to first quarter 2006 primarily due to higher
selling prices and increased sales volume, with contract ethylene sales having
minimal impact. The accelerated depreciation is related to the continuation
of
the planned staged phase-out of older cracking units in 2007 at the Company's
Longview, Texas facility.
In
the
fourth quarter 2006 the Company completed its divestiture of the PCI segment's
Batesville, Arkansas manufacturing facility and related assets and specialty
organic chemicals product lines. Sales revenue and operating earnings attributed
to the divested product lines were $30 million and $2 million, respectively,
in
first quarter 2006.
|
|
First
Quarter
|
|
|
Change
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
Sales
|
$
|
506
|
$
|
645
|
$
|
(139)
|
|
(22)
%
|
Volume
effect
|
|
|
|
|
|
(151)
|
|
(24)
%
|
Price
effect
|
|
|
|
|
|
(1)
|
|
--
%
|
Product
mix effect
|
|
|
|
|
|
(1)
|
|
--
%
|
Exchange
rate effect
|
|
|
|
|
|
14
|
|
2
%
|
|
|
|
|
|
|
|
|
|
Sales
- divested product lines
|
--
|
|
180
|
|
(180)
|
|
|
|
|
|
|
|
|
|
|
Sales
- continuing product lines
|
506
|
|
465
|
|
41
|
|
9
%
|
Volume
effect
|
|
|
|
|
29
|
|
6
%
|
Price
effect
|
|
|
|
|
(1)
|
|
--
%
|
Product
mix effect
|
|
|
|
|
(1)
|
|
--
%
|
Exchange
rate effect
|
|
|
|
|
14
|
|
3
%
|
|
|
|
|
|
|
|
|
Operating
earnings (loss)
|
(51)
|
|
17
|
|
(68)
|
|
|
Operating
earnings - divested product lines (1)
|
--
|
|
23
|
|
(23)
|
|
|
Operating
loss - continuing product lines
|
(51)
|
|
(6)
|
|
(45)
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
7
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
21
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss) excluding accelerated depreciation and asset impairments
and restructuring charges, net
|
(23)
|
|
17
|
|
(40)
|
|
|
Operating
earnings excluding accelerated depreciation and asset impairments
and
restructuring charges, net - divested product lines (1)
|
--
|
|
23
|
|
(23)
|
|
|
Operating
loss excluding accelerated depreciation and asset impairments and
restructuring charges, net - continuing product lines
|
(23)
|
|
(6)
|
|
(17)
|
|
|
(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 Polymers
segment's PE businesses and related assets located at the Longview, Texas site
and the Company's ethylene pipeline.
Sales
revenue decreased $139 million in first quarter 2007 compared to first quarter
2006 due to the divestiture of the PE product lines. For continuing product
lines, sales revenue increased $41 million due to increased sales volume,
primarily in Latin America attributed to continued strong demand in the region.
Excluding
asset impairments and restructuring charges and accelerated depreciation,
operating results decreased $40 million for first quarter 2007 compared to
first
quarter 2006 primarily due to the divestiture of the PE product lines. Operating
earnings for divested product lines were $23 million in the first quarter 2006.
In addition, operating results from continuing product lines declined as lower
selling prices and higher and continued volatile raw material and energy costs
resulted in compressed gross margins, particularly in North America. The results
were also impacted by costs associated with the new PET facility based on
IntegRex
technology becoming fully operational and the timing of the commercial launch
of
ParaStar
PET,
which is produced from the new PET facility using IntegRex
technology. The 2007 operating results included $21 million in asset impairment
and restructuring costs for the Spain PET facility and $7 million of accelerated
depreciation for restructuring actions associated with higher cost PET polymer
assets in Columbia, South Carolina.
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 350
thousand metric tons facility was fully operational in 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.
In
first
quarter 2007, the Company entered
into an agreement to sell the San Roque, Spain PET manufacturing facility,
which
is expected to be completed in second quarter 2007.
The
Company is considering strategic options for its underperforming PET
manufacturing facilities outside the United States that could lead to further
restructuring, divestiture, or consolidation in the Performance Polymers segment
to improve profitability.
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
212
|
$
|
187
|
$
|
25
|
|
13
%
|
Volume
effect
|
|
|
|
|
|
16
|
|
8
%
|
Price
effect
|
|
|
|
|
|
6
|
|
3
%
|
Product
mix effect
|
|
|
|
|
|
--
|
|
--
%
|
Exchange
rate effect
|
|
|
|
|
|
3
|
|
2
%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
18
|
|
18
|
|
--
|
|
--%
|
|
|
|
|
|
|
|
|
|
Sales
revenue increased $25 million in first quarter 2007 compared to first quarter
2006 primarily due 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.
Operating
earnings remained flat for first quarter 2007 compared to first quarter 2006
as
increased sales volume and higher selling prices were mostly offset by higher
raw material and energy costs, particularly for paraxylene.
Sales
Revenue
|
First
Quarter
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
967
|
$
|
1,073
|
|
(10)
%
|
|
(7)
%
|
|
(6)
%
|
|
3
%
|
|
--
%
|
Europe,
Middle East, and Africa
|
|
373
|
|
325
|
|
15
%
|
|
3
%
|
|
2
%
|
|
1
%
|
|
9
%
|
Asia
Pacific
|
|
253
|
|
211
|
|
19
%
|
|
10
%
|
|
11
%
|
|
(2)
%
|
|
--
%
|
Latin
America
|
|
202
|
|
194
|
|
4
%
|
|
3%
|
|
3
%
|
|
(2)
%
|
|
--
%
|
|
$
|
1,795
|
$
|
1,803
|
|
--
%
|
|
(2)
%
|
|
(1)
%
|
|
1
%
|
|
2
%
|
Sales
revenue in the United States and Canada decreased for first quarter 2007
compared to first quarter 2006 primarily due to lower sales volume attributed
to
divested product lines in the Performance Polymers, PCI and CASPI segments
and
lower selling prices in the PCI segment attributed to contract ethylene sales
under the transition agreement resulting from the divestiture of the Performance
Polymer's segment's PE business in fourth quarter 2006. Excluding divested
product lines and contract ethylene sales, sales revenue increased 2 percent
primarily due to sales volumes in the PCI segment and increased selling
prices.
Sales
revenue in Europe, Middle East and Africa increased for first quarter 2007
compared to first quarter 2006, primarily due to the effects of the exchange
rates, particularly in the Performance Polymers segment.
Sales
revenue in Asia Pacific increased for first quarter 2007 compared to first
quarter 2006 primarily due to higher selling prices and volume, particularly
in
the PCI segment attributed to strong demand for olefin-based derivative
products.
Sales
revenue in Latin America increased for first quarter 2007 compared to first
quarter 2006 primarily due to higher selling prices and volume, particularly
in
the Performance Polymers segment. Excluding divested product lines, sales
revenue increased 20 percent.
With
a
substantial portion of sales to customers outside the United States, Eastman
is
subject to the risks associated with operating in international markets. To
mitigate its exchange rate risks, the Company frequently seeks to negotiate
payment terms in U.S. dollars. In addition, where it deems such actions
advisable, the Company engages in foreign currency hedging transactions and
requires letters of credit and prepayment for shipments where its assessment
of
individual customer and country risks indicates their use is appropriate. For
additional information, see Note 9 to the consolidated financial statements
in
Part II, Item 8 and Part
II,
Item 7A
of the
Company’s 2006 Annual Report on Form 10-K and Forward-Looking Statements and
Risk Factors of this Quarterly Report on Form 10-Q.
Cash
Flows
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
Operating
activities
|
$
|
(66)
|
$
|
37
|
Investing
activities
|
|
(91)
|
|
(76)
|
Financing
activities
|
|
51
|
|
--
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
--
|
|
--
|
Net
change in cash and cash equivalents
|
|
(106)
|
|
(39)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
939
|
|
524
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
833
|
$
|
485
|
Cash
used
in operating activities was $66 million during first quarter 2007 compared
to
$37 million provided by operating activities in the first quarter 2006 due
primarily to higher current year pension contributions and lower net earnings.
The Company contributed $100 million and $20 million to its U.S. defined benefit
pension plans in the first quarter 2007 and 2006, respectively.
Cash
used
in investing activities increased $15 million in the first quarter 2007 compared
to first quarter 2006. Capital spending increased slightly consistent with
the
Company's higher expected annual capital spending in 2007.
Cash
provided by financing activities totaled $51 million in the first quarter 2007
and included cash received from stock option exercises of $44 million and an
increase in credit facility and other borrowings, including bank overdrafts,
of
$73 million, partially offset by share repurchases totaling $33 million.
The
payment of dividends is also reflected in financing activities in all
periods.
Liquidity
At
March
31, 2007, the Company has credit facilities with various U.S. and non-U.S.
banks
totaling approximately $890 million. These credit facilities consist of a $700
million revolving credit facility (the "Credit Facility"), expiring in April
2012, and a 140 million euro credit facility which expires in December 2011.
Both of these credit facilities have options for a one year extension.
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 the Company's credit rating. In
addition, these credit facilities contain a number of covenants and events
of
default, including the maintenance of certain financial ratios. The Company
was
in compliance with all such covenants for all periods presented. The Company's
combined credit facility borrowings at March 31, 2007 and December 31, 2006
were
$187 million and $185 million at weighted average interest rates of 4.21 percent
and 4.00 percent, respectively.
The
Credit Facility provides liquidity support for commercial paper borrowings
and
general corporate purposes. Accordingly, any outstanding commercial paper
borrowings reduce borrowings available under the Credit Facility. Since the
Credit Facility expires in April 2012, any commercial paper borrowings supported
by the Credit Facility are classified as long-term borrowings because the
Company has the ability to refinance such borrowings on a long-term basis.
For
more
information regarding interest rates, refer to Note 6 to the Company's unaudited
consolidated financial statements.
The
Company has effective shelf registration statements filed with the Securities
and Exchange Commission ("SEC") to issue a combined $1.1 billion of debt or
equity securities.
In
the
first quarter 2007, the Company announced its intention to repurchase up to
$300
million of its common shares. Under this repurchase plan, the Company
repurchased a total of 560,100 shares of its common stock during the first
quarter 2007 at a cost of $33 million, and is currently authorized to purchase
up to an additional $267 million of its 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 to meet common stock requirements for
compensation and benefit plans and other corporate purposes.
The
Company contributed $100 million to its U.S. defined benefit pension
plans in
the
first quarter 2007 and expects no further contributions to these plans during
2007.
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 $86 million and $78 million for the first quarter 2007 and
2006, respectively. The Company expects capital spending in 2007 will be
approximately $450 million which includes an
expansion
of acetate tow and copolyester intermediates, enhancements
to benefit the
PET
facilities in South Carolina, utilizing IntegRex
technology,,
and other
targeted growth initiatives.
Commitments
At
March
31, 2007, the Company’s obligations related to notes and debentures totaled
approximately $1.4 billion to be paid over a period of up to 20 years. Other
borrowings, related primarily to credit facility borrowings, totaled
approximately $200 million.
The
Company had various purchase obligations at March 31, 2007 totaling
approximately $2.2 billion over a period of approximately 15 years for
materials, supplies and energy incident to the ordinary conduct of business.
For
information regarding the
Company's lease commitments, refer to Note 10 to the Company's unaudited
consolidated financial statements.
In
addition, the Company had other liabilities at March 31, 2007 totaling
approximately $1.0 billion primarily related to pension, retiree medical, and
other post-employment obligations.
Off-Balance
Sheet and Other Financing Arrangements
If
certain operating leases are terminated by the Company, it guarantees a portion
of the residual value loss, if any, incurred by the lessors in disposing of
the
related assets. For information on the
Company's residual value guarantees, refer to Note 10 to the Company's unaudited
consolidated financial statements.
Eastman
entered into an agreement in 1999 that allows it to generate cash by reducing
its working capital through the sale of undivided interests in certain domestic
trade accounts receivable under a planned continuous sale program to a third
party. For information on the
Company's accounts receivable securitization program, refer to Note 10 to the
Company's unaudited consolidated financial statements.
The
Company did not have any other material relationships with unconsolidated
entities or financial partnerships, including special purpose entities, for
the
purpose of facilitating off-balance sheet arrangements with contractually narrow
or limited purposes. Thus, Eastman is not materially exposed to any financing,
liquidity, market, or credit risk related to the above or any other such
relationships.
The
Company has evaluated material relationships and has concluded that the legal
entities involved with these material relationships are not Variable Interest
Entities ("VIEs") or, in the case of Primester, a joint venture that
manufactures cellulose acetate at its Kingsport, Tennessee plant, the Company
is
not the primary beneficiary of the VIE. As such, in accordance with
Interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest
Entities" the Company is not required to consolidate these entities. In
addition, the Company has evaluated long-term purchase obligations with two
entities that may be VIEs at March 31, 2007. These potential VIEs are joint
ventures from which the Company has purchased raw materials and utilities for
several years and purchases approximately $70 million of raw materials and
utilities on an annual basis. The Company has no equity interest in these
entities and has confirmed that one party to each of these joint ventures
consolidates the potential VIE. However, due to competitive and other reasons,
the Company has not been able to obtain the necessary financial information
to
determine whether the entities are VIEs, and if one or both are VIEs, whether
or
not the Company is the primary beneficiary.
Guarantees
and claims also arise during the ordinary course of business from relationships
with suppliers, customers, and non-consolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others if specified
triggering events occur. Non-performance under a contract could trigger an
obligation of the Company. These potential claims include actions based upon
alleged exposures to products, intellectual property and environmental matters,
and other indemnifications. The ultimate effect on future financial results
is
not subject to reasonable estimation because considerable uncertainty exists
as
to the final outcome of these claims. However, while the ultimate liabilities
resulting from such claims may be significant to results of operations in the
period recognized, management does not anticipate they will have a material
adverse effect on the Company's consolidated financial position or
liquidity.
Treasury
Stock
On
February 20, 2007, the Board of Directors cancelled its prior authorization
for
share 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. During
first quarter 2007, the Company repurchased 560,100 shares of common stock
for a
cost of $33 million.
Dividends
The
Company declared cash dividends of $0.44 per share in the first quarter 2007
and
2006.
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements" ("SFAS No. 157"), 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
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"). 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.
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 in Texas 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
plans, 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 (which was fully operational
in the
first quarter 2007), debottlenecking the new PET facility 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 (which
was
entered into in the first quarter 2007), and considering other strategic
options for its underperforming PET manufacturing facilities outside
the
United States, which may lead to further asset impairment and
restructuring charges;
|
· |
capital
expenditures to increase to approximately $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.
|
The
Company expects continued solid results in all of the segments, with the
exception of Performance Polymers, despite continued high and volatile raw
material and energy costs. For the Performance Polymers segment, the Company
anticipates improved results sequentially as the positive impacts of the
Company's new PET facility utilizing IntegRex
technology are partially offset by continued challenging business conditions.
See
“Forward-Looking Statements and Risk Factors below.”
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.
|
· |
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 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.
|
· |
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.
There
are
no material changes to the Company's market risks since December 31, 2006.
For
more information regarding the Company's disclosure about market risks, see
Part
II, Item 7A of the Company's 2006 Annual Report on Form 10-K.
Disclosure
Controls and Procedures
The
Company maintains a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities and Exchange Act of 1934 is
accumulated and communicated to the issuer's management, including its principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. An evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company’s disclosure controls and procedures. Based on that evaluation, the CEO
and CFO have concluded that the Company's disclosure controls and procedures
are
effective as of March 31, 2007.
Changes
in Internal Control Over Financial Reporting
There
has
been no change in the Company’s internal control over financial reporting that
occurred during the first quarter of 2007 that has materially affected, or
is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II. OTHER INFORMATION
General
From
time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which
are
being handled and defended in the ordinary course of business. While the Company
is unable to predict the outcome of these matters, it does not believe, based
upon currently available facts, that the ultimate resolution of any such pending
matters, including the sorbates litigation and the asbestos litigation, will
have a material adverse effect on its overall financial condition, results
of
operations or cash flows. However, adverse developments could negatively impact
earnings or cash flows in a particular future period. For additional information
about the sorbates and asbestos litigation, refer to Note 19 to the Company's
unaudited consolidated financial statements.
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 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.
For
identification and discussion of the most significant risks applicable to the
Company and its business, see Part I - Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward-Looking
Statements and Risk Factors of this Quarterly Report on Form
10-Q.
(c)
Purchases of Equity Securities by the Issuer
Period
|
Total
Number
of
Shares
Purchased
(1)
|
|
Average
Price Paid Per Share
(2)
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
(3)
|
|
Approximate
Dollar
Value
(in millions) that May Yet Be Purchased Under the Plans or Programs
(3)
|
January
1- 31, 2007
|
--
|
$
|
--
|
|
--
|
$
|
288
|
February
1-28, 2007
|
100,164
|
$
|
59.13
|
|
100,000
|
$
|
294
|
March
1-31, 2007
|
460,182
|
$
|
59.69
|
|
460,100
|
$
|
267
|
Total
|
560,346
|
$
|
59.59
|
|
560,100
|
|
|
(1) |
Shares
repurchased under a Company announced repurchase plan and shares
surrendered to the Company by employees to satisfy individual tax
withholding obligations upon vesting of previously issued shares
of
restricted common stock.
|
(2) |
Average
price paid per share reflects the weighted average purchase price
paid for
share repurchases and the closing price of Eastman stock on the business
date the shares were surrendered by the employee stockholder to satisfy
individual tax withholding obligations upon vesting of restricted
common
stock.
|
(3) |
The
Company was authorized by the Board of Directors on February 4, 1999
to
repurchase up to $400 million of its common stock. Share repurchases
under
this authorization totaled 2,746,869 shares at a cost of approximately
$112 million. On February 20, 2007, the Board of Directors cancelled
its
February 4, 1999 authorization 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
compensation and benefit plans and other corporate
purposes.
|
Exhibits
filed as part of this report are listed in the Exhibit Index appearing on
page
44.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
Eastman
Chemical Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
April 30, 2007
|
|
By:
|
/s/
Richard A. Lorraine
|
|
|
|
Richard
A. Lorraine
|
|
|
|
Senior
Vice President and Chief Financial
Officer
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
12.01
|
|
|
|
44
|
|
|
|
|
|
31.01
|
|
|
|
45
|
|
|
|
|
|
31.02
|
|
|
|
46
|
|
|
|
|
|
32.01
|
|
|
|
47
|
|
|
|
|
|
32.02
|
|
|
|
48
|
|
|
|
|
|
99.01
|
|
|
|
49
|
|
|
|
|
|
|
43