form10qthirdquarter.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
|
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended September 30, 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 September
30, 2007
|
Common
Stock, par value $0.01 per share
|
|
81,027,677
|
|
|
|
--------------------------------------------------------------------------------------------------------------------------------
PAGE
1 OF 53 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 52
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
1.
|
Financial
Statements
|
|
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
|
2.
|
|
23
|
|
|
|
3.
|
|
48
|
|
|
|
4.
|
|
48
|
PART
II. OTHER INFORMATION
SIGNATURES
COMPREHENSIVE
INCOME AND RETAINED EARNINGS
|
|
Third
Quarter
|
|
First
Nine Months
|
(Dollars
in millions, except per share amounts)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,813
|
$
|
1,966
|
$
|
5,503
|
$
|
5,698
|
Cost
of sales
|
|
1,503
|
|
1,650
|
|
4,580
|
|
4,701
|
Gross
profit
|
|
310
|
|
316
|
|
923
|
|
997
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
107
|
|
105
|
|
321
|
|
316
|
Research
and development expenses
|
|
43
|
|
40
|
|
116
|
|
126
|
Asset
impairments and restructuring charges, net
|
|
120
|
|
13
|
|
143
|
|
23
|
Operating
earnings
|
|
40
|
|
158
|
|
343
|
|
532
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
17
|
|
21
|
|
50
|
|
62
|
Other
(income) charges, net
|
|
(9)
|
|
1
|
|
(15)
|
|
(2)
|
Earnings
before income taxes
|
|
32
|
|
136
|
|
308
|
|
472
|
Provision
for income taxes
|
|
12
|
|
41
|
|
106
|
|
158
|
Net
earnings
|
$
|
20
|
$
|
95
|
$
|
202
|
$
|
314
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.24
|
$
|
1.16
|
$
|
2.41
|
$
|
3.84
|
Diluted
|
$
|
0.24
|
$
|
1.15
|
$
|
2.38
|
$
|
3.79
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
Net
earnings
|
$
|
20
|
$
|
95
|
$
|
202
|
$
|
314
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Change
in cumulative translation adjustment
|
|
21
|
|
(8)
|
|
31
|
|
32
|
Change
in pension and other post employment benefits due to amortization,
net of
tax
|
|
22
|
|
--
|
|
18
|
|
--
|
Change
in unrealized gains (losses) on investments, net of tax
|
|
--
|
|
--
|
|
1
|
|
(1)
|
Change
in unrealized gains (losses) on derivative instruments, net of
tax
|
|
(8)
|
|
(6)
|
|
(5)
|
|
5
|
Total
other comprehensive income (loss)
|
|
35
|
|
(14)
|
|
45
|
|
36
|
Comprehensive
income
|
$
|
55
|
$
|
81
|
$
|
247
|
$
|
350
|
|
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of period
|
$
|
2,302
|
$
|
2,070
|
$
|
2,186
|
$
|
1,923
|
Net
earnings
|
|
20
|
|
95
|
|
202
|
|
314
|
Adoption
of accounting standards
|
|
--
|
|
--
|
|
8
|
|
--
|
Cash
dividends declared
|
|
(36)
|
|
(36)
|
|
(110)
|
|
(108)
|
Retained
earnings at end of period
|
$
|
2,286
|
$
|
2,129
|
$
|
2,286
|
$
|
2,129
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
September
30,
|
|
December
31,
|
(Dollars
in millions, except per share amounts)
|
|
2007
|
|
2006
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash
and cash equivalents
|
$
|
781
|
$
|
939
|
Trade
receivables, net of allowance of $6 and $16
|
|
596
|
|
682
|
Miscellaneous
receivables
|
|
69
|
|
72
|
Inventories
|
|
646
|
|
682
|
Other
current assets
|
|
75
|
|
47
|
Current
assets held for sale
|
|
130
|
|
--
|
Total
current assets
|
|
2,297
|
|
2,422
|
|
|
|
|
|
Properties
|
|
|
|
|
Properties
and equipment at cost
|
|
8,679
|
|
8,844
|
Less: Accumulated
depreciation
|
|
5,716
|
|
5,775
|
Net
properties
|
|
2,963
|
|
3,069
|
|
|
|
|
|
Goodwill
|
|
321
|
|
314
|
Other
noncurrent assets
|
|
309
|
|
368
|
Noncurrent
assets held for sale
|
|
55
|
|
--
|
Total
assets
|
$
|
5,945
|
$
|
6,173
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Payables
and other current liabilities
|
$
|
975
|
$
|
1,056
|
Borrowings
due within one year
|
|
72
|
|
3
|
Current
liabilities related to assets held for sale
|
|
27
|
|
--
|
Total
current liabilities
|
|
1,074
|
|
1,059
|
|
|
|
|
|
Long-term
borrowings
|
|
1,522
|
|
1,589
|
Deferred
income tax liabilities
|
|
234
|
|
269
|
Post-employment
obligations
|
|
985
|
|
1,084
|
Other
long-term liabilities
|
|
133
|
|
143
|
Other
long-term liabilities related to assets held for sale
|
|
6
|
|
--
|
Total
liabilities
|
|
3,954
|
|
4,144
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
Common
stock ($0.01 par value – 350,000,000 shares authorized; shares issued –
93,576,549 and 91,579,294 for 2007 and 2006, respectively)
|
|
1
|
|
1
|
Additional
paid-in capital
|
|
564
|
|
448
|
Retained
earnings
|
|
2,286
|
|
2,186
|
Accumulated
other comprehensive loss
|
|
(129)
|
|
(174)
|
|
|
2,722
|
|
2,461
|
Less:
Treasury stock at cost (12,631,546 shares for 2007 and 8,048,442
shares
for 2006)
|
|
731
|
|
432
|
|
|
|
|
|
Total
stockholders’ equity
|
|
1,991
|
|
2,029
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
|
5,945
|
$
|
6,173
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
First
Nine Months
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
Net
earnings
|
$
|
202
|
$
|
314
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
Depreciation
and amortization
|
|
247
|
|
226
|
Gain
on sale of assets
|
|
(3)
|
|
(5)
|
Asset
impairments
|
|
138
|
|
20
|
Provision
(benefits) for deferred income taxes
|
|
(23)
|
|
49
|
Changes
in operating assets and liabilities:
|
|
|
|
|
(Increase)
decrease in receivables
|
|
22
|
|
(189)
|
(Increase)
decrease in inventories
|
|
1
|
|
(134)
|
Increase
(decrease) in trade payables
|
|
(63)
|
|
50
|
(Decrease)
in liabilities for employee benefits and incentive pay
|
|
(88)
|
|
(60)
|
Other
items, net
|
|
(22)
|
|
(38)
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
411
|
|
233
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
Additions
to properties and equipment
|
|
(346)
|
|
(279)
|
Proceeds
from sale of assets and investments
|
|
43
|
|
12
|
Additions
to capitalized software
|
|
(8)
|
|
(12)
|
Other
items, net
|
|
12
|
|
--
|
|
|
|
|
|
Net
cash (used in) investing activities
|
|
(299)
|
|
(279)
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
Net
increase in commercial paper, credit facility and other
borrowings
|
|
42
|
|
33
|
Dividends
paid to stockholders
|
|
(112)
|
|
(108)
|
Treasury
stock purchases
|
|
(300)
|
|
--
|
Proceeds
from stock option exercises and other items
|
|
100
|
|
25
|
|
|
|
|
|
Net
cash (used in) financing activities
|
|
(270)
|
|
(50)
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
--
|
|
2
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
(158)
|
|
(94)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
939
|
|
524
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
781
|
$
|
430
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ITEM
|
Page
|
|
|
|
7
|
|
8
|
|
9
|
|
9
|
|
10
|
|
11
|
|
11
|
|
13
|
|
14
|
|
15
|
|
16
|
|
16
|
|
17
|
|
18
|
|
18
|
|
21
|
|
21
|
|
22
|
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 below. 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.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
During
the third quarter 2007, Eastman entered into definitive agreements to sell
its
polyethylene terephthalate ("PET") polymers production facilities in Mexico
and
Argentina and the related businesses. The sale, which is subject to
customary approvals, includes Eastman's PET manufacturing facilities in
Cosoleacaque, Mexico, and Zarate, Argentina. Their production capacity is
150,000 and 185,000 metric tons per year, respectively. The Company
also recorded an impairment charge of $117 million to adjust the asset values
to
the expected sales price less cost to sell, resulting from the expected fourth
quarter 2007 sale. See Note 7 for additional
information.
The
Company has concluded that the assets, businesses and product lines being sold
should not be reported as discontinued operations per Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," due to continuing
involvement in the PET businesses in the region.
|
|
September
30,
|
(Dollars
in millions)
|
|
2007
|
Current
assets
|
|
|
Miscellaneous
receivables
|
$
|
8
|
Trade
receivables
|
|
81
|
Inventories
|
|
41
|
Total
current assets held for sale
|
|
130
|
|
|
|
Non-current
assets
|
|
|
Properties
and Equipment, net
|
|
35
|
Other
non-current assets
|
|
20
|
Total
non-current assets held for sale
|
|
55
|
Total
assets
|
$
|
185
|
|
|
|
Current
liabilities
|
|
|
Payables
and other current liabilities, net
|
$
|
27
|
Total
current liabilities held for sale
|
|
27
|
|
|
|
Non-current
liabilities
|
|
|
Deferred
tax liability
|
|
6
|
Total
non-current liabilities held for sale
|
|
6
|
Total
liabilities
|
$
|
33
|
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
September
30,
|
|
December
31,
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
|
|
|
At
FIFO or average cost (approximates current cost)
|
|
|
|
Finished
goods
|
$
|
632
|
$
|
660
|
Work
in process
|
191
|
|
206
|
Raw
materials and supplies
|
304
|
|
280
|
Total
inventories
|
1,127
|
|
1,146
|
LIFO
Reserve
|
(481)
|
|
(464)
|
Inventories
before assets held for sale
|
|
646
|
|
682
|
Inventories
related to assets held for sale(1)
|
|
41
|
|
--
|
Total
inventories
|
$
|
687
|
$
|
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 September 30, 2007 and
65% as of December 31, 2006 of total inventories.
|
|
September
30,
|
|
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Trade
creditors
|
$
|
510
|
$
|
581
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
|
125
|
|
126
|
Accrued
taxes
|
|
26
|
|
59
|
Post-employment
obligations
|
|
60
|
|
63
|
Interest
payable
|
|
26
|
|
31
|
Bank
overdrafts
|
|
64
|
|
11
|
Other
|
|
164
|
|
185
|
Payables
and other current liabilities before assets held for sale
|
|
975
|
|
1,056
|
Current
liabilities related to assets held for sale (1)
|
|
27
|
|
--
|
Total
payables and other current liabilities
|
$
|
1,002
|
$
|
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
|
Third
Quarter
|
First
Nine Months
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
Provision
for
income
taxes
|
$
|
12
|
$
|
41
|
$
|
106
|
$
|
158
|
Effective
tax rate
|
|
40
%
|
|
30
%
|
|
35
%
|
|
34
%
|
The
third
quarter and first nine months 2007 effective tax rates reflect the Company's
normal tax rate on reported operating earnings before income tax, excluding
discrete items, of approximately 34 percent. The third quarter 2007
effective tax rate was negatively impacted by tax law changes in Europe due
to
German tax law changes resulting in a reduction in the value of deferred tax
assets. The third quarter 2006 effective tax rate was positively
impacted by the reversal of foreign loss valuation allowances.
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 FASB Staff Position
No. FIN 48-a, "Definition of Settlement in FASB Interpretation No. 48,"
the Company recognized a decrease of approximately $3 million 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 third quarter and first nine
months 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 relevant statutes of limitations.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
September
30,
|
|
December
31,
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Borrowings
consisted of:
|
|
|
|
|
3
1/4% notes due 2008
|
$
|
72
|
$
|
72
|
7%
notes due 2012
|
|
143
|
|
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
|
|
298
|
|
297
|
Credit
facility borrowings
|
|
187
|
|
185
|
Other
|
|
15
|
|
18
|
Total
borrowings
|
|
1,594
|
|
1,592
|
Borrowings
due within one year
|
|
(72)
|
|
(3)
|
Long-term
borrowings
|
$
|
1,522
|
$
|
1,589
|
At
September 30, 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 132 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
September 30, 2007 and December 31, 2006 were $187 million and $185 million
at
weighted average interest rates of 4.76 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.
At
September 30, 2007 and December 31, 2006, the Company had outstanding interest
rate swaps associated with the entire outstanding principal of the 7% notes
due
in 2012 and $150 million of the outstanding principal of the 6.30% notes due
in
2018. The average variable interest rate on the 7% notes was 7.66
percent and 7.89 percent for September 30, 2007 and December 31, 2006,
respectively. The average variable interest rate on the 6.30% notes
was 6.06 percent and 6.30 percent for September 30, 2007 and December 31, 2006,
respectively.
In
the
third quarter 2007 and first nine months 2007, asset impairments and
restructuring charges totaled $120 million and $143 million, respectively,
related primarily to the impairment of assets of Eastman's PET manufacturing
facilities in Cosoleacaque, Mexico, and Zarate, Argentina which were classified
as held for sale in the third quarter 2007. The Company impaired the
assets of these facilities in third quarter 2007 to adjust the asset values
to
the expected sales price less cost to sell. These charges were reflected in
the
Performance Polymers segment. Also in third quarter 2007, the Company
adjusted the severance accrual recorded in fourth quarter 2006 which resulted
in
a reversal which was reflected in all segments.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
first
quarter 2007, the Company impaired the assets of the San Roque, Spain PET
manufacturing facility which was sold in second quarter 2007 to adjust the
asset
values to the sales price less cost to sell and also recorded a charge to
shut
down the facility. The impairment was 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. The employees included in the
CHDM
severance accrual were employed by the purchaser of the San Roque, Spain
PET
manufacturing facility, relieving the Company of the severance
obligation. These charges were reflected in the Performance Polymers
and the Specialty Plastics ("SP") segments.
In
the
third quarter and first nine months 2006, asset impairments and restructuring
charges totaled $13 million and $23 million, respectively, relating primarily
to
previously closed manufacturing facilities.
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 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 nine months
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
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
charges
|
$
|
--
|
$
|
143
|
$
|
(143)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
34
|
|
(7)
|
|
--
|
|
(12)
|
|
15
|
Site
closure and other restructuring costs
|
|
14
|
|
7
|
|
--
|
|
(6)
|
|
15
|
Total
|
$
|
48
|
$
|
143
|
$
|
(143)
|
$
|
(18)
|
$
|
30
|
A
majority of the remaining severance is expected to be applied to the
reserves within one year.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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
|
|
|
|
|
|
|
Third
Quarter
|
|
First
Nine Months
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
12
|
$
|
11
|
$
|
36
|
$
|
33
|
Interest
cost
|
|
23
|
|
21
|
|
68
|
|
61
|
Expected
return on assets
|
|
(26)
|
|
(21)
|
|
(78)
|
|
(65)
|
Amortization
of:
|
|
|
|
|
|
|
|
|
Prior
service credit
|
|
(2)
|
|
(3)
|
|
(6)
|
|
(7)
|
Actuarial
loss
|
|
8
|
|
9
|
|
25
|
|
28
|
Other
loss
|
|
4
|
|
--
|
|
4
|
|
--
|
Net
periodic benefit cost
|
$
|
19
|
$
|
17
|
$
|
49
|
$
|
50
|
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 the first nine months
2007.
The
Company contributed $100 million and $75 million to its U.S. defined benefit
plans during first nine months 2007 and 2006, respectively.
POSTRETIREMENT
WELFARE PLANS
Eastman
provides life insurance and health care benefits for eligible retirees, and
health care benefits for retirees' eligible survivors. In general,
Eastman provides those benefits to retirees eligible under the Company's U.S.
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.
postretirement welfare plans:
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
Summary
of Components of Net Periodic Benefit Costs
|
|
|
|
|
|
|
Third
Quarter
|
|
First
Nine Months
|
|
|
2007
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
1
|
$
|
2
|
$
|
5
|
$
|
6
|
Interest
cost
|
|
11
|
|
10
|
|
32
|
|
31
|
Expected
return on assets
|
|
(1)
|
|
--
|
|
(2)
|
|
--
|
Amortization
of:
|
|
|
|
|
|
|
|
|
Prior
service credit
|
|
(6)
|
|
(5)
|
|
(17)
|
|
(17)
|
Actuarial
loss
|
|
3
|
|
3
|
|
9
|
|
11
|
Net
periodic benefit cost
|
$
|
8
|
$
|
10
|
$
|
27
|
$
|
31
|
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
in
the amount of $95 million effective in the fourth quarter 2006. 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
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 the first nine months 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 responsible for 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" in the Company's 2006 Annual Report on Form
10-K. Because of expected sharing of costs, the availability of legal
defenses, and the Company’s preliminary assessment of actions that may be
required, 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 $43
million and $47 million at September 30, 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 $14 million to the maximum of $20 million at September 30, 2007
and
the minimum or best estimate of $18 million to the maximum of $32 million at
December 31, 2006.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Purchase
Obligations and Lease Commitments
At
September 30, 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 10 percent
relate to machinery and equipment, including computer and communications
equipment and production equipment; approximately 55 percent relate to real
property, including office space, storage facilities and land; and approximately
35 percent relate to vehicles, primarily railcars.
Accounts
Receivable Securitization Program
In
1999,
the Company entered into an agreement that allows the Company to sell certain
domestic accounts receivable under a planned continuous sale program to a third
party. The agreement permits the sale of undivided interests in
domestic trade accounts receivable. Receivables sold to the third
party totaled $200 million at September 30, 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 $320 million and $334 million in
the
third quarter 2007 and 2006, respectively, and $308 million and $323 million
for
the first nine months of 2007 and 2006, respectively.
Guarantees
FASB
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"),
clarifies the requirements of Statement of Financial Accounting Standards
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 September 30, 2007 totaled $153 million
and
consisted primarily of leases for railcars, aircraft, and other
equipment. Leases with guarantee amounts totaling $2 million, $27
million, $9 million and $115 million will expire in 2007, 2008, 2011 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 including the guarantees related
to
the third-party borrowings of joint ventures and has concluded that the entities
are not Variable Interest Entities (“VIEs”) or, in the case of Primester, a
joint venture that manufactures cellulose acetate at the Company's Kingsport,
Tennessee plant, the Company is not the primary beneficiary of the
VIE. As such, in accordance with FASB Interpretation 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
September 30, 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.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Hedging
Programs
Financial
instruments held as part of the hedging programs described 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.
At
September 30, 2007, mark-to-market gains from raw material and energy, currency
and certain interest rate hedges that were included in accumulated other
comprehensive loss totaled approximately $11 million, and if realized, the
majority 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 third quarter of 2007.
A
reconciliation of the changes in stockholders’ equity for the first nine 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
|
--
|
--
|
202
|
--
|
--
|
202
|
Effect
of FIN 48 Adoption
|
--
|
--
|
8
|
--
|
--
|
8
|
Cash
Dividends Declared (1)
|
--
|
--
|
(110)
|
--
|
--
|
(110)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
45
|
--
|
45
|
Stock
Option Exercises and Other Items (2)(3)
|
--
|
116
|
--
|
--
|
1
|
117
|
Stock
Repurchases
|
--
|
--
|
--
|
--
|
(300)
|
(300)
|
Balance
at September 30, 2007
|
1
|
564
|
2,286
|
(129)
|
(731)
|
1,991
|
|
(1) Includes
cash dividends paid and dividends declared but
unpaid.
|
|
(2) The
tax benefits relating to the difference between the amounts deductible
for
federal income taxes over the amounts charged to income for financial
reporting purposes have been credited to paid-in
capital.
|
|
(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".
|
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars
in millions)
|
Cumulative
Translation Adjustment
|
Unfunded
Additional
Minimum
Pension Liability
|
Unrecognized
Loss and Prior Service Cost, net of taxes
|
Unrealized
Gains (Losses) on Cash Flow Hedges
|
Unrealized
Losses on Investments
|
Accumulated
Other Comprehensive Income (Loss)
|
Balance
at December 31, 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
|
31
|
--
|
18
|
(5)
|
1
|
45
|
Balance
at September 30, 2007
|
152
|
--
|
(270)
|
(11)
|
--
|
(129)
|
|
(1) SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" ("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.
|
Third
Quarter
|
|
First
Nine Months
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
Shares
used for earnings per share calculation:
|
|
|
|
|
|
|
|
Basic
|
82.6
|
|
82.1
|
|
83.6
|
|
81.8
|
Diluted
|
83.6
|
|
83.1
|
|
84.6
|
|
82.8
|
In
the
third quarter and first nine months 2007, common shares underlying options
to
purchase 20,000 shares of common stock and 591,233 shares of common stock,
respectively, were excluded from the computation of diluted earnings per share,
because the total market value of option exercises for these awards was less
than the total proceeds that would be received for these
awards. Additionally, the basic and diluted shares were reduced in
third quarter and first nine months 2007 as a result of the share repurchase
program completed in third quarter 2007. For third quarter and first
nine months 2007, a total of 3,231,348 shares and 4,601,448 shares,
respectively, were repurchased.
In
the
third quarter and first nine months 2006, common shares underlying options
to
purchase 2,193,779 shares of common stock for both periods were excluded from
the computation of diluted earnings per share because, the total market value
of
option exercises for these awards was less than the total proceeds that would
be
received for these awards.
The
Company declared cash dividends of $0.44 per share in the third quarters 2007
and 2006 and $1.32 per share in the first nine months 2007 and
2006.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
In
the
third quarter and first nine months 2007, approximately $5 million and $18
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 third quarter 2007 net earnings of $3 million
is net of a $2 million credit to deferred tax expense for recognition of
deferred tax assets. The impact on the first nine months 2007 net
earnings of $11 million is net of a $7 million credit to deferred tax expense
for recognition of deferred tax assets.
In
the
third quarter and first nine months 2006, approximately $4 million and $15
million, respectively, of compensation expense before tax was recognized in
selling, general and administrative expense in the earnings statement for all
share-based awards of which approximately $2 million and $6 million related
to
stock options in the third quarter and the first nine months 2006,
respectively. The impact on third quarter 2006 net earnings of $2
million is net of a $2 million credit to deferred tax expense for recognition
of
deferred tax assets. The impact on the first nine months 2006 net
earnings of $9 million is net of a $6 million credit to deferred tax expense
for
recognition of deferred tax assets.
Additional
information regarding share-based compensation 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.
Stockholders
approved the 2007 Omnibus Long-Term Compensation Plan at the annual
stockholders' meeting held on May 3, 2007. This new plan, effective
with the date of approval, replaces the 2002 Omnibus Long-Term Compensation
Plan.
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 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,
research and development, other expenses and assets 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,
operating losses and assets.
In
fourth
quarter 2006, certain product lines were transferred from the PCI segment to
the
Performance Polymers segment. Accordingly, the 2006 amounts for sales
and operating earnings have been adjusted to retrospectively apply these changes
to all periods presented.
|
|
Third
Quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
Sales
by Segment
|
|
|
|
|
CASPI
|
$
|
368
|
$
|
367
|
Fibers
|
|
258
|
|
228
|
PCI
|
|
509
|
|
437
|
Performance
Polymers
|
|
461
|
|
727
|
SP
|
|
217
|
|
207
|
Total
Sales by Segment
|
|
1,813
|
|
1,966
|
Other
|
|
--
|
|
--
|
|
|
|
|
|
Total
Sales
|
$
|
1,813
|
$
|
1,966
|
|
|
|
|
|
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
First
Nine Months
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
Sales
by Segment
|
|
|
|
|
CASPI
|
$
|
1,089
|
$
|
1,078
|
Fibers
|
|
731
|
|
696
|
PCI
|
|
1,559
|
|
1,260
|
Performance
Polymers
|
|
1,480
|
|
2,068
|
SP
|
|
644
|
|
596
|
Total
Sales by Segment
|
|
5,503
|
|
5,698
|
Other
|
|
--
|
|
--
|
|
|
|
|
|
Total
Sales
|
$
|
5,503
|
$
|
5,698
|
|
|
|
|
|
|
|
Third
quarter
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Operating
Earnings (Loss)
|
|
|
|
|
CASPI
(1)
|
$
|
59
|
$
|
53
|
Fibers
|
|
66
|
|
55
|
PCI
(1)
|
|
50
|
|
22
|
Performance
Polymers (1)
|
|
(134)
|
|
20
|
SP(1)
|
|
13
|
|
18
|
Total
Operating Earnings (Loss) by Segment
|
|
54
|
|
168
|
Other
|
|
(14)
|
|
(10)
|
|
|
|
|
|
Total
Operating Earnings (Loss)
|
$
|
40
|
$
|
158
|
|
(1)
Operating
earnings (loss) for the following segments include asset impairments
and
restructuring charges: CASPI includes $(1) million in the third
quarter 2007 related primarily to an adjustment to severance charges
recorded in fourth quarter 2006; PCI includes $(1) million in the
third
quarter 2007 related primarily to an adjustment to severance charges
recorded in fourth quarter 2006 and $11 million in the third quarter
2006
for the expected divestiture of the Arkansas facility; Performance
Polymers includes $120 million in the third quarter of 2007 relating
primarily to the divestiture of PET assets in Latin America; and
Other
includes $2 million in the third quarter 2007 related to an intangible
asset impairment and $2 million in third quarter 2006 for
Cendian's shutdown of its business activities. Operating
earnings (loss) for the third quarter 2007 in the PCI and Performance
Polymers segments also include $2 million and $7 million, respectively,
in
accelerated depreciation costs related to cracking units at the Company's
Longview, Texas facility and polymer assets in Columbia, South
Carolina.
|
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
First
Nine Months
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Operating
Earnings (Loss)
|
|
|
|
|
CASPI
(1)
|
$
|
190
|
$
|
176
|
Fibers
|
|
176
|
|
182
|
PCI
(1)
|
|
161
|
|
108
|
Performance
Polymers (1)
|
|
(198)
|
|
51
|
SP(1)
|
|
49
|
|
50
|
Total
Operating Earnings (Loss) by Segment
|
|
378
|
|
567
|
Other
|
|
(35)
|
|
(35)
|
|
|
|
|
|
Total
Operating Earnings (Loss)
|
$
|
343
|
$
|
532
|
(1)
|
Operating
earnings (loss) for the following segments include asset impairments
and
restructuring charges: CASPI includes $(1) million in the first
nine months 2007 related primarily to an adjustment to severance
charges
recorded in fourth quarter 2006 and $8 million in first nine months
2006
relating primarily to the divestiture of previously closed manufacturing
facilities; PCI includes $(1) million in the first nine months 2007
related primarily to an adjustment to severance charges recorded
in fourth
quarter 2006 and $11 million in the first nine months 2006 for the
expected divestiture of the Arkansas facility; Performance Polymers
includes $142 million in the first nine months 2007 related to the
divestiture of PET assets in Latin America and Europe; SP includes
$1
million in the first nine months 2007 relating primarily to the San
Roque,
Spain CHDM facility; and Other includes $2 million in first nine
months
2007 related to an intangible asset impairment and $4 million in
the first
nine months 2006 for Cendian's shutdown of its business activities.
Operating earnings (loss) for the first nine months 2007 in the PCI,
Performance Polymers and SP segments also include $16 million, $20
million
and $1 million, respectively, in accelerated depreciation costs related
to
cracking units at the Company's Longview, Texas facility and polymer
assets in Columbia, South Carolina.
|
|
|
September
30,
|
|
December
31,
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Assets
by Segment (1)
|
|
|
|
|
CASPI
|
$
|
1,118
|
$
|
1,078
|
Fibers
|
|
680
|
|
651
|
PCI
|
|
1,080
|
|
926
|
Performance
Polymers
(2)
|
|
972
|
|
1,480
|
SP
|
|
622
|
|
599
|
Total
Assets by Segment
|
|
4,472
|
|
4,734
|
Other
|
|
25
|
|
13
|
Corporate
Assets
|
|
1,263
|
|
1,426
|
Total
Assets Before Assets Held for Sale
|
|
5,760
|
|
6,173
|
Assets
Held for Sale (3)
|
|
185
|
|
--
|
Total
Assets
|
$
|
5,945
|
$
|
6,173
|
(1)
|
Assets
managed by segments include accounts receivable, inventory, fixed
assets
and goodwill.
|
(2)
|
The
Performance Polymers assets have decreased as a result of asset
impairments, divestitures in Europe and assets held for sale in Latin
America.
|
(3)
|
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
Over
time, the Company has been named in several putative class action lawsuits
filed
on behalf of purchasers of sorbates and products containing sorbates, claiming
those purchasers paid more for sorbates and for products containing sorbates
than they would have paid in the absence of the defendants’ price-fixing. 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 appellate court affirmed the trial
court's dismissal of all claims, except the plaintiff's claim for civil
penalties. 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 appealed this decision to
the state supreme court, which declined to review the
decision. Accordingly, the plaintiff filed its Second Amended
Complaint on July 9, 2007. 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 confirmed 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.
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.
Certain
Businesses and Product Lines and Related Assets in Performance Polymers
Segments
On
April
30, 2007, the Company sold its San Roque, Spain PET manufacturing facility
in
the Performance Polymer's segment for net proceeds of approximately $43
million. The Company also retained approximately $12 million of
accounts receivable related to this manufacturing site. The Company
will continue to produce certain intermediate products for the buyer under
ongoing supply agreements with indefinite terms. In addition, the
Company indemnified the buyer against certain liabilities primarily related
to
taxes, legal matters, environmental matters, and other representations and
warranties. During the first nine months 2007, the Company has
recorded an impairment charge and site closure costs of $21 million related
to
the San Roque PET site.
ITEM
|
Page
|
|
|
|
21
|
|
|
|
22
|
|
|
|
22
|
|
|
|
24
|
|
|
|
28
|
|
|
|
36
|
|
|
|
38
|
|
|
|
41
|
|
|
|
41
|
|
|
|
42
|
|
|
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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
During
the second and third quarters 2007, the Company undertook strategic actions
in
its Performance Polymers segment for its underperforming polyethylene
terephthalate ("PET") manufacturing facilities outside the United States. In
second quarter 2007, the Company completed the sale of its San Roque, Spain
PET
manufacturing facility. During the third quarter 2007, the
Company entered into definitive agreements to sell its PET polymers production
facilities in Mexico and Argentina and the related businesses. Asset
impairments and restructuring charges resulting from these actions were $21
million for the Spain divestiture in the first nine months 2007 and $117 million
in the third quarter and first nine months 2007 for the Latin American
manufacturing sites.
In
fourth
quarter 2006, the Company sold its Batesville, Arkansas manufacturing facility
and related assets in the Performance Chemicals and Intermediates ("PCI")
segment and its polyethylene ("PE") and Epolene polymer businesses and
related assets of the Performance Polymers and Coatings, Adhesives, Specialty
Polymers, and Inks ("CASPI") segments. For the third quarter and
first nine months of 2006, sales revenue of $225 million and $667 million,
respectively and operating earnings of $4 million and $47 million, respectively,
were attributed to these divested product lines. Asset impairments
and restructuring charges resulting from the divested Arkansas manufacturing
facility were $11 million for the third quarter and first nine months
2006. As part of the PE divestiture, the Company entered into a
transition agreement for contract ethylene sales, for which revenues and
operating earnings are reflected in the PCI segment results in third quarter
and
first nine months 2007. Third quarter and first nine months
2007 included accelerated depreciation costs of $9 million and $37 million,
respectively, resulting from the scheduled shutdown of cracking units in
Longview, Texas related to the divestiture and a planned shutdown of higher
cost
PET assets in Columbia, South Carolina.
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 PE product lines divested in fourth quarter
2006;
|
·
|
Company
sales and segment sales and operating results excluding sales revenue
and
operating results from the fourth quarter 2006 divested 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 of the 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 results. 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 to present in this Management's Discussion
and
Analysis certain financial measures for the Company and certain segments with
and without sales and operating results attributable to sales revenue and
operating results in Latin America from PET manufactured at non-U.S.
sites. This additional information is provided to assist the
reader in understanding the impact on the Company and the Performance Polymers
segment of the announced Latin American PET divestitures. Following
the completion of the divestitures, subject to certain product-specific
agreements associated with the sale of the manufacturing facilities in Mexico
and Argentina, the
Company plans to continue to sell a limited set of PET products manufactured
in
the U.S. in certain Latin American markets.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company generated sales revenue of $1.8 billion and $2.0 billion for the third
quarter 2007 and third quarter 2006, respectively, and $5.5 billion and $5.7
billion for the first nine months 2007 and first nine months 2006,
respectively. Excluding the sales from divested product lines and contract ethylene sales,
sales
revenue decreased 1 percent in the third quarter 2007 and increased 5 percent
in
the first nine months 2007.
As
a
result of strategic decisions related to the Performance Polymers and PCI
segments discussed above, operating earnings in third quarter and first nine
months 2007 were negatively impacted by accelerated depreciation costs of $9
million and $37 million, respectively, as well as asset impairments and
restructuring charges of $120 million and $143 million for the respective
periods. Operating earnings in third quarter and first nine months
2006 were negatively impacted by asset impairments and restructuring charges
of
$13 million and $23 million, respectively. Operating earnings were
$40 million in third quarter 2007, a $118 million decrease compared with third
quarter 2006, and $343 million in the first nine months 2007, a $189 million
decrease compared with the first nine months 2006. Excluding
accelerated depreciation costs and asset impairments and restructuring charges,
operating earnings were $169 million in third quarter 2007 compared with $171
million in third quarter 2006, and $523 million in first nine months 2007
compared with $555 million in first nine months 2006. Net earnings
were $20 million for third quarter 2007 compared to $95 million for third
quarter 2006. Net earnings were $202 million for first nine months
2007 compared to $314 million for first nine months
2006. Excluding accelerated depreciation costs and asset impairments
and restructuring charges, net earnings were $106 million and $103 million,
for
third quarter 2007 and 2006, respectively and $322 million and $331 million
for
first nine months 2007 and 2006, respectively. The Company's broad base of
businesses continues to have strong results, with the declines primarily due
to
operating results in the Performance Polymers segment.
The
Company generated $411 million in cash from operating activities during the
first nine months 2007 compared to $233 million from operating activities in
the
first nine months 2006. The difference was due primarily to the
significant increases in working capital in the first nine months
2006. The Company contributed $100 million and $75 million to its
U.S. defined benefit pension plans in the first nine months 2007 and 2006,
respectively. The Company does not plan to make additional
contributions to its U.S. defined benefit pension plans in
2007. Priorities for use of available cash include paying the
quarterly cash dividend, funding targeted growth initiatives and repurchasing
shares. In the third quarter and first nine months 2007,
the Company repurchased shares totaling $214 million and $300 million,
respectively, completing the share repurchases authorized by the board in
February 2007. In October 2007, the Board of Directors authorized an
additional $700 million in share repurchases.
In
addition to achieving the above results, Eastman continued to progress on its
overall growth objectives including the announcement in July 2007 of two
industrial gasification projects in the U.S. Gulf Coast and actions to improve
the performance of its Performance Polymers segment.
The
gasification projects announcement is an important milestone in the Company's
continuing efforts to leverage its technology and operational expertise for
future growth. The Beaumont, Texas project is expected to be
operational in 2011 and will produce low-cost intermediate chemicals, such
as
hydrogen, methanol, and ammonia. The Company will be an investor,
developer, service provider and customer for this project. In October
2007, the Company announced it has entered into an agreement with Green Rock
Energy, L.L.C., a company formed by the D. E. Shaw group and Goldman,
Sachs & Co., to jointly develop the approximately $1.6 billion industrial
gasification facility in Beaumont, Texas with expects to obtain non-recourse
project financing for the development, design, engineering, construction,
start-up, and testing of the facility. The Faustina project is
expected to be operational in 2010 and will produce anhydrous ammonia for
agriculture, methanol, sulfur and industrial-grade carbon
dioxide. The Company will be an investor, service provider and
customer for this project.
During
the second and third quarters 2007, the Company undertook strategic actions
in
its Performance Polymers segment for its underperforming PET manufacturing
facilities outside the United States. In second quarter 2007, the Company
completed the sale of its Spain PET manufacturing
facility. During the third quarter 2007, the Company entered
into definitive agreements to sell its PET polymers production facilities in
Mexico and Argentina and the related businesses.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Additional
actions in the Performance Polymers segment include 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 and continuing qualifications of the ParaStar PET
product with customers.
The
Company continues to pursue strategic actions for the remaining PET
manufacturing facilities located in Rotterdam, the Netherlands and Workington,
United Kingdom. The Company does not expect material asset
impairments and restructuring charges related to these actions.
|
Third
Quarter
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,813
|
$
|
1,966
|
|
(8)
%
|
|
(10)
%
|
|
1
%
|
|
1
%
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- contract ethylene sales
|
|
84
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Sales
- divested product lines (1)
|
|
--
|
|
225
|
|
|
|
|
|
|
|
|
|
|
Sales
– continuing product lines
|
|
1,729
|
|
1,741
|
|
(1)
%
|
|
(5)
%
|
|
2
%
|
|
1
%
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- PET sales in Latin
America from non-U.S. sites (2)
|
|
91
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– continuing product lines excluding PET sales in Latin
America from
non-U.S. sites(2)
|
|
1,638
|
|
1,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Divested
product lines are Polyethylene and Epolene polymer businesses and
related
assets of the Performance Polymers and CASPI segments located at
the
Longview, Texas site and the Company's ethylene pipeline and the
Company's
Batesville, Arkansas manufacturing facility and related assets and
the
specialty organic chemicals product lines in the PCI
segment.
|
(2)
|
Sales
revenue in Latin America from PET manufactured at non-U.S. sites,
including the Mexico and Argentina PET manufacturing facilities held
for
sale at September 30, 2007. During the third quarter 2007,
Eastman entered into definitive agreements to sell its PET manufacturing
facilities in Mexico and Argentina and the related
businesses. Subject to certain product-specific agreements
associated with the sale of the manufacturing facilities in Mexico
and
Argentina, the
Company plans to continue to sell a limited set of PET products
manufactured in the U.S. in certain Latin American markets.
For more information, refer to Note 2 to the unaudited consolidated
financial statements.
|
Sales
revenue in third quarter 2007 compared to the third quarter 2006 decreased
$153
million. Sales revenue in the third quarter 2007 included $84 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 third quarter 2006 included
$225 million of revenue from divested product lines. Excluding
contract ethylene sales and divested product lines, revenues decreased 1 percent
primarily due to lower volume in the Performance Polymers
segment.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
First
Nine Months
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
5,503
|
$
|
5,698
|
|
(3)
%
|
|
(6)
%
|
|
1
%
|
|
1
%
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- contract ethylene sales
|
|
228
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Sales
- divested product lines (1)
|
|
--
|
|
667
|
|
|
|
|
|
|
|
|
|
|
Sales
– continuing product lines
|
|
5,275
|
|
5,031
|
|
5
%
|
|
--
%
|
|
3
%
|
|
1
%
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- PET sales in Latin America from non-U.S. sites(2)
|
|
328
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– continuing product lines excluding PET sales in Latin
America
from non-U.S.
sites(2)
|
|
4,947
|
|
4,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Divested
product lines are Polyethylene and Epolene polymer businesses and
related
assets of the Performance Polymers and CASPI segments located at
the
Longview, Texas site and the Company's ethylene pipeline and the
Company's
Batesville, Arkansas manufacturing facility and related assets and
the
specialty organic chemicals product lines in the PCI
segment.
|
(2)
|
Sales
revenue in Latin America
from PET manufactured at non-U.S. sites, including the Mexico and
Argentina PET manufacturing facilities held for sale at September
30,
2007. During the third quarter 2007, Eastman entered
into definitive agreements to sell its PET manufacturing facilities
in
Mexico and Argentina and the related businesses. Subject to
certain product-specific agreements associated with the sale of the
manufacturing facilities in Mexico and Argentina, the
Company plans to continue to sell a limited set of PET products
manufactured in the U.S. in certain Latin American
markets. For more information,
refer to
Note 2 to the unaudited consolidated financial
statements.
|
Sales
revenue in the first nine months 2007 compared to the first nine months 2006
decreased $195 million. Sales revenue in the first nine months 2007
included $228 million of revenue from contract ethylene sales under the
transition agreement. Sales revenue in first nine months 2006
included $667 million of revenue from divested product
lines. Excluding contract ethylene sales and divested product lines,
revenues increased 5 percent primarily due to higher selling prices,
particularly in the PCI and Specialty Plastics ("SP") segments.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Third
Quarter
|
|
First
Nine Months
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
$
|
310
|
$
|
316
|
|
(2)
%
|
$
|
923
|
$
|
997
|
|
(7)
%
|
As
a percentage of sales
|
|
17
%
|
|
16
%
|
|
|
|
17
%
|
|
17
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
|
9
|
|
--
|
|
|
|
37
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit excluding accelerated depreciation
|
|
319
|
|
316
|
|
1
%
|
|
960
|
|
997
|
|
(4)
%
|
As
a percentage of sales
|
|
18
%
|
|
16
%
|
|
|
|
17
%
|
|
17
%
|
|
|
Gross
profit for third quarter and first nine months 2007 decreased compared to
the
third quarter and first nine months 2006 due primarily to accelerated
depreciation costs of $9 million and $37 million, respectively, resulting
from
the scheduled shutdown of cracking units in Longview, Texas and of higher
cost
PET polymer assets in Columbia, South Carolina. The Company's first
nine months 2007 raw material and energy costs increased by approximately
$100
million.
|
Third
Quarter
|
|
First
Nine Months
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
Expenses
|
$
|
107
|
$
|
105
|
|
3
%
|
$
|
321
|
$
|
316
|
|
2
%
|
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
43
|
|
40
|
|
7
%
|
|
116
|
|
126
|
|
(8)
%
|
|
$
|
150
|
$
|
145
|
|
4
%
|
$
|
437
|
$
|
442
|
|
(1)
%
|
As
a percentage of sales
|
|
8
%
|
|
7
%
|
|
|
|
8
%
|
|
8
%
|
|
|
Selling,
general and administrative ("SG&A") expenses for the third quarter and first
nine months 2007 increased compared to the comparable periods in 2006 due to
higher compensation expense.
Research
and development ("R&D") expenses increased $3 million in third quarter 2007
compared to third quarter 2006 primarily due to higher expenses for growth
initiatives in the SP segment. R&D expenses decreased $10 million in the
first nine months 2007 compared to first nine months 2006 primarily due to
decreases in the Performance Polymers segment resulting from the
commercialization of ParaStar next generation PET
resins using IntegRex technology in the fourth quarter
2006.
Asset
Impairments and Restructuring Charges, Net
Asset
impairments and restructuring charges, net, totaled $120 million and $143
million for the third quarter and first nine months 2007, respectively,
primarily associated with the held for sale PET manufacturing facilities in
Mexico and Argentina and the sale of the San Roque, Spain PET manufacturing
facility. Asset impairments and restructuring charges, net, totaled
$13 million and $23 million in the third quarter and first nine months
2006. The Company continues to make progress on strategic actions for
the remaining PET manufacturing facilities outside the United States and does
not expect material asset impairments and restructuring charges related to
these
actions. For more information regarding asset impairments and
restructuring charges, primarily related to recent and pending divestitures,
see
the Performance Polymers segment discussion and Note 7 to the Company's
unaudited consolidated financial statements.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
Earnings
|
Third
Quarter
|
|
First
Nine Months
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
$
|
40
|
$
|
158
|
|
(75)
%
|
$
|
343
|
$
|
532
|
|
(36)%
|
Accelerated
depreciation included in cost of goods sold
|
|
9
|
|
--
|
|
|
|
37
|
|
--
|
|
|
Asset
impairments and restructuring charges
|
|
120
|
|
13
|
|
|
|
143
|
|
23
|
|
|
Operating
earnings excluding accelerated depreciation and asset impairment
and
restructuring charges
|
$
|
169
|
$
|
171
|
|
(1)
%
|
$
|
523
|
$
|
555
|
|
(6)
%
|
Interest
Expense, Net
|
Third
Quarter
|
|
First
Nine Months
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
interest costs
|
$
|
31
|
$
|
28
|
|
10
%
|
$
|
89
|
$
|
84
|
|
6
%
|
Less: Capitalized
interest
|
|
3
|
|
2
|
|
|
|
8
|
|
5
|
|
|
Interest
expense
|
|
28
|
|
26
|
|
7
%
|
|
81
|
|
79
|
|
3
%
|
Interest
income
|
|
11
|
|
5
|
|
|
|
31
|
|
17
|
|
|
Interest
expense, net
|
$
|
17
|
$
|
21
|
|
(19)%
|
$
|
50
|
$
|
62
|
|
(19)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
interest costs for the third quarter and first nine months 2007 were higher
compared to the third quarter and first nine months 2006 due to higher average
interest rates. Capitalized interest for the third quarter and first
nine months 2007 were higher compared to the third quarter and first nine months
2006 due to increased spending on capital projects during those
periods. Interest income for the third quarter and first nine months
2007 was higher compared to the third quarter and first nine months 2006 due
to
higher average cash balances and higher average interest rates.
For
2007,
the Company expects net interest expense to decrease compared to 2006 due to
higher interest income driven by higher invested cash balances.
Other
(Income) Charges, Net
|
Third
Quarter
|
|
First
Nine Months
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income)
|
$
|
(12)
|
$
|
(3)
|
|
>100
%
|
$
|
(18)
|
$
|
(10)
|
|
80
%
|
Other
charges
|
|
3
|
|
4
|
|
(25)
%
|
|
3
|
|
8
|
|
(63)
%
|
Other
(income) charges, net
|
$
|
(9)
|
$
|
1
|
|
>100
%
|
$
|
(15)
|
$
|
(2)
|
|
>100
%
|
Included
in other income are the Company’s portion of earnings from its investments, net
gains on foreign exchange transactions, and other non-operating income related
to the funding of Holston Defense Corporation's post-retirement
benefits. Included in other charges are net losses on foreign
exchange transactions and fees on securitized receivables.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Provision
for Income Taxes
|
Third
Quarter
|
First
Nine Months
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
Provision
for
income
taxes
|
$
|
12
|
$
|
41
|
$
|
106
|
$
|
158
|
Effective
tax rate
|
|
40
%
|
|
30
%
|
|
35
%
|
|
34
%
|
The
third
quarter and first nine months 2007 effective tax rates reflect the Company's
normal tax rate on reported operating earnings before income tax, excluding
discrete items, of approximately 34 percent. The third quarter 2007
effective tax rate was negatively impacted by tax law changes in Europe due
to
German tax law changes resulting in a reduction in the value of deferred tax
assets.
The
third
quarter and first nine months 2006 effective tax rates reflect the Company's
expected normal tax rate on reported operating earnings before income tax,
excluding discrete items, of approximately 35 percent. The third
quarter and first nine months 2006 effective tax rates were positively impacted
by lower foreign earnings in favorable tax jurisdictions and the reversal of
foreign loss valuation allowances. The implementation of SFAS No. 123
Revised December 2004 ("SFAS No. 123(R)"), "Share-Based Payment", effective
January 1, 2006, did not have a material effect on the Company's effective
income tax rate in the third quarter and first nine months 2006.
Net
Earnings
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
First
Nine Months
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
$
|
20
|
$
|
95
|
$
|
202
|
$
|
314
|
Accelerated
depreciation included in cost of goods sold, net of tax
|
|
6
|
|
--
|
|
24
|
|
--
|
Asset
impairments and restructuring charges, net of tax
|
|
80
|
|
8
|
|
96
|
|
17
|
Net
earnings excluding accelerated depreciation and asset impairment and
restructuring charges, net of tax
|
$
|
106
|
$
|
103
|
$
|
322
|
$
|
331
|
Revenues
and expenses not identifiable to an operating segment are not included in
segment operating results for either of the periods presented and are shown
in
Note 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
CASPI
Segment
|
|
Third
Quarter
|
|
First
Nine Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
368
|
$
|
367
|
$
|
1
|
|
--
%
|
$
|
1,089
|
$
|
1,078
|
$
|
11
|
|
1
%
|
|
Volume
effect
|
|
|
|
|
(22)
|
|
(6)%
|
|
|
|
|
|
(64)
|
|
(6)%
|
|
Price
effect
|
|
|
|
|
8
|
|
2
%
|
|
|
|
|
|
40
|
|
4
%
|
|
Product
mix effect
|
|
|
|
|
11
|
|
3
%
|
|
|
|
|
|
19
|
|
2
%
|
|
Exchange
rate effect
|
|
|
|
|
4
|
|
1
%
|
|
|
|
|
|
16
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
59
|
|
53
|
|
6
|
|
11
%
|
|
190
|
|
176
|
|
14
|
|
8
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring
charges, net
|
(1)
|
|
--
|
|
(1)
|
|
|
|
(1)
|
|
8
|
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding asset impairments and restructuring charges,
net
|
58
|
|
53
|
|
5
|
|
9
%
|
|
189
|
|
184
|
|
5
|
|
3
%
|
Sales
revenue increased $1 million in third quarter 2007 compared to third quarter
2006 and $11 million in the first nine months 2007 compared to first nine months
2006 as a favorable shift in product mix and higher selling prices were offset
by lower sales volume. The lower sales volume was primarily
attributed to the divestiture of the Company's Epolene product lines in
fourth 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.
Operating
earnings increased $6 million for third quarter 2007 compared to third quarter
2006 and $14 million for first nine months 2007 compared to first nine months
2006. Excluding asset impairments and restructuring charges of $(1)
million in third quarter 2007 and $(1) million and $8 million for the first
nine
months 2007 and 2006, respectively, operating earnings increased $5 million
for
both comparable periods. Increases in operating earnings are
primarily due to higher selling prices and an improved product mix that more
than offset higher raw material and energy costs. Asset impairments
and restructuring charges in 2006 were related to previously closed
manufacturing facilities.
Fibers
Segment
|
|
Third
Quarter
|
|
First
Nine Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
258
|
$
|
228
|
$
|
30
|
|
14
%
|
$
|
731
|
$
|
696
|
$
|
35
|
|
5
%
|
|
Volume
effect
|
|
|
|
|
6
|
|
3
%
|
|
|
|
|
|
(14)
|
|
(2)%
|
|
Price
effect
|
|
|
|
|
21
|
|
9
%
|
|
|
|
|
|
39
|
|
6
%
|
|
Product
mix effect
|
|
|
|
|
2
|
|
2
%
|
|
|
|
|
|
8
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
1
|
|
--
%
|
|
|
|
|
|
2
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
66
|
|
55
|
|
11
|
|
20
%
|
|
176
|
|
182
|
|
(6)
|
|
(3)
%
|
Sales
revenue increased $30 million in third quarter 2007 compared to third quarter
2006 and increased $35 million in the first nine months 2007 compared to
first
nine months 2006 due primarily to higher selling prices. Selling
prices increased primarily due to efforts to offset higher raw material and
energy costs, particularly for wood pulp, and favorable market conditions
for
acetate tow and acetyl chemical product lines related to competitor
outages.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings increased $11 million for third quarter 2007 compared to third quarter
2006 reflecting improved results particularly for acetyl chemical and
acetate tow product lines. Operating earnings decreased $6 million
for first nine months 2007 compared to first nine months 2006.
PCI
Segment
|
|
Third
Quarter
|
|
First
Nine Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
509
|
$
|
437
|
$
|
72
|
|
17
%
|
$
|
1,559
|
$
|
1,260
|
$
|
299
|
|
24
%
|
|
Volume
effect
|
|
|
|
|
68
|
|
16
%
|
|
|
|
|
|
341
|
|
27
%
|
|
Price
effect
|
|
|
|
|
9
|
|
2
%
|
|
|
|
|
|
(36)
|
|
(3)
%
|
|
Product
mix effect
|
|
|
|
|
(6)
|
|
(1)
%
|
|
|
|
|
|
(12)
|
|
(1)
%
|
|
Exchange
rate effect
|
|
|
|
|
1
|
|
--
%
|
|
|
|
|
|
6
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– contract ethylene sales
|
84
|
|
--
|
|
84
|
|
|
|
228
|
|
--
|
|
228
|
|
|
Sales
– divested product lines
|
--
|
|
38
|
|
(38)
|
|
|
|
--
|
|
97
|
|
(97)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– excluding listed items
|
425
|
|
399
|
|
26
|
|
6
%
|
|
1,331
|
|
1,163
|
|
168
|
|
14
%
|
Volume
effect
|
|
|
|
|
(6)
|
|
(1)
%
|
|
|
|
|
|
101
|
|
8
%
|
Price
effect
|
|
|
|
|
29
|
|
7
%
|
|
|
|
|
|
66
|
|
6
%
|
Product
mix effect
|
|
|
|
|
2
|
|
--
%
|
|
|
|
|
|
(5)
|
|
--
%
|
Exchange
rate effect
|
|
|
|
|
1
|
|
--
%
|
|
|
|
|
|
6
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
50
|
|
22
|
|
28
|
|
>100
%
|
|
161
|
|
108
|
|
53
|
|
49
%
|
Operating
earnings (loss) – divested product lines (1)
|
--
|
|
(11)
|
|
11
|
|
100
%
|
|
--
|
|
(8)
|
|
8
|
|
100
%
|
Operating
earnings – excluding divested product lines
|
50
|
|
33
|
|
17
|
|
52
%
|
|
161
|
|
116
|
|
45
|
|
39
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
2
|
|
--
|
|
2
|
|
|
|
16
|
|
--
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment and restructuring charges
|
(1)
|
|
11
|
|
(12)
|
|
|
|
(1)
|
|
11
|
|
(12)
|
|
|
Asset
impairment and restructuring charges -divested product lines (1)
|
--
|
|
11
|
|
(11)
|
|
|
|
--
|
|
11
|
|
(11)
|
|
|
Asset
impairment and restructuring charges - excluding divested product
lines
|
(1)
|
|
--
|
|
(1)
|
|
|
|
(1)
|
|
--
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding certain items (2)
|
51
|
|
33
|
|
18
|
|
55
%
|
|
176
|
|
119
|
|
57
|
|
48
%
|
Operating
earnings excluding certain items (2)–
divested
product lines (1)
|
--
|
|
--
|
|
--
|
|
--
%
|
|
--
|
|
3
|
|
(3)
|
|
(100)%
|
Operating
earnings excluding certain items (2) –
excluding
divested product lines
|
51
|
|
33
|
|
18
|
|
55
%
|
|
176
|
|
116
|
|
60
|
|
52
%
|
|
(1)
Includes
allocated costs consistent with the Company’s historical practices, some
of which may remain and could be reallocated to the remainder of
the
segment and other segments.
|
|
(2)
Items
are
accelerated depreciation costs and asset impairment and restructuring
charges, net.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue increased $72 million in third quarter 2007 compared to third quarter
2006 and $299 million in the first nine months 2007 compared to first nine
months 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 $84 million
and $228 million in third quarter and first nine months 2007, respectively.
Excluding the contract ethylene sales and revenue from divested product lines,
sales revenue for third quarter 2007 increased due to higher selling prices,
which were in response to higher raw material and energy costs. Excluding the
contract ethylene sales and revenue from divested product lines, sales revenue
for first nine months 2007 increased due to higher sales volume and increased
selling prices, which were attributed to favorable market conditions, primarily
for olefin-based derivative products in Asia Pacific and the United
States.
Excluding
accelerated depreciation of $2 million and asset impairments and restructuring
charges of $(1) million in third quarter 2007, operating earnings increased
$18
million attributed to strong demand, particularly for acetyl chemicals and
olefin-based derivative products in the United States and Asia
Pacific. The accelerated depreciation is related to the continuation
of the planned staged phase-out of older cracking units at the Company's
Longview, Texas facility.
Excluding
accelerated depreciation of $16 million and asset impairment and restructuring
charges of $(1) million in the first nine months 2007 and asset impairment
and
restructuring charges of $11 million in first nine months 2006, operating
earnings increased $57 million. The increase is due to higher selling
prices and increased sales volume, with contract ethylene sales having minimal
impact on operating earnings for the first nine months 2007 compared to first
nine months 2006. Selling prices increased in response to higher raw
material and energy costs. The accelerated depreciation is related to
the continuation of the planned staged phase-out of older cracking units 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 $97 million and $3 million,
respectively for first nine months 2006.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
|
|
Third
Quarter
|
|
First
Nine Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
461
|
$
|
727
|
$
|
(266)
|
|
(37)
%
|
$
|
1,480
|
$
|
2,068
|
$
|
(588)
|
|
(28)
%
|
|
Volume
effect
|
|
|
|
|
(254)
|
|
(35)
%
|
|
|
|
|
|
(603)
|
|
(29)
%
|
|
Price
effect
|
|
|
|
|
(26)
|
|
(4)
%
|
|
|
|
|
|
(20)
|
|
(1)
%
|
|
Product
mix effect
|
|
|
|
|
6
|
|
1
%
|
|
|
|
|
|
4
|
|
--
%
|
|
Exchange
rate effect
|
|
|
|
|
8
|
|
1
%
|
|
|
|
|
|
31
|
|
2
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– divested PE product line (1)
|
--
|
|
169
|
|
(169)
|
|
(100)
%
|
|
--
|
|
517
|
|
(517)
|
|
(100)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
–PET product lines
|
461
|
|
558
|
|
(97)
|
|
(17)
%
|
|
1,480
|
|
1,551
|
|
(71)
|
|
(5)%
|
Volume
effect
|
|
|
|
|
(85)
|
|
(15)
%
|
|
|
|
|
|
(86)
|
|
(6)%
|
Price
effect
|
|
|
|
|
(26)
|
|
(4)
%
|
|
|
|
|
|
(20)
|
|
(1)%
|
Product
mix effect
|
|
|
|
|
6
|
|
1
%
|
|
|
|
|
|
4
|
|
--
%
|
Exchange
rate effect
|
|
|
|
|
8
|
|
1
%
|
|
|
|
|
|
31
|
|
2
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PET
sales in Latin America from non-U.S. sites (2)
|
91
|
|
136
|
|
(45)
|
|
(33)%
|
|
328
|
|
364
|
|
(36)
|
|
(10)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
–PET product lines excluding PET sales in Latin America from non-U.S.
sites (2)
|
370
|
|
422
|
|
(52)
|
|
(12)%
|
|
1,152
|
|
1,187
|
|
(35)
|
|
(3)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss)
|
(134)
|
|
20
|
|
(154)
|
|
|
|
(198)
|
|
51
|
|
(249)
|
|
|
Operating
earnings – divested PE product line (1)
(2)
|
--
|
|
15
|
|
(15)
|
|
|
|
--
|
|
53
|
|
(53)
|
|
|
Operating
earnings (loss) –PET product lines
|
(134)
|
|
5
|
|
(139)
|
|
|
|
(198)
|
|
(2)
|
|
(196)
|
|
|
Operating
loss - PET results in Latin America attributed to
non-U.S. sites (2)
|
(121)
|
|
(4)
|
|
(117)
|
|
|
|
(127)
|
|
(9)
|
|
(118)
|
|
|
Operating
earnings (loss) –PET results excluding PET results in Latin America
attributed to non-U.S. sites (2)
|
(13)
|
|
9
|
|
(22)
|
|
|
|
(71)
|
|
7
|
|
(78)
|
|
|
(1)
|
Divested
product line is the Polyethylene business located at the Longview,
Texas
site.
|
(2)
|
Sales
revenue and operating
results in Latin America from PET manufactured at non-U.S. sites,
including the Mexico and Argentina PET manufacturing facilities held
for
sale. During the third quarter 2007, Eastman entered
into definitive agreements to sell its PET manufacturing facilities
in
Mexico and Argentina and the related businesses. Subject to
certain product-specific agreements associated with the sale of the
manufacturing facilities in Mexico and Argentina, the
Company plans to continue to sell a limited set of PET products
manufactured in the U.S. in certain Latin American markets.
For more information, refer to Note 2 to the unaudited consolidated
financial statements.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
|
|
Third
Quarter
|
|
First
Nine Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss) excluding items (3)
|
(7)
|
|
20
|
|
(27)
|
|
|
|
(36)
|
|
51
|
|
(87)
|
|
|
Operating
earnings (loss) excluding items (3) –
divested PE product line (1)
(2)
|
--
|
|
15
|
|
(15)
|
|
|
|
--
|
|
53
|
|
(53)
|
|
|
Operating
earnings (loss) excluding items (3)–PET
product
lines
|
(7)
|
|
5
|
|
(12)
|
|
|
|
(36)
|
|
(2)
|
|
(34)
|
|
|
Operating
earnings (loss) excluding items (3)–PET
results
in Latin America attributed to non-U.S. sites (2)
|
(4)
|
|
(4)
|
|
--
|
|
|
|
(10)
|
|
(9)
|
|
(1)
|
|
|
Operating
earnings (loss) excluding items (3)–
PET
results excluding PET results in Latin America attributed to non-U.S.
sites (2)
|
(3)
|
|
9
|
|
(12)
|
|
|
|
(26)
|
|
7
|
|
(33)
|
|
|
(1)
|
Divested
product line is the Polyethylene businesses located at the Longview,
Texas
site.
|
(2)
|
Sales
revenue and operating
results in Latin America from PET manufactured at non-U.S. sites,
including the Mexico and Argentina PET manufacturing facilities held
for
sale. During the third quarter 2007, Eastman entered
into definitive agreements to sell its PET manufacturing facilities
in
Mexico and Argentina and the related businesses. Subject to
certain product-specific agreements associated with the sale of the
manufacturing facilities in Mexico and Argentina, the
Company plans to continue to sell a limited set of PET products
manufactured in the U.S. in certain Latin American
markets. For more information, refer to Note 2 to the
unaudited consolidated financial
statements.
|
(3)
|
Items
are accelerated
depreciation costs and asset impairment and restructuring charges,
net. In third quarter 2007, asset impairments and restructuring
charges of $120 million consist of $117 million relating to the Mexico
and
Argentina PET manufacturing facilities held for sale and $3 million
relating to other sites. Accelerated depreciation costs of $7
million relate to restructuring actions associated with higher cost
PET
polymer assets in Columbia, South Carolina. In first nine
months 2007, asset impairments and restructuring charges of $142
million
consist of $117 million relating to the Mexico and Argentina PET
manufacturing facilities held for sale and $25 million relating to
other
sites. Accelerated depreciation costs of $20 million relate to
restructuring actions associated with higher cost PET polymer assets
in
Columbia, South Carolina.
|
Sales
revenue decreased $266 million in third quarter 2007 compared to third quarter
2006 due primarily to the divestiture of the PE product lines and the San Roque,
Spain PET manufacturing facility. For continuing product lines, sales
revenue decreased $97 million due to decreased volumes in Europe attributed
to
the sale of the San Roque, Spain PET manufacturing facility and operational
disruptions at the Argentina PET facility, partially offset by increased North
America sales volumes attributed to increased operating rates for the Company's
ParaStar PET facility based on IntegRex
technology.
Sales
revenue decreased $588 million in first nine months 2007 compared to first
nine
months 2006 due to the divested product lines and manufacturing assets mentioned
above. For continuing product lines, sales revenue decreased $71
million primarily due to decreased volumes in Europe attributed to the
divestiture of the San Roque, Spain PET manufacturing facility offset by
increased North America sales volumes attributed to operating rates for the
Company's ParaStar PET facility based on IntegRex
technology.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Excluding
asset impairments and restructuring charges of $120 million related primarily
to
an impairment for Mexico and Argentina PET manufacturing facilities held for
sale and accelerated depreciation costs of $7 million for restructuring actions
associated with higher cost PET polymer assets in Columbia, South Carolina,
operating results decreased $27 million for third quarter 2007 compared to
third
quarter 2006 primarily due to the divestiture of the PE product
lines. Excluding asset impairments and restructuring charges
operating results from continuing product lines decreased $12 million in third
quarter 2007 compared to third quarter 2006 as higher and continued volatile
raw
material and energy costs and low PET industry operating rates resulted in
compressed gross margins, particularly in North America. For
additional information on asset impairments and restructuring charges, refer
to
Note 7 to the notes to the unaudited consolidated financial
statements.
Excluding
asset impairments and restructuring charges of $142 million primarily for the
Mexico and Argentina PET manufacturing facilities held for sale and $20 million
of accelerated depreciation costs for restructuring actions associated with
higher cost PET polymer assets in Columbia, South Carolina, operating results
decreased $87 million for the first nine months 2007 compared to the first
nine
months 2006 primarily due to the divestiture of the PE product
lines. Excluding asset impairments and restructuring
charges, operating results from continuing product lines decreased
$34 million as 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
produced in the IntegRex facility.
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 plans to increase capacity at this facility to over
525 thousand metric tons of ParaStar next generation PET resins by the
end of 2008 and to reduce the cost structure at this facility by $30
million.
In
second
quarter 2007, the Company completed the sale of the San Roque, Spain PET
manufacturing facility. For the first nine months 2007, sales revenue
attributed to PET product manufactured at the San Roque PET site was $25
million, all of which was recorded in first quarter 2007, and for the third
quarter and first nine months 2006, sales revenue was $64 million and $158
million, respectively.
During
the third quarter 2007, the Company entered into definitive agreements to sell
Eastman's PET polymers production facilities in Mexico and Argentina and the
related businesses. The sale, which is subject to customary
approvals, includes Eastman's PET manufacturing facilities in Cosoleacaque,
Mexico, and Zarate, Argentina.
The
Company continues to pursue strategic actions for the remaining PET
manufacturing facilities located in Rotterdam, the Netherlands and Workington,
United Kingdom. The Company does not expect material asset
impairments and restructuring charges related to these actions.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
SP
Segment
|
|
Third
Quarter
|
|
First
Nine Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
217
|
$
|
207
|
$
|
10
|
|
5
%
|
$
|
644
|
$
|
596
|
$
|
48
|
|
8
%
|
|
Volume
effect
|
|
|
|
|
(1)
|
|
(1)
%
|
|
|
|
|
|
17
|
|
3
%
|
|
Price
effect
|
|
|
|
|
6
|
|
3
%
|
|
|
|
|
|
19
|
|
3
%
|
|
Product
mix effect
|
|
|
|
|
3
|
|
2
%
|
|
|
|
|
|
5
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
2
|
|
1
%
|
|
|
|
|
|
7
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
13
|
|
18
|
|
(5)
|
|
(28)
%
|
|
49
|
|
50
|
|
(1)
|
|
(2)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
--
|
|
--
|
|
--
|
|
|
|
1
|
|
--
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
--
|
|
--
|
|
--
|
|
|
|
1
|
|
--
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding accelerated depreciation
|
13
|
|
18
|
|
(5)
|
|
(28)
%
|
|
51
|
|
50
|
|
1
|
|
2
%
|
Sales
revenue increased $10 million in third quarter 2007 compared to third quarter
2006 primarily due to higher selling prices to offset higher raw material and
energy costs and a favorable shift in product mix. Sales volume
decreased slightly as declines in demand for polyester product lines used in
photographic and optical films were mostly offset by higher volumes in
copolyester and cellulosic products.
Sales
revenue increased $48 million in the first nine months 2007 compared to the
first nine months 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 decreased $5 million for third quarter 2007 compared to third quarter
2006 due primarily to increased research and development costs related to
commercialization of high-temperature copolyester products,
EastmanTritan copolyester.
Excluding
asset impairments and restructuring charges and accelerated depreciation costs,
operating earnings were similar for the first nine months 2007 compared to
first
nine months 2006 as increased sales volume and higher selling prices offset
higher raw material and energy costs. The 2007 operating results
included $1 million in asset impairment and restructuring costs primarily for
the Spain CHDM facility and $1 million of accelerated depreciation costs for
restructuring actions associated with higher cost PET polymer assets in
Columbia, South Carolina.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
Revenue
|
Third
Quarter
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
1,023
|
$
|
1,111
|
|
(8)
%
|
|
(9)
%
|
|
1
%
|
|
--
%
|
|
--
%
|
Europe,
Middle East, and Africa
|
|
349
|
|
371
|
|
(6)
%
|
|
(10)
%
|
|
(2)
%
|
|
2
%
|
|
4
%
|
Asia
Pacific
|
|
259
|
|
243
|
|
6
%
|
|
(4)
%
|
|
6
%
|
|
4
%
|
|
--
%
|
Latin
America
|
|
182
|
|
241
|
|
(24)
%
|
|
(25)
%
|
|
1
%
|
|
--
%
|
|
--
%
|
|
$
|
1,813
|
$
|
1,966
|
|
(8)
%
|
|
(10)
%
|
|
1
%
|
|
1
%
|
|
--
%
|
Sales
revenue in the United States and Canada decreased for third quarter 2007
compared to third quarter 2006 primarily due to lower sales volume attributed
to
divested product lines in the Performance Polymers, PCI and CASPI
segments. These volumes were partially offset by contract ethylene
sales in the PCI segment under the transition agreement resulting from the
divestiture of the Performance Polymers segment's PE business in fourth quarter
2006 and lower average selling prices in the PCI segment attributed to these
contract ethylene sales. Excluding divested product lines and
contract ethylene sales, sales revenue increased 1 percent primarily due to
sales volumes in the Performance Polymers segment and increased selling
prices.
Sales
revenue in Europe, Middle East and Africa decreased for third quarter 2007
compared to third quarter 2006, primarily due to sales volume, particularly
in
the Performance Polymers segment due to the divestiture of the San Roque, Spain
PET manufacturing facility.
Sales
revenue in Asia Pacific increased for third quarter 2007 compared to third
quarter 2006 primarily due to higher selling prices, particularly in the PCI
segment attributed to strong demand for olefin-based derivative products and
acetyl chemicals.
Sales
revenue in Latin America decreased for third quarter 2007 compared to third
quarter 2006 primarily due to lower sales volume, particularly in the
Performance Polymers segment. Excluding divested product lines,
sales revenue decreased 16 percent. During the third quarter 2007,
the Company entered into definitive agreements to sell its PET polymers
production facilities in Mexico and Argentina and the related businesses, which
will result in significantly lower sales revenue in Latin America in the
future. However, following the completion of the divestitures, and
subject to certain product-specific agreements associated with the sale of
the
manufacturing facilities in Mexico and Argentina, the
Company plans to continue to sell a limited set of PET products manufactured
in
the U.S. in certain Latin American markets.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
|
First
Nine Months
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
3,055
|
$
|
3,278
|
|
(7)
%
|
|
(5)
%
|
|
(2)
%
|
|
--
%
|
|
--
%
|
Europe,
Middle East, and Africa
|
|
1,098
|
|
1,080
|
|
2
%
|
|
(6)
%
|
|
1
%
|
|
1 %
|
|
6
%
|
Asia
Pacific
|
|
782
|
|
702
|
|
11
%
|
|
--
%
|
|
9
%
|
|
2 %
|
|
--
%
|
Latin
America
|
|
568
|
|
638
|
|
(11)
%
|
|
(13)
%
|
|
3
%
|
|
(1)
%
|
|
--
%
|
|
$
|
5,503
|
$
|
5,698
|
|
(3)
%
|
|
(6)
%
|
|
1
%
|
|
1
%
|
|
1
%
|
Sales
revenue in the United States and Canada decreased for the first nine months
2007
compared to the first nine months 2006 primarily due to lower sales volume
attributed to divested product lines in the Performance Polymers, PCI and CASPI
segments. These volumes were partially offset by contract ethylene
sales in the PCI segment under the transition agreement resulting from the
divestiture of the Performance Polymers segment's PE business in fourth quarter
2006 and lower average selling prices in the PCI segment attributed to these
contract ethylene sales. Excluding divested product lines and contract ethylene
sales, sales revenue increased 4 percent primarily due to sales volumes in
the
PCI segment and increased selling prices.
Sales
revenue in Europe, Middle East and Africa increased for the first nine months
2007 compared to the first nine months 2006, due to the effects of the exchange
rates, particularly in the Performance Polymers segment, increased selling
prices and favorable product mix, partially offset by lower sales volume,
particularly in the Performance Polymers segment due to the divestiture of
the
San Roque, Spain PET manufacturing facility.
Sales
revenue in Asia Pacific increased for the first nine months 2007 compared to
the
first nine months 2006 primarily due to higher selling prices, particularly
in
the PCI segment attributed to strong demand for olefin-based derivative products
and acetyl chemicals.
Sales
revenue in Latin America decreased for the first nine months 2007 compared
to
the first nine months 2006 primarily due to lower sales volume, particularly
in
the Performance Polymers segment. Excluding divested product
lines, sales revenue was flat. During the third quarter 2007, the
Company entered into definitive agreements to sell its PET polymers production
facilities in Mexico and Argentina and the related businesses, which will result
in significantly lower sales revenue in Latin America in the
future. However, following the completion of the divestitures, and
subject to certain product-specific agreements associated with the sale of
the
manufacturing facilities in Mexico and Argentina, the
Company plans to continue to sell a limited set of PET products manufactured
in
the U.S. in certain Latin American markets.
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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Cash
Flows
|
|
First
Nine Months
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
Operating
activities
|
$
|
411
|
$
|
233
|
Investing
activities
|
|
(299)
|
|
(279)
|
Financing
activities
|
|
(270)
|
|
(50)
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
--
|
|
2
|
Net
change in cash and cash equivalents
|
|
(
158)
|
|
( 94)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
939
|
|
524
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
781
|
$
|
430
|
Cash
provided by operating activities increased $178 million in the first nine months
2007 compared to first nine months 2006 reflecting continued strong earnings
and
a smaller increase in working capital. In the first nine months 2006,
the Company's working capital increased, consistent with a more normal level,
following a reduction of working capital requirements in the fourth quarter
2005
due to the impact of the Gulf Coast hurricanes on sales volume, especially
in
the Performance Polymers segment. In the first nine months 2007, the working
capital has remained at a more normal level. The Company contributed
$100 million and $75 million to its U.S. defined benefit pension plans in the
first nine months 2007 and 2006, respectively.
Cash
used
in investing activities increased $20 million in the first nine months 2007
compared to first nine months 2006. During the first nine months
2007, the Company received net proceeds of approximately $42 million primarily
related to the sale of the San Roque, Spain PET manufacturing facility in the
Performance Polymer's segment. Additions to properties and equipment
increased $70 million in the first nine months 2007 consistent with the
Company's expected higher capital spending.
Cash
used
by financing activities totaled $270 million in the first nine months 2007
and
included cash paid for share repurchases totaling $300 million offset by cash
received from stock option exercises of $100 million. Cash used in financing
activities in the first nine months 2006 totaled $50
million. The payment of dividends is reflected in financing
activities in all periods.
Liquidity
At
September 30, 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 132 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 September 30, 2007 and December 31, 2006 were $187 million and
$185 million at weighted average interest rates of 4.76 percent and 4.00
percent, respectively.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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. In the third quarter 2007, the Company
completed these share repurchases having purchased a total of approximately
4.6
million common shares for a total of $300 million. In October 2007,
the Board authorized an additional $700 million in share
repurchases. 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 plansin
the
first quarter 2007 and expects no further contributions to this plan 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 strategy and financial
flexibility.
Capital
Expenditures
Capital
expenditures were $346 million and $279 million for the first nine months 2007
and 2006, respectively. The Company expects capital spending in 2007
will be approximately $500 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
September 30, 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 September 30, 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 September 30, 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 including the guarantees related
to
the third-party borrowings of joint ventures and has concluded that the entities
are not Variable Interest Entities ("VIEs") or, in the case of Primester, a
joint venture that manufactures cellulose acetate at its Kingsport, Tennessee
plant, the Company is not the primary beneficiary of the VIE. As
such, in accordance with Financial Accounting Standards Board ("FASB")
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 September 30,
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
In
the third quarter 2007, the Company
completed share repurchases authorized by the Board of Directors in February
2007 having
purchased a total of approximately 4.6 million common shares for a total of
$300
million. In
October 2007, the Board of Directors
authorized an additional $700 million for repurchase 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.
Dividends
The
Company declared cash dividends of $0.44 per share in the third quarter 2007
and
2006 and $1.32 per share in the first nine months 2007 and
2006.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
September 2006, the 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 costs 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;
|
·
|
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 34
percent;
|
·
|
that
acetate tow will have modest growth potential in future years and
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 which will result in
additional capacity of 50 percent over planned capacity,
rationalizing 350 thousand metric tons of existing capacity in North
America, completing the sale of its Spain PET manufacturing facility
(which was completed in second quarter 2007), selling the Latin America
PET manufacturing facilities (which was agreed to in third quarter
2007)
and pursuing other strategic options for its remaining underperforming
PET
manufacturing facilities outside the United
States;
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
capital
expenditures to increase to approximately $500 million and exceed
estimated depreciation and amortization of approximately $335 million,
including accelerated depreciation costs of $50 million; in 2007,
the
Company plans to pursue expansion of acetate tow and copolyester
intermediates, enhancements to benefit the PET facilities in South
Carolina, utilizing IntegRex technology, and pursue other
targeted growth initiatives;
|
·
|
continues
to evaluate its portfolio, which could lead to further restructuring,
divestiture, or consolidation of product lines as it continues to
focus on
profitability;
|
·
|
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;
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.
|
For
fourth quarter 2007, the Company expects normal seasonality will reduce demand
in most of its businesses and product lines sequentially. The Company
also expects continued volatility in its raw material and energy costs resulting
in similar results to fourth quarter 2006 excluding asset impairments and
restructuring charges related to ongoing strategic decisions in both
periods.
See
“Forward-Looking Statements and Risk Factors below.”
The
expectations under "Outlook" and certain other statements in this Quarterly
Report on Form 10-Q 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
These
plans and expectations are based upon certain underlying assumptions, including
those mentioned with the specific statements. Such assumptions are in
turn based upon internal estimates and analyses of current market conditions
and
trends, management plans and strategies, economic conditions and other
factors. These plans and expectations and the assumptions underlying
them are necessarily subject to risks and uncertainties inherent in projecting
future conditions and results. Actual results could differ materially
from expectations expressed in the forward-looking statements if one or more
of
the underlying assumptions and expectations proves to be inaccurate or is
unrealized. In addition to the factors described in this report, the
following are some of the important factors that could cause the Company's
actual results to differ materially from those in any such forward-looking
statements:
·
|
The
Company is reliant on certain strategic raw materials 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. Additionally, limitations of our
suppliers' and customers' available manufacturing capacity due to
the
factors described above 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.
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
·
|
The
Company's competitive position has from time to time been adversely
impacted by low cost competitors in certain regions. The Company has
efforts underway to exploit growth opportunities in certain core
businesses by developing new products and technologies, expanding
into new
markets, and tailoring product offerings to customer
needs. Current examples include IntegRex technology
and new PET polymers products, such as ParaStar, and copolyester
product innovations, such as Eastman Tritan
copolyester. There can be no assurance that such efforts will result
in
financially successful commercialization of such products or acceptance
by
existing or new customers or new markets or that large capital projects
for such growth efforts can be completed within the time or at the
costs
projected due, among other things, to demand for and availability
of
construction materials and labor.
|
·
|
The
Company has made, and intends to continue making, strategic investments,
including IntegRex technology and coal gasification, and has
entered, and expects to continue to enter, into strategic alliances
in
technology, services businesses, and other ventures in order to build,
diversify, and strengthen certain Eastman capabilities, improve Eastman's
raw materials and energy cost and supply position, and maintain high
utilization of manufacturing assets. There can be no assurance
that such investments and alliances will achieve their underlying
strategic business objectives or that they will be beneficial to
the
Company's results of operations or that large capital projects for
such
growth efforts can be completed within the time or at the costs projected
due, among other things, to demand for and availability of construction
materials and labor.
|
·
|
In
addition to productivity and cost reduction initiatives, the Company
is
striving to improve margins on its products through price increases
where
warranted and accepted by the market; however, the Company's earnings
could be negatively impacted should such increases be unrealized,
not be
sufficient to cover increased raw material and energy costs, or have
a
negative impact on demand and volume. There can be no
assurances that price increases will be realized or will be realized
within the company's anticipated
timeframe.
|
·
|
The
Company has undertaken and expects to continue to undertake productivity
and cost reduction initiatives and organizational restructurings
to
improve performance and generate cost savings. There can be no
assurance that these will be completed as planned or beneficial or
that
estimated cost savings from such activities will be
realized.
|
·
|
The
Company's facilities and businesses are subject to complex health,
safety
and environmental laws and regulations, which require and will continue
to
require significant expenditures to remain in compliance with such
laws
and regulations currently and in the future. The Company's
accruals for such costs and associated liabilities are subject to
changes
in estimates on which the accruals are based. The amount
accrued reflects the Company’s assumptions about remediation requirements
at the contaminated site, the nature of the remedy, the outcome of
discussions with regulatory agencies and other potentially responsible
parties at multi-party sites, and the number and financial viability
of
other potentially responsible parties. Changes in the estimates
on which the accruals are based, unanticipated government enforcement
action, or changes in health, safety, environmental, chemical control
regulations and testing requirements could result in higher or lower
costs.
|
·
|
The
Company and its operations from time to time are parties to or targets
of
lawsuits, claims, investigations, and proceedings, including product
liability, personal injury, asbestos, patent and intellectual property,
commercial, contract, environmental, antitrust, health and safety,
and
employment matters, which are handled and defended in the ordinary
course
of business. The Company believes amounts reserved are adequate
for such pending matters; however, results of operations could be
affected
by significant litigation adverse to the
Company.
|
·
|
The
Company has deferred tax assets related to capital and operating
losses. The Company establishes valuation allowances to reduce
these deferred tax assets to an amount that is more likely than not
to be
realized. The Company’s ability to utilize these deferred tax
assets depends on projected future operating results, the reversal
of
existing temporary differences, and the availability of tax planning
strategies. Realization of these assets is expected to occur
over an extended period of time. As a result, changes in tax laws,
assumptions with respect to future taxable income, and tax planning
strategies could result in adjustments to these
assets.
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
·
|
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 Quarterly Report on Form 10-Q 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 quantitative and qualitative information about the
Company's market risks from that disclosed in 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 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
September 30, 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 third 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 16 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)
|
July
1- 31, 2007
|
301,101
|
|
67.06
|
|
300,900
|
$
|
193
|
August
1-31, 2007
|
2,208,967
|
|
66.14
|
|
2,208,500
|
|
47
|
September
1-30, 2007
|
722,477
|
|
65.64
|
|
721,948
|
|
0
|
Total
|
3,232,545
|
$
|
66.11
|
|
3,231,348
|
|
|
(1)
|
Shares
repurchased under a publicly 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
during the period for all share repurchases and shares surrendered
by
employee stockholders to satisfy individual tax withholding obligations
upon vesting of restricted common
stock.
|
(3)
|
On
February 20, 2007, the Board of Directors 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. As of September 30, 2007, the Company has completed
the authorized share repurchases having purchased a total of 4,601,448
shares for a total amount of $300
million.
|
Exhibits
filed as part of this report are listed in the
Exhibit Index appearing on page 51.
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: October
31, 2007
|
|
By:
|
/s/
Richard A. Lorraine |
|
|
|
Richard
A. Lorraine
|
|
|
|
Senior
Vice President and Chief Financial
Officer
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
3.01
|
|
Amended
and Restated Certificate of Incorporation of Eastman Chemical Company,
as
amended (incorporated 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
|
|
|
|
|
|
|
|
|
|
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)
|
|
|