UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
|
|
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the fiscal year ended December 31,
2008
|
|
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
|
|
37662
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant’s
telephone number, including area code: (423)
229-2000
|
Securities
registered pursuant to Section 12(b) of the Act:
|
|
|
|
Title of each class
|
|
Name of each exchange on which
registered
|
Common
Stock, par value $0.01 per share
|
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
|
____________________________________________________________________________________________
PAGE 1 OF
140 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 137
|
Yes
|
No
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
|
[X]
|
|
|
Yes
|
No
|
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act.
|
|
[X]
|
|
Yes
|
No
|
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.
|
[X]
|
|
|
|
|
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
|
[X]
|
|
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
[X] Accelerated
filer [ ]
Non-accelerated
filer
[ ] Smaller
reporting company [ ]
(Do
not check if a smaller reporting company)
|
|
|
|
Yes
|
No
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
|
|
[X]
|
The
aggregate market value (based upon the $68.86 closing price on the New York
Stock Exchange on June 30, 2008) of the 72,025,651 shares of common equity held
by non-affiliates as of December 31, 2008 was approximately $4,959,686,328,
using beneficial ownership rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended, to exclude common stock that may be
deemed beneficially owned as of December 31, 2008 by Eastman Chemical Company’s
(“Eastman” or the “Company”) directors and executive officers and charitable
foundation, some of whom might not be held to be affiliates upon judicial
determination. A total of 72,547,177 shares of common stock of the
registrant were outstanding at December 31, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement relating to the 2009 Annual
Meeting of Stockholders (the "2009 Proxy Statement"), to be filed with the
Securities and Exchange Commission, are incorporated by reference in Part III,
Items 10 to 14 of this Annual Report on Form 10-K (the "Annual Report") as
indicated herein.
FORWARD-LOOKING
STATEMENTS
Certain
statements in this Annual Report are forward-looking in nature as defined in the
Private Securities Litigation Reform Act of 1995. These statements, and
other written and oral forward-looking statements made by the Company from time
to time, may relate to, among other things, such matters as planned and expected
capacity increases and utilization; anticipated capital spending; expected
depreciation and amortization; environmental matters; legal proceedings;
exposure to, and effects of hedging of, raw material and energy costs and
foreign currencies; global and regional economic, political, and business
conditions; competition; growth opportunities; supply and demand, volume, price,
cost, margin, and sales; earnings, cash flow, dividends, and other expected
financial results and conditions; expectations, strategies, and plans for
individual assets and products, businesses, and segments, as well as for the
whole of Eastman; cash requirements and sources of liquidity and uses of
available cash; financing plans and activities; pension expenses and funding;
credit ratings; anticipated restructuring, divestiture, and consolidation
activities; cost reduction and control efforts and targets; integration of any
acquired businesses; strategic initiatives and development,
production, commercialization, and acceptance of new products, services and
technologies and related costs; asset, business and product portfolio changes;
and expected tax rates and net interest costs.
These
plans and expectations are based upon certain underlying assumptions, including
those mentioned with the specific statements. Such assumptions are based
upon internal and other estimates and analyses of current market conditions and
trends, management plans and strategies, economic conditions, and other factors.
These plans and expectations and the assumptions underlying them are
necessarily subject to risks and uncertainties inherent in projecting future
conditions and results. Actual results could differ materially from
expectations expressed in the forward-looking statements if one or more of the
underlying assumptions and expectations proves to be inaccurate or is
unrealized. Certain important factors that could cause actual results to
differ materially from those in the forward-looking statements are included with
such forward-looking statements and in Part II—Item 7—"Management's Discussion
and Analysis of Financial Condition and Results of Operations—Forward-Looking
Statements and Risk Factors" of this Annual Report.
TABLE OF
CONTENTS
PART
I
1.
|
|
|
5
|
|
|
|
|
1A.
|
|
|
22
|
|
|
|
|
1B.
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
|
25
|
|
|
|
|
3.
|
|
|
26
|
|
|
|
|
4.
|
|
|
26
|
|
|
|
|
PART II
5.
|
|
|
27
|
|
|
|
|
6.
|
|
|
29
|
|
|
|
|
7.
|
|
|
31
|
|
|
|
|
7A.
|
|
|
76
|
|
|
|
|
8.
|
|
|
77
|
|
|
|
|
9.
|
|
|
130
|
|
|
|
|
9A.
|
|
|
130
|
|
|
|
|
9B.
|
|
|
131
|
|
|
|
|
PART
III
10.
|
|
|
132
|
|
|
|
|
11.
|
|
|
132
|
|
|
|
|
12.
|
|
|
132
|
|
|
|
|
13.
|
|
|
133
|
|
|
|
|
14.
|
|
|
133
|
|
|
|
|
PART
IV
SIGNATURES
PART
I
CORPORATE
OVERVIEW
Eastman
Chemical Company ("Eastman" or the "Company") is a global chemical company which
manufactures and sells a broad portfolio of chemicals, plastics, and
fibers. Eastman began business in 1920 for the purpose of producing
chemicals for Eastman Kodak Company's photographic business and became a public
company, incorporated in Delaware, as of December 31, 1993. Eastman
has eleven manufacturing sites in seven countries that supply chemicals,
plastics, and fibers products to customers throughout the world. The
Company's headquarters and largest manufacturing site are located in Kingsport,
Tennessee.
In 2008,
the Company had sales revenue of $6.7 billion, operating earnings of $519
million, and earnings from continuing operations of $328
million. Earnings per diluted share from continuing operations were
$4.31 in 2008. Included in 2008 operating earnings were asset
impairments and restructuring charges of $46 million, accelerated depreciation
costs related to restructuring decisions of $9 million, and other operating
income of $16 million.
The
Company’s products and operations are managed and reported in five operating
segments: the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI")
segment, the Fibers segment, the Performance Chemicals and Intermediates ("PCI")
segment, the Performance Polymers segment and the Specialty Plastics ("SP")
segment. For additional information concerning the Company’s
operating segments, see Note 23 "Segment Information" to the Company’s
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K.
The
Company manages certain costs and initiatives at the corporate level, including
certain research and development costs not allocated to the operating
segments. Industrial gasification, which consists of producing
cost-advantaged chemicals from petroleum coke or coal instead of natural gas or
petroleum, is currently the most significant of these corporate
initiatives.
Eastman's
objective is to leverage its heritage of expertise and innovation in acetyl,
polyester, and olefins chemistries to meet long-term demand and create new
opportunities for the Company's products in key markets. The Company
continues to invest in growth initiatives, but timing will depend, in part, on
economic conditions and the Company’s positive free cash flow generation
(operating cash flow less capital expenditures and dividends). The
Company’s current growth initiatives include:
·
|
In
the Fibers segment, in December 2008, the Company announced an alliance
with SK Chemicals Company Ltd. (“SK”) to form a company to acquire and
operate a cellulose acetate tow manufacturing facility and related
business, with the facility to be constructed by SK in
Korea. Eastman will have majority ownership of and will operate
the facility. Construction of the Korean facility began in
first quarter 2009 and is expected to be completed in second quarter
2010.
|
·
|
In
the SP segment, in 2008 Eastman continued the successful introduction of
new high-temperature copolyester products based on Eastman TritanTM
copolyester and is progressing on a new 30,000 metric ton TritanTM
manufacturing facility expected to be online in
2010.
|
·
|
The
SP segment will continue to pursue sales revenue growth from cellulosic
and copolyester products sold in the liquid crystal displays
market.
|
·
|
In
the CASPI segment, Eastman is continuing expansion of its hydrogenated
hydrocarbon resins manufacturing capacity in Middelburg, the Netherlands,
by expanding capacity an additional 30 percent, which is expected to be
completed in 2009.
|
·
|
In
2008, the Company continued to make progress on industrial gasification
including the acquisition of the remaining ownership interest of TX
Energy, L.L.C. (“TX Energy”), with a future plant site planned in
Beaumont, Texas. In 2008, the Company completed the purchase of
an idled methanol and ammonia plant from Terra Industries Inc. in
Beaumont, Texas and intends to restart these facilities using raw
materials supplied via pipeline from its nearby gasification facility,
once the gasification facility is complete. Front-end engineering
and design for the Beaumont industrial gasification project is planned to
be completed by mid-2009. The Company is pursuing non-recourse
project financing utilizing the Department of Energy’s Federal Loan
Guarantee Program.
|
In
addition, by leveraging its expertise in industrial gasification, Eastman
expects over time to increase the volume of products derived from gasification,
further driving long-term growth in overall profitability and sales
revenue.
The
Company has taken a number of actions to reposition itself in key markets and
geographies, and management believes the Company has been restructured for
sustained success. Recent restructuring actions include:
·
|
The
completed restructuring of the PCI segment to improve long-term
profitability, and the ongoing staged phase-out of the Company’s three
oldest cracking units in Longview, Texas. Eastman shut down the
first of these cracking units in fourth quarter
2007.
|
·
|
The
restructure of the Performance Polymers segment, which was completed in
fourth quarter 2008 to improve the segment's profitability, in part
enabled by IntegRexTM
technology. In 2008, Eastman debottlenecked the Columbia, South
Carolina facility for ParaStarTM
polyethylene terephthalate (“PET”)
resins. In 2007 and 2008, the Company also completed the
divestiture of its non-US PET facilities in the Netherlands, the United
Kingdom, Spain, Mexico, and
Argentina.
|
Manufacturing
Streams
As stated
above, Eastman's objective is to leverage its heritage of expertise and
innovation in acetyl, polyester, and olefins chemistries in key markets,
including packaging, tobacco, durable goods, building and construction, and
others. For each of these chemistries, Eastman has developed a
combination of assets and technologies that are operated within three
manufacturing "streams".
·
|
In
the acetyl stream, the Company begins with high sulfur coal which is then
gasified in its coal gasification facility. The resulting
synthesis gas is converted into a number of chemicals including methanol,
methyl acetate, acetic acid, and acetic anhydride. These
chemicals are used in products throughout the Company including acetate
tow, acetate yarn, and cellulose esters. The Company's ability
to use coal is a competitive advantage in both raw materials and
energy. The Company is pursuing opportunities to further
leverage its coal-based process know-how through its industrial
gasification corporate initiative to produce additional cost advantaged
chemicals from petroleum coke and coal instead of natural gas or
petroleum.
|
·
|
In
the polyester stream, the Company begins with purchased paraxylene and
produces purified terephthalic acid (“PTA”) for PET and copolyesters and
dimethyl terephthalate ("DMT") for copolyesters. PTA or DMT is
then reacted with ethylene glycol, which the Company both makes and
purchases, along with other raw materials (some of which the Company makes
and are proprietary) to produce PET and copolyesters. We
believe that this backward integration of polyester manufacturing is a
competitive advantage, giving Eastman a low cost position, as well as
surety of intermediate supply. In addition, Eastman can add
specialty monomers to copolyesters to provide clear, tough, chemically
resistant product characteristics. As a result, the Company's
copolyesters can compete with materials such as polycarbonate and
acrylic.
|
·
|
In
the olefins stream, the Company begins primarily with propane and ethane,
which are then cracked at its facility in Longview, Texas into propylene
and ethylene. “Cracking” is a chemical process in which gases
are broken down into smaller, lighter molecules for use in the
manufacturing process. The Company also purchases propylene for
use at its Longview facility and its facilities outside the
U.S. The propylene is used in oxo derivative products, while
the ethylene is used in oxo derivative products, acetaldehyde and ethylene
glycol production and is also sold. Petrochemical business
cycles are influenced by periods of over- and
under-capacity. Capacity additions to steam cracker units
around the world, combined with demand for light olefins, determine the
operating rate and thus profitability of producing
olefins. Historically, periodic additions of large blocks of
capacity have caused profit margins of light olefins to be very volatile,
resulting in "ethylene" or "olefins"
cycles.
|
The
following chart shows the Company's sites at which its manufacturing streams are
primarily employed.
SITE
|
ACETYL
STREAM
|
POLYESTER
STREAM
|
OLEFINS
STREAM
|
|
|
|
|
Kingsport,
Tennessee
|
X
|
X
|
X
|
Longview,
Texas
|
X
|
|
X
|
Columbia,
South Carolina
|
|
X
|
|
Kuantan,
Malaysia
|
|
X
|
|
Singapore
|
|
|
X
|
Workington,
United Kingdom
|
X
|
|
|
The
following chart shows significant Eastman products, markets, and end uses by
segment and manufacturing stream.
SEGMENT
|
ACETYL
STREAM
|
POLYESTER
STREAM
|
OLEFINS
STREAM
|
KEY
PRODUCTS, MARKETS, AND
END
USES
|
|
|
|
|
|
Coatings,
Adhesives, Specialty Polymers, and Inks (“CASPI”)
|
X
|
|
X
|
Adhesives
ingredients (tape, labels, nonwovens), paints and coatings (architectural,
automotive, industrial, and original equipment manufacturing
("OEM"))
|
Fibers
|
X
|
|
|
Acetate
fibers for filter products and textiles
|
Performance
Chemicals and Intermediates (“PCI”)
|
X
|
X
|
X
|
Intermediate
chemicals for agrochemicals, automotive, beverages, nutrition,
pharmaceuticals, coatings, medical devices, toys, photographic and
imaging, household products, polymers, textiles, and consumer and
industrial products and uses
|
Performance
Polymers
|
X
|
X
|
|
PET
for beverage and food packaging, custom-care and cosmetic packaging,
health care and pharmaceutical uses, household products, and industrial
packaging applications
|
Specialty
Plastics (“SP”)
|
X
|
X
|
X
|
Copolyesters
and cellulosics for appliances, store fixtures and displays, building and
construction, electronic packaging, medical devices and packaging, graphic
arts, general purpose packaging, personal care and cosmetics, food and
beverage packaging, performance films, tape and labels, fibers/nonwovens,
photographic and optical films, and liquid crystal displays
|
Cyclicality
and Seasonality
Certain
segments, particularly the PCI and Performance Polymers segments, are impacted
by the cyclicality of key products and markets, while other segments are more
sensitive to global economic conditions. Supply and demand dynamics
determine profitability at different stages of cycles and global economic
conditions affect the length of each cycle. Despite sensitivity to
global economic conditions, many of the products in the Fibers and CASPI
segments provide a stable foundation of earnings.
The
Company's earnings and cash flows also typically have some seasonal
characteristics. The Company's earnings are typically greater in the
second and third quarters, while cash from operations is usually greatest in the
fourth quarter.
Demand
for CASPI segment products is typically stronger in the second and third
quarters due to the increased use of coatings products in the building and
construction industries, while demand is typically weaker during the winter
months because of seasonal construction downturns. The PCI segment
typically has a weaker fourth quarter, due in part to a seasonal downturn in
demand for products used in certain building and construction and agricultural
markets. The Performance Polymers segment typically has stronger
demand for its PET polymers for beverage container plastics during the second
and early third quarters due to higher consumption of beverages in North
America, while demand typically weakens during the late third and fourth
quarters.
CASPI
SEGMENT
In the
CASPI segment, the Company manufactures liquid vehicles, additives, specialty
polymers, and other raw materials which are integral to the production of paints
and coatings, inks, adhesives, and other formulated products. Growth
in these markets in North America (Canada and the U.S.) and Europe typically
approximates general economic growth, due to the wide variety of end uses for
these applications and dependence on the economic conditions of the markets for
packaged goods, automobiles, durable goods, and housing. Growth in Asia,
Eastern Europe, and Latin America continues to be higher than general economic
growth, driven by regional growth in these emerging economies. The CASPI
segment focuses on producing raw materials rather than finished products and
developing long-term, strategic relationships to achieve preferred supplier
status with its customers. Eastman expects that the CASPI segment
will typically have operating margins in the range of 15 percent to 20
percent. In 2008, the CASPI segment had sales revenue of $1.5
billion, 23 percent of Eastman’s total sales.
The
profitability of the CASPI segment is sensitive to the global economy, market
trends, broader chemical cycles, particularly the olefins cycle, and foreign
currency exchange rates. The CASPI segment's specialty products,
which include coatings additives, coalescents, and selected hydrocarbon resins,
are less sensitive to the olefins cycle due to their functional performance
attributes. The commodity products, which include commodity solvents
and polymers, are more impacted by the olefins cycle. The Company
seeks to leverage its proprietary technologies, competitive cost structure, and
integrated manufacturing facilities to maintain a strong competitive position
throughout such cycles.
Ø
|
Coatings
Additives, Coalescents, and
Solvents
|
The
additives product lines consist of differentiated and proprietary products,
including cellulose-based specialty polymers which enhance the aesthetic appeal
and improve the performance of industrial and automotive original equipment and
refinish coatings and inks. Coalescents include products such as
TexanolTM ester
alcohol which improves film formation and durability in architectural latex
paints, and chlorinated polyolefins which promote the adherence of paints and
coatings to plastic substrates. Solvents, which consist of ester,
ketone, glycol ether, and alcohol solvents, are used in both paints and inks to
maintain the formulation in liquid form for ease of application.
Environmental
regulations that impose limits on the emission of volatile organic compounds
("VOCs") and hazardous air pollutants (“HAPs”) continue to impact coatings
formulations requiring compliant coatings raw materials. The coatings
industry is responding by promoting products and technologies designed to enable
customers and end users to reduce air emissions of VOCs and HAPs in compliance
with state and federal regulations. A significant portion of
Eastman’s coatings additives, coalescents, and solvents are currently used in
compliant coatings. Additional products are currently being developed
to meet the growing demand for low VOC coatings, with two new products,
SolusTM 2100
and AdvantisTM 510W,
introduced in 2008. Coatings additives, coalescents, and solvents
comprised 60 percent of the CASPI segment’s total sales for 2008.
Ø
|
Adhesives
Raw Materials
|
The
adhesives product lines consist of hydrocarbon resins, rosin resins, resin
dispersions, and polymers. These products are sold to adhesive
formulators and tape and label manufacturers for use as raw materials essential
in hot melt and pressure sensitive adhesives and as binders in nonwoven products
such as disposable diapers, feminine products, and pre-saturated
wipes. Eastman is one of the largest manufacturers of hydrogenated
gum rosins used in adhesive and chewing gum applications. Eastman
offers a very broad product portfolio of essential ingredients for the adhesives
industry, and ranks as the second largest global tackifier
supplier. Global demand for many adhesives products is growing faster
than general economic growth, driven by use in consumable markets and
substitution for other fasteners, such as nails and screws, by formulated
adhesives. Adhesives raw materials comprised 40 percent of the CASPI
segment’s total sales for 2008.
·
|
Strategy
and Innovation
|
A key
element of the CASPI segment’s growth strategy is the continued development of
innovative product offerings, building on proprietary technologies in
high-growth markets and regions that meet customers’ evolving needs and improve
the quality and performance of customers’ end products. Management
believes that its ability to leverage the CASPI segment's broad product line and
Eastman's research and development capabilities make the segment uniquely
capable of offering a broad array of solutions for new and emerging
markets.
The CASPI
segment is focused on expanding the coatings additives and specialty solvents
product offerings into adjacent markets and emerging economies. The
Company's global manufacturing presence positions the CASPI segment to take
advantage of areas for high industrial growth, particularly in Asia from its
facility in Singapore and joint venture operations in China.
The CASPI
segment is also focused on expanding the adhesives raw materials product
offerings into high-growth markets and regions by leveraging applications
technology and increasing production capacity. The segment is meeting
growing demand for specialty hydrocarbon resins through continued expansion of
the Company's hydrogenated hydrocarbon resins manufacturing capacity in
Middelburg, the Netherlands, with a 30 percent expansion expected to be
completed in 2009.
The
Company intends to continue to leverage its resources to strengthen the CASPI
segment's innovation pipeline through improved market connect and the expanded
use of proprietary products and technologies. Although CASPI segment
sales and application development are often specialized by end-use markets,
developments in technology can often be successfully shared across multiple
end-uses and markets.
As a
result of the variety of end uses for its products, the customer base for the
CASPI segment is broad and diverse. This segment has approximately 1,000
customers around the world, and 80 percent of its sales revenue in 2008 was
attributable to approximately 75 customers. The CASPI segment focuses
on establishing long-term, customer service-oriented relationships with its
strategic customers in order to become their preferred supplier and to leverage
these relationships to pursue sales opportunities in previously underserved
markets and to expand the scope of its value-added services. Growth
in North American and European markets typically coincides with economic growth
in general, due to the wide variety of end uses for these applications and their
dependence on the economic conditions of the markets for packaged goods,
automobiles, durable goods, and housing.
Competition
within the CASPI segment's markets varies widely depending on the specific
product or product group. The Company’s major competitors in the
CASPI segment's markets include larger companies such as Dow Chemical Company
("Dow"), BASF SE ("BASF"), and Exxon Mobil Corporation, which may have greater
financial and other resources than Eastman. Additionally, within each
CASPI segment product market, the Company competes with other smaller,
regionally focused companies that may have advantages based upon location, local
market knowledge, manufacturing strength in a specific product, or other similar
factors. However, Eastman does not believe that any of its
competitors has a dominant position within the CASPI segment's markets, nor the
breadth of product offerings that Eastman is able to offer its CASPI segment
customers. The Company believes its competitive advantages include
its level of vertical integration, breadth of product, service, and technology
offerings, low-cost manufacturing position, consistent product quality, security
of supply, and process and market knowledge. The CASPI segment
principally competes on
breadth of products and through leveraging its strong customer base and
long-standing customer relationships to promote substantial recurring business
and product development.
FIBERS
SEGMENT
· Overview
In the
Fibers segment, Eastman manufactures and sells EstronTM acetate tow and
EstrobondTM
triacetin plasticizers for use primarily in the manufacture of cigarette
filters; EstronTM natural
and ChromspunTM
solution-dyed acetate yarns for use in apparel, home furnishings and industrial
fabrics; and cellulose acetate flake and acetyl raw materials for other acetate
fiber producers. Eastman is one of the world’s two largest suppliers
of acetate tow and has been a market leader in the manufacture and sale of
acetate tow since it began production in the early 1950s. The Company
is the world’s largest producer of acetate yarn and has been in this business
for over 75 years. The Fibers segment's manufacturing operations are
primarily located at the Kingsport, Tennessee site, and also include a smaller
acetate tow production plant in Workington, England which was expanded in
2008. In 2008, the Fibers segment had sales revenue of $1.0 billion,
15 percent of Eastman's total sales. The segment remains a strong and
relatively stable cash generator for the Company. Eastman expects
that the Fibers segment will typically have operating margins of 20 to 25
percent.
The
Company’s long history and experience in the fibers markets are reflected in the
Fibers segment's operating expertise, both within the Company and in support of
its customers’ processes. The Fibers segment’s expertise in internal
operating processes allows it to achieve a consistently high level of product
quality, a differentiating factor in the industry. The Fibers
segment's knowledge of the industry and of customers' processes allows it to
assist its customers in maximizing their processing efficiencies, promoting
repeat sales, and mutually beneficial, long-term customer
relationships.
The
Company's fully integrated fiber manufacturing processes from coal-based acetyl
raw materials through acetate tow and yarn provide a competitive advantage over
companies whose processes are dependent on petrochemicals. In
addition, management believes the Fibers segment employs unique technology that
allows it to produce a broad range of high-purity wood pulps. Despite
consolidation in the fiber-grade pulp market in recent years, management
believes the Fibers segment has dependable sources of pulp
supply. The Fibers segment management believes that these factors
combine to make it an industry leader in reliability of supply and cost
position. In addition to the cost advantage of being coal-based, the
Fibers segment's competitive strengths include a reputation for high-quality
products, technical expertise, large scale vertically-integrated processes,
reliability of supply, acetate flake supply in excess of internal needs, a
reputation for customer service excellence, and a strong customer base
characterized by long-term customer relationships. The Company
intends to continue to capitalize and build on these strengths to improve the
strategic position of its Fibers segment.
Contributing
to the profitability in the Fibers segment is the relatively limited number of
competitors, the high industry capacity utilization, and strong barriers to
entry by potential competitors; these barriers include but are not limited to
high capital costs for integrated manufacturing facilities.
Eastman
manufactures acetate tow under the EstronTM
trademark according to a wide variety of customer specifications, primarily for
use in the manufacture of cigarette filters. Acetate tow is the
largest sales product of the Fibers segment. Worldwide demand for
acetate tow is expected to continue to increase by one to two percent per year
through 2012, with higher growth rates in Asia and Eastern Europe, further
contributing to the already high capacity utilization rates in the
industry.
The
Company manufactures acetate filament yarn under the EstronTM and
ChromspunTM
trademarks in a wide variety of specifications. EstronTM acetate
yarn is available in bright and dull luster and is suitable for subsequent
dyeing in the fabric form. ChromspunTM acetate
yarn is solution-dyed in the manufacturing process and is available in more than
20 colors. These products are used in fabrics for apparel, home
furnishings, and industrial applications. From a retail customer’s
perspective, garments made of acetate yarn are noted for their rich colors,
silky feel, supple drape, breathability, comfort, and when blended with spandex,
easy care.
|
Ø
|
Acetyl Chemical
Products
|
The
Fibers segment's acetyl chemical products are sold primarily to other acetate
fiber producers and include cellulose diacetate flake, acetylation-grade acetic
acid, and acetic anhydride. Each is used as a raw material for the
production of cellulose acetate fibers. The Fibers segment also
markets acetyl-based triacetin plasticizers under the EstrobondTM trademark, generally
for use by cigarette manufacturers as a bonding agent in cigarette
filters.
·
|
Strategy and
Innovation
|
In the
Fibers segment, Eastman is leveraging its strong customer relationships and
knowledge of the industry to identify growth options. These growth
options are enabled by its excess acetate flake capacity at the Kingsport,
Tennessee site. The capacity expansion of the Company's acetate tow
plant in Workington, England was completed in 2008, expanding Eastman's
world-wide capacity by five percent, serving existing customers in Western
Europe and the growing demand in Eastern Europe. In December 2008,
the Company announced an alliance with SK to form a company to acquire and
operate a cellulose acetate tow manufacturing facility and related business,
with the facility to be constructed by SK in Korea. Eastman will have
majority ownership of and will operate the facility. Construction of
the Korean facility began in first quarter 2009 and is expected to be completed
in second quarter 2010. Annual capacity at the Korea site is expected
to be approximately 27,000 metric tons and Eastman’s total worldwide capacity
for acetate tow will exceed 200,000 metric tons, an increase of 15
percent. The impact of the added Korean facility on global capacity
is estimated to be an increase of approximately two percent.
|
Ø
|
Continue to Capitalize on
Fibers Technology Expertise
|
The
Fibers segment intends to continue to make use of its capabilities in fibers
technology to maintain a strong focus on incremental product and process
improvements, with the goals of meeting customers' evolving needs and improving
the segment's manufacturing process efficiencies.
Ø
|
Maintain
Cost-Effective Operations and Consistent Cash Flows and
Earnings
|
The
Fibers segment intends to continue to operate in a cost effective manner,
capitalizing on its technology, scale and vertical integration, and to make
further productivity and efficiency improvements through continued investments
in research and development. The Company plans to continue to
reinvest in the Fibers business to sustain consistently strong earnings and cash
flows.
Ø
|
Research
and Development
|
The
Company's Fibers segment research and development efforts focus on process and
product improvements, as well as cost reduction, with the objectives of
increasing sales and reducing costs. Recent Fibers segment research
and development efforts have resulted in production capacity
improvements. The Fibers segment also conducts research to assist
acetate tow customers in the effective use of the segment's products and in the
customers’ product development efforts.
· Customers and
Markets
The
customer base in the Fibers segment is relatively concentrated, consisting of
approximately 150 companies in the tobacco, textile, and acetate fibers
industries. Eastman's Fibers segment customers are located in all
regions of the world. The largest 20 customers within the Fibers
segment include multinational as well as regional cigarette producers, fabric
manufacturers, and other acetate fiber producers. These top 20
customers accounted for about 80 percent of the segment’s total sales revenue in
2008. The segment maintains a strong position in acetate tow exports
to China, one of the largest and fastest growing markets in the
world.
· Competition
Eastman
is the second largest acetate tow manufacturer in the
world. Competitors in the fibers market for acetate tow include three
global companies, Celanese Corporation ("Celanese"), Rhodia S.A., and Daicel
Chemical Industries Ltd ("Daicel"); and two regional companies in Asia, SK, and
Mitsubishi Rayon Co., Ltd. ("Mitsubishi Rayon"). In the acetate tow
market, two major competitors, Celanese and Daicel, have joint venture capacity
in China. Modest acetate tow capacity expansions, completed in 2008,
included Eastman's Workington, England expansion and an expansion by an Asian
competitor. However, current global capacity utilization rates are
expected to remain high as the capacity provided by the recently completed
expansions will be required to meet the projected world-wide growth in
demand.
In the
segment's acetate yarn business, major competitors include five companies that
target multi-regional markets, Industrias del Acetato de Celulosa S.A.
("INACSA"), SK, Mitsubishi Rayon, UAB Korelita, and Novaceta
SpA. Eastman is the world leader in acetate yarn and the only
acetate yarn producer in North America. The physical properties of
acetate yarn make it desirable for use in textile products such as suit linings,
women’s apparel, medical tape, drapery, ribbons and other specialty
fabrics. However, over the past 20 years, demand for acetate yarn has
been adversely affected by the substitution of lower cost polyester and rayon
yarns. Accordingly, worldwide demand for acetate yarn is expected to
continue to decrease as mills substitute these cheaper yarns for acetate
yarn. Eastman, however, is uniquely positioned because it is the only
producer of both acetate flake and acetate yarn. In addition, during
2009, reductions in acetate filament yarn industry capacity are projected to
occur, which should improve the demand for Eastman acetate yarn.
As
described above under “Fibers Segment – Overview”, the principal methods of
competition include maintaining the Company’s large-scale vertically integrated
manufacturing process from coal-based acetyl raw materials, reliability of
supply, product quality, and sustaining long-term customer
relationships.
PCI
SEGMENT
The
Company’s PCI segment manufactures diversified products that are sold
externally, as well as used internally by other segments. The PCI
segment's earnings are highly dependent on how the Company chooses to optimize
the acetyl and olefins streams. In 2008, the PCI segment had sales
revenue of $2.2 billion, 32 percent of Eastman’s total sales.
Many of
the segment's products are affected by the olefins cycle. See
“Corporate Overview – Manufacturing Streams” earlier in this “Part 1 – Item 1.
Business.” This cyclicality is caused by periods of supply and demand
imbalance, either when incremental capacity additions are not offset by
corresponding increases in demand, or when demand exceeds existing
supply. Demand, in turn, is based on general economic conditions, raw
material and energy costs, and other factors beyond the Company’s
control. Future PCI segment results will continue to fluctuate from
period to period due to these changing economic conditions. The
Company expects the PCI segment typically to have a range of operating margins
between 5 percent and 10 percent through the olefins cycle.
Eastman
shut down the first of three cracking units as part of the staged phase-out of
its three oldest cracking units in Longview, Texas in fourth quarter
2007. Shutdown timing for the remaining two units will depend on
feedstock and olefin market conditions. In addition, as part of the
sale of the Performance Polymers segment's polyethylene business, the Company
agreed to supply ethylene to the buyer. These sales of ethylene,
previously used internally as a raw material, are now reported as sales in the
PCI segment.
The PCI
segment offers over 135 products that include intermediates based on oxo and
acetyl chemistries, and performance chemicals. The PCI segment's 2008
sales revenue was approximately 65 percent from olefin-based, 15 percent from
acetyl-based, and 20 percent from performance and other,
chemicals. Approximately 75 percent of the PCI segment's sales
revenue is generated in North America. Sales in all regions are
generated through a mix of the Company’s direct sales force and a network of
distributors. The Company's PCI segment is the largest marketer of
acetic anhydride in the United States, an intermediate that is a critical
component of analgesics and other pharmaceutical and agricultural products, and
is the only U.S. producer of acetaldehyde, a key intermediate in the production
of vitamins and other specialty products. Eastman believes that it
manufactures one of the world's broadest ranges of products derived from oxo
aldehydes. The PCI segment’s other intermediate products include
plasticizers and glycols. Many of the intermediates products in the
PCI segment are priced based on supply and demand of substitute and competing
products. In order to maintain a competitive position, the Company
strives to operate with a low cost manufacturing base.
The PCI
segment also manufactures performance chemicals, complex organic molecules such
as diketene derivatives, specialty ketones, and specialty anhydrides for
pharmaceutical, fiber, and food and beverage ingredients, which are typically
used in specialty market applications. These specialty products are
typically priced based on the amount of value added rather than supply and
demand factors.
·
|
Strategy
and Innovation
|
To build
on and maintain its status as a low cost producer, the PCI segment continuously
focuses on cost control, operational efficiency, and capacity utilization to
maximize earnings. The shutdown of the first of the three cracking
units as part of the staged phase-out in Longview, Texas, with the continued
shutdown dependent on feedstock and olefins market conditions, has been part of
the initiative to increase operational efficiency. Through the PCI
segment, the Company maximizes the advantage of its highly integrated and
world-scale manufacturing facilities. For example, the Kingsport,
Tennessee manufacturing facility allows the PCI segment to produce acetic
anhydride and other acetyl derivatives from coal rather than natural gas or
other petroleum feedstocks. At the Longview, Texas manufacturing
facility, Eastman's PCI segment uses its proprietary oxo-technology in the
world’s largest single-site, oxo aldehyde manufacturing facility to produce a
wide range of alcohols, esters, and other derivative products utilizing propane
and local ethane supplies, as well as purchased propylene. These
integrated facilities, combined with large scale production processes and a
continuous focus on additional process improvements, allow the PCI segment to
remain cost competitive with, and for some products cost-advantaged over, its
competitors.
The PCI
segment selectively focuses on continuing to develop and access markets with
high-growth potential for the Company’s chemicals. One such
market is for flexible plastic products used in highly regulated applications
such as child care articles, toys, and medical packaging and
devices. EastmanTM 168
Plasticizer provides an effective alternative to phthalate plasticizers
traditionally used in these applications. Eastman 168 Plasticizer
allows manufacturers to meet the challenging requirements of changing government
regulations and consumer preferences without sacrificing production efficiency
or product performance.
The
Company engages in customer-focused research and development initiatives in
order to develop new PCI products and find additional applications for existing
products. The Company also evaluates licensing opportunities for
acetic acid and oxo derivatives on a selective basis, and has licensed
technology to produce acetyl products to Saudi International Petrochemical
Company in Saudi Arabia and to Chang Chung Petrochemical Company in Taiwan in
2005 and 2007, respectively.
The PCI
segment’s products are used in a variety of markets and end uses, including
agrochemical, automotive, beverages, nutrition, pharmaceuticals, coatings,
flooring, medical devices, toys, photographic and imaging, household products,
polymers, textiles, and industrials. The Company believes its
position in many of these markets was positively affected by the olefins upcycle
through third quarter 2008. However, the strength of product-specific
olefin derivative markets will vary widely based upon prevailing supply and
demand conditions. An important negative trend within the PCI
segment's markets is increased regionalization of key markets, especially for
acetyl and olefins products, due to increased transportation
costs. Additionally, the PCI segment is engaged in continuous efforts
to optimize product and customer mix. Approximately 80 percent of the
PCI segment’s sales revenue in 2008 was from 94 out of approximately 1,100
customers worldwide.
Historically,
there have been significant barriers to entry for potential competitors in the
PCI segment's major product lines, including acetic acid and acetic anhydride,
primarily due to the fact that the relevant technology has been held by a small
number of companies. As this technology has become more readily
available, competition from multinational chemical manufacturers has
intensified. Eastman competes with these and other producers
primarily based on price, as products are interchangeable, but also on
technology, marketing, and services. Eastman’s major competitors in
this segment include large multinational companies such as Dow, Celanese, BASF,
and Exxon Mobil Corporation. While some competitors in PCI's product
markets may have greater financial resources than Eastman, the Company believes
it maintains a strong competitive position due to the combination of its scale
of operations, breadth of product line, level of integration, and technology
leadership.
PERFORMANCE
POLYMERS SEGMENT
In 2008,
the Performance Polymers segment had sales revenue of $1.1 billion, 16 percent
of the Company’s total sales. The segment is comprised primarily of
the Company's PET product lines, and also includes various polymer
intermediates.
In 2008,
the Company completed strategic actions to improve the operating results of the
Performance Polymers segment through innovation and
restructuring. The Company shut down 300,000 metric tons of higher
cost assets in 2008 after having shut down 100,000 metric tons of higher cost
PET assets during 2007, some of which were converted to SP segment
production. In fourth quarter 2008, the Company also successfully
completed a debottleneck of its IntegRexTM technology facility in
South Carolina, bringing its IntegRexTM
capacity to 525,000 metric tons. As described below under “Strategy
and Innovation”, IntegRexTM
technology provides a sustainable advantaged cost position in the PET
industry. As a result of these completed actions, the Performance
Polymers segment is expected to have total PET capacity of approximately 800,000
metric tons in 2009, of which over 65 percent is based on IntegRexTM
technology and all of which is based in North America.
In 2007
and early 2008, the Company also completed strategic actions for underperforming
PET assets outside the United States, with the divestiture of its PET
manufacturing sites in Spain, Mexico, Argentina and the United Kingdom and its
divestiture of the PET polymers and PTA facilities in the Netherlands and
related businesses. After divesting these PET manufacturing
facilities, Eastman has no PET manufacturing capacity outside the United
States.
Pricing
and profitability are strongly affected by raw material costs and capacity
utilization. PET global supply has exceeded demand since 1997 as a
result of capacity being introduced into the market at a rate exceeding that of
demand growth. While the global demand for PET continues to increase
steadily, excess capacity, particularly in Asia, remains. Excess
Asian capacity and related exports are expected to continue to have an adverse
impact on PET pricing and profitability worldwide and in the North American Free
Trade Agreement ("NAFTA") region.
PET is
used in beverage and food packaging and other applications such as personal care
and cosmetics packaging, health care and pharmaceutical uses, household
products, carpet fibers, and industrial packaging applications. PET
offers fast and easy processing, superb clarity, excellent colorability and
color consistency, durability and strength, impact and chemical resistance, and
high heat stability. Packages made from PET are characterized by
their light weight, high strength, durability, clarity, low cost, safety, and
recyclability.
·
|
Strategy
and Innovation
|
The
Performance Polymers segment focuses on improving its performance by directing
its research and development efforts to lowering its manufacturing costs through
technology innovations and process improvement. These efforts
resulted in the breakthrough technology of IntegRexTM, a
lower cost PET manufacturing process that provides manufacturing and capital
cost savings of approximately 50 percent over conventional PET
technologies. These efforts have allowed the Company to shut down
400,000 metric tons of higher cost manufacturing assets from 2007 through 2008,
some of which was converted to SP segment production. As a result of
the changes in its asset base, the Company has reduced its annual costs at the
South Carolina site by more than $30 million.
As a
strategic initiative to create and capture additional value from the IntegRex™
technology, the Company is actively pursuing a licensing
program. IntegRex™ technology provides significant capital and
operating cost benefits relative to conventional PTA and PET technologies.
The Company is offering licensees its Eastman-owned patents and expertise in the
design, construction, and operation of a full range of production facilities,
including IntegRex™ PTA, IntegRex™ PET, or integrated configurations of the two
processes. Also, as the Company improves the IntegRex™ technology for its
own use, it expects it may offer these enhancements to its
licensees.
Approximately
15 customers within the Performance Polymers segment accounted for more than 80
percent of the segment’s total sales revenue from continuing operations in
2008. With the completion of certain strategic actions described
above, the segment primarily serves PET customers in the NAFTA
region. These customers are primarily PET container producers for
large volume beverage markets such as carbonated soft drinks, water, and juice,
with strong participation in custom areas such as food, liquor, sport and fruit
beverages, health and beauty aids, and household products. In 2008,
the worldwide market for PET, including containers, film and sheet, was
approximately 15 million metric tons including 4 million metric tons in the
NAFTA region. Despite the move by customers to light weight PET
packaging, demand for PET is expected to continue to grow. PET
consumption has grown steadily over the past several years, driven by the
preference for recyclable, single-serve containers and as a substitute for glass
and aluminum. Although near-term growth in demand is uncertain, the
Company projects the NAFTA region for PET to grow by approximately three to four
percent annually on a long-term basis.
The
Company's PET product lines compete to a large degree on price in a capital
intensive industry. Profitability is dependent on attaining low cost
positions through technology innovation, manufacturing scale, capacity
utilization, access to reliable and competitive utilities, energy and raw
materials, and efficient manufacturing and distribution processes.
The
Company's PET production is vertically integrated back to the raw material
paraxylene. This gives Eastman a cost advantage and reliable
intermediate supply.
As a
result of recent strategic actions, the Performance Polymers segment competes
primarily in the NAFTA region. Major competitors in the NAFTA region
for the Performance Polymers segment include DAK Americas LLC, Indorama Group,
Invista, Mossi & Ghisolfi Group, Nan Ya Plastics Corporation, and Wellman
Inc., as well as Asian PET exporters.
SP
SEGMENT
In the SP
segment, the Company produces and markets specialized copolyesters and
cellulosic plastics that possess differentiated performance properties for
value-added end uses. In 2008, the SP segment had sales revenue of
$923 million, approximately 14 percent of Eastman’s total sales.
Eastman
has the ability within its SP segment to modify its polymers and plastics to
control and customize their final properties, creating numerous opportunities
for new application development, including the expertise to develop new
materials and new applications starting from the molecular level in the research
laboratory to the final designed application. The addition of the
Tritan™ family of products significantly enhances the segment’s ability to
customize copolyesters and cellulosic plastics for new markets and
applications. In addition, the SP segment has a long history of
manufacturing excellence with strong process improvement programs providing
continuing cost reduction.
The
Company typically expects the SP segment to have gross margins of approximately
25 percent with sales revenue growth of five to seven percent
annually. In 2008, the operating margin for the SP segment
was four percent as unprecedented raw material volatility, combined with
substantial demand decline in the second half of the year, resulted in lower
margins. Over time, as demand growth returns to historical levels,
management expects SP segment operating margins of 10 to 15 percent through a
combination of improved capacity utilization and growth in higher margin product
lines such as medical or liquid crystal displays (“LCD”), as well as growth in
the newly launched TritanTM
copolyester.
The SP
segment consists of two primary product lines, specialty copolyesters and
cellulosics. Eastman estimates that the market growth for
copolyesters will continue to be higher than general domestic economic growth
due to ongoing specialty copolyester material innovations and displacement
opportunities. Eastman believes that cellulosic materials will grow
at the rate of the domestic economy in general, with the strong demand for
cellulose esters in liquid crystal displays more than offsetting the decline in
legacy photographic markets. For both specialty copolyesters and
cellulosic plastics, the SP segment benefits from integration into the Company’s
polyester and acetyls streams. The SP segment's specialty
copolyesters are currently produced in Kingsport, Tennessee; Columbia, South
Carolina; and Kuantan, Malaysia. The cellulosic products are produced
in Kingsport, Tennessee.
Eastman’s
specialty copolyesters accounted for approximately 80 percent of the SP
segment’s 2008 sales revenue. Eastman’s specialty copolyesters, which
generally are based on Eastman's production of cyclohexane dimethanol ("CHDM")
modified polymers, typically fill a market position between polycarbonates and
acrylics. Polycarbonates traditionally have offered some superior
performance characteristics, while acrylics have been less
expensive. Specialty copolyesters combine superior performance with
competitive pricing and are being substituted for both polycarbonates and
acrylics in some applications.
The SP
segment continues to develop new applications for its core copolyesters to meet
growing demand for greener copolyester products. Eastman’s newest
copolyester, Tritan™, enables the Company to move to higher value applications
by adding high temperature resistance to the other properties of copolyesters,
including toughness, chemical resistance, and excellent
processability. These traits allow Eastman to position TritanTM as an
equal or superior alternative to polycarbonate, in part because TritanTM is a
very desirable Bisphenol A (“BPA”)-free alternative for a variety of food
contact or medical applications such as consumer housewares or baby
bottles. BPA is a raw material used in the production of certain
polycarbonate plastics. Some customers prefer plastics that do not
contain BPA.
Cellulosics
and cellulosic plastics accounted for approximately 20 percent of the SP
segment’s 2008 sales revenue. Sold under the TeniteTM brand,
these products are known for their excellent balance of properties, including
toughness, hardness, strength, surface gloss, clarity, chemical resistance, and
warmth to the touch. This product line includes TeniteTM
acetate, TeniteTM
butyrate, and TeniteTM
propionate flake and polymers, as well as a family of colored products for each
line.
In 2006,
Eastman commercialized a new family of cellulosic polymers, VisualizeTM
cellulosics, for the LCD market. Through the development of new
formulations and applications, Eastman’s LCD product line has continued to
experience double digit revenue and operating earnings growth through
2008.
·
|
Strategy
and Innovation
|
The SP
segment is focused on providing consistent profit margins and generating cash
which the Company can reinvest in the SP segment’s business for continued
growth. The Company continues to leverage the advantages of being an
integrated polyester manufacturer and will continue to pursue opportunities
within the integrated polyester stream. The Company is utilizing
rationalized PET assets to reduce SP copolyester conversion costs and expand
production with larger scale assets. In 2008, the Company completed
the conversion of certain PET manufacturing assets in Columbia, South
Carolina.
Through
Eastman’s advantaged asset position and innovation efforts around applications
development, the segment has increased specialty copolyesters sales volume to
twice gross domestic product (“GDP”) growth over the past 5
years. New applications include decorative films for hard surfaces
such as wood molding and trim, shrink films for food packaging, and innovative
clear handleware containers for beverages. Additionally, increased
environmental concerns related to BPA have created new opportunities for various
applications for legacy copolyesters.
The LCD
market is a developing growth market for the SP segment. The Company
continues to invest in the development of copolyester and cellulosic-based
product solutions for this high-growth market, with the objective of being a
strategic raw material supplier in the LCD market.
The
addition of Tritan™ copolyester to Eastman’s SP product offering has created new
opportunities for applications previously occupied by materials such as
polycarbonate or polysulfone. For example, in a number of food
contact applications, OEMs and brand owners have already required the use
of TritanTM, as it
offers a BPA-free alternative that is clear, tough, and offers dishwasher
durability. Examples of such applications are baby bottles, sports
bottles and food containers. The Company’s first full scale
manufacturing facility dedicated to the production of Tritan™ is scheduled to be
operational in 2010.
The
customer base in the SP segment is broad and diverse, consisting of
approximately 620 companies worldwide in a variety of
industries. Approximately 80 percent of the SP segment’s 2008 sales
revenue was attributable to approximately 65 customers. The SP
segment seeks to develop mutually beneficial relationships with its customers
throughout various stages of product life cycles. By doing so, it is
better able to understand its customers’ needs as those customers develop new
products, and more effectively bring new solutions to market.
Specialty
copolyesters are sold into a wide range of markets and applications including
specialty packaging (medical and electronic component trays, shrink label films,
general purpose packaging, and multilayer films); in-store fixtures and displays
(point of purchase displays including indoor sign and store fixtures); consumer
and durable goods (appliances, housewares, toys, and sporting goods); medical
goods (disposable medical devices, health care equipment and instruments, and
pharmaceutical packaging); personal care and consumer packaging (food and
beverage packaging and consumer packaging); photographic film, optical film,
fibers/nonwovens, tapes/labels, and LCD. The new Tritan™ family of
products is being sold into a range of markets including but not limited to,
consumer housewares, infant care, small appliances and other consumer durables
segments. Additional applications and markets are currently under
development.
The
segment principally competes by leveraging price and product performance in
specific applications. The customers’ product selection is typically
determined on an application-by-application basis and often by OEMs rather than
by resin converters. New market opportunities are coming from
substitution of plastic for other materials, and displacement of other plastic
resins in existing applications. While historically the SP segment’s
ability to compete was very closely tied to supply-demand balances of competing
plastics, the addition of Tritan™, a material based on Eastman proprietary
technology, opens new market opportunities in which Eastman expects to leverage
the unique combination of properties of the new family of
products. In certain cases, we believe that Tritan™ offers a unique
solution by bringing properties similar to polycarbonate without containing any
BPA.
The SP
segment believes that it maintains competitive advantages throughout the product
life cycle. At product introduction, the segment’s breadth of
offerings combined with its research and development capabilities and customer
service orientation enable it quickly to bring a wide variety of products to
market. As products enter the growth phase of the life cycle, the SP
segment is able to continue to leverage its product breadth by generating sales
revenue from multiple sources, as well as retaining customers from long-term
relationships. As products become more price sensitive, the SP
segment can take advantage of Eastman's scale of operations, including
conversion of rationalized PET assets, and vertical integration to maintain a
superior product conversion cost position.
The
industry has recently been confronted by unprecedented raw material cost
volatility. While raw material cost volatility is expected to
continue into the future, the segment benefits from diversification of its raw
materials base by using both coal for cellulosics, as well as
petrochemical-based feedstocks for copolyesters.
Eastman’s
primary competitors for copolyester products include SK Chemical Industries,
Bayer AG, Saudi Basic Industries Corporation ("SABIC"), Dow and Evonvik
Industries. Competition for cellulosic plastics is primarily from
other producers of cellulose ester polymers such as Acetati SpA and
Daicel.
CORPORATE
INITIATIVES - INDUSTRIAL GASIFICATION
In
addition to its business segments, the Company manages certain costs and
initiatives at the corporate level, including certain research and development
costs not allocated to any one operating segment. The most significant
corporate initiative is industrial gasification, which consists of producing
cost-advantaged chemicals from petroleum coke or coal instead of natural gas or
petroleum. The Company was the first to operate a commercial coal
gasification facility in the United States in 1983 at its headquarters in
Kingsport, Tennessee and has achieved industry-leading reliability and
production capacity performance since that time. The Company has developed
significant operating experience and other know-how as well as proprietary
intellectual property related to industrial gasification for the last quarter
century. The gasification initiatives are intended to leverage the
Company's operational expertise and exploit the continued high price spread
between coal and petroleum coke compared to oil and natural gas, and the
chemicals derived from them. The initiatives are intended to drive
long-term growth in overall profitability and sales revenue for the
Company.
As part
of these initiatives, the Company entered into an agreement in 2007 with a
co-investor to jointly develop an industrial gasification facility in Beaumont,
Texas through TX Energy. In June 2008, the Company acquired the
co-investor’s ownership interest in TX Energy for approximately $35 million,
which is primarily allocated to properties and equipment. With this
acquisition, the Company became the sole owner and developer of the Beaumont,
Texas facility. Front-end engineering and design is planned to be
completed by mid-2009. The Company is pursuing non-recourse project
financing utilizing the Department of Energy’s Federal Loan Guarantee
Program. In 2008, the Company completed the purchase of an idled
methanol and ammonia plant in Beaumont, Texas from Terra Industries Inc. and
intends to restart these facilities using raw materials supplied via pipeline
from the nearby gasification facility, once the gasification facility is
complete.
The
Company also continues development of additional industrial gasification
projects and to make progress on research and development for converting
gasification-derived synthesis gas and methanol to other chemicals that are of
strategic interest.
In 2008,
operating losses for corporate initiatives were $52 million compared with $47
million in 2007.
EASTMAN
CHEMICAL COMPANY GENERAL INFORMATION
Sales, Marketing, and
Distribution
The
Company markets and sells products primarily through a global marketing and
sales organization which has a presence in the United States and in over 35
other countries around the world. Eastman has a marketing and sales
strategy targeting industries and applications where Eastman products and
services provide differentiated value. Market, customer, and
technical expertise are critical capabilities. Through a highly
skilled and specialized sales force that is capable of providing customized
business solutions for each of its five operating segments, Eastman is able to
establish long-term customer relationships and strives to become the preferred
supplier of specialty chemicals and plastics worldwide.
The
Company's products are also marketed through indirect channels, which include
distributors. Non-U.S. sales tend to be made more frequently through
distributors than U.S. sales. The combination of direct and indirect
sales channels, including sales online through its website, allows Eastman to
reliably serve customers throughout the world.
The
Company’s products are shipped to customers directly from Eastman's
manufacturing plants, as well as from distribution centers
worldwide.
Sources
and Availability of Raw Material and Energy
Eastman
purchases a substantial portion, estimated to be approximately 75 percent, of
its key raw materials and energy through long-term contracts, generally of three
to five years in initial duration with renewal or cancellation options for each
party. Most of these agreements do not require the Company to
purchase materials or energy if its operations are reduced or
idle. The cost of raw materials and energy is generally based on
market price at the time of purchase, and Eastman uses derivative financial
instruments, valued at quoted market prices, to mitigate the impact of
short-term market price fluctuations. Key raw materials include
propane, ethane, paraxylene, ethylene glycol, PTA, coal, cellulose, methanol,
and a wide variety of precursors for specialty organic
chemicals. Key purchased energy sources include natural gas,
steam, coal, and electricity. The Company has multiple suppliers for
most key raw materials and energy and uses quality management principles, such
as the establishment of long-term relationships with suppliers and on-going
performance assessment and benchmarking, as part of its supplier selection
process. When appropriate, the Company purchases raw materials from a
single source supplier to maximize quality and cost improvements, and has
developed contingency plans designed to minimize the impact of any supply
disruptions from single source suppliers.
While
temporary shortages of raw materials and energy may occasionally occur, these
items are generally sufficiently available to cover current and projected
requirements. However, their continuous availability and cost are
subject to unscheduled plant interruptions occurring during periods of high
demand, or due to domestic or world market and political conditions, changes in
government regulation, natural disasters, war or other outbreak of hostilities
or terrorism or other political factors, or breakdown or degradation of
transportation infrastructure. Eastman’s operations or products have
been in the past and may be in the future, at times, adversely affected by these
factors. The Company’s raw material and energy costs as a percent of
total cost of operations were estimated to be approximately 70 percent in 2008,
2007 and 2006.
Capital
Expenditures
Capital
expenditures were $650 million, $518 million, and $389 million for 2008, 2007,
and 2006, respectively. The increased capital spending in 2008 was
primarily due to investment in strategic initiatives, particularly in the
Fibers, Performance Polymers, and SP segments and spending related to the
Company’s corporate initiatives, primarily the industrial gasification
project.
Employees
Eastman
employs approximately 10,500 men and women worldwide. Approximately 4
percent of the total worldwide labor force is represented by unions, mostly
outside the United States.
Customers
Eastman
has an extensive customer base and, while it is not dependent on any one
customer, loss of certain top customers could adversely affect the Company until
such business is replaced. The top 100 customers accounted for
approximately 70 percent of the Company's 2008 sales revenue.
Intellectual
Property and Trademarks
While the
Company’s intellectual property portfolio is an important Company asset which it
expands and vigorously protects globally through a combination of patents that
expire at various times, trademarks, copyrights, and trade secrets, neither its
business as a whole nor any particular segment is materially dependent upon any
one particular patent, trademark, copyright, or trade secret. As a
producer of a broad and diverse portfolio of both specialty and commodity
chemicals, plastics, and fibers, Eastman owns over 750 active United States
patents and more than 1,600 active foreign patents, expiring at various times
over several years, and also owns over 2,500 active worldwide trademark
applications and registrations. The Company’s intellectual property
relates to a wide variety of products and processes. Eastman
continues actively to protect its intellectual property. As the laws of many
countries do not protect intellectual property to the same extent as the laws of
the United States, Eastman cannot ensure that it will be able to adequately
protect its intellectual property assets outside the United States.
The
Company pursues opportunities to license proprietary technology to third parties
in areas where it has determined competitive impact to core businesses will be
minimal. These
arrangements typically are structured to require payments at significant project
milestones such as signing, completion of design, and start-up. To date,
efforts have been focused on acetyls technology in the PCI segment. The
Company also is actively pursuing licensing opportunities for its IntegRexTM
technology in the Performance Polymers segment.
Research
and Development
For 2008,
2007, and 2006, Eastman’s research and development expenses totaled $158
million, $156 million, and $155 million, respectively.
Environmental
Eastman
is subject to laws, regulations, and legal requirements relating to the use,
storage, handling, generation, transportation, emission, discharge, disposal,
and remediation of, and exposure to, hazardous and non-hazardous substances and
wastes in all of the countries in which it does business. These
health, safety, and environmental considerations are a priority in the Company’s
planning for all existing and new products and processes. The Health,
Safety, Environmental and Security Committee of Eastman’s Board of Directors
reviews the Company's policies and practices concerning health, safety, and the
environment and its processes for complying with related laws and regulations,
and monitors related matters.
The
Company’s policy is to operate its plants and facilities in a manner that
protects the environment and the health and safety of its employees and the
public. The Company intends to continue to make expenditures for
environmental protection and improvements in a timely manner consistent with its
policies and with the technology available. In some cases, applicable
environmental regulations such as those adopted under the U.S. Clean Air Act and
Resource Conservation and Recovery Act, and related actions of regulatory
agencies, determine the timing and amount of environmental costs incurred by the
Company.
The
Company accrues environmental costs when it is probable that the Company has
incurred a liability and the amount can be reasonably estimated. In
some instances, the amount cannot be reasonably estimated due to insufficient
information, particularly as to the nature and timing of future
expenditures. In these cases, the liability is monitored until such
time that sufficient data exists. With respect to a contaminated
site, the amount accrued reflects the Company’s assumptions about remedial
requirements at the site, the nature of the remedy, the outcome of discussions
with regulatory agencies and other potentially responsible parties at
multi-party sites, and the number and financial viability of other potentially
responsible parties. Changes in the estimates on which the accruals
are based, unanticipated government enforcement action, or changes in health,
safety, environmental, and chemical control regulations, and testing
requirements could result in higher or lower costs.
The
Company's cash expenditures related to environmental protection and improvement
were estimated to be approximately $218 million, $209 million, and $214 million
in 2008, 2007, and 2006, respectively. These amounts were primarily
for operating costs associated with environmental protection equipment and
facilities, but also included expenditures for construction and
development. The Company does not expect future environmental capital
expenditures arising from requirements of recently promulgated environmental
laws and regulations to materially increase the Company's planned level of
annual capital expenditures for environmental control facilities.
Other
matters concerning health, safety, and the environment are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II Item 7 and in Notes 1, "Significant Accounting Policies",
and 13, "Environmental Matters", to the Company’s consolidated financial
statements in Part II, Item 8 of this 2008 Annual Report on Form
10-K.
On
January 1, 2009 and 2008, Eastman’s backlog of firm sales orders represented
less than 10 percent of the Company’s total consolidated revenue for the
previous year. These orders are primarily short-term and all orders
are expected to be filled in the following year. The Company manages
its inventory levels to control the backlog of products depending on customers'
needs. In areas where the Company is the single source of supply, or
competitive forces or customers' needs dictate, the Company may carry additional
inventory to meet customer requirements.
Financial
Information About Geographic Areas
For sales
revenue and long-lived assets by geographic areas, see Note 23, "Segment
Information", to the Company’s consolidated financial statements in Part II,
Item 8 of this 2008 Annual Report on Form 10-K.
Available
Information – SEC Filings and Corporate Governance Materials
The
Company makes available free of charge, through the "Investors – SEC Filings"
section of its Internet website (www.eastman.com), its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable
after electronically filing such material with, or furnishing it to, the
Securities and Exchange Commission (the "SEC"). Once filed with the
SEC, such documents may be read and/or copied at the SEC’s Public Reference Room
at 100 F Street N.E., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers, including Eastman Chemical Company, that electronically file
with the SEC at www.sec.gov.
The
Company also makes available free of charge, through the "Investors – Corporate
Governance" section of its internet website (www.eastman.com), the Corporate
Governance Guidelines of its Board of Directors, the charters of each of the
committees of the Board, and codes of ethics and business conduct for directors,
officers and employees. Such materials are also available in print
upon the written request of any stockholder to Eastman Chemical Company, P.O.
Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor
Relations.
Stockholder
Information
Corporate
Offices Address: See Cover Page to this Annual Report on Form 10-K
Telephone:
877-EMN-INFO (877-366-4636)
Corporate
Website: www.eastman.com
Annual
Meeting:
Toy F.
Reid Employee Center
Kingsport,
Tennessee
Thursday,
May 7, 2009
11:30
a.m. (ET)
Stock Exchange
Listing:
Eastman
Chemical Company common stock is listed and traded on the New York Stock
Exchange under the ticker symbol "EMN." Most newspaper tables list
the Company's stock as "EmanChem."
Stock Transfer Agent and
Registrar:
Inquiries
and changes to stockholder accounts should be directed to our transfer
agent:
American
Stock Transfer & Trust Company
59 Maiden
Lane
New York,
NY 10038
In the
United States: 800-937-5449
Outside
the United States: (1) 212-936-5100 or (1) 718-921-8200
Website:
www.amstock.com
New
York Stock Exchange and Securities and Exchange Commission
Certifications
In 2008,
the Company submitted to the New York Stock Exchange (the "NYSE") the
certification of the Chief Executive Officer that he was not aware of any
violation by Eastman Chemical Company of the NYSE's corporate governance listing
standards as required by Section 303A.12(a) of the New York Stock Exchange
Listed Company Manual. In addition, the Company has filed with the
SEC, as exhibits to this Form 10-K for the year ended December 31, 2008, the
Chief Executive Officer's and the Chief Financial Officer's certifications
regarding the quality of the Company's public disclosure, disclosure controls
and procedures, and internal controls over financial reporting as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC
rules.
ITEM
1A. RISK FACTORS
For
identification and discussion of the most significant risks applicable to the
Company and its business, see Part II – Item 7 – "Management's Discussion and
Analysis of Financial Condition and Results of Operations – Forward-Looking
Statements and Risk Factors" of this 2008 Annual Report on Form
10-K.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
EXECUTIVE
OFFICERS OF THE COMPANY
Certain
information about the Company's executive officers is provided
below:
J. Brian
Ferguson, age 54, is Chairman of the Board and Chief Executive
Officer. Mr. Ferguson joined the Company in 1977. He was
named Vice President, Industry and Federal Affairs in 1994, became Managing
Director, Greater China in 1996, was named President, Eastman Chemical Asia
Pacific in 1998, became President, Polymers Group in 1999, became President,
Chemicals Group in 2001, and was elected to his current position in
2002. Mr. Ferguson will become Executive Chairman of the Board
effective May 7, 2009 when James P. Rogers succeeds him as Chief Executive
Officer.
James P.
Rogers, age 57, is President of Eastman Chemical Company and Chemicals &
Fibers Business Group Head and is a member of the Board of
Directors. Mr. Rogers was appointed Executive Vice President of the
Company and President of Eastman Division effective November
2003. Mr. Rogers joined the Company in 1999 as Senior Vice President
and Chief Financial Officer and in 2002, was also appointed Chief Operations
Officer of Eastman Division. He was appointed to his current position
in 2006. Mr. Rogers served previously as Executive Vice President and
Chief Financial Officer of GAF Materials Corporation ("GAF"). He also
served as Executive Vice President, Finance, of International Specialty
Products, Inc., which was spun off from GAF in 1997. Mr. Rogers will
become President and Chief Executive Officer of the Company effective
immediately following the Annual Meeting of Stockholders on May 7,
2009.
Mark J.
Costa, age 42, is Executive Vice President, Polymers Business Group and Chief
Marketing Officer. Mr. Costa joined the Company in June 2006 as
Senior Vice President, Corporate Strategy & Marketing and was appointed to
his current position in August 2008. Prior to joining Eastman, Mr.
Costa was a senior partner within Monitor Group's integrated North American and
global client service networks. He joined Monitor in 1988 and his
experience included corporate and business unit strategies, asset portfolio
strategies, innovation and marketing, and channel strategies across a wide range
of industries, including specialty and commodity chemicals, electricity, natural
gas and truck/auto manufacturing.
Theresa
K. Lee, age 56, is Senior Vice President, Chief Legal Officer and Corporate
Secretary. Ms. Lee joined Eastman as a staff attorney in 1987, served
as Assistant General Counsel for the health, safety, and environmental legal
staff from 1993 to 1995, and served as Assistant General Counsel for the
corporate legal staff from 1995 until her appointment as Vice President,
Associate General Counsel and Secretary in 1997. She became Vice
President, General Counsel, and Corporate Secretary of Eastman in 2000 and was
appointed to her current position in 2002.
Ronald C.
Lindsay, age 50, is Senior Vice President, Corporate Strategy and Regional
Leadership. He joined Eastman in 1980 and held a number of positions
in manufacturing and business organizations. In 2003, Mr. Lindsay was
appointed Vice President and General Manager of the Intermediates Business
Organization, in 2005 became Vice President, Performance Chemicals Business, and
in 2006 was appointed Senior Vice President and Chief Technology
Officer. He was appointed to his current position in August
2008.
Norris P.
Sneed, age 53, is Senior Vice President and Chief Administrative
Officer. Mr. Sneed joined the Company in 1979 as a chemical engineer
at Eastman’s South Carolina Operations. In 1989, he was assigned to
Eastman’s Arkansas Operations where he was superintendent for different
manufacturing and new business development departments. In 1997, he
served as assistant to the Chief Executive Officer. He was named
managing director for Eastman’s Argentina operations in 1999, Vice President of
Organization Effectiveness in 2001, and was appointed Senior Vice President,
Human Resources, Communications and Public Affairs in June
2003. Mr. Sneed was appointed to his current position in
September 2008.
Curtis E.
Espeland, age 44, is Senior Vice President and Chief Financial
Officer. Mr. Espeland joined Eastman in 1996, and has served in
various financial management positions of increasing responsibility, including
Vice President, Finance, Polymers Business Group; Vice President, Finance,
Eastman Division; Vice President and Controller: Director of Corporate Planning
and Forecasting; Director of Finance, Asia Pacific; and Director of Internal
Auditing. He served
as the Company's Chief Accounting Officer from December 2002 to
2008. Prior to joining Eastman, Mr. Espeland was an audit and
business advisory manager with Arthur Andersen LLP. Mr. Espeland was
appointed to his current position in September 2008.
Greg W.
Nelson, age 46, is Senior Vice President and Chief Technology
Officer. Dr. Nelson joined Eastman in 1988 in the Research and
Development organization, and served in various positions in technology,
including Technology Manager for the Flexible Plastics business, Vice President,
Polymers Technology, and Vice President Corporate Technology from 2007 until
appointed to his current position in August 2008.
Scott V.
King, age 40, is Vice President, Controller and Chief Accounting
Officer. Since joining Eastman in 1999 as Manager, Corporate
Consolidations and External Reporting, he has held various positions of
increasing responsibility in the financial organization, and was appointed Vice
President and Controller in August 2007. Prior to joining Eastman,
Mr. King was an audit and business advisory manager with PricewaterhouseCoopers
LLP. Mr. King was appointed to his current position in September
2008.
PROPERTIES
At
December 31, 2008, Eastman operated eleven manufacturing sites in seven
countries. Utilization of these facilities may vary with product mix and
economic, seasonal, and other business conditions; however, none of the
principal plants are substantially idle. The Company's plants, including
approved expansions, generally have sufficient capacity for existing needs and
expected near-term growth. These plants are generally well maintained, in
good operating condition, and suitable and adequate for their use. Unless
otherwise indicated, all of the properties are owned. The locations and
general character of the major manufacturing facilities are:
|
Segment using manufacturing
facility
|
Location
|
CASPI
|
PCI
|
SP
|
Performance
Polymers
|
Fibers
|
|
|
|
|
|
|
USA
|
|
|
|
|
|
Jefferson,
Pennsylvania
|
x
|
|
|
|
|
Columbia,
South Carolina
|
|
|
x
|
x
|
|
Kingsport,
Tennessee
|
x
|
x
|
x
|
x
|
x
|
Longview,
Texas
|
x
|
x
|
x
|
x
|
|
Franklin,
Virginia(1)
|
x
|
|
|
|
|
Europe
|
|
|
|
|
|
Workington,
England
|
|
|
|
|
x
|
Middelburg,
the Netherlands
|
x
|
|
|
|
|
Asia
Pacific
|
|
|
|
|
|
Kuantan,
Malaysia (1)
|
|
|
x
|
|
|
Jurong
Island, Singapore (1)
|
x
|
x
|
|
|
|
Zibo
City, China(2)
|
x
|
x
|
|
|
|
Latin
America
|
|
|
|
|
|
Uruapan,
Mexico
|
x
|
|
|
|
|
|
(1)
|
Indicates
a location that Eastman leases from a third
party.
|
|
(2)
|
Eastman
holds a 51 percent share in the joint venture Qilu Eastman Specialty
Chemical Ltd.
|
In 2008,
the Company completed the purchase of an idled methanol and ammonia plant in
Beaumont, Texas from Terra Industries Inc. and intends to restart these
facilities using raw materials supplied via pipeline from its nearby
gasification facility, once the gasification facility is complete.
In
addition, Eastman has a 50 percent interest in Primester, a joint venture that
manufactures cellulose acetate at Eastman's Kingsport, Tennessee plant.
The production of cellulose acetate is an intermediate step in the
manufacture of acetate tow and other cellulose acetate based products. The
Company also has a 50 percent interest in a manufacturing facility in Nanjing,
China. The Nanjing facility produces EastotacTM
hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and
sealants. EastotacTM
hydrocarbon resins are also used to produce hot melt adhesives for packaging
applications in addition to glue sticks, tapes, labels, and other adhesive
applications.
Eastman
has distribution facilities at all of its plant sites. In addition,
the Company owns or leases over 100 stand-alone distribution facilities in the
United States and 17 other countries. Corporate headquarters are in
Kingsport, Tennessee. The Company's regional headquarters are in
Miami, Florida; Capelle aan den Ijssel, the Netherlands; Zug, Switzerland;
Singapore; and Kingsport, Tennessee. Technical service is provided to
the Company's customers from technical service centers in Kingsport, Tennessee;
Kirkby, England; Shanghai, China and Singapore. Customer service
centers are located in Kingsport, Tennessee; Capelle aan den Ijssel, the
Netherlands; Miami, Florida; and Singapore.
General
From time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
being handled and defended in the ordinary course of business. While
the Company is unable to predict the outcome of these matters, it does not
believe, based upon currently available facts, that the ultimate resolution of
any such pending matters 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.
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 again in December 2007, and determined that it is not reasonably likely
that any civil penalty assessed by the EPA and DOJ will be less than
$100,000. While the Company intends to vigorously defend against
these allegations, this disclosure is made pursuant to SEC Regulation S-K, Item
103, Instruction 5.C., which requires disclosure of administrative proceedings
commenced under environmental laws that involve governmental authorities as
parties and potential monetary sanctions in excess of $100,000. The
Company believes that the ultimate resolution of this proceeding will not have a
material impact on the Company's financial condition, results of operations, or
cash flows.
There
were no matters submitted to a vote of the Company's stockholders during fourth
quarter of 2008.
PART
II
(a) Eastman
Chemical Company's ("Eastman" or the "Company") common stock is traded on the
New York Stock Exchange ("NYSE") under the symbol "EMN". The following
table presents the high and low sales prices of the common stock on the NYSE and
the cash dividends per share declared by the Company's Board of Directors for
each quarterly period of 2008 and 2007.
|
High
|
|
Low
|
|
Cash
Dividends Declared
|
2008
|
First
Quarter
|
$
|
67.77
|
$
|
56.31
|
$
|
0.44
|
|
Second
Quarter
|
78.29
|
|
62.16
|
|
0.44
|
|
Third
Quarter
|
69.45
|
|
52.91
|
|
0.44
|
|
Fourth
Quarter
|
55.22
|
|
25.87
|
|
0.44
|
2007
|
First
Quarter
|
$
|
64.77
|
$
|
57.54
|
$
|
0.44
|
|
Second
Quarter
|
69.77
|
|
63.02
|
|
0.44
|
|
Third
Quarter
|
72.44
|
|
61.55
|
|
0.44
|
|
Fourth
Quarter
|
68.97
|
|
58.81
|
|
0.44
|
As of
December 31, 2008, there were 72,547,177 shares of the Company's common stock
issued and outstanding, which shares were held by 24,917 stockholders of record.
These shares include 82,674 shares held by the Company's charitable
foundation. The Company has declared a cash dividend of $0.44 per share
during the first quarter of 2009, payable on April 1, 2009 to stockholders of
record on March 16, 2009. Quarterly dividends on common stock, if declared
by the Company's Board of Directors, are usually paid on or about the first
business day of the month following the end of each quarter. The payment
of dividends is a business decision made by the Board of Directors from time to
time based on the Company's earnings, financial position and prospects, and such
other considerations as the Board considers relevant. Accordingly, while
management currently expects that the Company will continue to pay the quarterly
cash dividend, its dividend practice may change at any time.
See Part
III, Item 12 — "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters—Securities Authorized for Issuance Under Equity
Compensation Plans" of this 2008 Annual Report on Form 10-K for the information
required by Item 201(d) of Regulation S-K.
(b) Not
applicable.
(c) Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
Period
|
Total
Number
of
Shares
Purchased
(1)
|
|
Average
Price Paid Per Share
(2)
|
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
or
Programs
(3)
|
|
Approximate
Dollar
Value
(in Millions) that May Yet Be Purchased Under the Plans or
Programs
(3)
|
October
1- 31, 2008
|
--
|
$
|
--
|
|
0
|
$
|
117
|
November
1-30, 2008
|
--
|
$
|
--
|
|
0
|
$
|
117
|
December
1-31, 2008
|
484
|
$
|
30.28
|
|
0
|
$
|
117
|
Total
|
484
|
$
|
30.28
|
|
0
|
$
|
117
|
(1)
|
Shares
surrendered to the Company by employees to satisfy individual tax
withholding obligations upon vesting of previously issued shares of
restricted common stock. Shares are not part of any Company
repurchase plan.
|
(2)
|
Average
price paid per share reflects the closing price of Eastman common stock on
the business day the shares were surrendered by the employee stockholder
to satisfy individual tax withholding
obligations.
|
(3)
|
In
October 2007, the Board of Directors authorized $700 million for
repurchase of the Company's outstanding common shares at such times, in
such amounts, and on such terms, as determined to be in the best interests
of the Company. As of December 31, 2008, a total of 9.4 million
shares have been repurchased under this authorization for a total amount
of $583 million. For
additional information, see Note 15, "Stockholders' Equity", to the
Company's consolidated financial statements in Part II, Item 8 of this
2008 Annual Report on Form 10-K.
|
Summary
of Operating Data
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
6,726
|
$
|
6,830
|
$
|
6,779
|
$
|
6,460
|
$
|
6,019
|
Operating
earnings
|
|
519
|
|
504
|
|
654
|
|
740
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
328
|
|
321
|
|
427
|
|
541
|
|
146
|
Earnings
(loss) from discontinued operations
|
|
--
|
|
(10)
|
|
(18)
|
|
16
|
|
24
|
Gain
(loss) from disposal of discontinued operations
|
|
18
|
|
(11)
|
|
--
|
|
--
|
|
--
|
Net
earnings
|
$
|
346
|
$
|
300
|
$
|
409
|
$
|
557
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
$
|
4.36
|
$
|
3.89
|
$
|
5.20
|
$
|
6.70
|
$
|
1.88
|
Earnings
(loss) from discontinued operations
|
|
0.23
|
|
(0.26)
|
|
(0.22)
|
|
0.20
|
|
0.32
|
Net
earnings
|
$
|
4.59
|
$
|
3.63
|
$
|
4.98
|
$
|
6.90
|
$
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
$
|
4.31
|
$
|
3.84
|
$
|
5.12
|
$
|
6.61
|
$
|
1.86
|
Earnings
(loss) from discontinued operations
|
|
0.24
|
|
(0.26)
|
|
(0.21)
|
|
0.20
|
|
0.32
|
Net
earnings
|
$
|
4.55
|
$
|
3.58
|
$
|
4.91
|
$
|
6.81
|
$
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Financial Position Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
$
|
1,423
|
$
|
2,293
|
$
|
2,422
|
$
|
1,924
|
$
|
1,768
|
Net
properties
|
|
3,198
|
|
2,846
|
|
3,069
|
|
3,162
|
|
3,192
|
Total
assets
|
|
5,281
|
|
6,009
|
|
6,132
|
|
5,737
|
|
5,839
|
Current
liabilities
|
|
832
|
|
1,122
|
|
1,059
|
|
1,051
|
|
1,099
|
Long-term
borrowings
|
|
1,442
|
|
1,535
|
|
1,589
|
|
1,621
|
|
2,061
|
Total
liabilities
|
|
3,728
|
|
3,927
|
|
4,103
|
|
4,125
|
|
4,655
|
Total
stockholders’ equity
|
|
1,553
|
|
2,082
|
|
2,029
|
|
1,612
|
|
1,184
|
Dividends
declared per share
|
|
1.76
|
|
1.76
|
|
1.76
|
|
1.76
|
|
1.76
|
In June
2008, the Company acquired Green Rock Energy, L.L.C.’s ("Green Rock") 50 percent
ownership interest in TX Energy, L.L.C. (“TX Energy”) for approximately $35
million, which is primarily allocated to properties and equipment. In
October 2007, the Company entered into an agreement with Green Rock to jointly
develop an industrial gasification facility in Beaumont, Texas through TX
Energy. The results of operations of TX Energy for the periods
subsequent to the acquisition have been included in Eastman's consolidated
financial statements. If TX Energy had been consolidated for the
periods prior to the acquisition, the Company’s consolidated revenue, net income
and earnings per share would not have been materially different than
reported. With this acquisition, the Company became the sole owner
and developer of the industrial gasification facility in Beaumont,
Texas.
In first
quarter 2008, the Company completed the sale of its polyethylene
terephthalate (“PET”)
polymers and purified terephthalic acid (“PTA”) manufacturing facilities in
Rotterdam, the Netherlands and the PET manufacturing facility in Workington,
United Kingdom and related businesses. Results from, charges related
to, and gains and losses from disposal of the San Roque, Spain, the Netherlands,
and the United Kingdom assets and businesses are presented as discontinued
operations. For more information regarding the impact of these
divestitures on financial results, refer to the segment discussions of Part II,
Item 7 – "Management Discussion and Analysis" and Part II, Item 8 – "Notes to
the Audited Consolidated Financial Statements" – Note 2, "Discontinued
Operations and Assets Held for Sale" and Note 17, "Divestitures" of this 2008
Annual Report on Form 10-K.
In second
quarter 2007, the Company completed the sale of its San Roque, Spain PET
manufacturing facility. During fourth quarter 2007, the Company
sold its PET polymers production facilities in Cosoleacaque, Mexico and Zarate,
Argentina and the related businesses and entered into definitive agreements to
sell its PET polymers production facilities in Rotterdam, the Netherlands and
Workington, United Kingdom and the related businesses. For more
information regarding the impact of these divestitures on financial results,
refer to the segment discussions of Part II, Item 7 – "Management Discussion and
Analysis" and Part II, Item 8 – "Notes to the Audited Consolidated Financial
Statements" – Note 2, "Discontinued Operations and Assets Held for Sale" and
Note 17, "Divestitures" of this 2008 Annual Report on Form 10-K.
In fourth
quarter 2006, the Company completed the sale of its Batesville, Arkansas
manufacturing facility and related assets and specialty organic chemicals
product lines in the Performance Chemicals and Intermediates segment and the
sale of its polyethylene and EpoleneTM polymer
businesses and related assets located at the Longview, Texas site and the
Company's ethylene pipeline. The polyethylene assets and product
lines were in the Performance Polymers segment, while the EpoleneTM assets
and product lines were in the Coatings, Adhesives, Specialty Polymers and Inks
("CASPI") segment. For more information regarding the impact of these
divestitures on financial results, refer to the segment discussions of Part II,
Item 7 – "Management Discussion and Analysis" and Part II, Item 8 – "Notes to
the Audited Consolidated Financial Statements" – Note 17, "Divestitures" of this
2008 Annual Report on Form 10-K.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
ITEM
|
Page
|
|
|
|
32
|
|
|
|
36
|
|
|
|
37
|
|
|
|
|
|
39
|
|
43
|
|
49
|
|
50
|
|
54
|
|
61
|
|
|
|
62
|
|
|
|
67
|
|
|
|
68
|
|
|
|
68
|
|
|
|
70
|
|
|
|
71
|
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the consolidated financial statements for Eastman
Chemical Company ("Eastman" or the "Company"), which have been prepared in
accordance with accounting principles generally accepted ("GAAP") in the United
States, and should be read in conjunction with the Company's consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K. All references to earnings per share contained in this
report are diluted earnings per share unless otherwise noted.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
preparing the consolidated financial statements in conformity with GAAP, the
Company’s management must make decisions which impact the reported amounts and
the related disclosures. Such decisions include the selection of the
appropriate accounting principles to be applied and assumptions on which to base
estimates and judgments that affect the reported amounts of assets, liabilities,
sales revenue and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to impairment of long-lived 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
estimates described below are the most important to the fair presentation of the
Company’s financial condition and results. These estimates require
management’s most significant judgments in the preparation of the Company’s
consolidated financial statements.
Allowances
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. The Company believes, based on historical results, the
likelihood of actual write-offs having a material impact on financial results or
earnings per share is low. However, if one of the Company’s key
customers were to file for bankruptcy, or otherwise be unable to make its
required payments, or there was a significant continued slow-down in the
economy, the Company could be forced to increase its allowances. This
could result in a material charge to earnings. The Company’s
allowances were $7 million and $5 million at December 31, 2008 and 2007,
respectively.
Impairment
of Long-Lived Assets
The
Company evaluates the carrying value of long-lived assets, including
definite-lived intangible assets, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Such events
and circumstances include, but are not limited to, significant decreases in the
market value of the asset, adverse change in the extent or manner in which the
asset is being used, significant changes in business conditions, or current or
projected cash flow losses associated with the use of the assets. The
carrying value of a long-lived asset is considered impaired when the total
projected undiscounted cash flows from such asset is separately identifiable and
is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
long-lived asset. For long-lived assets to be held and used, fair
value of fixed (tangible) assets and definite-lived intangible assets is
determined primarily using either the projected cash flows discounted at a rate
commensurate with the risk involved or an appraisal. For long-lived
assets to be disposed of by sale or other than by sale, fair value is determined
in a similar manner, except that fair values are reduced for disposal
costs.
The
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets," require that goodwill and
indefinite-lived intangible assets be tested at least annually for impairment
and require reporting units to be identified for the purpose of assessing
potential future impairments of goodwill. The carrying value of
goodwill and indefinite-lived intangibles is considered impaired when their fair
value, as established by appraisal or based on undiscounted future cash flows of
certain related products, is less than their carrying value. The
Company conducts its annual testing of goodwill and indefinite-lived intangible
assets for impairment in the third quarter of each year, unless events warrant
more frequent testing. Goodwill and indefinite-lived
intangibles primarily consist of goodwill in the Chemicals, Adhesives, Specialty
Polymers and Inks (“CASPI”) segment, which has maintained earnings through the
second half of 2008. As such, recent events did not warrant
retesting.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
As the
Company’s assumptions related to long-lived assets are subject to change,
additional write-downs may be required in the future. If estimates of fair
value less costs to sell are revised, the carrying amount of the related asset
is adjusted, resulting in a charge to earnings. The Company recognized no
fixed (tangible) asset impairment costs and no definite-lived intangible
asset impairment costs in results from continuing operations during
2008. The Company recognized fixed (tangible) asset impairment costs
of $120 million and definite-lived intangible asset impairment costs of $2
million in results from continuing operations during 2007.
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can be
reasonably estimated. When a single amount cannot be reasonably estimated
but the cost can be estimated within a range, the Company accrues the minimum
amount. This undiscounted accrued amount reflects the Company’s
assumptions about remediation requirements at the contaminated site, the nature
of the remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties. Changes in
the estimates on which the accruals are based, unanticipated government
enforcement action, or changes in health, safety, environmental, and chemical
control regulations and testing requirements could result in higher or lower
costs. Estimated future environmental expenditures for remediation
costs range from the minimum or best estimate of $11 million to the maximum of
$21 million at December 31, 2008.
In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations,"
(“SFAS No. 143”) the Company also establishes reserves for closure/postclosure
costs associated with the environmental and other assets it maintains.
Environmental assets, as defined in SFAS No. 143, include but are not
limited to waste management units, such as landfills, water treatment
facilities, and ash ponds. When these types of assets are constructed or
installed, a reserve is established for the future costs anticipated to be
associated with the retirement or closure of the asset based on an expected life
of the environmental assets and the applicable regulatory closure
requirements. These future expenses are charged against earnings over
the estimated useful life of the assets. Currently, the Company estimates
the useful life of each individual asset is up to 50 years. If the Company
changes its estimate of the asset retirement obligation costs or its estimate of
the useful lives of these assets, expenses to be charged against earnings could
increase or decrease.
In
accordance with Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” ("FIN 47"), the Company also monitors conditional
obligations and will record reserves associated with them when and to the extent
that more detailed information becomes available concerning applicable
retirement costs.
The
Company’s reserve was $41 million at December 31, 2008 and $42 million at
December 31, 2007, representing the minimum or best estimate for remediation
costs and the best estimate of the amount accrued to date over the regulated
assets' estimated useful lives for asset retirement obligation
costs.
Pension
and Other Post-employment Benefits
The
Company maintains defined benefit pension plans that provide eligible employees
with retirement benefits. Additionally, Eastman provides life insurance
and health care benefits for eligible retirees and health care benefits for
retirees’ eligible survivors. The costs and obligations related to these
benefits reflect the Company’s assumptions related to general economic
conditions (particularly interest rates) and expected return on plan
assets. For the U.S., at December 31, 2008, the Company assumed a
discount rate of 6.08 percent on its defined benefit pension plan, 6.09 percent
on its other post-employment benefit plan and an expected return on assets of 9
percent. The cost of providing plan benefits also depends on demographic
assumptions including retirements, mortality, turnover, and plan
participation.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company expects its 2009 pension expense to be similar to 2008. The
December 31, 2008 projected benefit obligation and 2009 expense are affected by
year-end 2008 assumptions. The sensitivities below are specific to
the time periods noted. They also may not be additive, so the impact
of changing multiple factors simultaneously cannot be calculated by combining
the individual sensitivities shown. The following table illustrates
the sensitivity to changes in the Company’s long-term assumptions in the
expected return on assets and assumed discount rate for the U.S. pension plan
and other postretirement welfare plans:
Change
in
Assumption
|
Impact
on
2009
Pre-tax U.S.
Benefits
Expense
|
Impact
on
December
31, 2008 Projected Benefit Obligation for U.S. Pension
Plan
|
Impact
on
December
31, 2008 Benefit Obligation for Other U.S. Postretirement
Plans
|
|
|
|
|
25
basis point
decrease
in discount
rate
|
+$5
Million
|
+$39
Million
|
+$22
Million
|
|
|
|
|
25
basis point
increase
in discount
rate
|
-$5
Million
|
-$37
Million
|
-$21
Million
|
|
|
|
|
25
basis point
decrease
in expected return on assets
|
+$3
Million
|
No
Impact
|
N/A
|
|
|
|
|
25
basis point
increase
in expected
return
on assets
|
-$3
Million
|
No
Impact
|
N/A
|
The
expected return on assets and assumed discount rate used to calculate the
Company’s pension and other post-employment benefit obligations are established
each December 31. The expected return on assets is based upon the
long-term expected returns in the markets in which the pension trust invests its
funds, primarily the domestic, international, and private equity
markets. Historically, the Company has achieved an actual return
which was equal to or greater than the expected return on
assets. However, due to the global recession in 2008, the actual
returns for 2008 were below expected returns. The assumed discount
rate is based upon a portfolio of high-grade corporate bonds, which are used to
develop a yield curve. This yield curve is applied to the expected
durations of the pension and post-employment benefit obligations. As
future benefits under the U.S. benefit plan have been fixed at a certain
contribution amount, changes in the health care trend assumptions do not have a
material impact on the results of operations.
The
Company uses the market related valuation method to determine the value of plan
assets, which recognizes the change of the fair value of the plan assets over
five years. If actual experience differs from these long-term
assumptions, the difference is recorded as an unrecognized actuarial gain (loss)
and then amortized into earnings over a period of time based on the average
future service period, which may cause the expense related to providing these
benefits to increase or decrease. The charges applied to earnings in
2008, 2007, and 2006 due to the amortization of these unrecognized actuarial
losses, largely due to actual experience versus assumptions of discount rates,
were $37 million, $47 million, and $54 million, respectively.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company does not anticipate that a change in pension and other post-employment
obligations caused by a change in the assumed discount rate during 2009 will
impact the cash contributions to be made to the pension plans during
2009. However, an after-tax charge or credit will be recorded
directly to accumulated other comprehensive income (loss), a component of
stockholders’ equity, as of December 31, 2009 for the impact on the pension’s
projected benefit obligation of the change in interest rates, if
any. While the amount of the change in these obligations does not
correspond directly to cash funding requirements, it is an indication of the
amount the Company will be required to contribute to the plans in future
years. The amount and timing of such cash contributions is dependent
upon interest rates, actual returns on plan assets, retirement, attrition rates
of employees, and other factors. For further information regarding
pension and other post-employment obligations, see Note 11, "Retirement Plans",
to the Company’s consolidated financial statements in Part II, Item 8 of this
2008 Annual Report on Form 10-K.
Litigation
and Contingent Liabilities
From time
to time, the Company and its operations are parties to or targets of lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
handled and defended in the ordinary course of business. The Company
accrues a liability for such matters when it is probable that a liability has
been incurred and the amount can be reasonably estimated. When a
single amount cannot be reasonably estimated but the cost can be estimated
within a range, the Company accrues the minimum amount. The Company
expenses legal costs, including those expected to be incurred in connection with
a loss contingency, as incurred. Based upon facts and information
currently available, the Company believes the amounts reserved are adequate for
such pending matters; however, results of operations could be affected by
monetary damages, costs or expenses, and charges against earnings in particular
periods.
Income
Taxes
The
Company records deferred tax assets and liabilities based on temporary
differences between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates expected to be in effect for the year in
which the differences are expected to reverse. The ability to realize the
deferred tax assets is evaluated through the forecasting of taxable income using
historical and projected future operating results, the reversal of existing
temporary differences, and the availability of tax planning strategies.
Valuation allowances are recorded to reduce deferred tax assets when it is
more likely than not that a tax benefit will not be realized. In the event
that the actual outcome of future tax consequences differs from our estimates
and assumptions, the resulting change to the provision for income taxes could
have a material adverse impact on the consolidated results of operations and
statement of financial position. As of December 31, 2008, a valuation
allowance of $131 million has been provided against the deferred tax
assets.
In
accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – An Interpretation of FASB No. 109”, the Company recognizes income
tax positions that meet the more likely than not threshold and accrues interest
related to unrecognized income tax positions which is recorded as a component of
the income tax provision.
Prior to
2007, the Company determined tax contingencies in accordance with SFAS
No. 5, “Accounting for Contingencies.” The Company recorded
estimated tax liabilities to the extent the contingencies were probable and
could be reasonably estimated.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
During
2007 and 2008, the Company took strategic actions in its Performance Polymers
segment to address its underperforming polyethylene terephthalate (“PET”) manufacturing
facilities outside the United States. In second quarter 2007, the
Company completed the sale of its PET manufacturing facility in Spain and in
first quarter 2008, the Company completed the sale of its PET polymers and
purified terephthalic acid (“PTA”) manufacturing facilities in the Netherlands
and the PET manufacturing facility in the United Kingdom and related
businesses. Results from, charges related to, and gains and losses
from disposal of the Spain, the Netherlands, and the United Kingdom assets and
businesses are presented as discontinued operations. In fourth
quarter 2007, the Company completed the sale of its Mexico and Argentina
manufacturing facilities. As part of this divestiture, the Company
entered into transition supply agreements for polymer
intermediates. In order to provide a better understanding of the
impact on Performance Polymers segment results of the divested Latin American
PET assets, this Management's Discussion and Analysis includes certain financial
measures with and without sales and operating results in Latin America from PET
manufacturing facilities and related businesses in Mexico and Argentina and with
and without contract polymer intermediates sales.
In fourth
quarter 2006, the Company sold its polyethylene ("PE") and EpoleneTM polymer
businesses and related assets of the Performance Polymers and CASPI
segments. As part of the PE divestiture, the Company entered into a
transition supply agreement for contract ethylene sales, from which sales
revenue and operating earnings are included in the Performance Chemicals and
Intermediates ("PCI") segment results in 2008 and 2007.
Also in
fourth quarter 2006, the Company made strategic decisions relating to the
scheduled shutdown of cracking units in Longview, Texas and a planned shutdown
of higher cost PET assets in Columbia, South Carolina. Accelerated
depreciation costs resulting from these decisions were $9 million and $49
million in 2008 and 2007, respectively. For more information on
accelerated depreciation costs, see "Gross Profit" in the "Results of
Operations" section of this Management's Discussion and Analysis.
In 2008,
the Company sold certain mineral rights at an operating manufacturing site,
recognizing $16 million of other operating income.
This
Management's Discussion and Analysis includes the following non-GAAP financial
measures and accompanying reconciliations to the most directly comparable GAAP
financial measures. The non-GAAP financial measures used by the
Company may not be comparable to similarly titled measures used by other
companies and should not be considered in isolation or as a substitute for
measures of performance or liquidity prepared in accordance with
GAAP.
·
|
Company
sales and segment sales and results from continuing operations excluding
sales revenue and results from continuing operations from sales in Latin
America of PET products manufactured at the divested Mexico and Argentina
PET manufacturing sites;
|
·
|
Company
and segment sales excluding contract ethylene sales under a transition
agreement related to the divestiture of the PE product
lines;
|
·
|
Company
and segment sales excluding contract polymer intermediates sales under a
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and
Argentina;
|
·
|
Company
and segment gross profit, operating earnings and earnings from continuing
operations excluding accelerated depreciation costs, asset impairments and
restructuring charges, and other operating income;
and
|
·
|
Company
earnings from continuing operations excluding net deferred tax benefits
related to the previous divestiture of
businesses.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Eastman's
management believes that contract ethylene sales under the transition agreement
related to the divestiture of the PE product lines, the contract polymer
intermediates sales under the transition supply agreement related to the
divestiture of the PET manufacturing facilities and related businesses in Mexico
and Argentina, and the other operating income from the sale of mineral rights do
not reflect the continuing and expected future business of the PCI and
Performance Polymers segments or of the Company. In addition, for
evaluation and analysis of ongoing business results and of the impact on the
Company and segments of strategic decisions and actions to reduce costs and to
improve the profitability of the Company, management believes that Company and
segment earnings from continuing operations should be considered both with and
without accelerated depreciation costs, asset impairments and restructuring
charges, and deferred tax benefits related to the previous divestiture of
businesses, and that Company and segment sales and results from continuing
operations should be considered both with and without sales revenue and results
from continuing operations from sales in Latin America of PET products
manufactured at the divested Mexico and Argentina manufacturing
facilities. Management believes that investors can better evaluate
and analyze historical and future business trends if they also consider the
reported Company and segment results, respectively, without the identified
items. Management utilizes Company 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.
The
Company generated sales revenue of $6.7 billion for 2008 compared to $6.8
billion for 2007. Excluding the results of contract ethylene sales,
contract polymer intermediates sales, and sales from divested PET facilities in
Mexico and Argentina, sales revenue increased by 3 percent. The sales
revenue increase was due to increased selling prices in response to higher raw
material and energy costs more than offsetting lower sales
volume. Although the Company had some volume decline through the
first nine months 2008 compared to first nine months 2007, in addition to normal
seasonality, Eastman’s sales volumes had an unprecedented drop in fourth quarter
2008 due to the global recession.
Operating
earnings were $519 million in 2008 compared to $504 million in
2007. Excluding accelerated depreciation costs, asset impairments and
restructuring charges and other operating income, operating earnings were $558
million in 2008 compared with $665 million in 2007. The
Company had strong results, despite Eastman, and the chemical industry as a
whole, facing unprecedented
declines in demand, particularly in fourth quarter 2008, extremely volatile raw
material and energy costs and an uncertain global economy. The lower full
year operating earnings were driven by the year over year decline in
fourth quarter results, primarily due to the sharp deterioration in
demand. This decline in demand caused lower sales volume and
historically low capacity utilization which resulted in higher unit
costs. These challenges resulted in lower than anticipated operating
margins for the majority of the segments and the Company as a
whole.
Primarily
as a result of strategic actions related to the Performance Polymers and PCI
segments, as well as a corporate severance program, operating earnings in 2008
were negatively impacted by $46 million in asset impairments and restructuring
charges and $9 million of accelerated depreciation costs, and were positively
impacted by $16 million in other operating income. Operating earnings
in 2007 were negatively impacted by $112 million in asset impairments and
restructuring charges and $49 million of accelerated depreciation
costs. Asset impairments and restructuring charges for 2007 were
primarily related to the divestiture of the Company’s Mexico and Argentina PET
manufacturing sites.
Earnings
from continuing operations increased by $7 million for 2008 as compared to
2007. Excluding accelerated depreciation costs and asset impairments
and restructuring charges, net, earnings from continuing operations were $342
million and $423 million, respectively. Earnings from continuing
operations for 2008 compared to 2007 benefited from a lower effective tax
rate.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company generated $653 million in cash from operating activities during 2008
compared to $732 million generated by operating activities in
2007. The difference was primarily due to a more challenging economic
environment resulting in lower net earnings excluding accelerated depreciation
and asset impairments and restructuring charges. In 2007, the Company
contributed $100 million to its U.S. defined benefit pension plan and did not
make any contributions in 2008. In 2008, the Company received
proceeds from sales of assets and investments of $337 million, repurchased
shares totaling $501 million, and repaid $175 million of
borrowings.
The
Company believes that cash balances, cash flows from operations, and external
sources of liquidity will be available and sufficient to meet foreseeable cash
flow requirements. As of December 31, 2008, the Company had $387 million
of cash and cash equivalents and an undrawn $700 million committed revolving
credit facility (the “Credit Facility”). The Credit Facility is
substantially available through 2013, is supported by a diverse group of banks,
and can be drawn for general corporate purposes. The Company is
currently in compliance with all covenants under the Credit
Facility. In addition, there are no material debt maturities until
2012. The Company believes the combination of cash from operations,
manageable leverage, and committed external sources of liquidity provides a
solid financial foundation that positions it well in the current volatile
economic and financial environments.
In
addition to the completion of the sale of its PET polymers and PTA manufacturing
facilities in the Netherlands and the PET manufacturing facility in the United
Kingdom in first quarter 2008, actions to improve the performance of its
Performance Polymers segment including the transformation at the South Carolina
facility. In the Fibers segment, the Company completed the acetate
tow capacity expansion in the United Kingdom and announced a cellulose acetate
tow alliance in Korea. Eastman continued to progress on its strategic
growth initiatives including the industrial gasification project in the U.S.
Gulf Coast and.
In June
2008, as part of the progression on the gasification project in Beaumont, Texas,
the Company acquired entire ownership interest in TX Energy, L.L.C. ("TX
Energy") for approximately $35 million, which is primarily allocated to
properties and equipment. Front-end engineering and design for the
project is planned to be completed by mid-2009. The Company is
pursuing non-recourse project financing utilizing the Department of Energy’s
Federal Loan Guarantee Program and its completed application was submitted in
November 2008. In 2008, the Company completed the purchase of
an idled methanol and ammonia plant in Beaumont, Texas from Terra Industries
Inc. and intends to restart these facilities using raw materials supplied via
pipeline from the nearby gasification facility, once the gasification facility
is complete.
In
December 2008, the Company announced an alliance with SK Chemicals Company Ltd.
(“SK”) to form a company to acquire and operate a cellulose acetate tow
manufacturing facility and related business, with the facility to be constructed
by SK in Korea. Eastman will have majority ownership and will operate
the facility. Construction began in first quarter 2009 and is
expected to be completed during second quarter 2010. Annual
capacity at the site is expected to be approximately 27,000 metric tons and
Eastman’s total worldwide capacity for acetate tow is expected to exceed 200,000
metric tons, an increase of 15 percent. The impact on global capacity
is estimated to be an increase of approximately two percent.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company’s results of operations as presented in the Company’s consolidated
financial statements in Part II, Item 8 of this 2008 Annual Report on Form 10-K
are summarized and analyzed below.
|
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
6,726
|
$
|
6,830
|
|
(1)
%
|
|
(11)
%
|
|
9
%
|
|
--
%
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- sales from Mexico and Argentina PET manufacturing facilities (1)
|
|
--
|
|
413
|
|
|
|
|
|
|
|
|
|
|
Sales
– contract polymer intermediates sales (2)
|
|
138
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Sales
- contract ethylene sales (3)
|
|
314
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– excluding listed items
|
$
|
6,274
|
$
|
6,088
|
|
3
%
|
|
(7)
%
|
|
9
%
|
|
--
%
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Sales
revenue for 2007 includes sales revenue from PET manufacturing facilities
and related businesses in Cosoleacaque, Mexico and Zarate, Argentina
divested in fourth quarter
2007.
|
(2)
|
Included
in 2008 sales revenue are contract polymer intermediates sales under the
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and Argentina in
fourth quarter 2007.
|
(3)
|
Included
in 2008 and 2007 sales revenue are contract ethylene sales under the
transition supply agreement related to the divestiture of the PE
businesses.
|
Sales
revenue for 2008 compared to 2007 decreased $104 million. Excluding
contract ethylene sales, contract polymer intermediates sales, and sales from
Mexico and Argentina PET manufacturing facilities, sales revenue increased 3
percent primarily due to higher selling prices in all segments in response to
higher raw material and energy costs more than offsetting lower sales volume,
particularly in the Performance Polymers, PCI, and CASPI
segments. Although the Company experienced some volume decline
through the first nine months 2008 compared to first nine months 2007, the
global recession, experienced particularly in fourth quarter 2008, resulted in
an unprecedented decrease in sales volume across all segments and all regions in
fourth quarter 2008 compared to fourth quarter 2007.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
Gross
Profit
|
$
|
1,126
|
$
|
1,192
|
|
(6)
%
|
As
a percentage of sales
|
|
17
%
|
|
17
%
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
|
9
|
|
49
|
|
|
|
|
|
|
|
|
|
Gross
Profit excluding accelerated depreciation costs
|
|
1,135
|
|
1,241
|
|
(9)
%
|
As
a percentage of sales
|
|
17
%
|
|
18
%
|
|
|
Gross
profit for 2008 decreased compared with 2007 in the PCI, Specialty Plastics
(“SP”) and CASPI segments partially offset by increases in the Performance
Polymers and Fibers segments, as higher raw material and energy costs more than
offset higher selling prices. Gross profit included accelerated
depreciation costs of $9 million and $49 million in 2008 and 2007, respectively,
resulting from the previously reported shutdowns of the cracking units in
Longview, Texas and of higher cost PET polymer assets in Columbia, South
Carolina. The Company's 2008 raw material and energy costs increased
by approximately $600 million compared with 2007.
An
unprecedented decline in demand caused lower sales volume and historically low
capacity utilization resulting in higher unit costs in fourth quarter
2008. The historically low capacity utilization rates in the fourth
quarter negatively affected the average capacity utilization rate for the full
year 2008.
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses ("SG&A")
|
$
|
419
|
$
|
420
|
|
--
%
|
Research
and Development Expenses ("R&D")
|
|
158
|
|
156
|
|
1
%
|
|
$
|
577
|
$
|
576
|
|
--
%
|
As
a percentage of sales
|
|
9
%
|
|
8
%
|
|
|
Asset
Impairments and Restructuring Charges, Net
Asset impairments and
restructuring charges totaled $46 million and $112 million in 2008 and 2007,
respectively. Asset impairments and restructuring charges in
2008 were primarily for restructuring at the South Carolina facility in the
Performance Polymers segment, severance and pension costs from the decision to
close a previously impaired site in the United Kingdom in the PCI segment, and
severance costs resulting from a corporate severance program. Asset
impairments and restructuring charges in 2007 were primarily costs associated
with the PET manufacturing facilities in Mexico and Argentina sold in fourth
quarter 2007. For more information regarding asset impairments and
restructuring charges, primarily related to recent strategic decisions and
actions, see the Performance Polymers and PCI segments discussion and Note 18,
"Asset Impairments and Restructuring Charges, Net", to the Company's
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K.
Other
Operating Income, Net
Other
operating income, net for 2008 reflects proceeds of $16 million from the sale of
certain mineral rights at an operating manufacturing site.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
2008
|
|
2007
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
$
|
519
|
$
|
504
|
|
3
%
|
Accelerated
depreciation included in cost of goods sold
|
|
9
|
|
49
|
|
|
Asset
impairments and restructuring charges, net
|
|
46
|
|
112
|
|
|
Other
operating income, net
|
|
(16)
|
|
--
|
|
|
Operating
earnings excluding accelerated depreciation costs, asset impairment and
restructuring charges, net, and other operating income,
net
|
$
|
558
|
$
|
665
|
|
(16)
%
|
Interest
Expense, Net
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
Gross
interest costs
|
$
|
106
|
$
|
113
|
|
|
Less:
capitalized interest
|
|
12
|
|
10
|
|
|
Interest
expense
|
|
94
|
|
103
|
|
(9)
%
|
Interest
income
|
|
24
|
|
41
|
|
|
Interest
expense, net
|
$
|
70
|
$
|
62
|
|
13
%
|
Gross
interest costs for 2008 compared to 2007 were lower due to lower average
interest rates and lower average borrowings. Interest income in 2008
compared to 2007 was lower due to lower average invested cash balances and lower
average interest rates.
For 2009,
the Company expects net interest expense to increase compared with 2008
primarily due to lower interest income, driven by lower average invested cash
balances and lower average interest rates.
Other
Charges (Income), Net
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
Foreign
exchange transactions losses (gains)
|
$
|
17
|
$
|
(11)
|
Equity
and business venture investments losses (gains)
|
|
6
|
|
(12)
|
Other,
net
|
|
(3)
|
|
(5)
|
Other
charges (income), net
|
$
|
20
|
$
|
(28)
|
Included
in other charges (income), net are gains or losses on foreign exchange
transactions, results from equity investments, gains on the sale of business
venture investments, write-downs to fair value of certain technology business
venture investments due to other than temporary declines in value, other
non-operating income or charges related to Holston Defense Corporation
("HDC"), gains from the sale of non-operating assets, royalty income,
certain litigation costs, fees on securitized receivables, other non-operating
income, and other miscellaneous items.
Equity
and business venture investments (gains) losses include gains of $4 million in
both 2008 and 2007 resulting from a favorable decision of the U.S. Department of
the Army to reimburse post-employment benefits being provided to retirees of
HDC, a wholly owned subsidiary. This gain reflected a portion of the
unrecognized gain resulting from the reimbursement decision that will be
amortized into earnings over future periods. For additional
information, see Note 11,
"Retirement Plans", to the Company’s consolidated financial statements in Part
II, Item 8 of this 2008 Annual Report on Form 10-K.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Provision
for Income Taxes
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
101
|
$
|
149
|
|
(32)
%
|
Effective
tax rate
|
|
24
%
|
|
32
%
|
|
|
The 2008
effective tax rate reflects the Company’s tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 27
percent. The 2008 effective tax rate was impacted by a $16 million
benefit resulting from a gasification investment tax credit of $11 million and a
research and development credit of $5 million, a $14 million benefit from state
income tax credits (net of federal tax effect), and a $6 million benefit from
the settlement of a non-U.S. income tax audit.
The 2007
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 33
percent.
The Company expects
its effective tax rate in 2009 will be between 30 and 33 percent, including
investment tax credits and research and development tax credits.
Earnings
from Continuing Operations
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
Earnings
from continuing operations
|
$
|
328
|
$
|
321
|
Accelerated
depreciation included in cost of goods sold, net of tax
|
|
6
|
|
31
|
Asset
impairments and restructuring charges, net of tax
|
|
32
|
|
71
|
Other
operating income, net
|
|
(10)
|
|
--
|
Net
deferred tax benefits related to the previous divestiture of
businesses
|
|
(14)
|
|
--
|
Earnings
from continuing operations excluding accelerated depreciation costs, net
of tax, asset impairments and restructuring charges, net of
tax, other operating income, net, and net deferred tax benefits
related to the previous divesture of businesses
|
$
|
342
|
$
|
423
|
Net
Earnings
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
Earnings
from continuing operations
|
$
|
328
|
$
|
321
|
Loss
from discontinued operations, net of tax
|
|
--
|
|
(10)
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
|
18
|
|
(11)
|
Net
earnings
|
$
|
346
|
$
|
300
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The gain
on disposal of discontinued operations, net of tax of $18 million in 2008 is
from the sale of the Company's PET polymers and PTA production facilities in the
Netherlands and its PET production facility in the United Kingdom and related
businesses for approximately $329 million in first quarter 2008. The
loss on disposal of discontinued operations, net of tax of $11 million in 2007
is from the sale of the Company's PET polymers manufacturing facility in Spain
for approximately $42 million. During 2007, the Company also
recognized site closure costs of $4 million, net of tax, for the San Roque PET
site. For additional information, see Note 2, "Discontinued
Operations and Assets Held for Sale", to the Company's consolidated financial
statements in Part II, Item 8 of this 2008 Annual Report on Form
10-K.
The
Company’s products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the PCI
segment, the Performance Polymers segment, and the SP segment. For
additional information concerning the Company’s operating businesses and
products, refer to Note
23, "Segment Information", to the consolidated financial statements in Part II,
Item 8 of this 2008 Annual Report on Form 10-K.
Sales
revenue 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 23, "Segment Information", as "other" sales revenue and operating
losses.
CASPI
Segment
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,524
|
$
|
1,451
|
$
|
73
|
|
5
%
|
|
Volume
effect
|
|
|
|
|
|
(148)
|
|
(10)
%
|
|
Price
effect
|
|
|
|
|
|
167
|
|
12
%
|
|
Product
mix effect
|
|
|
|
|
|
34
|
|
2
%
|
|
Exchange
rate effect
|
|
|
|
|
|
20
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
202
|
|
235
|
|
(33)
|
|
(14)
%
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring gains
|
|
--
|
|
(1)
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
(5)
|
|
--
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding asset impairments and restructuring gains and other
operating income
|
|
197
|
|
234
|
|
(37)
|
|
(16)
%
|
Sales
revenue for 2008 increased $73 million compared to 2007 due to higher selling
prices partially offset by lower sales volume. The higher selling
prices were in response to higher raw material and energy costs, particularly
for propane, propylene, and adhesives raw materials. Sales volume
declined due primarily to the recession in North America and the divestiture of
certain adhesives product lines, partially offset by slightly higher sales
volume in Asia Pacific.
Excluding
asset impairments and restructuring gains and other operating income, operating
earnings for 2008 decreased $37 million compared to 2007 due primarily to lower
sales volume and lower capacity utilization, particularly in fourth quarter,
causing higher unit costs. Other operating income for 2008 reflects
the segment’s allocated portion of proceeds from the sale of certain mineral
rights at an operating manufacturing site.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
margins, typically in the range of 15 percent to 20 percent, were slightly below
the anticipated range in 2008 due primarily to the impact of the recession in
North America, particularly in the automotive and construction
industries.
Fibers
Segment
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,045
|
$
|
999
|
$
|
46
|
|
5
%
|
|
Volume
effect
|
|
|
|
|
|
(11)
|
|
(1)
%
|
|
Price
effect
|
|
|
|
|
|
59
|
|
6
%
|
|
Product
mix effect
|
|
|
|
|
|
(3)
|
|
--
%
|
|
Exchange
rate effect
|
|
|
|
|
|
1
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
238
|
|
238
|
|
--
|
|
--
%
|
|
|
|
|
|
|
|
|
|
Sales
revenue for 2008 increased $46 million compared to 2007 due to higher
selling prices. The higher selling prices were in response to higher
raw material and energy costs, particularly for wood pulp and
coal. An increase in acetate tow sales volume was offset by a
decrease in acetyl chemical and acetate yarn sales volume.
Operating
earnings for 2008 were flat compared to 2007, as an increase in acetate tow
sales volume was offset by a decrease in acetyl chemical and acetate yarn sales
volume.
The
capacity expansion of the Company's acetate tow plant in Workington, England was
completed in 2008, expanding Eastman's world-wide capacity by five percent,
better enabling Eastman to serve existing customers in Western Europe and the
growing demand in Eastern Europe.
In
December 2008, the Company announced an alliance with SK to form a company to
acquire and operate a cellulose acetate tow manufacturing facility and related
business, with the facility to be constructed by SK in Korea. Eastman
will have majority ownership and will operate the
facility. Construction began in first quarter 2009 and should be
completed during the second quarter 2010.
Despite
current economic conditions, the Fibers segment had operating margins in its
typical 20 percent to 25 percent range in 2008.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
PCI
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
2,160
|
$
|
2,095
|
$
|
65
|
|
3
%
|
|
Volume
effect
|
|
|
|
|
|
(219)
|
|
(10)
%
|
|
Price
effect
|
|
|
|
|
|
289
|
|
14
%
|
|
Product
mix effect
|
|
|
|
|
|
(15)
|
|
(1)
%
|
|
Exchange
rate effect
|
|
|
|
|
|
10
|
|
--
%
|
|
|
|
|
|
|
|
|
|
Sales
– contract ethylene sales
|
|
314
|
|
314
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– excluding listed items
|
|
1,846
|
|
1,781
|
|
65
|
|
4
%
|
Volume
effect
|
|
|
|
|
|
(135)
|
|
(8)
%
|
Price
effect
|
|
|
|
|
|
225
|
|
13
%
|
Product mix
effect
|
|
|
|
|
|
(35)
|
|
(2)
%
|
Exchange rate
effect
|
|
|
|
|
|
10
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
153
|
|
220
|
|
(67)
|
|
(31)
%
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation costs included in cost of goods sold
|
|
5
|
|
19
|
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges (gains)
|
|
22
|
|
(1)
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
(9)
|
|
--
|
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges (gains), and other operating income
|
|
171
|
|
238
|
|
(67)
|
|
(28)
%
|
Sales
revenue for 2008 increased $65 million compared to 2007. Excluding
contract ethylene sales under the transition agreement resulting from the
divestiture of the Performance Polymers segment's PE business in fourth quarter
2006, sales revenue increased due to higher selling prices in response to higher
raw material and energy costs, partially offset by lower sales volumes,
particularly in fourth quarter 2008. Lower sales volumes
were primarily in olefin-based derivative products, particularly for Asia,
and bulk olefins product lines related to the previously reported shutdown of a
cracking unit in fourth quarter 2007. Contract ethylene sales
revenues remained unchanged as higher selling prices offset lower sales volume
resulting from the shutdown of one of the Company’s cracking units.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Excluding
accelerated depreciation costs, asset impairments and restructuring charges
(gains) and other income, operating earnings in 2008 decreased $67 million
compared to 2007. The decline was primarily in the Asia Pacific
region due to lower sales volume, particularly for olefin-based derivative
product lines, and higher raw material and energy costs partially offset by
higher selling prices. Sales revenue and operating earnings for 2007
included $22 million of earnings from the licensing of acetyl technology.
In addition, 2007 operating earnings were impacted by favorable market
conditions. In 2007, contract ethylene sales had minimal impact on
operating earnings. The accelerated depreciation costs were related
to the continuation of the previously reported planned staged phase-out of older
cracking units at the Company's Longview, Texas facility. Asset
impairments and restructuring charges for 2008 consisted primarily of severance
and pension costs from the decision to close a previously impaired site in the
United Kingdom. Asset impairments and restructuring gains for 2007 were
primarily related to severance costs related to a voluntary reduction in force
in 2006. Other operating income for 2008 reflects the segment’s
allocated portion of proceeds from the sale of certain mineral rights at an
operating manufacturing site.
Despite
current economic conditions, the PCI segment had operating margins in its
typical 5 percent to 10 percent range.
Performance
Polymers Segment
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,074
|
$
|
1,413
|
$
|
(339)
|
|
(24)
%
|
|
Volume
effect
|
|
|
|
|
|
(369)
|
|
(26)
%
|
|
Price
effect
|
|
|
|
|
|
51
|
|
4
%
|
|
Product
mix effect
|
|
|
|
|
|
(23)
|
|
(2)
%
|
|
Exchange
rate effect
|
|
|
|
|
|
2
|
|
--
%
|
|
|
|
|
|
|
|
|
|
Sales
from Mexico and Argentina PET manufacturing facilities (1)
|
|
--
|
|
413
|
|
(413)
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– contract polymer intermediates sales (2)
|
|
138
|
|
15
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– U.S. PET manufacturing facilities
|
|
936
|
|
985
|
|
(49)
|
|
(5)
%
|
Volume
effect
|
|
|
|
|
|
(115)
|
|
(12)
%
|
Price
effect
|
|
|
|
|
|
47
|
|
5
%
|
Product mix
effect
|
|
|
|
|
|
17
|
|
2
%
|
Exchange rate
effect
|
|
|
|
|
|
2
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss (3)
|
|
(57)
|
|
(207)
|
|
150
|
|
73
%
|
Operating
loss - from sales from Mexico and Argentina PET
manufacturing facilities (1)(3)
|
|
(3)
|
|
(127)
|
|
124
|
|
98
%
|
Operating
loss - U.S. PET manufacturing facilities (3)
|
|
(54)
|
|
(80)
|
|
26
|
|
33
%
|
(1)
|
Sales
revenue and operating results for 2007 includes sales revenue from PET
manufacturing facilities and related businesses in Cosoleacaque, Mexico
and Zarate, Argentina divested in fourth quarter
2007.
|
(2)
|
Sales
revenue for 2008 includes contract polymer intermediates sales under the
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and Argentina in
fourth quarter 2007.
|
(3)
|
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.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Operating
loss excluding certain items (1)(2)
|
$
|
(29)
|
$
|
(65)
|
$
|
36
|
|
55
%
|
Operating
loss excluding certain items - from sales from Mexico and Argentina PET
manufacturing facilities (1)(3)(4)
|
|
--
|
|
(12)
|
|
12
|
|
100
%
|
Operating
loss excluding certain items - U.S. PET manufacturing
facilities (1)(5)
|
|
(29)
|
|
(53)
|
|
24
|
|
45
%
|
(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 impairments and restructuring
charges, net. In 2008, asset impairments and restructuring
charges of $24 million related to restructuring at the South Carolina
facility using IntegRexTM
technology, the divested PET manufacturing facilities in Mexico and
Argentina, and charges related to a corporate severance program, partially
offset by a resolution of a contingency from the sale of the Company’s PE
and EpoleneTM
polymer businesses divested in fourth quarter 2006. Accelerated
depreciation costs of $4 million resulted from restructuring actions
associated with higher cost PET polymer assets in Columbia, South
Carolina. In 2007, asset impairments and restructuring charges
of $113 million primarily related to the Mexico and Argentina PET
manufacturing facilities sale. Accelerated depreciation costs of $29
million resulted from restructuring actions associated with higher cost
PET polymer assets in Columbia, South
Carolina.
|
(3)
|
Operating
results for 2007 includes sales revenue from PET manufacturing facilities
and related businesses in Cosoleacaque, Mexico and Zarate, Argentina
divested in fourth quarter 2007.
|
(4)
|
Items
are asset impairments and restructuring charges (gains) relating to the
Mexico and Argentina PET manufacturing facilities, and were $3 million and
$115 million in 2008 and 2007,
respectively.
|
(5)
|
Items
are accelerated depreciation costs and asset impairments and restructuring
charges (gains) related to the U.S. PET manufacturing
facilities. Asset impairments and restructuring charges (gains)
were $21 million and $(2) million in 2008 and 2007,
respectively. Accelerated depreciation costs were $4 million
and $29 million in 2008 and 2007,
respectively.
|
Sales
revenue for 2008 decreased $339 million compared to 2007 due to the divestiture
of PET manufacturing facilities and related businesses in Cosoleacaque, Mexico
and Zarate, Argentina.
For U.S.
PET manufacturing facilities, excluding contract polymer intermediates sales to
the buyer of the divested Mexico and Argentina facilities and sales from the
divested PET facilities in Mexico and Argentina, sales revenue for 2008
decreased $49 million compared to 2007 due to lower sales volume resulting from
the shutdown of higher cost PET assets in the first half of 2008, weaker demand
for bottled carbonated soft drinks, and lighter-weight water
bottles.
Excluding
accelerated depreciation costs, asset impairments and restructuring charges and
other operating expense, operating results for 2008 for U.S. PET manufacturing
facilities improved $24 million compared to 2007 due primarily to actions
at the Company’s South Carolina PET facility, including the PET facility based
on IntegRex™ technology and higher selling prices, partially offset by higher
raw material and energy costs and higher unit costs due to lower capacity
utilization particularly in fourth quarter.
Manufacturing
ParaStarTM PET
resins, the 350,000 metric ton PET manufacturing facility utilizing
IntegRexTM technology in Columbia,
South Carolina was fully operational in first quarter of 2007. A
previously disclosed reduction of $30 million in annual costs at this facility
was completed in second quarter 2008. The debottleneck of the PET
facility based on IntegRexTM technology was
successfully completed in fourth quarter 2008, expanding annual capacity of the
plant to 525,000 metric tons of ParaStarTM PET
resins.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
SP
Segment
|
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2008
|
|
2007
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
Sales
|
$
|
923
|
$
|
872
|
$
|
51
|
|
6
%
|
|
Volume
effect
|
|
|
|
|
(9)
|
|
(1)
%
|
|
Price
effect
|
|
|
|
|
28
|
|
3
%
|
|
Product
mix effect
|
|
|
|
|
16
|
|
2
%
|
|
Exchange
rate effect
|
|
|
|
|
16
|
|
2
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
35
|
|
65
|
|
(30)
|
|
(46)
%
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
--
|
|
1
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges
|
--
|
|
1
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
(2)
|
|
--
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and other operating income
|
33
|
|
67
|
|
(34)
|
|
(51)
%
|
Sales
revenue for 2008 increased $51 million compared to 2007 due to higher selling
prices, a favorable exchange rate and a favorable shift in product
mix. Selling prices increased in response to higher raw material and
energy costs, particularly for paraxylene and ethylene glycol. While
sales volume in full year 2008 decreased only slightly, increases through nine
months 2008 compared to nine months 2007 were more than offset by a sharp
decline in sales volume in fourth quarter 2008 attributed to the global
recession particularly impacting end-use demand for consumer and durable goods
(appliances and electronics), in-store fixtures and displays, and specialty
packaging.
Excluding
accelerated depreciation costs, asset impairments and restructuring charges and
other operating income, operating earnings for 2008 decreased $34 million
compared to 2007 due to higher raw material and energy costs and lower capacity
utilization resulting in higher unit costs, particularly in fourth quarter
2008. The 2008 operating results included $2 million in other
operating income related to the segment’s allocated portion of proceeds from the
sale of certain mineral rights at an operating manufacturing site. The 2007
operating results included $1 million in asset impairment and restructuring
costs primarily for the Spain cyclohexane dimethanol ("CHDM") facility and $1
million of accelerated depreciation costs for restructuring actions associated
with higher cost PET polymer assets in Columbia, South Carolina.
The SP
segment is progressing with the introduction of its new copolyester, Eastman
TritanTM
copolyester, including a new 30,000 metric ton TritanTM
manufacturing facility expected to be online in 2010.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
Revenue
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
4,065
|
$
|
4,043
|
|
1
%
|
|
(12)
%
|
|
12
%
|
|
1
%
|
|
--
%
|
Asia
Pacific
|
|
1,185
|
|
1,103
|
|
8
%
|
|
1
%
|
|
6
%
|
|
--
%
|
|
1
%
|
Europe,
Middle East, and Africa
|
|
977
|
|
932
|
|
5
%
|
|
(2)
%
|
|
1
%
|
|
2
%
|
|
4
%
|
Latin
America
|
|
499
|
|
752
|
|
(34)
%
|
|
(33)
%
|
|
4
%
|
|
(5)
%
|
|
--
%
|
|
$
|
6,726
|
$
|
6,830
|
|
(1)
%
|
|
(11)
%
|
|
9
%
|
|
--
%
|
|
1
%
|
Sales
revenue in the United States and Canada increased slightly primarily due to
higher selling prices in all segments and a favorable shift in product mix,
particularly in the CASPI segment, partially offset by lower sales volumes in
all segments.
Sales
revenue in Asia Pacific increased primarily due to higher selling prices in all
segments in response to higher raw material and energy costs. Sales
volume increased in the CASPI, Fibers and SP segments, partially offset by lower
sales volume primarily in the PCI segment.
Sales
revenue in Europe, the Middle East and Africa increased primarily due to the
effect of the foreign currency exchange rates, particularly in the CASPI, SP and
Fibers segments.
Sales
revenue in Latin America decreased primarily due to lower sales volume,
particularly in the Performance Polymers segment. Excluding divested
PET manufacturing facilities and related businesses in Cosoleacaque, Mexico and
Zarate, Argentina and contract polymer intermediates sales to those facilities,
sales revenue increased 12 percent primarily due to higher selling prices in all
segments as a result of higher raw material and energy costs and higher sales
volume, particularly in the PCI segment. During fourth quarter 2007,
the Company sold its PET polymers production facilities in Mexico and Argentina
and the related businesses, which is expected to result in significantly lower
sales revenue in Latin America in future periods. However, subject to
certain product-specific agreements associated with the sale of the
manufacturing facilities in Mexico and Argentina, the Company sold a limited set
of PET products manufactured in the U.S. in certain Latin American markets
through 2008.
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 or euros. In
addition, where it deems such actions advisable, the Company engages in foreign
currency hedging transactions and requires letters of credit and prepayment for
shipments where its assessment of individual customer and country risks
indicates their use is appropriate. For more information on these
practices see Note 10, "Fair Value of Financial Instruments", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K and Part II, Item 7A--"Quantitative and Qualitative Disclosures
About Market Risk."
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
6,830
|
$
|
6,779
|
|
1
%
|
|
(3)
%
|
|
3
%
|
|
--
%
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- contract ethylene sales (1)
|
|
314
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Sales
– 2006 divested product lines (2)
|
|
--
|
|
811
|
|
|
|
|
|
|
|
|
|
|
Sales
- sales from Mexico and Argentina PET manufacturing facilities (3)
|
|
413
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– excluding listed items
|
$
|
6,103
|
$
|
5,501
|
|
11
%
|
|
5
%
|
|
4
%
|
|
1
%
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included
in 2007 and 2006 sales revenue are contract ethylene sales under the
transition supply agreement related to the divestiture of the PE
businesses.
|
(2)
|
Included
in 2006 sales revenue are sales revenue from sales of products of the
divested product lines of the Company's Batesville, Arkansas manufacturing
facility and related assets in the PCI segment and of the divested PE and
EpoleneTM
polymer businesses and related assets of the Performance Polymers and
CASPI segments.
|
(3)
|
Included
in 2007 and 2006 sales revenue are sales revenue from PET manufacturing
facilities and related businesses in Cosoleacaque, Mexico and Zarate,
Argentina divested in fourth quarter 2007. These sales are not
considered discontinued operations due to continuing involvement in the
Latin America region and raw material sales to the divested
facilities.
|
Sales
revenue for 2007 compared to 2006 increased $51 million. Excluding
contract ethylene sales, sales from 2006 divested product lines, and sales from
Mexico and Argentina PET manufacturing facilities, sales revenue increased 11
percent primarily due to higher sales volume, particularly in the Performance
Polymers and PCI segments, and higher selling prices in all segments except the
Performance Polymers segment in response to higher raw material and energy
costs.
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
Gross
Profit
|
$
|
1,192
|
$
|
1,265
|
|
(6)
%
|
As
a percentage of sales
|
|
17
%
|
|
19
%
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
|
49
|
|
10
|
|
|
|
|
|
|
|
|
|
Gross
Profit excluding accelerated depreciation costs
|
|
1,241
|
|
1,275
|
|
(3)
%
|
As
a percentage of sales
|
|
18
%
|
|
19
%
|
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Gross
profit and gross profit as a percentage of sales for 2007 decreased compared
with 2006 primarily due to higher raw material and energy costs more than
offsetting higher selling prices. Gross profit and gross profit as a
percentage of sales were also impacted by accelerated depreciation costs
resulting from the scheduled shutdown of cracking units in Longview, Texas and
of higher cost PET polymer assets in Columbia, South Carolina. In
2007, raw material and energy costs increased by approximately $250 million over
the prior year, compared to increases in selling prices of approximately $200
million.
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses ("SG&A")
|
$
|
420
|
$
|
423
|
|
(1)
%
|
Research
and Development Expenses ("R&D")
|
|
156
|
|
155
|
|
--
%
|
|
$
|
576
|
$
|
578
|
|
--
%
|
As
a percentage of sales
|
|
8
%
|
|
9
%
|
|
|
SG&A
expenses in 2007 decreased compared to 2006 primarily as a result of the
manufacturing sites, businesses, and product lines divested in 2007 and 2006
partially offset by increased spending on growth initiatives. For
additional information refer to Note 17, "Divestitures", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K.
R&D
expenses for 2007 were flat compared to 2006 as decreased expenses in
Performance Polymers resulting from the fourth quarter 2006 completion
of the Company's new PET manufacturing facility utilizing
IntegRexTM technology in Columbia,
South Carolina were offset by increased spending on the industrial gasification
initiatives and on growth projects in the SP segment.
Asset
Impairments and Restructuring Charges, Net
Asset impairments and
restructuring charges totaled $112 million and $101 million in 2007 and 2006,
respectively. Asset impairments and restructuring charges in
2007 were primarily costs associated with the PET manufacturing facilities in
Mexico and Argentina sold in fourth quarter 2007. Asset impairments
and restructuring charges in 2006 were primarily severance charges for work
force reductions and impairments resulting from the shutdown of an R&D pilot
plant and the shutdown of the CHDM manufacturing assets in San Roque,
Spain. For more information regarding asset impairments and
restructuring charges, primarily related to recent strategic decisions and
actions, see the Performance Polymers segment discussion and Note 18, "Asset
Impairments and Restructuring Charges, Net", to the Company's consolidated
financial statements in Part II, Item 8 of this 2008 Annual Report on Form
10-K.
Other
Operating Income, Net
Other
operating income, net for 2006 reflects a gain of $75 million on the sale of the
Company's PE and EpoleneTM polymer
businesses, related assets, and the Company's ethylene pipeline and a charge of
approximately $7 million related to the sale of the Company's Batesville,
Arkansas manufacturing facility and its related assets and product
lines. For more information concerning divestitures, see Note 17,
"Divestitures", to the Company’s consolidated financial statements in Part II,
Item 8 of this 2008 Annual Report on Form 10-K.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
|
|
2007
|
|
2006
|
|
Change
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
$
|
504
|
$
|
654
|
|
(23)
%
|
Accelerated
depreciation included in cost of goods sold
|
|
49
|
|
10
|
|
|
Asset
impairments and restructuring charges, net
|
|
112
|
|
101
|
|
|
Other
operating income, net
|
|
--
|
|
(68)
|
|
|
Operating
earnings excluding accelerated depreciation costs, asset impairment and
restructuring charges, net, and other operating income,
net
|
$
|
665
|
$
|
697
|
|
(5)
%
|
Interest
Expense, Net
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
Gross
interest costs
|
$
|
113
|
$
|
109
|
|
|
Less:
capitalized interest
|
|
10
|
|
7
|
|
|
Interest
expense
|
|
103
|
|
102
|
|
1
%
|
Interest
income
|
|
41
|
|
25
|
|
|
Interest
expense, net
|
$
|
62
|
$
|
77
|
|
(19)
%
|
Gross
interest costs for 2007 compared to 2006 were higher due to higher average
interest rates. Higher capitalized interest is due to higher levels
of capital expenditures. Higher interest income for 2007 compared to
2006 reflected higher
invested cash balances, as well as higher average interest rates, resulting in
lower net interest expense.
Other
(Income) Charges, Net
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Foreign
exchange transactions (gains) losses
|
$
|
(11)
|
$
|
(2)
|
Equity
and business venture investments (gains) losses
|
|
(12)
|
|
(12)
|
Other,
net
|
|
(5)
|
|
(3)
|
Other
(income) charges, net
|
$
|
(28)
|
$
|
(17)
|
Included
in other (income) charges, net are gains or losses on foreign exchange
transactions, results from equity investments, gains on the sale of business
venture investments, write-downs to fair value of certain technology business
venture investments due to other than temporary declines in value, other
non-operating income or charges related to HDC, gains from the sale of
non-operating assets, royalty income, certain litigation costs, fees on
securitized receivables, other non-operating income, and other miscellaneous
items.
Equity
and business venture investments (gains) losses for 2007 and 2006 included gains
of $4 million and $12 million, respectively, resulting from a favorable decision
of the U.S. Department of the Army to reimburse post-employment benefits being
provided to retirees of HDC, a wholly owned subsidiary. This gain
reflected a portion of the unrecognized gain resulting from the reimbursement
decision that will be amortized into earnings over future
periods. For additional information, see Note 11,
"Retirement Plans", to the Company’s consolidated financial statements in Part
II, Item 8 of this 2008 Annual Report on Form 10-K.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Provision
for Income Taxes
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
149
|
$
|
167
|
|
(11)
%
|
Effective
tax rate
|
|
32
%
|
|
28
%
|
|
|
The 2007
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 33
percent.
The 2006
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 31
percent. The effective tax rate was impacted by $25 million of
deferred tax benefit resulting from the reversal of capital loss carryforward
valuation reserves and $11 million of deferred tax benefit resulting from the
reversal of foreign net operating loss valuation reserves.
Earnings
from Continuing Operations
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Earnings
from continuing operations
|
$
|
321
|
$
|
427
|
Accelerated
depreciation included in cost of goods sold, net of tax
|
|
31
|
|
6
|
Asset
impairments and restructuring charges, net of tax
|
|
71
|
|
69
|
Other
operating income, net
|
|
--
|
|
(68)
|
Earnings
from continuing operations excluding accelerated depreciation costs, asset
impairments and restructuring charges, net of tax, and other operating
income, net
|
$
|
423
|
$
|
434
|
Net
Earnings
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
Earnings
from continuing operations
|
$
|
321
|
$
|
427
|
Loss
from discontinued operations, net of tax
|
|
(10)
|
|
(18)
|
Loss
on disposal of discontinued operations, net of tax
|
|
(11)
|
|
--
|
Net
earnings
|
$
|
300
|
$
|
409
|
The loss
on disposal of discontinued operations, net of tax of $11million is from the
sale of the Company's San Roque, Spain PET manufacturing facility in the
Performance Polymer segment. Net proceeds from the sale of the San
Roque site were approximately $42 million. During 2007, the Company
also recognized site closure costs of $4 million, net of tax, for the San Roque
PET site. For additional information on discontinued operations, see
to Note 2, "Discontinued Operations and Assets Held for Sale", to the
Company’s consolidated financial statements in Part II, Item 8 of this 2008
Annual Report on Form 10-K.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company’s products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the PCI
segment, the Performance Polymers segment, and the SP
segment. For additional information concerning the Company’s
operating businesses and products, refer to Note
23, "Segment Information", to the consolidated financial statements in Part II,
Item 8 of this 2008 Annual Report on Form 10-K.
Sales
revenue 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 23, "Segment Information", as "other" sales revenue and operating
losses.
CASPI
Segment
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,451
|
$
|
1,421
|
$
|
30
|
|
2
%
|
|
Volume
effect
|
|
|
|
|
|
(68)
|
|
(5)
%
|
|
Price
effect
|
|
|
|
|
|
48
|
|
3
%
|
|
Product
mix effect
|
|
|
|
|
|
26
|
|
2
%
|
|
Exchange
rate effect
|
|
|
|
|
|
24
|
|
2
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
235
|
|
229
|
|
6
|
|
3
%
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
(1)
|
|
13
|
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding asset impairments and restructuring charges,
net
|
|
234
|
|
242
|
|
(8)
|
|
(3)
%
|
Sales
revenue for 2007 increased $30 million compared to 2006 as higher selling
prices, a favorable shift in product mix, and favorable foreign currency
exchange rates were partially offset by lower sales volume. Selling
prices increased in response to higher raw material and energy
costs. The lower sales volume was primarily attributed to the
divestiture of the Company's EpoleneTM product
lines in fourth quarter 2006 and slightly lower sales volume for coatings
product lines in North America.
Operating
earnings for 2007 increased $6 million compared to 2006. Excluding
asset impairments and restructuring charges, operating earnings decreased $8
million in 2007 compared to 2006. The decrease in operating earnings
is primarily due to lower sales volumes, primarily in the coatings product
lines, partially offset by higher selling prices, a favorable shift in product
mix, and favorable foreign currency exchange rates. Asset impairments
and restructuring charges in 2006 were related to previously closed
manufacturing facilities and severance costs related to a voluntary reduction in
force.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Fibers
Segment
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
999
|
$
|
910
|
$
|
89
|
|
10
%
|
|
Volume
effect
|
|
|
|
|
|
25
|
|
3
%
|
|
Price
effect
|
|
|
|
|
|
51
|
|
6
%
|
|
Product
mix effect
|
|
|
|
|
|
9
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
|
4
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
238
|
|
226
|
|
12
|
|
5
%
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
--
|
|
2
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding asset impairments and restructuring charges,
net
|
|
238
|
|
228
|
|
10
|
|
4
%
|
Sales
revenue for 2007 increased $89 million compared to 2006 primarily due to higher
selling prices and higher sales volume. Selling prices increased
primarily due to efforts to offset higher raw material and energy costs,
particularly for wood pulp. The increased sales volume was attributed
to continued industry market growth in acetate tow product lines and competitor
outages.
Operating
earnings for 2007 increased $12 million compared to 2006 due to higher selling
prices and higher sales volume. Asset impairments and restructuring
charges of $2 million in 2006 primarily related to severance costs of a
voluntary reduction in force.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
PCI
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
2,095
|
$
|
1,659
|
$
|
436
|
|
26
%
|
|
Volume
effect
|
|
|
|
|
|
401
|
|
24
%
|
|
Price
effect
|
|
|
|
|
|
74
|
|
4
%
|
|
Product
mix effect
|
|
|
|
|
|
(49)
|
|
(3)
%
|
|
Exchange
rate effect
|
|
|
|
|
|
10
|
|
1
%
|
|
|
|
|
|
|
|
|
|
Sales
– contract ethylene sales (1)
|
|
314
|
|
27
|
|
287
|
|
|
Sales
– divested product lines (2)
|
|
--
|
|
111
|
|
(111)
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– excluding listed items
|
|
1,781
|
|
1,521
|
|
260
|
|
17
%
|
Volume
effect
|
|
|
|
|
|
131
|
|
9
%
|
Price
effect
|
|
|
|
|
|
98
|
|
6
%
|
Product
mix effect
|
|
|
|
|
|
22
|
|
1
%
|
Exchange
rate effect
|
|
|
|
|
|
9
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
220
|
|
132
|
|
88
|
|
67
%
|
Operating
earnings (loss) – divested product lines (2)(3)
|
|
--
|
|
(15)
|
|
15
|
|
100
%
|
Operating
earnings – excluding divested product lines (3)
|
|
220
|
|
147
|
|
73
|
|
50
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding certain items (4)
|
|
238
|
|
161
|
|
77
|
|
48
%
|
Operating
earnings excluding certain items (4)
– divested product lines (2)(3)
|
|
--
|
|
3
|
|
(3)
|
|
(100)%
|
Operating
earnings excluding certain items (4)
– excluding divested product lines (3)
|
|
238
|
|
158
|
|
80
|
|
51
%
|
(1)
|
Sales
revenue for 2007 and 2006 included contract ethylene sales under the
transition supply agreement related to the divestiture of the PE
businesses.
|
(2)
|
Sales
revenue and operating results for 2006 included sales revenue from sales
of products of the divested product lines of the Company's Batesville,
Arkansas manufacturing facility and related assets and specialty organic
chemicals product lines.
|
(3)
|
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.
|
(4)
|
Items
are accelerated depreciation costs, asset impairments and restructuring
charges (gains) and other operating charges. Accelerated
depreciation costs and asset impairments and restructuring gains for 2007
were $19 million and $1 million, respectively. Accelerated
depreciation costs, asset impairments and restructuring charges, and other
operating charges for 2006 were $2 million, $20 million, and $7 million,
respectively. The accelerated depreciation costs are related to
the continuation of the planned staged phase-out of older cracking units
at the Company's Longview, Texas facility. Asset impairments
and restructuring charges were primarily related to the divestiture of the
PCI segment's Batesville, Arkansas manufacturing facility and related
assets and specialty organic chemicals product lines completed in fourth
quarter 2006 and to severance costs related to a voluntary reduction in
force in 2006. The other operating charges resulted from the
Batesville, Arkansas divestiture.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue for 2007 increased $436 million compared to 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. Excluding the contract ethylene sales and sales revenue
from divested product lines, sales revenue for 2007 increased due to higher
sales volume and increased selling prices, which were attributed to favorable
market conditions, primarily for olefin-based derivative products and acetyl
chemicals in Asia Pacific and the United States, and competitor
outages.
Operating
earnings increased $88 million in 2007 compared to 2006. Excluding
accelerated depreciation costs, asset impairment and restructuring charges
(gains), and other operating charges, operating earnings increased $77
million. The increase is due to higher sales volume, higher selling
prices, and earnings from the licensing of acetyl technology, with contract
ethylene sales having minimal impact on operating earnings for 2007 compared to
2006. Selling prices increased in response to higher raw material and
energy costs. The accelerated depreciation costs are related to the
continuation of the planned staged phase-out of older cracking units at the
Company's Longview, Texas facility.
The
Company evaluates licensing opportunities for acetic acid and oxo derivatives on
a selective basis, and has licensed technology for two projects to produce
acetyl products -- one to Saudi International Petrochemical Company ("SipChem")
in Saudi Arabia in 2005, and a second to Chang Chung Petrochemical Company in
Taiwan in 2007.
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 loss
attributed to the divested product lines were $111 million and $15 million,
respectively for 2006.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
As a
result of the Company's strategic actions in the Performance Polymers segment,
the financial discussion below is of results from continuing operations in all
periods presented. For additional information, see Note 2,
"Discontinued Operations and Assets Held for Sale", to the Company's
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K.
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,413
|
$
|
1,971
|
$
|
(558)
|
|
(28)
%
|
|
Volume
effect
|
|
|
|
|
|
(557)
|
|
(28)
%
|
|
Price
effect
|
|
|
|
|
|
(5)
|
|
--
%
|
|
Product
mix effect
|
|
|
|
|
|
4
|
|
--
%
|
|
Exchange
rate effect
|
|
|
|
|
|
--
|
|
--
%
|
|
|
|
|
|
|
|
|
|
Sales
– divested PE product lines (1)
|
|
--
|
|
635
|
|
(635)
|
|
(100)%
|
|
|
|
|
|
|
|
|
|
Sales
from Mexico and Argentina PET manufacturing facilities (2)
|
|
413
|
|
440
|
|
(27)
|
|
(6)%
|
|
|
|
|
|
|
|
|
|
Sales
– U.S. PET manufacturing facilities
|
|
1,000
|
|
896
|
|
104
|
|
12
%
|
Volume
effect
|
|
|
|
|
|
115
|
|
13
%
|
Price
effect
|
|
|
|
|
|
(15)
|
|
(1)
%
|
Product
mix effect
|
|
|
|
|
|
4
|
|
--
%
|
Exchange
rate effect
|
|
|
|
|
|
--
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss) (3)
|
|
(207)
|
|
68
|
|
(275)
|
|
>(100)
%
|
Operating
earnings - divested PE product lines (1)(4)
|
|
--
|
|
136
|
|
(136)
|
|
(100)
%
|
Operating
loss - from sales from Mexico and Argentina PET
manufacturing facilities (2)(4)
|
|
(127)
|
|
(12)
|
|
(115)
|
|
>(100)
%
|
Operating
loss - U.S. PET manufacturing facilities (3)(4)
|
|
(80)
|
|
(56)
|
|
(24)
|
|
(43)
%
|
(1)
|
PE
product lines of the PE businesses and related assets located at the
Longview, Texas site which were sold in fourth quarter
2006.
|
(2)
|
Sales
revenue and operating results for 2007 and 2006 include sales revenue from
PET manufacturing facilities and related businesses in Cosoleacaque,
Mexico and Zarate, Argentina divested in fourth quarter
2007. These sales are not presented as discontinued
operations due to the Performance Polymers segment's continuing
involvement in the Latin American region and raw material sales to the
divested facilities.
|
(3)
|
Includes
allocated costs not included in discontinued operations, some of which may
remain and could be reallocated to the remainder of the segment and other
segments.
|
(4)
|
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.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss) excluding certain items (1)(2)
|
$
|
(65)
|
$
|
46
|
$
|
(111)
|
|
>(100)
%
|
Operating
earnings excluding certain items (3)
- divested PE product line (4)
|
|
--
|
|
61
|
|
(61)
|
|
>(100)
%
|
Operating
loss excluding certain items (5)
- from sales from Mexico and Argentina PET manufacturing facilities
(6)
|
|
(12)
|
|
(12)
|
|
--
|
|
--
%
|
Operating
loss excluding certain items (7) -
U.S. PET manufacturing facilities (1)
|
|
(53)
|
|
(3)
|
|
(50)
|
|
>(100)
%
|
(1)
|
Includes
allocated costs not included in discontinued operations, some of which may
remain and could be reallocated to the remainder of the segment and other
segments.
|
(2)
|
Items
are accelerated depreciation costs, asset impairments and restructuring
charges, net and other operating income. In 2007, asset
impairments and restructuring charges of $113 million primarily related to
the Mexico and Argentina PET manufacturing facilities
sale. Accelerated depreciation costs of $29 million resulted
from restructuring actions associated with higher cost PET polymer assets
in Columbia, South Carolina. In 2006, asset impairments and
restructuring charges of $46 million were primarily related to the
shutdown of a research and development Kingsport, Tennessee pilot plant,
discontinued production of CHDM modified polymers in San Roque, Spain and
severance costs from a reduction in force in the U.S. and
Spain. CHDM, an internal intermediate product primarily used in
copolyester and PET production, was discontinued in San Roque, Spain to
gain operational efficiencies at other facilities. Accelerated
depreciation of $7 million in 2006 related to the restructuring decisions
and actions for higher cost PET polymer intermediates assets in
Columbia. Other operating income was $75 million in 2006 from
the divestiture of the PE businesses and
assets.
|
(3)
|
Items
are other operating income from the sale of the PE businesses and related
assets located at the Longview, Texas site which were sold in fourth
quarter 2006, and which were $75 million in
2006.
|
(4)
|
PE
product lines of the PE businesses and related assets located at the
Longview, Texas site which were sold in fourth quarter
2006. 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.
|
(5)
|
Items
are asset impairments and restructuring charges (gains) relating to the
Mexico and Argentina PET manufacturing facilities, and were $115 million
in 2007.
|
(6)
|
Sales
revenue and operating results for 2007 and 2006 include sales revenue from
PET manufacturing facilities and related businesses in Mexico and
Argentina divested in fourth quarter 2007. These sales are not
presented as discontinued operations due to the Performance Polymers
segment's continuing involvement in the Latin American region and raw
material sales to the divested facilities. 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.
|
(7)
|
Items
are accelerated depreciation costs and asset impairments and restructuring
charges (gains) related to the U.S. PET manufacturing
facilities. Asset impairments and restructuring charges (gains)
were $(2) million and $46 million in 2007 and 2006,
respectively. Accelerated depreciation costs were $29 million
and $7 million in 2007 and 2006,
respectively.
|
Sales
revenue decreased $558 million in 2007 compared to 2006 primarily due to the
divested PE product lines. For U.S. PET manufacturing facilities,
sales revenue increased $104 million primarily due to the increased North
America sales volumes attributed to increased capacity from the Company's
ParaStarTM PET
facility based on IntegRexTM technology.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Excluding
operating losses from sales from Mexico and Argentina PET manufacturing
facilities of $127 million and $12 million for 2007 and 2006, respectively, and
operating earnings from the divested PE product lines of $136 million in 2006,
operating results decreased $24 million for 2007 compared to
2006. Excluding asset impairments and restructuring charges and
accelerated depreciation costs, operating results from U.S. manufacturing
facilities decreased $50 million due to costs associated with the new PET
facility based on IntegRexTM technology becoming
fully operational and the timing of the commercial launch of ParaStarTM PET
produced in the IntegRexTM technology facility as
well as higher and continued volatile raw material and energy costs resulting in
compressed gross margins, particularly in North America.
Production
began in November 2006 at the Company's new PET manufacturing facility utilizing
IntegRexTM technology in Columbia,
South Carolina. Manufacturing ParaStarTM next
generation PET resins, the 350,000 metric tons facility was fully operational in
first quarter of 2007.
During
fourth quarter 2007, the Company completed the sale of Eastman's PET polymers
production facilities in Mexico and Argentina and the related
businesses. Sales revenue attributed to PET product manufactured at
the Mexico and Argentina PET sites for 2007 and 2006 was $413 million and $440
million, respectively.
SP
Segment
|
|
|
|
|
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
Sales
|
$
|
872
|
$
|
818
|
$
|
54
|
|
6
%
|
|
Volume
effect
|
|
|
|
|
10
|
|
1
%
|
|
Price
effect
|
|
|
|
|
23
|
|
3
%
|
|
Product
mix effect
|
|
|
|
|
10
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
11
|
|
1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
65
|
|
46
|
|
19
|
|
41
%
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of goods sold
|
1
|
|
1
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
1
|
|
16
|
|
(15)
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding accelerated depreciation costs and asset impairments
and restructuring charges, net
|
67
|
|
63
|
|
4
|
|
6
%
|
Sales
revenue for 2007 increased $54 million compared to 2006 primarily due to higher
selling prices, favorable foreign currency exchange rates, higher sales volume,
and a favorable shift in product mix. Selling prices increased to
offset higher raw material, energy, and transportation costs. The
increased sales volume was primarily attributed to continued market development
efforts, particularly in copolyester and cellulose esters product lines, which
more than offset a decline in demand for polyester products used in photographic
and optical films.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings increased $19 million. Excluding asset impairments and
restructuring charges and accelerated depreciation costs, operating earnings for
2007 increased compared to 2006 as higher selling prices and favorable foreign
currency exchange rates more than offset increased raw material and energy costs
and increased expenditures related to growth initiatives. The 2007
operating earnings included $1 million in asset impairments and restructuring
charges primarily for the Spain CHDM facility and $1 million of accelerated
depreciation costs from restructuring actions for higher cost PET polymer assets
in Columbia, South Carolina. The 2006 operating results included $16
million in asset impairments and restructuring charges related to the
discontinued production of CHDM and $1 million of accelerated depreciation costs
from restructuring actions for higher cost PET polymer assets in Columbia, South
Carolina.
Sales
Revenue
(Dollars
in millions)
|
|
2007
|
|
2006
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
4,043
|
$
|
4,221
|
|
(4)
%
|
|
(4)
%
|
|
2
%
|
|
(2)
%
|
|
--
%
|
Asia
Pacific
|
|
1,103
|
|
941
|
|
17
%
|
|
3
%
|
|
8
%
|
|
6
%
|
|
--
%
|
Europe,
Middle East, and Africa
|
|
932
|
|
816
|
|
14
%
|
|
3
%
|
|
3
%
|
|
2
%
|
|
6
%
|
Latin
America
|
|
752
|
|
801
|
|
(6)
%
|
|
(8)
%
|
|
2
%
|
|
--
%
|
|
--
%
|
|
$
|
6,830
|
$
|
6,779
|
|
1
%
|
|
(3)
%
|
|
3
%
|
|
--
%
|
|
1
%
|
Sales
revenue in the United States and Canada decreased primarily due to lower volumes
particularly in the CASPI and Performance Polymers segments due to the
divestitures in those segments, partially offset by higher volumes in the PCI
segment due to the contract ethylene sales.
Sales
revenue in Asia Pacific increased primarily due to higher selling prices and a
favorable shift in product mix, primarily in the PCI segment. Product
mix was positively impacted by $20 million from technology licensing in the PCI
segment.
Sales
revenue in Europe, the Middle East and Africa increased due to the effect of the
foreign currency exchange rates, particularly in the CASPI and SP segments,
higher selling prices, particularly in the Fibers and SP segments, and higher
volumes, particularly in the SP
and Fibers segments. The higher selling
prices were primarily in response to increases in raw material and energy
costs.
Sales
revenue in Latin America decreased primarily due to lower sales volume,
particularly in the Performance Polymers segment. Excluding divested
product lines and manufacturing facilities, sales revenue was
flat. During the fourth quarter 2007, the Company sold 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 future periods. However, subject to certain
product-specific agreements associated with the sale of the manufacturing
facilities in Mexico and Argentina, the Company continued 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
Cash
Flows
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
$
|
653
|
$
|
732
|
$
|
609
|
Investing
activities
|
|
(376)
|
|
(335)
|
|
(94)
|
Financing
activities
|
|
(779)
|
|
(448)
|
|
(101)
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
1
|
|
--
|
|
1
|
Net
change in cash and cash equivalents
|
$
|
(501)
|
$
|
(51)
|
$
|
415
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
387
|
$
|
888
|
$
|
939
|
Cash
provided by operating activities decreased $79 million in 2008 compared with
2007 primarily due to a more challenging economic environment resulting in lower
net earnings excluding accelerated depreciation and asset impairments and
restructuring charges. During 2008, the Company increased working
capital by $45 million primarily due to reductions in accounts payable and an
increase in inventory partially offset by a reduction in accounts
receivable. Cash provided by operating activities increased $123
million in 2007 compared with 2006 due primarily to changes in working
capital. During 2007, the Company reduced working capital by $86
million, primarily due to reductions in inventory. The Company
contributed $100 million and $75 million to its U.S. defined benefit pension
plan in 2007 and 2006, respectively. There was no contribution to its
U.S. defined benefit pension plan in 2008.
Cash used
in investing activities totaled $376 million, $335 million, and $94 million in
2008, 2007, and 2006, respectively. In 2008, the Company received
approximately $337 million net cash proceeds primarily from the sale of the
Company's PET polymers and PTA manufacturing facilities in the Netherlands and
the PET manufacturing facility in the United Kingdom. In 2007, the
Company received approximately $42 million in proceeds from the sale of its San
Roque, Spain manufacturing facility and related assets and $160 million in
proceeds from the sale of its Mexico and Argentina manufacturing facilities and
related assets. In 2006, the Company received $74 million in proceeds
from the sale of its Batesville, Arkansas manufacturing facility and related
assets and the specialty organic chemicals product lines and $235 million in
proceeds from the sale of PE and EpoleneTM polymer
businesses and related assets located at the Longview, Texas site and the
Company's ethylene pipeline. For more information concerning
divestitures, see Note 2, “Discontinued Operations and Assets Held for Sale”,
Note 7, "Acquisition and Divestiture of Industrial Gasification Interests", and
Note 17, "Divestitures", to the Company’s consolidated financial statements in
Part II, Item 8 of this 2008 Annual Report on Form 10-K. Capital
spending of $634 million, $518 million, and $389 million in 2008, 2007, and
2006, respectively, is discussed below.
Cash used
in financing activities totaled $779 million, $448 million, and $101 million in
2008, 2007, and 2006 respectively. Financing activities in 2008
included the Company's repayment of $72 million of its outstanding long-term
debt that matured in 2008, a repayment of $103 million of its Euro credit
facility, a decrease in credit facility and other borrowings, including bank
overdrafts, of $7 million, and repurchases of stock totaling $501 million offset
by cash received from stock option exercises of $35 million. In 2007,
financing activities included a decrease in credit facility and other
borrowings, including bank overdrafts, of $22 million and repurchases of stock
totaling $382 million, offset by cash received from stock option exercises of
$91 million. Financing activities in 2006 included a decrease in
credit facility and other borrowings, including bank overdrafts, of $50 million,
offset by cash received from stock option exercises of $83 million.
The
payment of dividends is also reflected in financing activities in all
periods.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company expects to generate positive free cash flow (operating cash flow less
capital expenditures and dividends) in 2009, with the priorities for uses of
available cash to be payment of the quarterly cash dividend, funding targeted
growth initiatives and defined benefit pension plans, and repurchasing
shares.
Liquidity
At
December 31, 2008, the Company had credit facilities with various U.S. and
foreign banks totaling approximately $800 million. These credit
facilities consist of the $700 million Credit Facility and a 60 million euro
credit facility ("Euro Facility"). The Credit Facility has two
tranches, with $125 million expiring in 2012 and $575 million expiring in
2013. The Euro Facility expires in 2012. Borrowings under
these credit facilities are subject to interest at varying spreads above quoted
market rates. The Credit Facility requires a facility fee on the
total commitment that is based on Eastman’s credit rating. In
addition, these credit facilities contain a number of customary 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. At December 31, 2008, the Company’s credit
facility borrowings totaled $84 million, primarily the Euro Facility, at an
effective interest rate of 3.74 percent. At December 31, 2007,
borrowings on these credit facilities were $188 million, primarily from the Euro
Facility, at an effective interest rate of 4.79 percent.
The
Company used part of the proceeds from the sale of its PET polymers and PTA
production facilities in the Netherlands and its PET production facility in the
United Kingdom and related businesses to reduce the balance outstanding on its
Euro Facility by $103 million in second quarter 2008.
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 2013, 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.
Additionally, the
Company maintains a $200 million accounts receivable securitization program that is available to provide
liquidity through the sale of receivables and was fully drawn at December 31,
2008. For more information, see “Off Balance Sheet and Other
Financing Arrangements” below and Note 12, “Commitments”, to the Company’s
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K.
For more
information regarding interest rates, see Note 9, "Borrowings", to
the Company’s consolidated financial statements in Part II, Item 8 of this 2008
Annual Report on Form 10-K.
In 2008,
the Company made no contribution to its U.S. defined benefit pension
plan. The Company expects to make contributions to its defined
benefit pension plans in 2009 of between $25 million and $50
million.
Cash
flows from operations and the other sources of liquidity described above are
expected to be available and sufficient to meet foreseeable cash flow
requirements. However, the Company’s cash flows from operations can
be affected by numerous factors including risks associated with global
operations, raw material availability and cost, demand for and pricing of
Eastman’s products, capacity utilization, and other factors described under
"Forward-Looking Statements and Risk Factors" below. The Company
believes maintaining a financial profile consistent with an investment grade
company is important to its long term strategic and financial
flexibility.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Capital
Expenditures
Capital
expenditures were $650 million, $518 million, and $389 million for 2008, 2007,
and 2006, respectively. The increase of $132 million in 2008 compared
with 2007 was primarily due to increasing manufacturing capacity for Eastman
TritanTM
copolyester, debottlenecking the South Carolina PET manufacturing facility
utilizing IntegRexTM technology, the purchase
of assets from Terra Industries Inc.,
completing
the acetate tow capacity expansion in Workington, England, front-end engineering
and design for the industrial gasification project, and increasing capacity of
cellulose triacetate (“CTA”) for liquid crystal display (“LCD”)
screens. The Company expects that 2009 capital spending will be $350
million to $400 million, which is sufficient for required maintenance and
certain strategic growth initiatives.
The
Company expects that 2009 depreciation and amortization will be at or slightly
higher than 2008 expenses of approximately $260 million, excluding accelerated
depreciation.
Other
Commitments
At
December 31, 2008, the Company’s obligations related to notes and debentures
totaled approximately $1.4 billion to be paid over a period of approximately 20
years. Other borrowings, related primarily to credit facility
borrowings, totaled approximately $100 million.
The
Company had various purchase obligations at December 31, 2008 totaling
approximately $1.6 billion over a period of approximately 15 years for
materials, supplies and energy incident to the ordinary conduct of
business. The Company also had various lease commitments for property
and equipment under cancelable, noncancelable, and month-to-month operating
leases totaling approximately $115 million over a period of several
years. Of the total lease commitments, approximately 16 percent
relate to machinery and equipment, including computer and communications
equipment and production equipment; approximately 41 percent relate to real
property, including office space, storage facilities, and land; and
approximately 43 percent relate to railcars.
In
addition, the Company had other liabilities at December 31, 2008 totaling
approximately $1.5 billion related primarily to pension, retiree medical, other
post-employment obligations, and environmental reserves.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
obligations described above are summarized in the following table:
(Dollars
in millions)
|
|
Payments
Due for
|
Period
|
|
Notes
and Debentures
|
|
Credit
Facility Borrowings and Other
|
|
Interest
Payable
|
|
Purchase
Obligations
|
|
Operating
Leases
|
|
Other
Liabilities (a)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
$
|
--
|
$
|
13
|
$
|
100
|
$
|
351
|
$
|
30
|
$
|
240
|
$
|
734
|
2010
|
|
--
|
|
--
|
|
100
|
|
387
|
|
26
|
|
84
|
|
597
|
2011
|
|
2
|
|
--
|
|
100
|
|
246
|
|
22
|
|
58
|
|
428
|
2012
|
|
154
|
|
84
|
|
92
|
|
243
|
|
14
|
|
53
|
|
640
|
2013
|
|
--
|
|
--
|
|
85
|
|
230
|
|
9
|
|
54
|
|
378
|
2014
and beyond
|
|
1,202
|
|
--
|
|
877
|
|
140
|
|
14
|
|
1,042
|
|
3,275
|
Total
|
$
|
1,358
|
$
|
97
|
$
|
1,354
|
$
|
1,597
|
$
|
115
|
$
|
1,531
|
$
|
6,052
|
(a)
Amounts represent the current estimated cash payments to be made by the Company
primarily for pension and other post-employment benefits and taxes payable in
the periods indicated. The amount and timing of such payments is dependent
upon interest rates, health care trends, actual returns on plan assets,
retirement and attrition rates of employees, continuation or modification of the
benefit plans, and other factors. Such factors can significantly impact
the amount and timing of any future contributions by the Company.
Off
Balance Sheet and Other Financing Arrangements
If
certain operating leases are terminated by the Company, it guarantees a portion
of the residual value loss, if any, incurred by the lessors in disposing of the
related assets. Under these operating leases, the residual value
guarantees at December 31, 2008 totaled $152 million and consisted primarily of
leases for railcars, company aircraft, and other equipment. Leases
with guarantee amounts totaling $2 million, $11 million, and $139 million will
expire in 2009, 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.
As
described in Note 6, "Equity Investments ", to the Company’s consolidated
financial statements in Part II, Item 8 of this 2008 Annual Report on Form 10-K,
Eastman has a 50 percent interest in and serves as the operating partner in
Primester, a joint venture which manufactures cellulose acetate at Eastman's
Kingsport, Tennessee plant. This investment is accounted for under
the equity method. Eastman's net investment
in the joint venture at December 31, 2008 and 2007 was approximately $39 million
and $43 million, respectively, which was comprised of the recognized portion of
the venture's accumulated deficits, long-term amounts owed to Primester, and a
line of credit from Eastman to Primester.
As
described in Note 12, "Commitments", to the Company’s consolidated financial
statements in Part II, Item 8 of this 2008 Annual Report on Form 10-K, Eastman
entered into an agreement in 1999 that allows it to generate cash by reducing
its working capital through the sale of undivided interests in certain domestic
trade accounts receivable under a planned continuous sale program to a third
party. Under this agreement, receivables sold to the third party totaled
$200 million at December 31, 2008 and 2007. Undivided interests in
designated receivable pools were sold to the purchaser with recourse limited to
the purchased interest in the receivable pools.
The
Company did not have any other material relationships with unconsolidated
entities or financial partnerships, including special purpose entities, for the
purpose of facilitating off-balance sheet arrangements with contractually narrow
or limited purposes. Thus, Eastman is not materially exposed to any
financing, liquidity, market, or credit risk related to the above or any other
such relationships.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not Variable Interest
Entities (“VIE’s”) or, in the case of Primester, a joint venture that
manufactures cellulose acetate at the Company’s Kingsport, Tennessee plant, the
Company is not the primary beneficiary of the VIE. As such, in
accordance with FASB Interpretation Number 46, "Consolidation of Variable
Interest Entities", the Company is not required to consolidate these
entities. In addition, the Company has evaluated long-term purchase
obligations with an entity that may be a VIE at December 31,
2008. This potential VIE is a joint venture from which the Company
has purchased raw materials and utilities for several years and purchases
approximately $50 million of raw materials and utilities on an annual
basis. The Company has no equity interest in this entity and has
confirmed that one party to this joint venture 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 entity is a VIE, and whether or not the Company is the primary
beneficiary.
Guarantees
and claims also arise during the ordinary course of business from relationships
with suppliers, customers, and non-consolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others, if specified
triggering events occur. Non-performance under a contract could
trigger an obligation of the Company. These potential claims include
actions based upon alleged exposures to products, intellectual property and
environmental matters, and other indemnifications. The ultimate
effect on future financial results is not subject to reasonable estimation
because considerable uncertainty exists as to the final outcome of these
claims. However, while the ultimate liabilities resulting from such
claims may be significant to results of operations in the period recognized,
management does not anticipate they will have a material adverse effect on the
Company's consolidated financial position or liquidity.
See Note
11, "Retirement Plans", to the Company's consolidated financial statements in
Part II, Item 8 of this 2008 Annual Report on Form 10-K for off-balance sheet
post-employment benefit obligations.
Treasury
Stock Transactions
On
February 4, 1999, the Company was authorized by its Board of Directors to
repurchase up to $400 million of its common stock. Through January
2007, a total of 2.7 million shares of common stock were repurchased under the
authorization at a cost of approximately $112 million.
On
February 20, 2007, the Board of Directors cancelled its prior authorization and
approved a new authorization for the repurchase of up to $300 million of the
Company's outstanding common stock. The Company completed the $300
million repurchase authorization in September 2007, acquiring a total of 4.6
million shares.
In
October 2007, the Board of Directors authorized an additional $700 million for
repurchase of the Company's outstanding common shares at such times, in such
amounts, and on such terms, as determined to be in the best interests of the
Company. As of December 31, 2008, a total of 9.4 million shares have
been repurchased under this authorization for a total amount of approximately
$583 million.
Dividends
The
Company declared quarterly cash dividends of $0.44 per share for a total of
$1.76 per share in 2008, 2007, and 2006. The Company has declared a cash
dividend of $0.44 per share during the first quarter of 2009, payable on April
1, 2009 to stockholders of record on March 16, 2009.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes of which
the treatment, storage, transportation, and disposal are regulated by various
governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP") by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be
required to incur costs for environmental remediation and closure and
postclosure under the Federal Resource Conservation and Recovery
Act. Reserves for environmental contingencies have been established
in accordance with Eastman’s policies as described in Note 1, "Significant
Accounting Policies", to the Company’s consolidated financial statements in Part
II, Item 8 of this 2008 Annual Report on Form 10-K. Because of
expected sharing of costs, the availability of legal defenses, and the Company’s
preliminary assessment of actions that may be required, it does not believe its
liability for these environmental matters, individually or in the aggregate,
will be material to the Company’s consolidated financial position, results of
operations, or cash flows.
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can be
reasonably estimated. When a single amount cannot be reasonably
estimated but the cost can be estimated within a range, the Company accrues the
minimum amount. This undiscounted accrued amount reflects the Company’s
assumptions about remediation requirements at the contaminated site, the nature
of the remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties. Changes in
the estimates on which the accruals are based, unanticipated government
enforcement action, or changes in health, safety, environmental, and chemical
control regulations and testing requirements could result in higher or lower
costs. Estimated future environmental expenditures for remediation costs
range from the minimum or best estimate of $11 million to the maximum of $21
million at December 31, 2008.
In
addition to remediation activities, the Company establishes reserves for
closure/postclosure costs associated with the environmental assets it maintains.
Environmental assets include but are not limited to waste management
units, such as landfills, water treatment facilities, and ash ponds. When
these types of assets are constructed or installed, a reserve is established for
the anticipated future costs associated with the closure of the asset based on
its expected life and the applicable regulatory closure
requirements. These future expenses are charged into earnings over
the estimated useful life of the assets.
FIN 47
requires an entity to recognize a liability for a conditional asset retirement
obligation when incurred if the liability can be reasonably
estimated. The Interpretation also clarifies that the term
Conditional Asset Retirement Obligation ("CARO") refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The Company performed a thorough examination
of various asset categories. Although it may have CAROs at certain of
its facilities, including, but not limited to, the potential for asbestos
abatement activities, the Company is unable to determine potential settlement
dates to be used in fair value calculations for estimating these obligations as
a result of an absence of plans or expectations to undertake a major renovation
or demolition project that would require the removal of asbestos. The
Company continues to monitor these conditional obligations, as well as any new
ones that may develop, and will record reserves associated with them
when and to the extent that more detailed information becomes available
concerning applicable retirement costs. The recorded obligations did
not have a material impact on its consolidated financial position, results of
operations and cash flows.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Reserves
related to environmental assets accounted for approximately 70 percent of the
total environmental reserve at December 31, 2008. Currently, the Company’s
environmental assets are expected to reach the end of their useful lives at
different times over the next 50 years. If the Company were to invest in
numerous new environmental assets, or, these assets were to require closure a
significant number of years before the Company anticipated they would, the
amortization on them would increase, and could have a material negative impact
on the Company’s financial condition and results of operations. The
Company views the likelihood of this occurrence to be remote, and does not
anticipate, based on its past experience with this type of planned remediation,
that an additional accrual related to environmental assets will be
necessary.
The
Company's cash expenditures related to environmental protection and improvement
were approximately $218 million, $209 million, and $214 million in 2008, 2007,
and 2006, respectively. These amounts were primarily for operating
costs associated with environmental protection equipment and facilities, but
also included expenditures for construction and development. The
Company does not expect future environmental capital expenditures arising from
requirements of recently promulgated environmental laws and regulations to
materially increase the Company's planned level of annual capital expenditures
for environmental control facilities.
In recent
years, general economic inflation has not had a material adverse impact on
Eastman's costs. The cost of raw materials is generally based on
market price, although derivative financial instruments were utilized, as
appropriate, to mitigate short-term market price fluctuations. The
volatility of raw material and energy costs will continue and the Company will
continue to pursue pricing and hedging strategies and ongoing cost control
initiatives to offset the effects on gross profit. For additional
information see Note 10, "Fair Value of Financial Instruments", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K.
Effective
first quarter 2008, the Company adopted SFAS No. 157, "Fair Value Measurements",
("SFAS No. 157"), except as it applies to those nonfinancial assets and
nonfinancial liabilities addressed in Financial Accounting Standards Board
(“FASB”) Staff Position FAS 157-2 ("FSP FAS 157-2"). The FASB issued
FSP FAS 157-2 which delays the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The
Company has concluded that FSP FAS 157-2 will not have an impact the Company’s
consolidated financial statements upon adoption.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In December 2007, the FASB issued SFAS
No. 141 (revised 2007) "Business Combinations" ("SFAS No. 141R") which replaces
SFAS No. 141 "Business Combinations" ("SFAS No. 141"). SFAS No. 141R
retains the fundamental requirements of SFAS No. 141 that the acquisition method
of accounting be used for all business combinations. However, SFAS
No. 141R provides for the following changes from SFAS No. 141: an acquirer will
record 100% of assets and liabilities of acquired business, including goodwill,
at fair value, regardless of the level of interest acquired; certain contingent
assets and liabilities will be recognized at fair value at the acquisition date;
contingent consideration will be recognized at fair value on the acquisition
date with changes in fair value to be recognized in earnings upon settlement;
acquisition-related transaction and restructuring costs will be expensed as
incurred; reversals of valuation allowances related to acquired deferred tax
assets and changes to acquired income tax uncertainties will be recognized in
earnings; and when making adjustments to finalize preliminary accounting,
acquirers will revise any previously issued post-acquisition financial
information in future financial statements to reflect any adjustments as if they
occurred on the acquisition date. SFAS No. 141R applies prospectively
to business combinations for which the acquisition date is on or after January
1, 2009. SFAS No. 141R will not have an impact on the Company's
consolidated financial statements when effective, but the nature and magnitude
of the specific effects will depend upon the nature, terms, and size of the
acquisitions consummated after the effective date.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51" ("SFAS No. 160"),
which establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 provides that accounting and reporting for
minority interests be recharacterized as noncontrolling interests and
classified as a component of equity. This Statement also establishes
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 applies to all entities that
prepare consolidated financial statements but will affect only those entities
that have an outstanding noncontrolling interest in one or more subsidiaries or
that deconsolidate a subsidiary. This Statement is effective as of
the beginning of an entity’s first fiscal year beginning after December 15,
2008. The Company has concluded that SFAS No. 160 will not have a
material impact on the Company’s consolidated financial position, liquidity, or
results of operations.
In March
2008, the FASB issued SFAS Statement No. 161 "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The new standard also improves
transparency about the location and amounts of derivative instruments in an
entity’s financial statements; how derivative instruments and related hedged
items are accounted for under SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities"; and how derivative instruments and related
hedged items affect its financial position, financial performance, and cash
flows. The Company has concluded that SFAS No. 161 will not have a
material impact on the Company’s disclosures.
In June
2008, the FASB issued FASB Staff Position ("FSP") Emerging Issues Task Force
("EITF") Issue No. 03-6-1, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities" ("EITF Issue No.
03-6-1"). The FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method. The FSP affects
entities that accrue dividends on share-based payment awards during the awards’
service period when the dividends do not need to be returned if the employees
forfeit the award. This FSP is effective for fiscal years beginning
after December 15, 2008. The Company has concluded that EITF Issue
No. 03-6-1 will not have a material impact on the Company’s consolidated
financial statements.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
December 2008, the FASB issued FSP FAS 132(R)-1, "Employers’ Disclosures about
Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). This FSP
amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,” to provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. This FSP is effective for fiscal years ending
after December 15, 2009. The Company is currently evaluating the
effect FSP FAS 132(R)-1 will have on its disclosures.
For 2009,
the Company expects:
·
|
declines
in volume due to the global recession, partially offset by continued
substitution of Eastman products for other materials and new applications
for existing products despite the softening U.S. and global
economies;
|
·
|
the
volatility of market prices for raw material and energy to continue and
that the Company will continue to use pricing strategies and ongoing cost
control initiatives in an attempt to offset the effects on gross
profit;
|
·
|
most
segments will be challenged to meet their typical operating margins with
the current uncertainty of the global
recession;
|
·
|
modest
sales volume growth for acetate tow in the Fibers segment. The
Company will invest in its alliance with SK to form a company to acquire
and operate a cellulose acetate tow manufacturing facility and related
business in Korea;
|
·
|
to
complete an additional 30 percent expansion of its CASPI segment's
hydrogenated hydrocarbon resins manufacturing capacity in Middelburg, the
Netherlands;
|
·
|
ethylene
volume to decline in the PCI segment due to the staged phase-out of older
cracking units at the Company's Longview, Texas
facility;
|
·
|
the
SP segment will continue to progress with the introduction of its new
copolyester, Eastman TritanTM
copolyester, including a new 30,000 metric ton TritanTM
manufacturing facility expected to be online in
2010;
|
·
|
to
improve the profitability of its PET product lines in the Performance
Polymers segment as a result of previous restructuring actions and to
continue to pursue options to create additional value from its
IntegRexTM technology,
primarily by actively pursuing licensing
opportunities;
|
·
|
to
complete the front-end engineering and design for the industrial
gasification project by mid-2009 and to pursue non-recourse project
financing utilizing the Department of Energy's Federal Loan Guarantee
Program;
|
·
|
depreciation
and amortization to be at or slightly higher than
2008;
|
·
|
pension
expense to be similar to 2008. The Company anticipates defined
benefit pension plans funding of between $25 million and $50
million;
|
·
|
net
interest expense to increase compared with 2008 primarily due to lower
interest income, driven by lower average invested cash balances and lower
average interest rates;
|
·
|
the
effective tax rate to be between 30 and 33 percent, including the benefit
of the investment tax credit and the research and development tax
credit;
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
capital
spending to be between $350 million and $400 million as it selectively
funds targeted growth efforts, while prioritizing capital spending,
including the increased capacity for Eastman TritanTM
copolyester and the front-end engineering and design for the industrial
gasification project;
|
|
to
generate positive free cash flow;
and
|
|
priorities
for uses of available cash to be payment of the quarterly cash dividend,
fund targeted growth initiatives and defined benefit pension plans, and
repurchase shares.
|
In
addition to the above, the Company expects to significantly improve earnings
over the long-term through strategic efforts and growth initiatives in existing
businesses, and expects:
·
|
the
SP segment to improve earnings by continued focus on copolyesters growth,
increasing sales revenue from cellulose esters used in LCD screens and
continued progress with the introduction of its high performance
copolyesters;
|
·
|
to
pursue licensing opportunities for the PCI segment's acetyl and oxo
technologies and for the Performance Polymers segment's IntegRexTM technology;
|
·
|
to
pursue additional growth opportunities in Asia for acetate tow in the
Fibers segment; and
|
·
|
to
continue exploring options with industrial
gasification.
|
See
“Forward-Looking Statements and Risk Factors below.”
The
expectations under "Outlook" and certain other statements in this Annual Report
on Form 10-K may be forward-looking in nature as defined in the Private
Securities Litigation Reform Act of 1995. These statements and other
written and oral forward-looking statements made by the Company from time to
time may relate to, among other things, such matters as planned and expected
capacity increases and utilization; anticipated capital spending; expected
depreciation and amortization; environmental matters; legal proceedings;
exposure to, and effects of hedging of, raw material and energy costs, foreign
currencies and interest rates; global and regional economic, political, and
business conditions; competition; growth opportunities; supply and demand,
volume, price, cost, margin, and sales; earnings, cash flow, dividends and other
expected financial results and conditions; expectations, strategies, and plans
for individual assets and products, businesses and segments as well as for the
whole of Eastman Chemical Company; cash requirements and uses of available cash;
financing plans; pension expenses and funding; credit ratings; anticipated
restructuring, divestiture, and consolidation activities; cost reduction and
control efforts and targets; integration of acquired businesses; strategic
initiatives and development, production, commercialization, and acceptance of
new products, services and technologies and related costs; asset, business and
product portfolio changes; and expected tax rates and net interest
costs.
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 elsewhere in this
Annual 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:
·
|
Conditions
in the global economy and global capital markets may adversely affect the
Company’s results of operations, financial condition, and cash
flows. The Company’s business and operating results have been
and will continue to be affected by the global recession, including the
credit market crisis, declining consumer and business confidence,
fluctuating commodity prices, volatile exchange rates, and other
challenges currently affecting the global economy. The
Company’s customers may experience deterioration of their businesses, cash
flow shortages, and difficulty obtaining financing. As a
result, existing or potential customers may delay or cancel plans to
purchase products and may not be able to fulfill their obligations in a
timely fashion. Further, suppliers may be experiencing similar
conditions, which could impact their ability to fulfill their obligations
to the Company. If the global recession continues for
significant future periods or deteriorates significantly, the Company’s
results of operations, financial condition and cash flows could be
materially adversely
affected.
|
·
|
The
Company is reliant on certain strategic raw material 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 material
and energy commodities, or breakdown or degradation of transportation
infrastructure used for delivery of strategic raw material and energy
commodities, could affect availability and costs of raw material and
energy commodities.
|
·
|
While
temporary shortages of raw material 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 material
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.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
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 material and energy supplies to the Company and
for delivery of the Company's products to customers, could have a material
adverse affect on sales revenue, costs and results of operations and
financial condition.
|
·
|
The
Company has an extensive customer base; however, loss of, or material
financial weakness of, certain of the largest customers could adversely
affect the Company's financial condition and results of operations until
such business is replaced and no assurances can be made that the Company
would be able to regain or replace any lost
customers.
|
·
|
The
Company has efforts underway to exploit growth opportunities in certain
core businesses by developing new products and technologies, licensing
technologies, expanding into new markets, and tailoring product offerings
to customer needs. Current examples include IntegRexTM
technology and new PET polymers products and TritanTM
and other copolyester product innovations. There can be no
assurance that such efforts will result in financially successful
commercialization of such products or acceptance by existing or new
customers or new markets or that large capital projects for such growth
efforts can be completed within the time or at the costs projected due,
among other things, to demand for and availability of construction
materials and labor.
|
·
|
The
Company has made, and intends to continue making, strategic investments,
including in industrial 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 material
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
and obtaining regulatory approvals and operating permits and reaching
agreement on terms of key agreements and arrangements with potential
suppliers and customers. Such delays or cost overruns or the
inability to obtain such approvals or to reach such agreements on
acceptable terms could negatively affect the returns from these strategic
investments and projects.
|
·
|
The
Company anticipates obtaining non-recourse project financing for its
industrial gasification project. There is risk that such
financing cannot be obtained or, if obtained, may be on terms different
than those assumed in the Company's projections for financial performance
of the project, due to any circumstance, change, or condition in the loan
syndication, financial, capital markets, or government loan guarantee
programs, that could reasonably be expected to materially affect
availability, terms, and syndication of such financing. The
ability to enter into financially acceptable project commercial agreements
for such elements as engineering, procurement, and construction, off-take
agreements, commodity and/or interest hedges, utilities, administrative
services, and others, as well as obtaining all necessary regulatory
approvals and operating permits, may impact the available financing for
the project or the terms of such financing, if available, including the
nature and terms of any recourse back to the
Company.
|
·
|
In
addition to productivity and cost reduction initiatives, the Company is
striving to improve margins on its products through price increases where
warranted and accepted by the market; however, the Company's earnings
could be negatively impacted should such increases be unrealized, not be
sufficient to cover increased raw material and energy costs, or have a
negative impact on demand and volume. There can be no
assurances that price increases will be realized or will be realized
within the Company's anticipated
timeframe.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
The
Company has undertaken and expects to continue to undertake productivity
and cost reduction initiatives and organizational restructurings to
improve performance and generate cost savings. There can be no
assurance that these will be completed as planned or beneficial or that
estimated cost savings from such activities will be
realized.
|
·
|
The
Company's facilities and businesses are subject to complex health, safety
and environmental laws and regulations, which require and will continue to
require significant expenditures to remain in compliance with such laws
and regulations currently and in the future. The Company's
accruals for such costs and associated liabilities are subject to changes
in estimates on which the accruals are based. The amount
accrued reflects the Company’s assumptions about remediation requirements
at the contaminated site, the nature of the remedy, the outcome of
discussions with regulatory agencies and other potentially responsible
parties at multi-party sites, and the number and financial viability of
other potentially responsible parties. Changes in the estimates
on which the accruals are based, unanticipated government enforcement
action, or changes in health, safety, environmental, chemical control
regulations, and testing requirements could result in higher or lower
costs.
|
·
|
The
Company and its operations from time to time are parties to, or targets
of, lawsuits, claims, investigations, and proceedings, including product
liability, personal injury, asbestos, patent and intellectual property,
commercial, contract, environmental, antitrust, health and safety, and
employment matters, which are handled and defended in the ordinary course
of business. The Company believes amounts reserved are adequate
for such pending matters; however, results of operations could be affected
by significant litigation adverse to the
Company.
|
·
|
The
Company has deferred tax assets related to capital and operating
losses. The Company establishes valuation allowances to reduce
these deferred tax assets to an amount that is more likely than not to be
realized. The Company’s ability to utilize these deferred tax
assets depends on projected future operating results, the reversal of
existing temporary differences, and the availability of tax planning
strategies. Realization of these assets is expected to occur
over an extended period of time. As a result, changes in tax
laws, assumptions with respect to future taxable income, and tax planning
strategies could result in adjustments to these
assets.
|
·
|
Due
to the Company's global sales, earnings, and asset profile, it is exposed
to volatility in foreign currency exchange rates and interest
rates. The Company may use derivative financial instruments,
including swaps, options and forwards, to mitigate the impact of changes
in exchange rates and interest rates on its financial
results. However, there can be no assurance that these efforts
will be successful and operating results could be affected by significant
adverse changes in currency exchange rates or interest
rates.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
The
Company’s sources of liquidity have been and are expected to be cash from
operating activities, available cash balances, the revolving $700 million
credit facility, sales of domestic receivables under the $200 million
accounts receivable securitization program, the commercial paper market,
and the capital markets. Additionally, the Company relies upon
third parties to provide it with trade credit for purchases of various
products and services. While the Company maintains business
relationships with a diverse group of financial institutions, their
continued viability is not certain and could lead them not to honor their
contractual credit commitments or to renew their extensions of credit or
provide new sources of credit. Furthermore, trade creditors may
be unable to obtain credit and reduce their trade credit
extension. Recently, the capital and credit markets have become
increasingly volatile as a result of adverse conditions that have caused
the failure or near failure of a number of large financial services
companies. If the capital and credit markets continue to
experience volatility and the availability of funds remains limited, the
Company may incur increased costs associated with
borrowings. In addition, it is possible that the Company’s
ability to access the capital and credit markets may be limited by these
or other factors at a time when it would like, or need, to do so, which
could have an impact on the Company’s ability to finance its business or
react to changing economic and business conditions. While the
Company believes that recent governmental and regulatory actions reduce
the risk of a further deterioration or systemic contraction of capital and
credit markets, there can be no certainty that the Company’s liquidity
will not be negatively impacted. Company borrowings are subject
to a number of customary covenants and events of default, including the
maintenance of certain financial ratios. While the Company
expects to remain in compliance with such covenants, there is no certainty
that events and circumstances will not result in covenant violations which
could limit access to credit facilities or cause events of default with
outstanding borrowings. In addition, the
Company’s cash flows from operations may be adversely affected by
unfavorable consequences to the Company’s customers and the markets in
which the Company competes as a result of the current financial, economic,
and capital and credit market conditions and
uncertainty.
|
The
foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure,
including that under "Outlook" and "Forward-Looking Statements and Risk
Factors," and other forward-looking statements and related disclosures made by
the Company in this Annual Report on Form 10-K and elsewhere from time to time,
represents management's best judgment as of the date the information is
given. The Company does not undertake responsibility for updating any
of such information, whether as a result of new information, future events, or
otherwise, except as required by law. Investors are advised, however,
to consult any further public Company disclosures (such as in filings with the
Securities and Exchange Commission or in Company press releases) on related
subjects.
The
Company is exposed to changes in financial market conditions in the normal
course of its business due to its use of certain financial instruments as well
as transacting in various foreign currencies and funding foreign
operations. To mitigate the Company's exposure to these market risks,
Eastman has established policies, procedures, and internal processes governing
its management of financial market risks and the use of financial instruments to
manage its exposure to such risks.
The
Company determines its market risk utilizing sensitivity analysis, which
measures the potential losses in fair value resulting from one or more selected
hypothetical changes in interest rates, foreign currency exchange rates, and/or
commodity prices.
The
Company is exposed to changes in interest rates primarily as a result of its
borrowing and investing activities, which include long-term borrowings used to
maintain liquidity and to fund its business operations and capital requirements.
Currently, these borrowings and investments are predominately U.S. dollar
denominated. The nature and amount of the Company's long-term and
short-term debt may vary as a result of future business requirements, market
conditions, and other factors. For purposes of calculating the market
risks associated with the fair value of interest-rate-sensitive instruments, the
Company uses a one percent or less absolute shift in interest
rates. For 2008 and 2007, the market risks associated with the fair
value of interest-rate-sensitive instruments, assuming an instantaneous absolute
shift in interest rates of one percent or less were approximately $107 million
and $104 million, respectively. This exposure is primarily related to
long-term debt with fixed interest rates.
The
Company's operating cash flows and borrowings denominated in foreign currencies
are exposed to changes in foreign currency exchange rates. The
Company continually evaluates its foreign currency exposure based on current
market conditions and the locations in which the Company conducts
business. In order to mitigate the effect of foreign currency risk,
the Company enters into currency options to hedge probable anticipated, but not
yet committed, export sales and purchase transactions expected within no more
than five years and denominated in foreign currencies; and forward exchange
contracts to hedge certain firm commitments denominated in foreign
currencies. The gains and losses on these contracts offset changes in
the value of related exposures. It is the Company's policy to enter
into foreign currency derivative financial instruments only to the extent
considered necessary to meet its objectives as stated above. The
Company does not enter into foreign currency derivative financial instruments
for speculative purposes. For 2008, the market risks associated with
borrowings denominated in foreign currencies assuming a 10 percent adverse move
in the U.S. dollar relative to each foreign currency was approximately $39
million and an additional $4 million for each additional one percentage point
adverse change in foreign currency rates. For 2007, the market risks
associated with borrowings denominated in foreign currencies assuming a 10
percent adverse move in the U.S. dollar relative to each foreign currency was
approximately $31 million and an additional $3 million for each additional one
percentage point adverse change in foreign currency
rates. Furthermore, since the Company utilizes currency-sensitive
derivative instruments for hedging anticipated foreign currency transactions, a
loss in fair value for those instruments is generally offset by increases in the
value of the underlying anticipated transactions.
The
Company is exposed to fluctuations in market prices for certain of its major raw
materials and energy. To mitigate short-term fluctuations in market
prices for certain commodities, principally propane and natural gas, the Company
enters into option and forward contracts. For 2008, there was limited
market risk associated with options and forwards for these same
commodities. For 2007, the market risk associated with forwards and
options for feedstock and natural gas, assuming an instantaneous parallel shift
in the underlying commodity price of 10 percent, was $20 million and an
additional $2 million for each one percentage point move in closing price
thereafter.
ITEM
|
Page
|
|
|
|
78
|
|
|
|
79
|
|
|
|
81
|
|
|
|
82
|
|
|
|
83
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
84
|
|
90
|
|
91
|
|
91
|
|
92
|
|
92
|
|
92
|
|
93
|
|
93
|
|
94
|
|
96
|
|
103
|
|
105
|
|
105
|
|
106
|
|
108
|
|
111
|
|
112
|
|
115
|
|
116
|
|
116
|
|
120
|
|
120
|
|
125
|
|
127
|
|
129
|
|
|
Management
is responsible for the preparation and integrity of the accompanying
consolidated financial statements of Eastman appearing on pages 80 through 129
Eastman has prepared these consolidated financial statements in accordance with
accounting principles generally accepted in the United States, and the
statements of necessity include some amounts that are based on management's best
estimates and judgments.
Eastman's
accounting systems include extensive internal controls designed to provide
reasonable assurance of the reliability of its financial records and the proper
safeguarding and use of its assets. Such controls are based on
established policies and procedures, are implemented by trained, skilled
personnel with an appropriate segregation of duties, and are monitored through a
comprehensive internal audit program. The Company's policies and
procedures prescribe that the Company and all employees are to maintain the
highest ethical standards and that its business practices throughout the world
are to be conducted in a manner that is above reproach.
The
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, who were responsible for
conducting their audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Their report is included
herein.
The Board
of Directors exercises its responsibility for these financial statements through
its Audit Committee, which consists entirely of non-management Board
members. The independent registered public accounting firm and
internal auditors have full and free access to the Audit
Committee. The Audit Committee meets periodically with
PricewaterhouseCoopers LLP and Eastman's director of internal auditing, both
privately and with management present, to discuss accounting, auditing, policies
and procedures, internal controls, and financial reporting matters.
/s/ J. Brian Ferguson |
|
/s/ Curtis E. Espeland |
J.
Brian Ferguson
|
|
Curtis
E. Espeland
|
Chairman
of the Board and
|
|
Senior
Vice President and
|
Chief
Executive Officer
|
|
Chief
Financial Officer
|
|
|
|
February 25,
2009
|
|
|
To the
Board of Directors and Stockholders of
Eastman
Chemical Company
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Eastman Chemical Company and its subsidiaries at December 31, 2008
and 2007, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal
Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As
discussed in Note 21 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertain tax positions as of
January 1, 2007, and as discussed in Note 11 to the consolidated financial
statements, the Company changed the manner in which it accounts for defined
benefit pension and other postretirement benefit plans as of December 31,
2006.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Cincinnati,
Ohio
February 25,
2009
|
|
For
years ended December 31,
|
(Dollars
in millions, except per share amounts)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Sales
|
$
|
6,726
|
$
|
6,830
|
$
|
6,779
|
Cost
of sales
|
|
5,600
|
|
5,638
|
|
5,514
|
Gross
profit
|
|
1,126
|
|
1,192
|
|
1,265
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
419
|
|
420
|
|
423
|
Research
and development expenses
|
|
158
|
|
156
|
|
155
|
Asset
impairments and restructuring charges, net
|
|
46
|
|
112
|
|
101
|
Other
operating income, net
|
|
(16)
|
|
--
|
|
(68)
|
Operating
earnings
|
|
519
|
|
504
|
|
654
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
70
|
|
62
|
|
77
|
Other
charges (income), net
|
|
20
|
|
(28)
|
|
(17)
|
Earnings
from continuing operations before income taxes
|
|
429
|
|
470
|
|
594
|
Provision
for income taxes from continuing operations
|
|
101
|
|
149
|
|
167
|
Earnings
from continuing operations
|
|
328
|
|
321
|
|
427
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued operations, net of tax
|
|
--
|
|
(10)
|
|
(18)
|
Earnings
(loss) from disposal of discontinued operations, net of
tax
|
|
18
|
|
(11)
|
|
--
|
Net
earnings
|
$
|
346
|
$
|
300
|
$
|
409
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
Earnings
from continuing operations
|
$
|
4.36
|
$
|
3.89
|
$
|
5.20
|
Earnings
(loss) from discontinued operations
|
|
0.23
|
|
(0.26)
|
|
(0.22)
|
Basic
earnings per share
|
$
|
4.59
|
$
|
3.63
|
$
|
4.98
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
Earnings
from continuing operations
|
$
|
4.31
|
$
|
3.84
|
$
|
5.12
|
Earnings
(loss) from discontinued operations
|
|
0.24
|
|
(0.26)
|
|
(0.21)
|
Diluted
earnings per share
|
$
|
4.55
|
$
|
3.58
|
$
|
4.91
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
Net
earnings
|
$
|
346
|
$
|
300
|
$
|
409
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
Change
in cumulative translation adjustment, net of tax
|
|
(97)
|
|
36
|
|
60
|
Change
in pension liability, net of tax
|
|
(232)
|
|
15
|
|
48
|
Change
in unrealized gains (losses) on derivative instruments, net of
tax
|
|
23
|
|
3
|
|
(1)
|
Change
in unrealized gains (losses) on investments, net of tax
|
|
(1)
|
|
1
|
|
--
|
Total
other comprehensive income (loss)
|
|
(307)
|
|
55
|
|
107
|
Comprehensive
income
|
$
|
39
|
$
|
355
|
$
|
516
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
|
|
Retained
earnings at beginning of period
|
$
|
2,349
|
$
|
2,186
|
$
|
1,923
|
Net
earnings
|
|
346
|
|
300
|
|
409
|
Cash
dividends declared
|
|
(132)
|
|
(145)
|
|
(146)
|
Effect
of adoption of FIN 48
|
|
--
|
|
8
|
|
--
|
Retained
earnings at end of period
|
$
|
2,563
|
$
|
2,349
|
$
|
2,186
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
December
31,
|
|
December
31,
|
(Dollars
in millions, except per share amounts)
|
|
2008
|
|
2007
|
|
|
|
|
|
Assets
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash
and cash equivalents
|
$
|
387
|
$
|
888
|
Trade
receivables, net
|
|
275
|
|
546
|
Miscellaneous
receivables
|
|
79
|
|
112
|
Inventories
|
|
637
|
|
539
|
Other
current assets
|
|
45
|
|
74
|
Current
assets held for sale
|
|
--
|
|
134
|
Total
current assets
|
|
1,423
|
|
2,293
|
|
|
|
|
|
Properties
|
|
|
|
|
Properties
and equipment at cost
|
|
8,527
|
|
8,152
|
Less: Accumulated
depreciation
|
|
5,329
|
|
5,306
|
Net
properties
|
|
3,198
|
|
2,846
|
|
|
|
|
|
Goodwill
|
|
325
|
|
316
|
Other
noncurrent assets
|
|
335
|
|
313
|
Noncurrent
assets held for sale
|
|
--
|
|
241
|
Total
assets
|
$
|
5,281
|
$
|
6,009
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Payables
and other current liabilities
|
$
|
819
|
$
|
1,013
|
Borrowings
due within one year
|
|
13
|
|
72
|
Current
liabilities related to assets held for sale
|
|
--
|
|
37
|
Total
current liabilities
|
|
832
|
|
1,122
|
|
|
|
|
|
Long-term
borrowings
|
|
1,442
|
|
1,535
|
Deferred
income tax liabilities
|
|
106
|
|
300
|
Post-employment
obligations
|
|
1,246
|
|
852
|
Other
long-term liabilities
|
|
102
|
|
118
|
Total
liabilities
|
|
3,728
|
|
3,927
|
|
|
|
|
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
Common
stock ($0.01 par value – 350,000,000 shares authorized; shares issued –
94,495,860 and 93,630,292 for 2008 and 2007, respectively)
|
|
1
|
|
1
|
Additional
paid-in capital
|
|
638
|
|
573
|
Retained
earnings
|
|
2,563
|
|
2,349
|
Accumulated
other comprehensive loss
|
|
(335)
|
|
(28)
|
|
|
2,867
|
|
2,895
|
Less:
Treasury stock at cost (22,031,357 shares for 2008 and 13,959,951 shares
for 2007 )
|
|
1,314
|
|
813
|
|
|
|
|
|
Total
stockholders’ equity
|
|
1,553
|
|
2,082
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
|
5,281
|
$
|
6,009
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
For
years ended December 31,
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
earnings
|
$
|
346
|
$
|
300
|
$
|
409
|
|
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
267
|
|
327
|
|
308
|
Asset
impairments charges
|
|
1
|
|
138
|
|
62
|
Gains
on sale of assets
|
|
(14)
|
|
(8)
|
|
(74)
|
Provision
(benefit) for deferred income taxes
|
|
(71)
|
|
(9)
|
|
7
|
Changes
in operating assets and liabilities, net of effect of acquisitions and
divestitures:
|
|
|
|
|
|
|
(Increase)
decrease in trade receivables
|
|
261
|
|
(28)
|
|
(82)
|
(Increase)
decrease in inventories
|
|
(95)
|
|
66
|
|
(99)
|
Increase
(decrease) in trade payables
|
|
(211)
|
|
48
|
|
53
|
Increase
(decrease) in liabilities for employee benefits and incentive
pay
|
|
7
|
|
(55)
|
|
(44)
|
Other
items, net
|
|
162
|
|
(47)
|
|
69
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
653
|
|
732
|
|
609
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
Additions
to properties and equipment
|
|
(634)
|
|
(518)
|
|
(389)
|
Proceeds
from sale of assets
|
|
337
|
|
197
|
|
322
|
Proceeds
from sale of investments
|
|
--
|
|
5
|
|
--
|
Acquisitions
of joint ventures
|
|
(32)
|
|
--
|
|
--
|
Investments
in joint ventures
|
|
(6)
|
|
(40)
|
|
--
|
Additions
to capitalized software
|
|
(10)
|
|
(11)
|
|
(16)
|
Other
items, net
|
|
(31)
|
|
32
|
|
(11)
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(376)
|
|
(335)
|
|
(94)
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
Net
decrease in commercial paper, credit facility, and other
borrowings
|
|
(7)
|
|
(22)
|
|
(50)
|
Repayment
of borrowings
|
|
(175)
|
|
--
|
|
--
|
Dividends
paid to stockholders
|
|
(135)
|
|
(147)
|
|
(144)
|
Treasury
stock purchases
|
|
(501)
|
|
(382)
|
|
--
|
Proceeds
from stock option exercises and other items
|
|
39
|
|
103
|
|
93
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
(779)
|
|
(448)
|
|
(101)
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
1
|
|
--
|
|
1
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
(501)
|
|
(51)
|
|
415
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
888
|
|
939
|
|
524
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
387
|
$
|
888
|
$
|
939
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Financial
Statement Presentation
The
consolidated financial statements of Eastman Chemical Company and subsidiaries
("Eastman" or the "Company") are prepared in conformity with accounting
principles generally accepted in the United States and of necessity include some
amounts that are based upon management estimates and
judgments. Future actual results could differ from such current
estimates. The consolidated financial statements include assets,
liabilities, sales revenue, and expenses of all majority-owned subsidiaries and
joint ventures. Eastman accounts for other joint ventures and
investments in minority-owned companies where it exercises significant influence
on the equity basis. Intercompany transactions and balances are
eliminated in consolidation.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash, time deposits, and readily marketable securities
with maturities of three months or less at the purchase date.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. The allowances are based on the number of days an
individual receivable is delinquent and management’s regular assessment of the
financial condition of the Company’s customers. The Company considers
that a receivable is delinquent if it is unpaid after the terms of the related
invoice have expired. The Company evaluates the allowance based on a
monthly assessment of the aged receivables. Write-offs are recorded
at the time a customer receivable is deemed uncollectible. Allowance
for doubtful accounts was $8 million and $6 million at December 31, 2008 and
2007, respectively.
Inventories
Inventories
are valued at the lower of cost or market. The Company determines the
cost of most raw materials, work in process, and finished goods inventories in
the United States by the last-in, first-out ("LIFO") method. The cost
of all other inventories, including inventories outside the United States, is
determined by the average cost method, which approximates the first-in,
first-out ("FIFO") method. The Company writes-down its inventories
for estimated obsolescence or unmarketable inventory equal to the difference
between the carrying value of inventory and the estimated market value based
upon assumptions about future demand and market conditions.
Properties
The
Company records properties at cost. Maintenance and repairs are
charged to earnings; replacements and betterments are
capitalized. When Eastman retires or otherwise disposes of assets, it
removes the cost of such assets and related accumulated depreciation from the
accounts. The Company records any profit or loss on retirement or
other disposition in earnings. Asset impairments are reflected as
increases in accumulated depreciation.
Depreciation
Depreciation
expense is calculated based on historical cost and the estimated useful lives of
the assets (buildings and building equipment 20 to 50 years; machinery and
equipment 3 to 33 years), generally using the straight-line
method. Accelerated depreciation is reported when the estimated
useful life is shortened and continues to be reported in Cost of Goods
Sold.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Computer
Software Costs
Capitalized
software costs are amortized primarily on a straight-line basis over three
years, the expected useful life of such assets, beginning when the software
project is substantially complete and placed in service. Capitalized
software in 2008, 2007, and 2006 was approximately $10 million, $11 million, and
$17 million, respectively. During those same periods, approximately
$11 million, $13 million, and $13 million, respectively, of previously
capitalized costs were amortized. At December 31, 2008 and 2007, the
unamortized capitalized software costs were $24 million and $24 million,
respectively. Capitalized software costs are reflected in other
noncurrent assets.
Impairment
of Long Lived Assets
The
Company evaluates the carrying value of long-lived assets, including
definite-lived intangible assets, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Such events
and circumstances include, but are not limited to, significant decreases in the
market value of the asset, adverse changes in the extent or manner in which the
asset is being used, significant changes in business climate, or current or
projected cash flow losses associated with the use of the assets. The
carrying value of a long-lived asset is considered impaired when the total
projected undiscounted cash flows from such asset is separately identifiable and
is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
long-lived asset. For long-lived assets to be held and used, fair
value of fixed (tangible) assets and definite-lived intangible assets is
determined primarily using either the projected cash flows discounted at a rate
commensurate with the risk involved or an appraisal. For long-lived
assets to be disposed of by sale or other than by sale, fair value is determined
in a similar manner, except that fair values are reduced for disposal
costs.
The
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", require that goodwill and
indefinite-lived intangible assets be tested at least annually for impairment
and require reporting units to be identified for the purpose of assessing
potential future impairments of goodwill. The carrying value of
goodwill and indefinite-lived intangibles is considered impaired when their fair
value, as established by appraisal or based on undiscounted future cash flows of
certain related products, is less than their carrying value. The
Company conducts its annual testing of goodwill and indefinite-lived intangible
assets for impairment in the third quarter of each year, unless events warrant
more frequent testing. Goodwill and indefinite-lived intangibles
primarily consist of goodwill in the Chemicals, Adhesives, Specialty Polymers
and Inks (“CASPI”) segment, which has maintained earnings through the second
half of 2008. As such, recent events did not warrant
retesting.
Investments
The
consolidated financial statements include the accounts in which the Company is a
primary beneficiary of a variable interest entity (“VIE”), if applicable, or the
accounts of the Company and all its subsidiaries in which a controlling interest
is maintained. For those consolidated subsidiaries in which the
Company’s ownership is less than 100 percent, the interests of the other
stockholders are included in other long-term liabilities.
Investments
in affiliates over which the Company has significant influence but not a
controlling interest are carried on the equity basis. Under the
equity method of accounting, these investments are included in other noncurrent
assets. The Company includes its share of earnings and losses of such
investments in other income and charges and its share of other comprehensive
income (loss) in the appropriate component of other accumulated comprehensive
income (loss) in stockholders’ equity.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Marketable
securities held by the Company, currently common or preferred stock, are deemed
by management to be available-for-sale and are reported at fair value, with net
unrealized gains or losses reported as a component of other accumulated
comprehensive income (loss) in stockholders' equity. Realized gains
and losses are included in earnings and are derived using the specific
identification method for determining the cost of securities. The
Company includes these investments in other noncurrent assets.
Other
equity investments, for which fair values are not readily determinable, are
carried at historical cost and are included in other noncurrent
assets.
The
Company records an investment impairment charge when it believes an investment,
accounted for by the Company as a marketable security or recorded at historical
cost, has experienced a decline in value that is other than
temporary.
Pension
and Other Post-employment Benefits
The
Company maintains defined benefit plans that provide eligible employees with
retirement benefits. Additionally, Eastman provides life insurance
and health care benefits for eligible retirees and health care benefits for
retirees’ eligible survivors. The costs and obligations related to
these benefits reflect the Company’s assumptions related to general economic
conditions (particularly interest rates), expected return on plan assets, rate
of compensation increase for employees, and health care cost
trends. The cost of providing plan benefits depends on demographic
assumptions including retirements, mortality, turnover, and plan
participation.
In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 158, "Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statement No. 87, 88, 106, and 132
(R)" ("SFAS No. 158"), which changes the accounting for pension and other
postretirement benefit plans. This Standard was adopted by Eastman
for the year ended December 31, 2006. For additional information, see
Note 11, "Retirement Plans."
The
Company adopted SFAS No. 157, "Fair Value Measurements", ("SFAS 157") on January
1, 2008 and applied the standard to the defined benefit pension plan assets as
of December 31, 2008 consistent with the measurement date.
SFAS 157
establishes a valuation hierarchy for disclosure of the inputs to the valuation
used to measure fair value. This hierarchy prioritizes the inputs
into three broad levels. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or
liabilities. Level 2 inputs are quoted prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument. Level 3
inputs are unobservable inputs based on the Company's assumptions used to
measure assets and liabilities at fair value. A financial asset or
liability’s classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.
(Dollars
in millions)
|
|
Fair
Value Measurements at December 31, 2008
|
Description
|
|
December
31, 2008
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant
Other Observable Inputs (Level 2)
|
|
Significant
Unobservable Inputs (Level 3)
|
Public
Equity Funds
|
$
|
437
|
$
|
437
|
$
|
--
|
$
|
--
|
Private
Equity and Real Estate Funds
|
|
314
|
|
8
|
|
--
|
|
306
|
Fixed
Income and Cash
|
|
179
|
|
179
|
|
--
|
|
--
|
Total
|
$
|
930
|
$
|
624
|
$
|
--
|
$
|
306
|
|
|
|
|
|
|
|
|
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can be
reasonably estimated. When a single amount cannot be reasonably
estimated but the cost can be estimated within a range, the Company accrues the
minimum amount. This undiscounted accrued amount reflects the
Company’s assumptions about remediation requirements at the contaminated site,
the nature of the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites, and the number
and financial viability of other potentially responsible
parties. Changes in the estimates on which the accruals are based,
unanticipated government enforcement action, or changes in health, safety,
environmental, and chemical control regulations and testing requirements could
result in higher or lower costs.
The
Company also establishes reserves for closure/postclosure costs associated with
the environmental and other assets it maintains. Environmental assets
include but are not limited to waste management units, such as landfills, water
treatment facilities, and ash ponds. When these types of assets are
constructed or installed, a reserve is established for the future costs
anticipated to be associated with the closure of the site based on an expected
life of the environmental assets and the applicable regulatory closure
requirements. These expenses are charged into earnings over the
estimated useful life of the assets. Currently, the Company estimates
the useful life of each individual asset up to 50 years. If the
Company changes its estimate of the asset retirement obligation costs or its
estimate of the useful lives of these assets, the expenses to be charged into
earnings could increase or decrease.
In
accordance with Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations" ("FIN 47"), the Company also monitors conditional
obligations and will record reserves associated with them when and to the extent
that more detailed information becomes available concerning applicable
retirement costs.
Accruals
for environmental liabilities are included in other long-term liabilities and
exclude claims for recoveries from insurance companies or other third
parties. Environmental costs are capitalized if they extend the life
of the related property, increase its capacity, and/or mitigate or prevent
future contamination. The cost of operating and maintaining
environmental control facilities is charged to expense.
The
Company's cash expenditures related to environmental protection and improvement
were approximately $218 million, $209 million, and $214 million in 2008, 2007,
and 2006, respectively. These amounts were primarily for operating
costs associated with environmental protection equipment and facilities, but
also included expenditures for construction and development. The
Company does not expect future environmental capital expenditures arising from
requirements of recently promulgated environmental laws and regulations to
materially increase the Company's planned level of annual capital expenditures
for environmental control facilities.
For
additional information see Note 13, "Environmental Matters" and Note 26,
"Reserve Rollforwards".
Derivative
Financial Instruments
Derivative
financial instruments are used by the Company in the management of its exposures
to fluctuations in foreign currency, raw material and energy costs, and interest
rates. Such instruments are used to mitigate the risk that changes in
exchange rates, interest rates or raw material and energy costs will adversely
affect the eventual dollar cash flows resulting from the hedged
transactions.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company enters into currency option and forward contracts to hedge anticipated,
but not yet committed, export sales and purchase transactions expected within no
more than five years and denominated in foreign currencies (principally the
Euro, British pound and the Japanese yen); and forward exchange contracts to
hedge certain firm commitments denominated in foreign currencies. To
mitigate short-term fluctuations in market prices for propane and natural gas
(major raw material and energy used in the manufacturing process), the Company
enters into option and forward contracts. From time to time, the
Company also utilizes interest rate derivative instruments, primarily swaps, to
hedge the Company's exposure to movements in interest rates.
The
Company's qualifying option and forward contracts are accounted for as hedges
because the derivative instruments are designated and effective as hedges and
reduce the Company's exposure to identified risks. Gains and losses
resulting from effective hedges of existing liabilities, firm commitments, or
anticipated transactions are deferred and recognized when the offsetting gains
and losses are recognized on the related hedged items and are reported as a
component of operating earnings.
Deferred
currency option premiums are included in the fair market value of the
hedges. The related obligation for payment is generally included in
other liabilities and is paid in the period in which the options are exercised
or expire.
(Dollars
in millions)
|
|
Fair
Value Measurements at December 31, 2008
|
Description
|
|
December
31, 2008
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant
Other Observable Inputs (Level 2)
|
|
Significant
Unobservable Inputs (Level 3)
|
Derivative
Assets
|
$
|
16
|
$
|
--
|
$
|
16
|
$
|
--
|
Derivative
Liabilities
|
|
(14)
|
|
--
|
|
(14)
|
|
--
|
|
$
|
2
|
$
|
--
|
$
|
2
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Litigation
and Contingent Liabilities
The
Company and its operations from time to time are parties to or targets of
lawsuits, claims, investigations, and proceedings, including product liability,
personal injury, asbestos, patent and intellectual property, commercial,
contract, environmental, antitrust, health and safety, and employment matters,
which are handled and defended in the ordinary course of
business. The Company accrues a liability for such matters when it is
probable that a liability has been incurred and the amount can be reasonably
estimated. When a single amount cannot be reasonably estimated but
the cost can be estimated within a range, the Company accrues the minimum
amount. The Company expenses legal costs, including those expected to
be incurred in connection with a loss contingency, as incurred.
Revenue
Recognition and Customer Incentives
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price to the customer
is fixed or determinable, and collectability is reasonably assured.
The
Company records estimated obligations for customer programs and incentive
offerings, which consist primarily of revenue or volume-based amounts that a
customer must achieve over a specified period of time, as a reduction of revenue
to each underlying revenue transaction as the customer progresses toward
reaching goals specified in incentive agreements. These estimates are
based on a combination of forecast of customer sales and actual sales volumes
and revenues against established goals, the customer’s current level of
purchases, Eastman’s knowledge of customer purchasing habits, and industry
pricing practice. The incentive payment rate may be variable, based
upon the customer reaching higher sales volume or revenue levels over a
specified period of time in order to receive an agreed upon incentive
payment.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Shipping
and Handling Fees and Costs
Shipping
and handling fees related to sales transactions are billed to customers and are
recorded as sales revenue. Shipping and handling costs incurred are
recorded in cost of sales.
Restructuring
of Operations
The
Company records restructuring charges incurred in connection with consolidation
of operations, exited business lines, or shutdowns of specific sites that
are expected to be substantially completed within twelve months.
These restructuring charges are recorded as incurred, and are associated
with site closures, legal and environmental matters, demolition, contract
terminations, or other costs directly related to the restructuring.
The Company records severance charges for involuntary employee separations
when the separation is probable and reasonably estimable. The Company
records severance charges for voluntary employee separations ratably over the
remaining service period of those employees.
Share-based
Compensation
The
Company recognizes compensation expense in the financial statements for stock
options and other share-based compensation awards based upon the grant-date fair
value over the substantive vesting period. For additional
information, see Note 16, "Share-Based Compensation Plans and
Awards."
Compensated
Absences
The
Company accrues compensated absences and related benefits as current charges to
earnings in the period earned.
Research
and Development
All costs
identified as research and development costs are charged to expense when
incurred with the exception of third-party reimbursed and government-funded
research and development. Expenses for third-party reimbursed and
government-funded research and development are deferred until reimbursement is
received to ensure appropriate matching of revenue and expense, provided
specific criteria are met.
Other
Income and Other Charges
Included
in other charges (income), net are gains or losses on foreign exchange
transactions, results from equity investments, gains on the sale of business
venture investments, write-downs to fair value of certain technology business
venture investments due to other than temporary declines in value, other
non-operating income or charges related to Holston Defense Corporation
("HDC"), gains from the sale of non-operating assets, royalty income,
certain litigation costs, fees on securitized receivables, other non-operating
income, and other miscellaneous items.
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach,
deferred taxes represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable for the
current year plus the change in deferred taxes during the
year. Deferred taxes result from differences between the financial
and tax bases of the Company’s assets and liabilities and are adjusted for
changes in tax rates and tax laws when changes are enacted. Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized. Provision has been
made for income taxes on unremitted earnings of subsidiaries and affiliates,
except for subsidiaries in which earnings are deemed to be permanently
reinvested.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
accordance with Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB No. 109”, the Company recognizes income tax
positions that meet the more likely than not threshold and accrues interest
related to unrecognized income tax positions which is recorded as a component of
the income tax provision
Prior to
2007, the Company determined tax contingencies in accordance with SFAS
No. 5, “Accounting for Contingencies.” The Company recorded
estimated tax liabilities to the extent the contingencies were probable and
could be reasonably estimated.
|
DISCONTINUED
OPERATIONS AND ASSETS HELD FOR SALE
|
In first
quarter 2008, the Company sold its polyethylene terephthalate ("PET") polymers
and purified terephthalic acid ("PTA") production facilities in the Netherlands
and its PET production facility in the United Kingdom and related businesses for
approximately $329 million. The Company recognized a gain of $18
million, net of tax, related to the sale of these businesses which includes the
recognition of deferred currency translation adjustments of approximately $40
million, net of tax. In addition, the Company indemnified the buyer
against certain liabilities primarily related to taxes, legal matters,
environmental matters, and other representations and warranties. As
of December 31, 2007, the Company had definitive agreements to sell assets and
liabilities related to these businesses, resulting in them being classified as
assets held for sale at December 31, 2007. During first quarter 2007,
the Company recorded asset impairments and restructuring charges of $21 million
for its PET polymers manufacturing facility in Spain, which it sold in second
quarter 2007. Net proceeds from the sale of the Spain site were
approximately $42 million. In addition, the Company indemnified the
buyer against certain liabilities primarily related to taxes, legal matters,
environmental matters, and other representations and warranties.
The
manufacturing facilities in the Netherlands, United Kingdom, and Spain, and
related businesses represent the Company's European PET business and qualify as
a component of an entity under SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," and accordingly their results are presented as
discontinued operations and are not included in the results from continuing
operations for all periods presented in the Company's unaudited consolidated
financial statements.
In fourth
quarter 2007, the Company sold its PET polymers production facilities in Mexico
and Argentina and the related businesses. The results related to the
Mexico and Argentina facilities are not presented as discontinued operations due
to continuing involvement of the Company's Performance Polymers segment in the
region including contract polymer intermediates sales under a transition supply
agreement to the divested sites through 2008.
Operating
results of the discontinued operations which were formerly included in the
Performance Polymers segment are summarized below:
|
|
For
years ended December 31,
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Sales
|
$
|
169
|
$
|
542
|
$
|
671
|
Earnings
(loss) before income taxes
|
|
6
|
|
(9)
|
|
(18)
|
Earnings
(loss) from discontinued operations, net of tax
|
|
--
|
|
(10)
|
|
(18)
|
Earnings
(loss) on disposal, net of tax
|
|
18
|
|
(11)
|
|
--
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Assets
and liabilities of the discontinued operations classified as held for sale as of
December 31, 2007 are summarized below:
|
|
December
31,
|
(Dollars
in millions)
|
|
2007
|
Current
assets
|
|
|
Trade
receivables
|
$
|
85
|
Inventories
|
|
49
|
Total
current assets held for sale
|
|
134
|
|
|
|
Non-current
assets
|
|
|
Properties
and equipment, net
|
|
236
|
Other
non-current assets
|
|
5
|
Total
non-current assets held for sale
|
|
241
|
|
|
|
Total
assets
|
$
|
375
|
|
|
|
Current
liabilities
|
|
|
Payables
and other current liabilities, net
|
$
|
37
|
Total
current liabilities held for sale
|
|
37
|
|
|
|
Total
liabilities
|
$
|
37
|
|
|
December
31,
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
At
FIFO or average cost (approximates current cost)
|
|
|
|
|
Finished
goods
|
$
|
634
|
$
|
607
|
Work
in process
|
|
200
|
|
195
|
Raw
materials and supplies
|
|
328
|
|
247
|
Total
inventories
|
|
1,162
|
|
1,049
|
LIFO
Reserve
|
|
(525)
|
|
(510)
|
Total
inventories
|
$
|
637
|
$
|
539
|
Inventories
valued on the LIFO method were approximately 75 percent and 70 percent of total
inventories for 2008 and 2007, respectively.
|
PROPERTIES
AND ACCUMULATED DEPRECIATION
|
|
|
December
31,
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
Properties
|
|
|
|
|
Land
|
$
|
79
|
$
|
53
|
Buildings
and building equipment
|
|
803
|
|
782
|
Machinery
and equipment
|
|
7,190
|
|
7,002
|
Construction
in progress
|
|
455
|
|
315
|
Properties
and equipment at cost
|
$
|
8,527
|
$
|
8,152
|
Less: Accumulated
depreciation
|
|
5,329
|
|
5,306
|
Net
properties
|
$
|
3,198
|
$
|
2,846
|
Cumulative
construction-period interest of $204 million and $224 million, reduced by
accumulated depreciation of $130 million and $146 million, is included in net
properties at December 31, 2008 and 2007, respectively.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Interest
capitalized during 2008, 2007, and 2006 was $12 million, $10 million, and $7
million, respectively.
Depreciation
expense related to continuing operations was $256 million, $313 million, and
$294 million for 2008, 2007, and 2006, respectively. Depreciation
expense for the years ended December 31, 2008 and 2007 included $9 million and
$49 million, respectively, of accelerated depreciation costs related to
restructuring decisions in association with cracking units in Longview, Texas,
and higher cost PET polymer intermediates assets in Columbia, South
Carolina. The accelerated depreciation was completed in
2008. The transformation at Columbia, South Carolina was completed in
2008. The Company shut down the first of three cracking units as part
of the stage phase-out of its three oldest cracking units in Longview, Texas in
fourth quarter 2007. Shutdown timing for the remaining two units will
depend on feedstock and olefin market conditions.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Changes
in the carrying amount of goodwill follow:
(Dollars
in millions)
|
|
CASPI
Segment
|
|
Other
Segments
|
|
Total
Eastman Chemical
|
|
|
|
|
|
|
|
Reported
balance at December 31, 2006
|
$
|
308
|
$
|
6
|
$
|
314
|
Currency
translation adjustments
|
|
2
|
|
--
|
|
2
|
Reported
balance at December 31, 2007
|
$
|
310
|
$
|
6
|
$
|
316
|
Additions
|
|
--
|
|
10
|
|
10
|
Currency
translation adjustments
|
|
(1)
|
|
--
|
|
(1)
|
Reported
balance at December 31, 2008
|
$
|
309
|
$
|
16
|
$
|
325
|
Intangible
assets include developed technology, customer lists, patents and patent
licenses, and trademarks with a net book value of $79 million in 2008 and $16
million in 2007. Other intangible assets are included in other
noncurrent assets on the balance sheet.
Eastman has a 50 percent
interest in and serves as the operating partner in Primester, a joint venture
which manufactures cellulose acetate at Eastman's Kingsport, Tennessee
plant. This investment is accounted for under the equity
method. Eastman's net investment in the joint venture at
December 31, 2008 and 2007 was approximately $39 million and $43 million,
respectively, which was comprised of the recognized portion of the venture's
accumulated deficits, long-term amounts owed to Primester, and a line of credit
from Eastman to Primester. Such amounts are included in other noncurrent
assets.
Eastman
owns a 50 percent interest in Nanjing Yangzi Eastman Chemical Ltd. (“Nanjing”),
a company which manufactures EastotacTM
hydrocarbon tackifying resins for the adhesives market. This joint
venture is accounted for under the equity method and is included in other
noncurrent assets. At December 31, 2008 and 2007, the Company’s
investment in Nanjing was approximately $5 million and $7 million,
respectively.
|
ACQUISITION
AND DIVESTITURE OF INDUSTRIAL GASIFICATION
INTERESTS
|
In
October 2007, the Company entered into an agreement with Green Rock Energy,
L.L.C. ("Green Rock") to jointly develop an industrial gasification facility in
Beaumont, Texas through TX Energy, L.L.C. ("TX Energy"). In June
2008, the Company acquired Green Rock’s 50 percent ownership interest in TX
Energy for approximately $35 million, which is primarily allocated to properties
and equipment.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
results of operations of TX Energy for the periods subsequent to the acquisition
have been included in Eastman's consolidated financial statements. If
TX Energy had been consolidated for the periods prior to the acquisition, the
Company’s consolidated revenue, net income and earnings per share would not have
been materially different than reported. With this acquisition, the
Company became the sole owner and developer of the industrial gasification
facility in Beaumont, Texas.
Eastman
had also begun to participate in an industrial gasification project in St. James
Parish, Louisiana sponsored by Faustina Hydrogen Products, L.L.C.
("Faustina"). Through May 2008, the Company had invested
approximately $11 million in Faustina. In June 2008, the Company sold
its ownership interest in Faustina for approximately $11 million and will no
longer participate in the project.
|
PAYABLES
AND OTHER CURRENT LIABILITIES
|
|
|
December
31,
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
Trade
creditors
|
$
|
390
|
$
|
578
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
|
129
|
|
138
|
Accrued
taxes
|
|
41
|
|
36
|
Post-employment
obligations
|
|
60
|
|
60
|
Interest
payable
|
|
30
|
|
31
|
Bank
overdrafts
|
|
4
|
|
6
|
Other
|
|
165
|
|
164
|
Total
payables and other current liabilities
|
$
|
819
|
$
|
1,013
|
The
current portion of post-employment obligations is an estimate of current year
payments in excess of plan assets.
|
December
31,
|
(Dollars
in millions)
|
2008
|
|
2007
|
|
|
|
|
Borrowings
consisted of:
|
|
|
|
3
1/4% notes due 2008
|
$
|
--
|
$
|
72
|
7%
notes due 2012
|
154
|
|
148
|
6.30%
notes due 2018
|
207
|
|
188
|
7
1/4% debentures due 2024
|
497
|
|
497
|
7
5/8% debentures due 2024
|
200
|
|
200
|
7.60%
debentures due 2027
|
298
|
|
298
|
Credit
facility borrowings
|
84
|
|
188
|
Other
|
15
|
|
16
|
Total
borrowings
|
1,455
|
|
1,607
|
Borrowings
due within one year
|
(13)
|
|
(72)
|
Long-term
borrowings
|
$
|
1,442
|
$
|
1,535
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2008, the Company had credit facilities with various U.S. and
foreign banks totaling approximately $800 million. These credit
facilities consist of a $700 million revolving credit facility (the "Credit
Facility") expiring in April 2013, as well as a 60 million Euro credit facility
("Euro Facility"). The Credit Facility has two tranches, with $125
million expiring in 2012 and $575 million expiring in 2013. The Euro
Facility expires in 2012. Borrowings under these credit facilities
are subject to interest at varying spreads above quoted market
rates. The Credit Facility requires a facility fee on the total
commitment. In addition, these credit facilities contain a number of
customary 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. At December 31, 2008, the
Company’s credit facility borrowings totaled $84 million at an effective
interest rate of 3.74 percent. At December 31, 2007, the Company’s
credit facility borrowings totaled $188 million at an effective interest rate of
4.79 percent.
The
Credit Facility provides liquidity support for commercial paper borrowings and
general corporate purposes. Accordingly, any outstanding commercial
paper borrowings reduce borrowings available under the Credit
Facility. Since the Credit Facility expires in April 2013, any
commercial paper borrowings supported by the Credit Facility are classified as
long-term borrowings because the Company has the ability and intent to refinance
such borrowings on a long-term basis.
In
December 2008, outstanding interest rate swaps were settled for $36 million
resulting in effective interest rates of 5.22 percent for the 7% notes due in
2012 and 4.14 percent for the 6.30% notes due in 2018. At December
31, 2007 the Company had outstanding interest rate swaps associated with the
entire outstanding principle of the 7% notes due in 2012 and $150 million of the
outstanding principle of the 6.30% notes due in 2018 to convert the notes from
fixed rate to variable rate borrowings. The average variable interest
rate on the 7% notes was 7.12 percent for December 31,
2007. The average variable interest rate on the 6.30% notes was
5.52 percent for
December 31, 2007.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
|
|
December
31, 2008
|
|
December
31, 2007
|
(Dollars
in millions)
|
|
Recorded
Amount
|
|
Fair
Value
|
|
Recorded
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
$
|
1,442
|
$
|
1,369
|
$
|
1,535
|
$
|
1,637
|
The fair
value for fixed-rate borrowings is based on current interest rates for
comparable securities. The Company's floating-rate borrowings
approximate fair value.
Hedging
Programs
Financial
instruments held as part of the hedging programs discussed below are recorded at
fair value based upon comparable market transactions as quoted by the broker and
on valuations based on the current forward market.
The
Company is exposed to market risk, such as changes in currency exchange rates,
raw material and energy costs and interest rates. The Company uses
various derivative financial instruments pursuant to the Company's hedging
policies to mitigate these market risk factors and their effect on the cash
flows of the underlying transactions. Designation is performed on a
specific exposure basis to support hedge accounting. The changes in
fair value of these hedging instruments are offset in part or in whole by
corresponding changes in the cash flows of the underlying exposures being
hedged. The Company does not hold or issue derivative financial
instruments for trading purposes.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company manufactures and sells its products in a number of countries throughout
the world and, as a result, is exposed to movements in foreign currency exchange
rates. To manage the volatility relating to these exposures, the
Company nets the exposures on a consolidated basis to take advantage of natural
offsets. To manage the remaining exposure, the Company enters into
currency options and forwards to hedge probable anticipated, but not yet
committed, export sales and purchase transactions expected within no more than
five years and denominated in foreign currencies (principally the Euro, British
pound, and the Japanese yen) and forward exchange contracts to hedge certain
firm commitments denominated in foreign currencies. These contracts
are designated as cash flow hedges. The mark-to-market gains or
losses on qualifying hedges are included in accumulated other comprehensive
income (loss) to the extent effective, and reclassified into sales in the period
during which the hedged transaction affects earnings.
Raw
Material and Energy Hedging
Raw
material and energy sources used by the Company are subject to price volatility
caused by weather, supply conditions, economic variables and other unpredictable
factors. To mitigate short-term fluctuations in market prices for
propane and natural gas, the Company enters into option and forward
contracts. These contracts are designated as cash flow
hedges. The mark-to-market gains or losses on qualifying hedges are
included in accumulated other comprehensive income (loss) to the extent
effective, and reclassified into cost of sales in the period during which the
hedged transaction affects earnings.
Interest
Rate Hedging
The
Company's policy is to manage interest cost using a mix of fixed and variable
rate debt. To manage this mix in a cost-efficient manner, the Company
enters into interest rate swaps in which the Company agrees to exchange the
difference between fixed and variable interest amounts calculated by reference
to an agreed upon notional principal amount. These swaps are
designated to hedge the fair value of underlying debt obligations with the
interest rate differential reflected as an adjustment to interest expense over
the life of the swaps. As these instruments are 100 percent
effective, there is no impact on earnings due to hedge
ineffectiveness.
From time
to time, the Company also utilizes interest rate derivative instruments,
primarily forwards, to hedge the Company’s exposure to movements in interest
rates on anticipated debt offerings. These instruments are designated
as cash flow hedges and are typically 100 percent effective. As a
result, there is no current impact on earnings due to hedge
ineffectiveness. The mark-to-market gains or losses on these hedges
are included in accumulated other comprehensive income (loss) to the extent
effective, and are reclassified into interest expense over the term of the
related debt instruments.
Hedging
Summary
At
December 31, 2008, monetized positions and mark-to-market gains from raw
materials and energy, currency, and certain interest rate hedges that were
included in accumulated other comprehensive income totaled approximately $20
million. If realized, approximately $7 million in gains will be
reclassified into earnings during the next 12 months. The
mark-to-market gains or losses on non-qualifying, excluded and ineffective
portions of hedges are immediately recognized in cost of sales or other income
and charges. There were none recognized in 2008.
At
December 31, 2007, mark-to-market losses from raw materials and energy,
currency, and certain interest rate hedges that were included in accumulated
other comprehensive loss totaled approximately $3 million. 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. The Company recognized a $3 million net gain during
2007.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Eastman
maintains defined benefit plans that provide eligible employees with retirement
benefits. Prior to 2000, benefits were calculated using a defined
benefit formula based on age, years of service, and the employee’s final average
compensation as defined in the plans. Effective January 1, 2000, the
Company's U.S. defined benefit pension plan, the Eastman Retirement Assistance
Plan, was amended. Employees' accrued pension benefits earned prior
to January 1, 2000 are calculated based on previous plan provisions using the
employee's age, years of service, and final average compensation as defined in
the plans. The amended defined benefit pension plan uses a pension
equity formula based on age, years of service, and final average compensation to
calculate an employee's retirement benefits from January 1, 2000
forward. Benefits payable will be the combined pre-2000 and post-1999
benefits. Employees hired on or after January 1, 2007 will not be
eligible for the U.S. defined benefit pension plans.
Benefits
are paid to employees from trust funds. Contributions to the plan are made as
permitted by laws and regulations. The pension trust fund does not directly own
any of the Company’s common stock.
Pension
coverage for employees of Eastman's non-U.S. operations is provided, to the
extent deemed appropriate, through separate plans. The Company
systematically provides for obligations under such plans by depositing funds
with trustees, under insurance policies, or by book reserves.
Eastman
adopted the provisions of SFAS No. 158 as of December 31, 2006. The
table below summarizes the incremental effects of SFAS No. 158 adoption on the
individual line items in the Statement of Financial Position at December 31,
2006 for defined benefit retirement plans.
December
31, 2006
|
(Dollars
in millions)
|
|
Pre-SFAS
No.
158
|
|
Adjustment
to initially apply FAS 158
|
|
Post
SFAS
No.
158 Adjustment
|
|
|
|
|
|
|
|
Intangible
asset
|
$
|
21
|
$
|
(21)
|
$
|
--
|
Deferred
tax asset
|
|
119
|
|
42
|
|
161
|
Accrued
pension liability
|
|
(241)
|
|
(105)
|
|
(346)
|
Accumulated
other comprehensive loss, net of tax
|
|
(207)
|
|
(84)
|
|
(291)
|
|
|
|
|
|
|
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Below is
a summary balance sheet of the change in plan assets during 2008 and 2007, the
funded status of the plans, amounts recognized in the Statements of Financial
Position, and a summary of amounts recognized in accumulated other comprehensive
income.
The
assumptions used to develop the projected benefit obligation for the Company's
significant U.S. and non-U.S. defined benefit pension plans are also provided in
the following tables.
Summary
Balance Sheet
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
Change
in projected benefit obligation:
|
|
|
|
|
Benefit
obligation, beginning of year
|
$
|
1,470
|
$
|
1,593
|
Service
cost
|
|
46
|
|
48
|
Interest
cost
|
|
87
|
|
90
|
Actuarial
gain
|
|
--
|
|
(58)
|
Plan
amendments and other
|
|
(22)
|
|
(55)
|
Effect
of currency exchange
|
|
(52)
|
|
16
|
Benefits
paid
|
|
(106)
|
|
(164)
|
Benefit
obligation, end of year
|
$
|
1,423
|
$
|
1,470
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
Fair
value of plan assets, beginning of year
|
$
|
1,346
|
$
|
1,247
|
Actual
return on plan assets
|
|
(290)
|
|
115
|
Plan
amendments and other
|
|
--
|
|
1
|
Effect
of currency exchange
|
|
(41)
|
|
12
|
Company
contributions
|
|
21
|
|
135
|
Benefits
paid
|
|
(106)
|
|
(164)
|
Fair
value of plan assets, end of year
|
$
|
930
|
$
|
1,346
|
|
|
|
|
|
Funded
Status at end of year
|
$
|
(493)
|
$
|
(124)
|
|
|
|
|
|
Amounts
recognized in the Statements of Financial Position consist
of:
|
|
|
|
|
Noncurrent
Asset
|
$
|
--
|
$
|
2
|
Current
liability
|
|
(3)
|
|
(3)
|
Noncurrent
liability
|
|
(490)
|
|
(123)
|
Net
amount recognized, end of year
|
$
|
(493)
|
$
|
(124)
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income consist
of:
|
|
|
|
|
Net
actuarial loss
|
$
|
712
|
$
|
360
|
Prior
service credit
|
|
(70)
|
|
(58)
|
Accumulated
other comprehensive loss
|
$
|
642
|
$
|
302
|
|
|
|
|
|
The
accumulated benefit obligation basis at the end of 2008 and 2007 was $1,345
million and $1,358 million, respectively.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary
of the components of net periodic benefit cost recognized for Eastman's
significant U.S. and non-U.S. defined benefit pension plans
follows:
Summary
of Benefit Costs and Other Amounts Recognized in Other Comprehensive
Income
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
Service
cost
|
$
|
46
|
$
|
48
|
$
|
44
|
Interest
cost
|
|
88
|
|
90
|
|
82
|
Expected
return on assets
|
|
(105)
|
|
(105)
|
|
(88)
|
Curtailment
charge
|
|
9
|
|
4
|
|
--
|
Amortization
of:
|
|
|
|
|
|
|
Prior
service credit
|
|
(16)
|
|
(9)
|
|
(10)
|
Actuarial
loss
|
|
27
|
|
35
|
|
39
|
Net
periodic benefit cost
|
$
|
49
|
$
|
63
|
$
|
67
|
|
|
|
|
|
|
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income:
|
|
|
|
|
|
|
Curtailment
effect
|
$
|
15
|
$
|
10
|
$
|
--
|
Current
year actuarial (loss) gain
|
|
(395)
|
|
68
|
|
--
|
Current
year prior service credit
|
|
16
|
|
49
|
|
--
|
Amortization
of:
|
|
|
|
|
|
|
Prior
service credit
|
|
(16)
|
|
(9)
|
|
(10)
|
Actuarial
loss
|
|
27
|
|
35
|
|
39
|
Effect
of currency exchange
|
|
13
|
|
(3)
|
|
--
|
Total
|
$
|
(340)
|
$
|
150
|
$
|
29
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine benefit obligations for years ended December
31:
|
|
|
|
|
|
Discount
rate
|
6.05%
|
|
6.03%
|
|
5.66%
|
Expected
return on assets
|
8.47%
|
|
8.54%
|
|
8.57%
|
Rate
of compensation increase
|
3.57%
|
|
3.83%
|
|
3.78%
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine net periodic pension cost for years ended
December 31:
|
|
|
|
|
|
Discount
rate
|
6.03%
|
|
5.66%
|
|
5.51%
|
Expected
return on assets
|
8.54%
|
|
8.57%
|
|
8.59%
|
Rate
of compensation increase
|
3.83%
|
|
3.78%
|
|
3.75%
|
|
|
|
|
|
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The fair
value of plan assets for domestic plans at December 31, 2008 and 2007 was $739
million and $1,107 million, respectively, while the fair value of plan assets at
December 31, 2008 and 2007 for non-U.S. plans was $191 million and $239 million,
respectively. At December 31, 2008 and 2007, the expected long-term
rate of return on the U.S. plan assets was 9 percent, while the expected
long-term rate of return on non-U.S. plan assets was 6.40 percent and 6.43
percent at December 31, 2008 and 2007, respectively. The target
allocation for the Company’s U.S. pension plan for 2009 and the asset allocation
at December 31, 2008 and 2007, by asset category, is as follows:
|
Target
Allocation
|
Plan
Assets at December 31, 2008
|
Plan
Assets at December 31, 2007
|
Asset
category
|
|
|
|
|
|
|
|
Equity
securities
|
59%
|
50%
|
69%
|
Debt
securities
|
12%
|
6%
|
9%
|
Real
estate
|
9%
|
16%
|
8%
|
Other
investments
|
20%
|
28%
|
14%
|
Total
|
100%
|
100%
|
100%
|
The asset
allocation for the Company’s non-U.S. pension plans at December 31, 2008 and
2007, and the target allocation for 2009, by asset category, is as
follows:
|
Target
Allocation
|
Plan
Assets at December 31, 2008
|
Plan
Assets at December 31, 2007
|
Asset
category
|
|
|
|
|
|
|
|
Equity
securities
|
37%
|
32%
|
34%
|
Debt
securities
|
55%
|
61%
|
57%
|
Other
investments
|
8%
|
7%
|
9%
|
Total
|
100%
|
100%
|
100%
|
The
Company’s investment strategy for its defined benefit pension plans is to
maximize long-term rate of return on plan assets within an acceptable level of
risk in order to minimize the cost of providing pension benefits. The
investment policy establishes a target allocation range for each asset class and
the fund is managed within those ranges. The plans use a number of
investment approaches including equity, real estate, and fixed income funds in
which the underlying securities are marketable in order to achieve this target
allocation. The U.S. plan also invests in private equity and other
funds.
The
expected rate of return was determined by modeling the expected long-term rates
of return for broad categories of investments held by the plan against a number
of various potential economic scenarios.
The
Company funded its U.S. defined benefit plan for 2007 by $100 million in January
2007.
Benefits
expected to be paid from pension plans are as follows:
(Dollars
in millions)
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014-2018
|
U.S.
plans
|
$100
|
$106
|
$113
|
$113
|
$117
|
$619
|
Non
U.S. plans
|
$5
|
$5
|
$6
|
$6
|
$6
|
$40
|
The
estimated net loss and prior service credit for the pension plans that will be
amortized from accumulated other comprehensive income into net periodic cost
over the next fiscal year are $30 million and $16 million,
respectively.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DEFINED
CONTRIBUTION PLANS
The
Company sponsors a defined contribution employee stock ownership plan (the
"ESOP"), a qualified plan under Section 401(a) of the Internal Revenue Code,
which is a component of the Eastman Investment Plan and Employee Stock Ownership
Plan ("EIP/ESOP"). Eastman anticipates that it will make annual
contributions for substantially all U.S. employees equal to 5 percent of
eligible compensation to the ESOP, or for employees who have five or more prior
ESOP contributions, to either the Eastman Stock Fund or other investment funds
within the EIP. Employees may diversify to other investment funds
within the EIP from the ESOP at any time without
restrictions. Allocated shares in the ESOP totaled 1,465,656;
1,540,303; and 1,721,199 shares as of December 31, 2008, 2007, and 2006,
respectively. Dividends on shares held by the EIP/ESOP are charged to
retained earnings. All shares held by the EIP/ESOP are treated as
outstanding in computing earnings per share.
In July
2006, the Company amended its EIP/ESOP to provide a company match of 50 percent
of the first 7 percent of an employee's compensation contributed to the plan for
employees who are hired on or after January 1, 2007. Employees who
are hired on or after January 1, 2007, will also be eligible for the 5 percent
contribution to the ESOP as described above.
Charges
for domestic contributions to the EIP/ESOP were $33 million, $34 million, and
$35 million for 2008, 2007, and 2006, respectively.
POSTRETIREMENT
WELFARE PLANS
Eastman
provides a subsidy toward life insurance and health care and dental benefits for
eligible retirees hired prior to January 1, 2007, and a subsidy toward health
care benefits for retirees' eligible survivors. In general, Eastman
provides those benefits to retirees eligible under the Company's U.S.
plans. Similar benefits are also made available to retirees of HDC, a
wholly-owned subsidiary of the Company that, prior to January 1, 1999, operated
a government-owned ammunitions plant. HDC's contract with the
Department of Army ("DOA") provided for reimbursement of allowable costs
incurred by HDC including certain postretirement welfare costs, for as long as
HDC operated the plant. After the contract was terminated at the end
of 1998, the Army did not contribute further to these costs. The
Company pursued extraordinary relief from the DOA and was granted an award
effective in the fourth quarter 2006 in the amount of $95
million. This award was for reimbursement of previously expensed
postretirement benefit costs. The Company began recognizing the
impact of the reimbursement in fourth quarter 2006 by recording an unrecognized
gain and will be amortizing the remaining gain into earnings over an extended
period of time. Included in other income is a gain of $4 million for
both 2008 and 2007 and $12 million for 2006 reflecting a portion of the
unrecognized gain resulting from the award.
Employees
hired on or after January 1, 2007 will have access to postretirement health care
benefits only; Eastman will not provide a subsidy toward the premium cost of
postretirement benefits for those employees.
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.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Below is
a summary balance sheet of the change in plan assets during 2008 and 2007, the
funded status of the plans, amounts recognized in the Statements of Financial
Position, and a summary of amounts recognized in accumulated other comprehensive
income.
Summary
Balance Sheet
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
Benefit
obligation, beginning of year
|
$
|
716
|
$
|
731
|
Service
cost
|
|
7
|
|
7
|
Interest
cost
|
|
43
|
|
43
|
Plan
participants' contributions
|
|
18
|
|
16
|
Actuarial
(gain) loss
|
|
26
|
|
(16)
|
Benefits
paid
|
|
(64)
|
|
(59)
|
Plan
amendments
|
|
--
|
|
(6)
|
Benefit
obligation, end of year
|
$
|
746
|
$
|
716
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
Fair
value of plan assets, beginning of year
|
$
|
56
|
$
|
57
|
Actual
return on plan assets
|
|
(19)
|
|
2
|
Company
contributions
|
|
39
|
|
37
|
Reserve
for third party contributions
|
|
25
|
|
3
|
Plan
participants' contributions
|
|
18
|
|
16
|
Benefits
paid
|
|
(64)
|
|
(59)
|
Fair
value of plan assets, end of year
|
$
|
55
|
$
|
56
|
|
|
|
|
|
Funded
status
|
$
|
(691)
|
$
|
(660)
|
|
|
|
|
|
Amounts
recognized in the Statements of Financial Position consist
of:
|
|
|
|
|
Current
liabilities
|
$
|
(40)
|
$
|
(40)
|
Non-current
liabilities
|
|
(651)
|
|
(620)
|
Net
amount recognized, end of year
|
$
|
(691)
|
$
|
(660)
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income consist
of:
|
|
|
|
|
Actuarial
(gain) loss
|
$
|
191
|
$
|
176
|
Prior
service (credit) cost
|
|
(172)
|
|
(194)
|
Accumulated
other comprehensive income
|
$
|
19
|
$
|
(18)
|
|
|
|
|
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
A summary
of the components of net periodic benefit cost recognized for Eastman's
postretirement benefit cost follows:
Summary
of Benefit Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
Service
cost
|
$
|
6
|
$
|
7
|
$
|
8
|
Interest
cost
|
|
43
|
|
43
|
|
41
|
Expected
return on assets
|
|
(4)
|
|
(3)
|
|
--
|
Other
|
|
--
|
|
--
|
|
(12)
|
Amortization
of:
|
|
|
|
|
|
|
Prior
service credit
|
|
(23)
|
|
(23)
|
|
(22)
|
Actuarial
loss
|
|
10
|
|
12
|
|
15
|
Net
periodic benefit cost
|
$
|
32
|
$
|
36
|
$
|
30
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine end of year benefit
obligations:
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Discount
rate
|
6.08%
|
|
6.19%
|
|
5.86%
|
Rate
of compensation increase
|
3.50%
|
|
3.75%
|
|
3.75%
|
Health
care cost trend
|
|
|
|
|
|
Initial
|
8.00%
|
|
9.00%
|
|
9.00%
|
Decreasing
to ultimate trend of
|
5.00%
|
|
5.00%
|
|
5.00%
|
in
year
|
2015
|
|
2012
|
|
2011
|
Weighted-average
assumptions used to determine end of year net benefit
cost:
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Discount
rate
|
6.19%
|
|
5.86%
|
|
5.62%
|
Rate
of compensation increase
|
3.75%
|
|
3.75%
|
|
3.75%
|
Health
care cost trend
|
|
|
|
|
|
Initial
|
9.00%
|
|
9.00%
|
|
8.00%
|
Decreasing
to ultimate trend of
|
5.00%
|
|
5.00%
|
|
5.00%
|
in
year
|
2012
|
|
2011
|
|
2009
|
Benefits,
net of participant contributions, expected to be paid for post-employment
obligations are as follows:
(Dollars
in millions)
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014-2018
|
U.S.
plans
|
$46
|
$46
|
$47
|
$47
|
$48
|
$262
|
|
|
|
|
|
|
|
An 8
percent rate of increase in per capita cost of covered health care benefits is
assumed for 2009. The rate is assumed to decrease gradually to 5
percent for 2015 and remain at that level thereafter. A 1 percent
increase or decrease in health care trend would have had no material impact on
the 2008 service and interest costs or the 2008 benefit obligation, because the
Company's contributions for benefits are fixed.
The
estimated net loss and prior service credit for the postretirement benefit plans
that will be amortized from accumulated other comprehensive income into net
periodic cost over the next fiscal year are $12 million and $23 million,
respectively.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Purchase
Obligations and Lease Commitments
At
December 31, 2008, the Company had various purchase obligations totaling
approximately $1.6 billion over a period of approximately 15 years for
materials, supplies, and energy incident to the ordinary conduct of
business. The Company also had various lease commitments for property
and equipment under cancelable, noncancelable, and month-to-month operating
leases totaling approximately $115 million over a period of several
years. Of the total lease commitments, approximately 16 percent
relate to machinery and equipment, including computer and communications
equipment and production equipment; approximately 41 percent relate to real
property, including office space, storage facilities and land; and approximately
43 percent relate to railcars. Rental expense, net of sublease
income, was approximately $44 million, $56 million, and $62 million in 2008,
2007, and 2006, respectively.
The
obligations described above are summarized in the following table:
(Dollars
in millions)
|
|
Payments
Due For
|
Period
|
|
Notes
and Debentures
|
|
Credit
Facility Borrowings and Other
|
|
Interest
Payable
|
|
Purchase
Obligations
|
|
Operating
Leases
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
$
|
--
|
$
|
13
|
$
|
100
|
$
|
351
|
$
|
30
|
$
|
494
|
2010
|
|
--
|
|
--
|
|
100
|
|
387
|
|
26
|
|
513
|
2011
|
|
2
|
|
--
|
|
100
|
|
246
|
|
22
|
|
370
|
2012
|
|
154
|
|
84
|
|
92
|
|
243
|
|
14
|
|
587
|
2013
|
|
--
|
|
--
|
|
85
|
|
230
|
|
9
|
|
324
|
2014
and beyond
|
|
1,202
|
|
--
|
|
877
|
|
140
|
|
14
|
|
2,233
|
Total
|
$
|
1,358
|
$
|
97
|
$
|
1,354
|
$
|
1,597
|
$
|
115
|
$
|
4,521
|
Accounts
Receivable Securitization Program
In 1999,
the Company entered into an agreement that allows the Company to sell certain
trade receivables on a non-recourse basis to a consolidated special purpose
entity which in turn may sell interests in those receivables to a third party
purchaser which generally funds its purchases via the issuance of commercial
paper backed by the receivables interests. The agreement permits the
sale of undivided interests in domestic trade accounts
receivable. The assets of the special purpose entity are not
available to satisfy the Company’s general obligations. Receivables
sold to the third party totaled $200 million at December 31, 2008 and December
31, 2007. 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 $339 million and
$308 million in 2008 and 2007, respectively.
Guarantees
FASB
Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others,” an interpretation of FASB Statements No. 5, 57, and 107 and
“Rescission of FASB Interpretation No. 34” clarifies the requirements of
SFAS No. 5, “Accounting for Contingencies,” relating to the guarantor’s
accounting for, and disclosure of, the issuance of certain types of
guarantees. Disclosures about each group of similar guarantees are
provided below.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Residual
Value Guarantees
If
certain operating leases are terminated by the Company, it guarantees a portion
of the residual value loss, if any, incurred by the lessors in disposing of the
related assets. Under these operating leases, the residual value
guarantees at December 31, 2008 totaled $152 million and consisted primarily of
leases for railcars, company aircraft, and other equipment. Leases
with guarantee amounts totaling $2 million, $11 million, and $139 million will
expire in 2009, 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.
Other
Guarantees
Guarantees
and claims also arise during the ordinary course of business from relationships
with suppliers, customers and non-consolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others if specified
triggering events occur. Non-performance under a contract could
trigger an obligation of the Company. These potential claims include
actions based upon alleged exposures to products, intellectual property and
environmental matters, and other indemnifications. The ultimate
effect on future financial results is not subject to reasonable estimation
because considerable uncertainty exists as to the final outcome of these
claims. However, while the ultimate liabilities resulting from such
claims may be significant to results of operations in the period recognized,
management does not anticipate they will have a material adverse effect on the
Company's consolidated financial position or liquidity.
Variable
Interest Entities
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not VIEs or, in the case
of Primester, a joint venture that manufactures cellulose acetate at the
Company's Kingsport, Tennessee plant, the Company is not the primary beneficiary
of the VIE. As such, in accordance with FASB Interpretation Number
46, "Consolidation of Variable Interest Entities", the Company is not required
to consolidate these entities. In addition, the Company has evaluated
long-term purchase obligations with an entity that may be a VIE at December 31,
2008. This potential VIE is a joint venture from which the Company
has purchased raw materials and utilities for several years and purchases
approximately $50 million of raw materials and utilities on an annual
basis. The Company has no equity interest in this entity and has
confirmed that one party to this joint venture 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 entity is a VIE, and whether or not the Company is the primary
beneficiary.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of
various hazardous waste sites, the Company, along with many other entities, has
been designated a potentially responsible party ("PRP"), by the U.S.
Environmental Protection Agency under the Comprehensive Environmental Response,
Compensation and Liability Act, which potentially subjects PRPs to joint and
several liability for such cleanup costs. In addition, the Company
will be required to incur costs for environmental remediation and closure and
postclosure under the federal Resource Conservation and Recovery
Act. Reserves for environmental contingencies have been established
in accordance with Eastman’s policies described in Note 1, "Significant
Accounting Policies." Because of expected sharing of costs, the
availability of legal defenses, and the Company’s preliminary assessment of
actions that may be required, management does not believe that the Company's
liability for these environmental matters, individually or in the aggregate,
will be material to the Company’s consolidated financial position, results of
operations or cash flows. The Company’s reserve for environmental
contingencies was $41 million and $42 million at December 31, 2008 and 2007,
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 $11 million to the maximum of $21 million at December 31,
2008.
The
following table summarizes the activity in the Company's accrued obligations for
environmental matters for the years ended December 31, 2008 and
2007:
Accrued
Obligations for Environmental Matters
(Dollars
in millions)
|
|
December
31, 2008
|
|
December
31, 2007
|
|
|
|
|
|
Beginning
environmental liability
|
$
|
42
|
$
|
47
|
|
|
|
|
|
Liabilities
incurred in current period
|
|
4
|
|
1
|
Liabilities
settled in current period
|
|
(4)
|
|
(6)
|
Accretion
expense
|
|
2
|
|
2
|
Revisions
to estimated cash flow
|
|
(3)
|
|
(2)
|
|
|
|
|
|
Ending
environmental liability
|
$
|
41
|
$
|
42
|
For
additional information, refer to Note 26, "Reserve Rollforwards."
General
From time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
being handled and defended in the ordinary course of business. While
the Company is unable to predict the outcome of these matters, it does not
believe, based upon currently available facts, that the ultimate resolution of
any such pending matters 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.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A
reconciliation of the changes in stockholders’ equity for 2006, 2007, and 2008
is provided below:
(Dollars
in millions)
|
Common
Stock at Par Value
$
|
Paid-in
Capital
$
|
Retained
Earnings
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
Treasury
Stock at Cost
$
|
Total
Stockholders’ Equity
$
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
1
|
320
|
1,923
|
(200)
|
(432)
|
1,612
|
|
|
|
|
|
|
|
Net
Earnings
|
--
|
--
|
409
|
--
|
--
|
409
|
Cash
Dividends(1)
|
--
|
--
|
(146)
|
--
|
--
|
(146)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
107
|
--
|
107
|
Effect
of FAS 158 adoption
|
--
|
--
|
--
|
(81)
|
--
|
(81)
|
Share-based
Compensation Expense (2)
|
--
|
22
|
--
|
--
|
--
|
22
|
Stock
Option Exercises
|
--
|
83
|
--
|
--
|
--
|
83
|
Other
(3)
|
--
|
23
|
--
|
--
|
--
|
23
|
Balance
at December 31, 2006
|
1
|
448
|
2,186
|
(174)
|
(432)
|
2,029
|
|
|
|
|
|
|
|
Net
Earnings
|
--
|
--
|
300
|
--
|
--
|
300
|
Effect
of FIN 48 Adoption
|
--
|
--
|
8
|
--
|
--
|
8
|
Cash
Dividends Declared (1)
|
--
|
--
|
(145)
|
--
|
--
|
(145)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
146
|
--
|
146
|
Share-based
Compensation Expense (2)
|
--
|
18
|
--
|
--
|
--
|
18
|
Stock
Option Exercises
|
--
|
87
|
--
|
--
|
--
|
87
|
Other
(3)
|
--
|
20
|
--
|
--
|
1
|
21
|
Stock
Repurchases
|
--
|
--
|
--
|
--
|
(382)
|
(382)
|
Balance
at December 31, 2007
|
1
|
573
|
2,349
|
(28)
|
(813)
|
2,082
|
|
|
|
|
|
|
|
Net
Earnings
|
--
|
--
|
346
|
--
|
--
|
346
|
Cash
Dividends Declared (1)
|
--
|
--
|
(132)
|
--
|
--
|
(132)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
(307)
|
--
|
(307)
|
Share-based
Compensation Expense (2)
|
--
|
24
|
--
|
--
|
--
|
24
|
Stock
Option Exercises
|
--
|
46
|
--
|
--
|
--
|
46
|
Other
(3)
|
--
|
(5)
|
--
|
--
|
--
|
(5)
|
Stock
Repurchases
|
--
|
--
|
--
|
--
|
(501)
|
(501)
|
Balance
at December 31, 2008
|
1
|
638
|
2,563
|
(335)
|
(1,314)
|
1,553
|
(1)
|
Includes
cash dividends paid and dividends declared, but unpaid. Also,
includes the redemption of the outstanding preferred stock purchase
rights.
|
(2)
|
Includes
the fair value of equity share-based awards recognized under SFAS No.
123(R).
|
(3)
|
The
tax benefits relating to the difference between the amounts deductible for
federal income taxes over the amounts charged to income for book value
purposes have been credited to paid-in
capital.
|
The
Company is authorized to issue 400 million shares of all classes of stock, of
which 50 million may be preferred stock, par value $0.01 per share, and 350
million may be common stock, par value $0.01 per share. The Company
declared dividends of $1.76 per share in each of 2008, 2007, and
2006.
The
Company established a benefit security trust in 1997 to provide a degree of
financial security for unfunded obligations under certain plans and contributed
to the trust a warrant to purchase up to 1 million shares of common stock of the
Company for par value. The warrant, which remains outstanding, is
exercisable by the trustee if the Company does not meet certain funding
obligations, which obligations would be triggered by certain occurrences,
including a change in control or potential change in control, as defined, or
failure by the Company to meet its payment obligations under covered unfunded
plans. Such warrant is excluded from the computation of diluted
earnings per share because the conditions upon which the warrant becomes
exercisable have not been met.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
additions to paid-in capital for 2008, 2007, and 2006 are primarily the result
of stock option exercises by employees. Effective January 1, 2006,
this includes exercises and recognition of compensation expense of equity awards
determined under SFAS No. 123(R).
On February 4, 1999, the
Company was authorized by its Board of Directors to repurchase up to $400
million of its common stock. Through January 2007, a total of 2.7
million shares of common stock was repurchased under the authorization at a cost
of approximately $112 million. On February 20, 2007, the Board
of Directors cancelled its prior authorization for stock repurchases and
approved a new authorization for the repurchase of up to $300 million of the
Company's outstanding common stock. The Company completed the $300
million repurchase authorization in September 2007 acquiring a total of 4.6
million shares. In October 2007, the Board of Directors authorized an
additional $700 million for repurchase of the Company's outstanding common
shares at such times, in such amounts, and on such terms, as determined to be in
the best interests of the Company. As of December 31, 2008, a total
of 9.4 million shares have been repurchased under this authorization for a total
amount of approximately $583 million.
The
Company's charitable foundation held the following shares of the Company's
common stock at December 31 of each year and are reported in treasury
stock: 82,674 shares for 2008 and 2007 and 106,771 shares for
2006.
During
the fourth quarter of 2006, the Board of Directors of the Company redeemed all
of the outstanding preferred stock purchase rights issuable pursuant to the
Stockholder Protection Rights Agreement and terminated the Stockholder
Protection Rights Agreement. The payment of $0.01 per share of common
stock was recorded in dividends payable at December 31, 2006 and was paid
January 2, 2007.
For 2008,
2007, and 2006, the weighted average number of common shares outstanding used to
compute basic earnings per share was 75.2 million, 82.8 million, and 82.1
million, respectively, and for diluted earnings per share was 76.0 million, 83.9
million, and 83.2 million, respectively, reflecting the effect of dilutive
share-based equity awards outstanding. Excluded from the 2008, 2007,
and 2006 calculation of diluted earnings per share were 2,355,954 stock options,
1,026,284 stock options, and 3,284,662 stock options, respectively, because the
total market value of option exercises for these awards was less than the total
cash proceeds that would be received from these exercises.
Shares
of common stock issued (1)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
93,630,292
|
|
91,579,441
|
|
89,566,115
|
Issued
for employee compensation and benefit plans
|
|
865,568
|
|
2,050,851
|
|
2,013,326
|
Balance
at end of year
|
|
94,495,860
|
|
93,630,292
|
|
91,579,441
|
|
|
|
|
|
|
|
(1)
Includes shares held in treasury.
|
|
|
|
|
|
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars
in millions)
|
Cumulative
Translation Adjustment
$
|
Unrecognized
Loss and Prior Service Cost
$
|
Unrealized
Gains (Losses) on Cash Flow Hedges
$
|
Unrealized
Losses on Investments
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
Balance
at December 31, 2006
|
121
|
(288)
|
(6)
|
(1)
|
(174)
|
Period
change
|
36
|
106
|
3
|
1
|
146
|
Balance
at December 31, 2007
|
157
|
(182)
|
(3)
|
--
|
(28)
|
Period
change
|
(97)
|
(232)
|
23
|
(1)
|
(307)
|
Balance
at December 31, 2008
|
60
|
(414)
|
20
|
(1)
|
(335)
|
Amounts
of other comprehensive income (loss) are presented net of applicable
taxes. The Company records deferred income taxes on the cumulative
translation adjustment related to branch operations and other entities included
in the Company's consolidated U.S. tax return. No deferred income
taxes are provided on the cumulative translation adjustment of subsidiaries
outside the United States, as such cumulative translation adjustment is
considered to be a component of permanently invested, unremitted earnings of
these foreign subsidiaries.
|
SHARE-BASED
COMPENSATION PLANS AND AWARDS
|
2007
Omnibus Long-Term Compensation Plan
Eastman's
2007 Omnibus Long-Term Compensation Plan ("2007 Omnibus Plan") was approved by
shareholders at the May 3, 2007 Annual Meeting of Shareholders and shall remain
in effect until its fifth anniversary. The 2007 Omnibus Plan
authorizes the Compensation and Management Development Committee of the Board of
Directors to: grant awards, designate participants, determine the
types and numbers of awards, determine the terms and conditions of awards and
determine the form of award settlement. Under the 2007 Omnibus Plan,
the aggregate number of shares reserved and available for issuance is 4.1
million. Any stock distributed pursuant to an award may consist of,
in whole or in part, authorized and unissued stock, treasury stock, or stock
purchased on the open market. Under the 2007 Omnibus Plan and
previous plans, the form of awards have included: restricted stock
and restricted stock units, stock options, stock appreciation rights ("SAR’s"),
and performance shares. The 2007 Omnibus Plan is flexible as to the
number of specific forms of awards, but provides that stock options and SARs are
to be granted at an exercise price not less than 100 percent of the per share
fair market value on the date of the grant.
2008
Director Long-Term Compensation Subplan
Eastman's
2008 Director Long-Term Compensation Subplan ("2008 Directors' Subplan"), a
component of the 2007 Omnibus Plan, remains in effect until terminated by the
Board of Directors or the earlier termination of the 2007 Omnibus
Plan. The 2008 Directors' Subplan provides for structured awards of
restricted shares to non-employee members of the Board of
Directors. Restricted shares awarded under the 2008 Directors'
Subplan are subject to the same terms and conditions of the 2007 Omnibus
Plan. The 2008 Directors' Subplan does not constitute a separate
source of shares for grant of equity awards and all shares awarded are part of
the 4.1 million shares authorized by the 2007 Omnibus Plan. Shares of
restricted stock are granted upon the first day of a non-employee director's
initial term of service and shares of restricted stock are granted each year to
each non-employee director on the date of the annual meeting of
stockholders.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company is authorized by the Board of Directors under the 2007 Omnibus Plan and
2008 Directors' Subplan to provide grants to employees and non-employee members
of the Board of Directors. It has been the Company's practice to
issue new shares rather than treasury shares for equity awards that require
payment by the issuance of common stock and to withhold or accept back shares
awarded to cover the income taxes of employee participants. Shares of
non-employee directors are not withheld or acquired for the withholding of their
income taxes. Shares of unrestricted common stock owned by specified
senior management level employees are accepted by the Company to pay for the
exercise price of stock options in accordance with the terms and conditions of
their awards.
On
January 1, 2006, the Company adopted SFAS No. 123 Revised December 2004 ("SFAS
No. 123(R)"), "Share-Based Payment". Effective with the adoption of
SFAS No 123(R), compensation expense for all employee and non-employee director
share-based compensation awards are recognized in the financial statements, in
accordance with the adopted modified prospective method, based upon their grant
date fair value over the requisite service or vesting period: a) based upon the
requirements of SFAS No. 123(R) for all new awards granted after the effective
date of implementation and b) based upon the requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation" for all awards granted prior to the
effective date of SFAS No. 123(R) that remain unvested on the effective
date.
For 2008,
2007, and 2006, total share-based compensation expense (before tax) of
approximately $21 million, $26 million, and $29 million, respectively, was
recognized in selling, general and administrative expense in the consolidated
statement of earnings for all share-based awards of which approximately $9
million, $13 million, and $17 million, respectively, related to stock
options. SFAS No. 123(R) requires that compensation expense is
recognized over the substantive vesting period, which may be a shorter time
period than the stated vesting period for retirement-eligible
employees. For 2008, 2007, and 2006, approximately $2 million, $3
million and $8 million, respectively, of stock option compensation expense was
recognized due to retirement eligibility preceding the requisite vesting
period.
Stock
Option Awards
Options
have been granted on an annual basis to non-employee directors under predecessor
plans to the 2008 Directors' Subplan and by the Compensation and Management
Development Committee of the Board of Directors under the 2007 Omnibus Plan and
predecessor plans to employees. Option awards have an exercise price
equal to the closing price of the Company's stock on the date of
grant. The term life of options is ten years with vesting periods
that vary up to three years. Vesting usually occurs ratably over the
vesting period or at the end of the vesting period. The Company
utilizes the Black Scholes Merton ("BSM") option valuation model which relies on
certain assumptions to estimate an option's fair value.
The
weighted average assumptions used in the determination of fair value for stock
options awarded in 2008, 2007, and 2006 are provided in the table
below:
Assumptions
|
2008
|
2007
|
2006
|
|
|
|
|
Expected
volatility rate
|
21.96
%
|
20.80
%
|
21.40
%
|
Expected
dividend yield
|
2.66
%
|
2.92
%
|
3.24
%
|
Average
risk-free interest rate
|
2.76
%
|
4.24
%
|
4.62
%
|
Expected
forfeiture rate
|
0.75
%
|
0.75
%
|
0.75
%
|
Expected
term years
|
5.00
|
4.40
|
4.40
|
The
volatility rate of grants is derived from historical Company common stock price
volatility over the same time period as the expected term of each stock option
award. The volatility rate is derived by mathematical formula
utilizing the weekly high closing stock price data over the expected
term.
The
expected dividend yield is calculated using the expected Company annual dividend
amount over the expected term divided by the fair market value of the Company's
common stock.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
average risk-free interest rate is derived from United States Department of
Treasury published interest rates of daily yield curves for the same time period
as the expected term.
SFAS No.
123(R) specifies only share-based awards expected to vest be included in
share-based compensation expense. Estimated forfeiture rates are
determined using historical forfeiture experience for each type of award and are
excluded from the quantity of awards included in share-based compensation
expense.
The
weighted average expected term reflects the analysis of historical share-based
award transactions and includes option swap and reload grants which may have
much shorter remaining expected terms than new option grants.
A summary
of the activity of the Company's stock option awards for 2008, 2007, and 2006
are presented below:
|
2008
|
|
2007
|
|
2006
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
4,481,300
|
$
|
55
|
|
5,866,900
|
$
|
52
|
|
6,616,800
|
$
|
48
|
Granted
|
445,700
|
|
38
|
|
643,000
|
|
65
|
|
1,481,300
|
|
61
|
Exercised
|
(691,500)
|
|
51
|
|
(2,010,100)
|
|
50
|
|
(2,001,800)
|
|
45
|
Cancelled,
forfeited, or expired
|
(17,800)
|
|
55
|
|
(18,500)
|
|
59
|
|
(229,400)
|
|
56
|
Outstanding
at end of year
|
4,217,700
|
$
|
54
|
|
4,481,300
|
$
|
55
|
|
5,866,900
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
2,980,100
|
|
|
|
2,686,800
|
|
|
|
3,385,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for grant at end of year
|
2,545,400
|
|
|
|
3,379,200
|
|
|
|
1,244,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table provides the remaining contractual term and weighted average
exercise prices of stock options outstanding and exercisable at December 31,
2008:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range
of Exercise Prices
|
|
Number Outstanding
at 12/31/08
|
|
Weighted-Average
Remaining Contractual Life (Years)
|
|
Weighted-Average
Exercise Price
|
|
Number
Exercisable at 12/31/08
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$30-45
|
|
701,900
|
|
7.5
|
$
|
37
|
|
276,200
|
$
|
37
|
$46-52
|
|
645,100
|
|
3.7
|
|
48
|
|
644,100
|
|
48
|
$53-59
|
|
1,031,800
|
|
6.8
|
|
54
|
|
951,000
|
|
54
|
$60-64
|
|
1,242,600
|
|
7.5
|
|
61
|
|
821,100
|
|
61
|
$65-74
|
|
596,300
|
|
7.5
|
|
66
|
|
287,700
|
|
66
|
|
|
4,217,700
|
|
6.7
|
$
|
54
|
|
2,980,100
|
$
|
54
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The range
of exercise prices of options outstanding at December 31, 2008 is approximately
$30 to $74 per share. The aggregate intrinsic value of total options
outstanding and total options exercisable at December 31, 2008 is
insignificant. Intrinsic value is the amount by which the closing
market price of the stock at December 31, 2008 exceeds the exercise price of the
option grants.
The
weighted average remaining contractual life of all exercisable options is 5.9
years.
The
weighted average fair value of options granted during 2008, 2007, and 2006 were
$6.59, $11.12, and $10.57, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2008, 2007, and
2006, was $15 million, $30 million, and $27 million,
respectively. Cash proceeds received by the Company from option
exercises and the related tax benefit totals $35 million and $4 million,
respectively for 2008, $91 million and $10 million, respectively, for 2007, and
$83 million and $10 million, respectively, for 2006. The total fair
value of shares vested during the years ended December 31, 2008, 2007, and 2006
was $11 million, $13 million, and $9 million, respectively.
A summary
of the status of the Company's nonvested options as of December 31, 2008 and
changes during the year then ended is presented below:
Nonvested
Options
|
Number
of Options
|
|
Weighted-Average
Grant Date Fair Value
|
Nonvested
at January 1, 2008
|
1,794,500
|
$
|
10.87
|
Granted
|
445,700
|
|
6.59
|
Vested
|
(994,100)
|
|
10.71
|
Forfeited
|
(8,600)
|
|
10.34
|
Nonvested
Options at December 31, 2008
|
1,237,500
|
$
|
9.46
|
For
options unvested at December 31, 2008, approximately $4 million in compensation
expense will be recognized over three years.
Other
Share-Based Compensation Awards
In
addition to stock option awards, the Company has long-term performance stock
awards, restricted stock awards, and stock appreciation rights. The
long-term performance awards are based upon actual return on capital compared to
a target return on capital and total shareholder return compared to a peer group
ranking by total shareholder return. The recognized compensation cost
before tax for these other share-based awards in the years ended December 31,
2008, 2007, and 2006 is approximately $12 million, $13 million, and $12 million,
respectively. The unrecognized compensation expense before tax for
these same type awards at December 31, 2008 is approximately $30 million and
will be recognized primarily over a period of three years.
Certain
Businesses and Product Lines and Related Assets in CASPI, PCI, and Performance
Polymers Segments
On
November 30, 2007, the Company sold its PET polymers production facilities in
Mexico and Argentina and the related businesses for net proceeds of
approximately $160 million and an earn-out provision based on certain future
sales amounts. The Company will continue to produce certain
intermediates products for the buyer under supply agreements through
2008. In addition, the Company indemnified the buyer against certain
liabilities primarily related to taxes, legal matters, environmental matters,
and other representations and warranties. The results related to the
Mexico and Argentina facilities are not presented as discontinued operations due
to continuing involvement of the Company's Performance Polymers segment in the
region including certain intermediates products sales to the divested
sites. During 2007, the Company recorded asset impairments and
restructuring charges of approximately $115 million related to the Mexico and
Argentina PET sites.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
On
November 30, 2006, the Company sold its polyethylene (“PE”) and EpoleneTM polymer businesses and
related assets located at the Longview, Texas site and the Company's ethylene
pipeline in the CASPI and Performance Polymers segments for net proceeds of
approximately $235 million. The Company also retained and
subsequently collected approximately $83 million of accounts receivable related
to these businesses and product lines. The Company will continue to
produce certain products for the buyer under ongoing supply agreements and
purchase certain products from the buyer under ongoing purchase agreements with
terms up to ninety-nine years. As part of these agreements, the
Company began a staged phase-out of older cracking units in 2007, with timing
dependent in part on market conditions, resulting in accelerated depreciation
and environmental closure obligations. In addition, the Company
indemnified the buyer against certain liabilities primarily related to taxes,
legal matters, environmental matters, and other representations and
warranties. In 2006, the Company recorded a gain of $75 million in
other operating income related to this transaction.
On
October 31, 2006, the Company sold its Batesville, Arkansas manufacturing
facility and related assets and the specialty organic chemicals product lines in
the Performance Chemicals and Intermediates ("PCI") segment for net proceeds of
approximately $74 million. The Company also retained and subsequently
collected approximately $9 million of accounts receivable related to these
businesses and product lines. The Company will continue to produce
certain products for the buyer under ongoing supply agreements and purchase
certain products from the buyer under ongoing purchase agreements with terms up
to five years. In addition, the Company indemnified the buyer against
certain liabilities primarily related to taxes, legal matters, environmental
matters, and other representations and warranties. In 2006, the
Company recorded $7 million in other operating loss related to this
transaction.
|
ASSET
IMPAIRMENTS AND RESTRUCTURING CHARGES,
NET
|
Restructuring
charges totaled $46 million during 2008. Impairments and
restructuring charges totaled $112 million during 2007, consisting of non-cash
asset impairments of $122 million and restructuring gains of $10
million. Impairments and restructuring charges totaled $101 million
during 2006, consisting of non-cash asset impairments of $62 million and
restructuring charges of $39 million.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes the 2008, 2007, and 2006 charges by
segment:
(Dollars
in millions)
|
2008
|
2007
|
2006
|
CASPI:
|
|
|
|
Fixed
asset impairments
|
$
--
|
$
--
|
$
6
|
Severance
charges
|
--
|
(1)
|
4
|
Site
closure and restructuring costs
|
--
|
--
|
3
|
|
|
|
|
Fibers:
|
|
|
|
Severance
charges
|
--
|
--
|
2
|
|
|
|
|
PCI:
|
|
|
|
Fixed
asset impairments
|
--
|
--
|
10
|
Severance
charges
|
8
|
(1)
|
6
|
Site
closure and restructuring costs
|
14
|
--
|
4
|
|
|
|
|
Performance
Polymers:
|
|
|
|
Fixed
asset impairments
|
--
|
118
|
30
|
Severance
charges
|
2
|
(5)
|
16
|
Site
closure and restructuring costs
|
22
|
--
|
--
|
|
|
|
|
Specialty
Plastics (“SP”):
|
|
|
|
Fixed
asset impairments
|
--
|
2
|
12
|
Severance
charges
|
--
|
(2)
|
4
|
Site
closure and restructuring costs
|
--
|
1
|
--
|
|
|
|
|
Other:
|
|
|
|
Fixed
asset impairments
|
--
|
--
|
3
|
Intangible
asset impairments
|
--
|
2
|
1
|
Site
closure and restructuring costs
|
--
|
(2)
|
--
|
|
|
|
|
Total
Eastman Chemical Company
|
|
|
|
Fixed
asset impairments
|
$ --
|
$
120
|
$
61
|
Intangible
asset impairments
|
--
|
2
|
1
|
Severance
charges
|
10
|
(9)
|
32
|
Site
closure and restructuring costs
|
36
|
(1)
|
7
|
Total
Eastman Chemical Company
|
$
46
|
$
112
|
$
101
|
2008
During
2008, the Company recorded $46 million in restructuring
charges. These charges consist of approximately $24 million in the
Performance Polymers segment for restructuring at the South Carolina facility,
$22 million in asset impairments and restructuring charges primarily for
severance and pension charges in the PCI segment resulting from the decision to
close a previously impaired site in the United Kingdom.
2007
In fourth
quarter 2007 asset impairments and restructuring gains totaled $4 million
related primarily to the adjustments to previously recorded charges for Cendian
Corporation ("Cendian"), the Company's logistics subsidiary, and the PET
manufacturing facilities in Latin America which were sold in third quarter
2007.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In third
quarter 2007 asset impairments and restructuring charges totaled $114 million
were primarily the impairment of assets of Eastman's PET manufacturing
facilities in Cosoleacaque, Mexico, and Zarate, Argentina which were classified
as held for sale as of September 30, 2007. The Company wrote down the
value of the assets of these facilities in third quarter 2007 to the expected
sales proceeds less cost to sell. These charges were 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
of approximately $5 million, which was reflected in all segments.
In first
and second quarter 2007, the Company recorded $2 million in charges related
primarily to the site closure and asset removal related to the shutdown of the
Company's Spanish cyclohexane dimethanol ("CHDM") manufacturing facility,
located adjacent to the PET manufacturing facility. These charges
were offset by the reversal of fourth quarter 2006 severance accrual at the same
site, as 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 SP segments.
2006
In fourth
quarter 2006, the Company recorded asset impairments and restructuring charges
of $78 million, consisting of non-cash impairments of $42 million and
restructuring charges of $36 million. The asset impairments consisted
of approximately $20 million related to the shutdown of the CHDM manufacturing
assets in San Roque, Spain, utilized in the SP and the Performance Polymers
segments and $22 million primarily related to the shutdown of a research and
development pilot plant in the Performance Polymers segment. The
decisions to shutdown the San Roque, Spain site to gain operational efficiencies
at other facilities and to shutdown the research and development pilot plant
were made in fourth quarter 2006. The restructuring charges consisted
of $32 million of estimated severance costs primarily for work force reductions
and $3 million of other charges.
In third
quarter 2006, asset impairments and restructuring charges totaled $13
million. During third quarter 2006, the Company classified the
Batesville, Arkansas manufacturing facility as an asset group held for sale and
recorded a related $11 million impairment charge to reduce the recorded book
value of the assets to the estimated sales proceeds.
In second
quarter 2006, asset impairments and restructuring charges totaled $3 million,
relating primarily to previously closed manufacturing facilities.
In first
quarter 2006, asset impairments and restructuring charges totaled $7 million,
relating primarily to the divestiture of a previously closed manufacturing
facility.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The
following table summarizes the charges and changes in estimates described above,
other asset impairments and restructuring charges, the non-cash reductions
attributable to asset impairments, and the cash reductions in shutdown reserves
for severance costs and site closure costs paid:
(Dollars
in millions)
|
|
Balance
at
January
1, 2006
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges
|
$
|
--
|
$
|
62
|
$
|
(62)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
3
|
|
32
|
|
--
|
|
(1)
|
|
34
|
Site
closure and restructuring costs
|
|
7
|
|
7
|
|
--
|
|
--
|
|
14
|
Total
|
$
|
10
|
$
|
101
|
$
|
(62)
|
$
|
(1)
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
January
1, 2007
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges
|
$
|
--
|
$
|
122
|
$
|
(122)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
34
|
|
(9)
|
|
--
|
|
(18)
|
|
7
|
Site
closure and restructuring costs
|
|
14
|
|
(1)
|
|
--
|
|
(2)
|
|
11
|
Total
|
$
|
48
|
$
|
112
|
$
|
(122)
|
$
|
(20)
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
January
1, 2008
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges
|
$
|
--
|
$
|
2
|
$
|
(2)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
7
|
|
10
|
|
--
|
|
(12)
|
|
5
|
Site
closure and restructuring costs
|
|
11
|
|
34
|
|
--
|
|
(20)
|
|
25
|
Total
|
$
|
18
|
$
|
46
|
$
|
(2)
|
$
|
(32)
|
$
|
30
|
A
majority of all severance and site closure costs are expected to be applied to
the reserves within one year.
During
2008, the Company accrued for approximately 40 employee
separations. As of the end of 2008, no separations for the 2008
accrual were complete and all of the 2007 and 2006 separations were
completed. During 2007, the Company accrued for approximately 25
employee separations. As of the end of 2007, approximately 10 of the
2007 separations were not complete and approximately 40 of the 2006 separations
were not complete. During 2006, the Company accrued for approximately
400 employee separations. As of the end of 2006, no separations
accrued for were completed.
|
OTHER
OPERATING INCOME, NET
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Other
operating income, net
|
$
|
(16)
|
$
|
--
|
$
|
(68)
|
Other operating income, net for 2008
reflects a gain of $16 million from the sale of certain mineral
rights at an operating manufacturing site. Other operating income,
net for 2006 reflects a gain of $75 million on the sale of the Company's PE and
EpoleneTM polymer businesses, related assets,
and the Company's ethylene pipeline and charges of approximately $7 million
related to the sale of the Company's Batesville, Arkansas manufacturing facility
and related assets and product lines. For additional information, see Note 17,
"Divestitures".
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
OTHER
CHARGES (INCOME), NET
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Foreign
exchange transactions losses (gains)
|
$
|
17
|
$
|
(11)
|
$
|
(2)
|
Equity
and business venture investments losses (gains)
|
|
6
|
|
(12)
|
|
(12)
|
Other,
net
|
|
(3)
|
|
(5)
|
|
(3)
|
Other
charges (income), net
|
$
|
20
|
$
|
(28)
|
$
|
(17)
|
Included
in other charges (income), net are gains or losses on foreign exchange
transactions, results from equity investments, gains on the sale of business
venture investments, write-downs to fair value of certain technology business
venture investments due to other than temporary declines in value, other
non-operating income or charges related to HDC, gains from the sale of
non-operating assets, royalty income, certain litigation costs, fees on
securitized receivables, other non-operating income, and other miscellaneous
items.
Equity
and business venture investments (gains) losses for 2008, 2007, and 2006
included gains of $4 million, $4 million, and $12 million, respectively,
resulting from a favorable decision of the U.S. Department of the Army to
reimburse post-employment benefits being provided to retirees of HDC, a wholly
owned subsidiary. This gain reflected a portion of the unrecognized
gain resulting from the reimbursement decision that will be amortized into
earnings over future periods. For additional information, see Note 11,
"Retirement Plans".
Components
of earnings (loss) before income taxes and the provision (benefit) for U.S. and
other income taxes from continuing operations follow:
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations before income taxes
|
|
|
|
|
|
|
United
States
|
$
|
355
|
$
|
489
|
$
|
601
|
Outside
the United States
|
|
74
|
|
(19)
|
|
(7)
|
Total
|
$
|
429
|
$
|
470
|
$
|
594
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes on earnings from continuing
operations
|
|
|
|
|
|
|
United
States
|
|
|
|
|
|
|
Current
|
$
|
88
|
$
|
173
|
$
|
135
|
Deferred
|
|
7
|
|
(24)
|
|
22
|
Outside
the United States
|
|
|
|
|
|
|
Current
|
|
16
|
|
(30)
|
|
6
|
Deferred
|
|
(1)
|
|
21
|
|
(14)
|
State
and other
|
|
|
|
|
|
|
Current
|
|
2
|
|
10
|
|
17
|
Deferred
|
|
(11)
|
|
(1)
|
|
1
|
Total
|
$
|
101
|
$
|
149
|
$
|
167
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following represents the deferred tax charge (benefit) recorded as a component
of accumulated other comprehensive income (loss) in stockholders’
equity.
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Unrecognized
loss and prior service cost
|
$
|
(142)
|
$
|
56
|
$
|
(9)
|
Cumulative
translation adjustment
|
|
16
|
|
5
|
|
2
|
Unrealized
gains (losses) on cash flow hedges
|
|
14
|
|
3
|
|
(1)
|
Total
|
$
|
(112)
|
$
|
64
|
$
|
(8)
|
Total
income tax expense (benefit) included in the consolidated financial statements
was composed of the following:
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
101
|
$
|
149
|
$
|
167
|
Discontinued
operations
|
|
(12)
|
|
(3)
|
|
(1)
|
Other
comprehensive income
|
|
(112)
|
|
64
|
|
(8)
|
Total
|
$
|
(23)
|
$
|
210
|
$
|
158
|
Differences
between the provision for income taxes on earnings from continuing operations
and income taxes computed using the U.S. federal statutory income tax rate
follow:
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Amount
computed using the statutory rate
|
$
|
150
|
$
|
165
|
$
|
208
|
State
income taxes, net
|
|
(6)
|
|
8
|
|
12
|
Foreign
rate variance
|
|
(4)
|
|
(3)
|
|
(2)
|
Extraterritorial
income exclusion
|
|
--
|
|
--
|
|
(9)
|
Domestic
manufacturing deduction
|
|
(7)
|
|
(11)
|
|
(4)
|
ESOP
dividend payout
|
|
(1)
|
|
(1)
|
|
(2)
|
Capital
loss benefits
|
|
(12)
|
|
(3)
|
|
(25)
|
Change
in reserves for tax contingencies
|
|
(8)
|
|
(2)
|
|
(3)
|
Net
operating loss benefits
|
|
--
|
|
--
|
|
(11)
|
General
business credits
|
|
(16)
|
|
(5)
|
|
(2)
|
Other
|
|
5
|
|
1
|
|
5
|
Provision
for income taxes
|
$
|
101
|
$
|
149
|
$
|
167
|
The 2008
effective tax rate was impacted by a $16 million benefit resulting from a
gasification investment tax credit of $11 million and a research and development
tax credit of $5 million, a $14 million benefit from state income tax credits
(net of federal effect), a $12 million benefit from the reversal of a U.S.
capital loss valuation allowance associated with the sale of businesses, and a
$6 million benefit from the settlement of a non-U.S. income tax
audit.
The 2006
effective tax rate from continuing operations was impacted by $25 million of net
deferred tax benefit resulting from the reversal of capital loss carryforward
valuation reserves and $11 million of deferred tax benefit resulting from the
reversal of foreign net operating loss valuation reserves.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
significant components of deferred tax assets and liabilities
follow:
|
|
December
31,
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
Post-employment
obligations
|
$
|
491
|
$
|
343
|
Net
operating loss carry forwards
|
|
113
|
|
130
|
Capital
loss carry forwards
|
|
33
|
|
42
|
Other
|
|
37
|
|
42
|
Total
deferred tax assets
|
|
674
|
|
557
|
Less
valuation allowance
|
|
(131)
|
|
(146)
|
Deferred
tax assets less valuation allowance
|
$
|
543
|
$
|
411
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
Depreciation
|
$
|
(599)
|
$
|
(629)
|
Inventory
reserves
|
|
(23)
|
|
(42)
|
Total
deferred tax liabilities
|
$
|
(622)
|
$
|
(671)
|
|
|
|
|
|
Net
deferred tax liabilities
|
$
|
(79)
|
$
|
(260)
|
|
|
|
|
|
As
recorded in the Consolidated Statements of Financial
Position:
|
|
|
|
|
Other
current assets
|
$
|
2
|
$
|
5
|
Other
noncurrent assets
|
|
28
|
|
45
|
Payables
and other current liabilities
|
|
(3)
|
|
(10)
|
Deferred
income tax liabilities
|
|
(106)
|
|
(300)
|
Net
deferred tax liabilities
|
$
|
(79)
|
$
|
(260)
|
Unremitted
earnings of subsidiaries outside the United States, considered to be reinvested
indefinitely, totaled $287 million at December 31, 2008. It is not
practicable to determine the deferred tax liability for temporary differences
related to those unremitted earnings.
For
certain consolidated foreign subsidiaries, income and losses directly flow
through to taxable income in the United States. These entities are
also subject to taxation in the foreign tax jurisdictions. Net
operating loss carryforwards exist to offset future taxable income in foreign
tax jurisdictions and valuation allowances are provided to reduce deferred
related tax assets if it is more likely than not that this benefit will not be
realized. Changes in the estimated realizable amount of deferred tax
assets associated with net operating losses for these entities could result in
changes in the deferred tax asset valuation allowance in the foreign tax
jurisdiction. At the same time, because these entities are also
subject to tax in the United States, a deferred tax liability for the expected
future taxable income will be established concurrently. Therefore,
the impact of any reversal of valuation allowances on consolidated income tax
expense will only be to the extent that there are differences between the United
States statutory tax rate and the tax rate in the foreign
jurisdiction. A valuation allowance of $78 million at December 31,
2008, has been provided against the deferred tax asset resulting from these
operating loss carryforwards.
At
December 31, 2008, foreign net operating loss carryforwards totaled $391
million. Of this total, $258 million will expire in 3 to 15 years;
and $133 million has no expiration date.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Amounts
due to and from tax authorities as recorded in the Consolidated Statements of
Financial Position:
|
|
December
31,
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
|
|
|
|
Miscellaneous
receivables
|
$
|
10
|
$
|
20
|
|
|
|
|
|
Payables
and other current liabilities
|
|
11
|
|
6
|
Other
long-term liabilities
|
|
11
|
|
24
|
Total
income taxes payable
|
$
|
22
|
$
|
30
|
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Incomes Taxes”, ("FIN 48"), on January 1, 2007. As a
result of the implementation of FIN 48 and reliance on the FASB Staff Position
No. FIN 48-1, "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. A reconciliation of the beginning
and ending amounts of unrecognized tax benefits is as follows:
|
|
December
31,
|
|
|
2008
|
|
2007
|
(Dollars
in millions)
|
|
|
|
|
Balance
at January 1
|
$
|
24
|
$
|
28
|
Additions
based on tax positions related to current year
|
|
--
|
|
1
|
Reductions
for tax positions of prior years
|
|
(4)
|
|
(3)
|
Settlements
|
|
(7)
|
|
--
|
Lapse
of statute of limitations
|
|
(2)
|
|
(2)
|
Balance
at December 31
|
$
|
11
|
$
|
24
|
As of
December 31, 2008 and 2007, $11 million and $24 million, respectively, of
unrecognized tax benefits 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, 2008 and 2007, the
Company had accrued a liability of approximately $4 million and $3 million,
respectively, for interest, net of tax and had no accrual for tax
penalties. During 2008, the Company recognized income of $2 million
for interest, net of tax and no penalties associated with unrecognized tax
benefits, resulting in an accrued balance of $2 million for interest, net of tax
benefit and no amount of penalties as of December 31, 2008. During
2007, the Company recognized expense of $1 million for interest, net of tax and
no penalties associated with unrecognized tax benefits, resulting in an accrued
balance of $4 million for interest, net of tax benefit and no amount of
penalties as of December 31, 2007.
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
2002. It is reasonably possible that within the next 12 months the
Company will recognize approximately $3 million of unrecognized tax benefits as
a result of the expiration of relevant statutes of limitations.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes is as follows:
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
$
|
96
|
$
|
108
|
$
|
105
|
Income
taxes paid
|
|
150
|
|
173
|
|
157
|
Derivative
financial instruments and related gains and losses are included in cash flows
from operating activities.
Non-cash
portion of losses from the Company’s equity investments was $9 million for
2008. The non-cash portions of earnings from the Company's equity
investments in 2007 and 2006 were $3 million and $1 million,
respectively.
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the PCI
segment, the Performance Polymers segment, and the SP segment.
The CASPI
segment manufactures raw materials, additives, and specialty polymers, primarily
for the paints and coatings, inks, and adhesives markets. The CASPI
segment's products consist of liquid vehicles, coatings additives, and
hydrocarbon resins and rosins and rosin esters. Liquid vehicles, such as
ester, ketone and alcohol solvents, maintain the binders in liquid form for ease
of application. Coatings additives, such as cellulosic polymers,
TexanolTM ester
alcohol and chlorinated polyolefins, enhance the rheological, film formation and
adhesion properties of paints, coatings, and inks. Hydrocarbon resins and
rosins and rosin esters are used in adhesive, ink, and polymers compounding
applications. Additional products are developed in response to, or in
anticipation of, new applications where the Company believes significant value
can be achieved. In 2006, the Company sold its EpoleneTM polymer
businesses and related assets located at the Longview, Texas site.
The
Fibers segment manufactures EstronTM acetate
tow and EstrobondTM
triacetin plasticizers which are used primarily in cigarette filters;
EstronTM and
ChromspunTM acetate
yarns for use in apparel, home furnishings and industrial fabrics; acetate flake
for use by other acetate tow producers; and acetyl chemicals.
The PCI
segment manufactures diversified products that are used in a variety of markets
and industrial and consumer applications, including chemicals for agricultural
intermediates, fibers, food and beverage ingredients, photographic chemicals,
pharmaceutical intermediates, polymer compounding, and chemical manufacturing
intermediates. As part of the sale of the Performance Polymers
segment's PE business, the Company has agreed to supply ethylene to the
buyer. These sales of ethylene, previously used internally as a raw
material, are reported in the PCI segment. Additionally, the Company
sold its Batesville, Arkansas manufacturing facility and related assets in
2006.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The
Performance Polymers segment manufactures and supplies PET intermediates and
polymers for use primarily in beverage and food packaging, including carbonated
soft drinks, water, juices, sports drinks, beer, and food containers that are
suitable for both conventional and microwave oven use. Other end-uses
for PET packaging include bottles for non-food items such as household cleaners
and clear, disposable clamshell trays such as those used in delis and salad
bars. In 2007, the Company's PET manufacturing facility based
on IntegRexTM
technology became fully operational and produces ParaStarTM, the
next generation PET resins. During fourth quarter 2007, the Company
sold its Mexico and Argentina PET manufacturing sites. In 2006, the
Company sold its PE businesses, related assets and the Company's ethylene
pipeline located at the Longview, Texas site.
The SP
segment’s key products include engineering and specialty polymers, specialty
film and sheet products, and packaging film and fiber
products. Included in these are highly specialized copolyesters and
cellulosic plastics that possess unique performance properties for value-added
end uses such as appliances, store fixtures and displays, building and
construction, electronic packaging, medical packaging, personal care and
cosmetics, performance films, tape and labels, fiber, photographic and optical
film, graphic arts, and general packaging. In fourth quarter 2007,
Eastman commercialized a new family of high-temperature copolyester products,
Eastman TritanTM
copolyester. In 2006, Eastman commercialized a new family of
cellulosic polymers, VisualizeTM
cellulosics, for the liquid crystal displays market.
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
Sales
by Segment
|
|
|
|
|
|
|
CASPI
|
$
|
1,524
|
$
|
1,451
|
$
|
1,421
|
Fibers
|
|
1,045
|
|
999
|
|
910
|
PCI
|
|
2,160
|
|
2,095
|
|
1,659
|
Performance
Polymers
|
|
1,074
|
|
1,413
|
|
1,971
|
SP
|
|
923
|
|
872
|
|
818
|
Total
Sales by Segment
|
|
6,726
|
|
6,830
|
|
6,779
|
Other
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
Total
Sales
|
$
|
6,726
|
$
|
6,830
|
$
|
6,779
|
|
|
|
|
|
|
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
Operating
Earnings (Loss)
|
|
|
|
|
|
|
CASPI
(1)
|
$
|
202
|
$
|
235
|
$
|
229
|
Fibers
(2)
|
|
238
|
|
238
|
|
226
|
PCI
(3)
|
|
153
|
|
220
|
|
132
|
Performance
Polymers (4)
|
|
(57)
|
|
(207)
|
|
68
|
SP
(5)
|
|
35
|
|
65
|
|
46
|
Total
Operating Earnings by Segment
|
|
571
|
|
551
|
|
701
|
Other
(6)
|
|
(52)
|
|
(47)
|
|
(47)
|
|
|
|
|
|
|
|
Total
Operating Earnings
|
$
|
519
|
$
|
504
|
$
|
654
|
(1)
|
CASPI
includes $(1) million and $13 million in 2007 and 2006, respectively, in
asset impairments and restructuring charges (gains) for previously closed
manufacturing facilities and severance costs of a voluntary reduction in
force and $5 million in 2008 in other operating income related to the sale
of certain mineral rights at an operating manufacturing
site.
|
(2)
|
Fibers
includes $2 million in 2006 in asset impairments and restructuring charges
related to severance costs.
|
(3)
|
PCI
includes $22 million, $(1) million, and $20 million in 2008, 2007, and
2006, respectively, in asset impairments and restructuring charges (gains)
related to the divestiture of the Batesville, Arkansas facility,
manufacturing facilities outside the U.S. and severance charges, $5
million, $19 million and $2 million in 2008, 2007 and 2006, respectively,
in accelerated depreciation related to crackers at the Company's Longview,
Texas facility, and other operating (income) charges of $(9) million and
$7 million, respectively, related to the sale of certain
mineral rights at an operating manufacturing site and the divestiture of
the Batesville, Arkansas facility.
|
(4)
|
Performance
Polymers includes $24 million, $113 million, and $46 million in 2008, 2007
and 2006, respectively, in asset impairments and restructuring charges
related to restructuring at the South Carolina facility using
IntegRexTM
technology, partially offset by a resolution of a contingency from the
sale of the Company’s PE and EpoleneTM
polymer businesses divested in fourth quarter 2006, the PET divestitures
in Mexico and Argentina, the shutdown of a research and development pilot
plant in Kingsport, Tennessee, discontinued production of CHDM modified
polymers in San Roque, Spain and severance costs related to a reduction in
force in the U.S. and Spain, $4 million, $29 million, and $7 million in
2008, 2007, and 2006, respectively, of accelerated depreciation related to
assets in Columbia, South Carolina and other operating income of $75
million in 2006 from the divestiture of the PE businesses and related
assets.
|
(5)
|
SP
includes $1 million and $16 million in 2007 and 2006, respectively, in
asset impairments and restructuring charges related to the discontinued
production of CHDM in Spain, a previously closed manufacturing facility
and severance costs, $1 million in both 2007 and 2006 of accelerated
depreciation related to assets in Columbia, South Carolina, and $2 million
in 2008 in other operating income related to the sale of certain mineral
rights at an operating manufacturing
site.
|
(6)
|
Other
includes $4 million in 2006 primarily for the shutdown of Cendian's
business activities.
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
Assets
by Segment (1)
|
|
|
|
|
|
|
CASPI
|
$
|
1,160
|
$
|
1,114
|
$
|
1,078
|
Fibers
|
|
758
|
|
692
|
|
651
|
PCI
|
|
844
|
|
1,062
|
|
926
|
Performance
Polymers (2)
|
|
606
|
|
727
|
|
1,480
|
SP
|
|
828
|
|
622
|
|
599
|
Total
Assets by Segment
|
|
4,196
|
|
4,217
|
|
4,734
|
Corporate
Assets
|
|
1,085
|
|
1,417
|
|
1,398
|
Assets
Held for Sale (2)(3)
|
|
--
|
|
375
|
|
--
|
Total
Assets
|
$
|
5,281
|
$
|
6,009
|
$
|
6,132
|
(1)
|
Assets
managed by the Chief Operating Decision Maker include accounts receivable,
inventory, fixed assets, and
goodwill.
|
(2)
|
The
Performance Polymers assets have decreased as a result of asset
impairments, divestitures in Spain and Latin America, and classification
of European assets as assets held for sale as of December 31,
2007.
|
(3)
|
For
more information regarding assets held for sale, see Note 2, "Discontinued
Operations and Assets Held for
Sale."
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
Depreciation
Expense by Segment (1)
|
|
|
|
|
|
|
CASPI
|
$
|
50
|
$
|
53
|
$
|
54
|
Fibers
|
|
50
|
|
57
|
|
41
|
PCI
|
|
53
|
|
70
|
|
59
|
Performance
Polymers
|
|
49
|
|
81
|
|
93
|
SP
|
|
53
|
|
50
|
|
47
|
Total
Depreciation Expense by Segment
|
|
255
|
|
311
|
|
294
|
Other
|
|
1
|
|
2
|
|
--
|
|
|
|
|
|
|
|
Total
Depreciation Expense
|
$
|
256
|
$
|
313
|
$
|
294
|
|
|
|
|
|
|
|
(1)
|
In
the fourth quarter 2006, the Company made strategic decisions relating to
the scheduled shutdown of cracking units in Longview, Texas and a planned
shutdown of higher cost PET assets in Columbia, South
Carolina. In 2008, accelerated depreciation costs resulting
from these decisions were $5 million and $4 million in PCI and Performance
Polymers, respectively. In 2007, accelerated depreciation costs
were $19 million, $29 million, and $1 million in PCI, Performance
Polymers, and SP segments, respectively. In 2006, accelerated
depreciation costs were $2 million, $7 million, and $1 million in PCI,
Performance Polymers, and SP segments,
respectively.
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
Capital
Expenditures by Segment
|
|
|
|
|
|
|
CASPI
|
$
|
69
|
$
|
73
|
$
|
60
|
Fibers
|
|
87
|
|
87
|
|
44
|
PCI
|
|
126
|
|
104
|
|
66
|
Performance
Polymers
|
|
126
|
|
126
|
|
125
|
SP
|
|
152
|
|
111
|
|
94
|
Total
Capital Expenditures by Segment
|
|
560
|
|
501
|
|
389
|
Other
|
|
90
|
|
17
|
|
--
|
|
|
|
|
|
|
|
Total
Capital Expenditures
|
$
|
650
|
$
|
518
|
$
|
389
|
(Dollars
in millions)
|
|
2008
|
|
2007
|
|
2006
|
Geographic
Information
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
United
States
|
$
|
3,965
|
$
|
3,959
|
$
|
4,039
|
All
foreign countries
|
|
2,761
|
|
2,871
|
|
2,740
|
Total
|
$
|
6,726
|
$
|
6,830
|
$
|
6,779
|
|
|
|
|
|
|
|
Long-Lived
Assets, Net
|
|
|
|
|
|
|
United
States
|
$
|
2,794
|
$
|
2,564
|
$
|
2,407
|
All
foreign countries
|
|
404
|
|
518
|
|
662
|
Total
|
$
|
3,198
|
$
|
3,082
|
$
|
3,069
|
|
|
|
|
|
|
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
QUARTERLY
SALES AND EARNINGS DATA – UNAUDITED
|
(Dollars
in millions, except per share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,727
|
$
|
1,834
|
$
|
1,819
|
$
|
1,346
|
Gross
profit
|
|
337
|
|
321
|
|
322
|
|
146
|
Asset
impairment and restructuring charges
|
|
17
|
|
3
|
|
2
|
|
24
|
Other
operating income
|
|
--
|
|
--
|
|
--
|
|
(16)
|
Earnings
from continuing operations
|
|
115
|
|
115
|
|
100
|
|
(2)
|
Gain
(loss) from disposal of discontinued operations, net of
tax
|
|
18
|
|
--
|
|
--
|
|
--
|
Net
earnings
|
|
133
|
|
115
|
|
100
|
|
(2)
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations per share (1)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.47
|
$
|
1.51
|
$
|
1.35
|
$
|
(0.03)
|
Diluted
|
$
|
1.46
|
$
|
1.48
|
$
|
1.33
|
$
|
(0.03)
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued operations per share (1)(2)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.23
|
$
|
--
|
$
|
--
|
$
|
--
|
Diluted
|
$
|
0.22
|
$
|
--
|
$
|
--
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Net
earnings per share (1)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.70
|
$
|
1.51
|
$
|
1.35
|
$
|
(0.03)
|
Diluted
|
$
|
1.68
|
$
|
1.48
|
$
|
1.33
|
$
|
(0.03)
|
(1)
|
Each
quarter is calculated as a discrete period; the sum of the four quarters
may not equal the calculated full year
amount.
|
(2)
|
In
first quarter 2008, the Company sold its PET polymers and PTA production
facilities in the Netherlands and its PET production facility in the
United Kingdom and related
businesses.
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in millions, except per share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter(2)
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,637
|
$
|
1,764
|
$
|
1,692
|
$
|
1,737
|
Gross
profit
|
|
286
|
|
309
|
|
307
|
|
290
|
Asset
impairment and restructuring charges
|
|
--
|
|
2
|
|
114
|
|
(4)
|
Earnings
from continuing operations
|
|
93
|
|
102
|
|
25
|
|
101
|
Earnings
(loss) from discontinued operations, net of tax
|
|
(3)
|
|
1
|
|
(5)
|
|
(3)
|
Gain
(loss) from disposal of discontinued operations, net of
tax
|
|
(13)
|
|
2
|
|
--
|
|
--
|
Net
earnings
|
|
77
|
|
105
|
|
20
|
|
98
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations per share (1)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.11
|
$
|
1.21
|
$
|
0.30
|
$
|
1.26
|
Diluted
|
$
|
1.10
|
$
|
1.19
|
$
|
0.30
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued operations per share (1)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.19)
|
$
|
0.03
|
$
|
(0.06)
|
$
|
(0.04)
|
Diluted
|
$
|
(0.19)
|
$
|
0.03
|
$
|
(0.06)
|
$
|
(0.04)
|
|
|
|
|
|
|
|
|
|
Net
earnings per share (1)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.92
|
$
|
1.24
|
$
|
0.24
|
$
|
1.22
|
Diluted
|
$
|
0.91
|
$
|
1.22
|
$
|
0.24
|
$
|
1.21
|
(1)
|
Each
quarter is calculated as a discrete period; the sum of the four quarters
may not equal the calculated full year
amount.
|
(2)
|
In
fourth quarter 2007, the Company completed the sale of its Argentina and
Mexico manufacturing sites and related
businesses.
|
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
Effective
first quarter 2008, the Company adopted SFAS No. 157, except as it applies to
those nonfinancial assets and nonfinancial liabilities addressed in FASB Staff
Position FAS 157-2 ("FSP FAS 157-2"). The FASB issued FSP FAS 157-2
which delays the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The
Company has concluded that FSP FAS 157-2 will not have an impact on the
Company’s consolidated financial statements upon
adoption.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) "Business
Combinations" ("SFAS No. 141R") which replaces SFAS No. 141 "Business
Combinations" ("SFAS No. 141"). SFAS No. 141R retains the fundamental
requirements of SFAS No. 141 that the acquisition method of accounting be used
for all business combinations. However, SFAS No. 141R provides for
the following changes from SFAS No. 141: an acquirer will record 100% of assets
and liabilities of acquired business, including goodwill, at fair value,
regardless of the level of interest acquired; certain contingent assets and
liabilities will be recognized at fair value at the acquisition date; contingent
consideration will be recognized at fair value on the acquisition date with
changes in fair value to be recognized in earnings upon settlement;
acquisition-related transaction and restructuring costs will be expensed as
incurred; reversals of valuation allowances related to acquired deferred tax
assets and changes to acquired income tax uncertainties will be recognized in
earnings; and when making adjustments to finalize preliminary accounting,
acquirers will revise any previously issued post-acquisition financial
information in future financial statements to reflect any adjustments as if they
occurred on the acquisition date. SFAS No. 141R applies prospectively
to business combinations for which the acquisition date is on or after January
1, 2009. SFAS No. 141R will not have an impact on the Company's
consolidated financial statements when effective, but the nature and magnitude
of the specific effects will depend upon the nature, terms, and size of the
acquisitions consummated after the effective date.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51" ("SFAS No. 160"),
which establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 provides that accounting and reporting for
minority interests be recharacterized as noncontrolling interests and classified
as a component of equity. This Statement also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 applies to all entities that
prepare consolidated financial statements but will affect only those entities
that have an outstanding noncontrolling interest in one or more subsidiaries or
that deconsolidate a subsidiary. This Statement is effective as of
the beginning of an entity’s first fiscal year beginning after December 15,
2008. The Company has concluded that SFAS No. 160 will not have a
material impact on the Company’s consolidated financial position, liquidity, or
results of operations.
In March
2008, the FASB issued SFAS Statement No. 161 "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The new standard also improves
transparency about the location and amounts of derivative instruments in an
entity’s financial statements; how derivative instruments and related hedged
items are accounted for under SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities"; and how derivative instruments and related
hedged items affect its financial position, financial performance, and cash
flows. The Company has concluded that SFAS No. 161 will not have a
material impact on the Company’s disclosures.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
In June
2008, the FASB issued FASB Staff Position ("FSP") Emerging Issues Task Force ("
EITF") Issue No. 03-6-1, " Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities" (" EITF Issue No.
03-6-1"). The FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method. The FSP affects
entities that accrue dividends on share-based payment awards during the awards’
service period when the dividends do not need to be returned if the employees
forfeit the award. This FSP is effective for fiscal years beginning
after December 15, 2008. The Company has concluded that EITF Issue No. 03-6-1
will not have a material impact on the Company’s consolidated financial
statements.
In
December 2008, the FASB issued FSP FAS 132(R)-1, "Employers’ Disclosures about
Postretirement Benefit Plan Assets.” This FSP amends FASB Statement
No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits,” to provide guidance on an employer’s disclosures about
plan assets of a defined benefit pension or other postretirement
plan. This FSP is effective for fiscal years ending after December
15, 2009. The Company is currently evaluating the effect FSP 132(R)-1
will have on its disclosures.
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Valuation
and Qualifying Accounts
|
|
|
|
Additions
|
|
|
|
|
|
|
Balance
at January 1, 2006
|
|
Charged
to Cost and Expense
|
|
Charged
to Other Accounts
|
|
Deductions
|
|
Balance
at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for:
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns
|
$
|
20
|
$
|
(3)
|
$
|
--
|
$
|
2
|
$
|
15
|
LIFO
Inventory
|
|
447
|
|
17
|
|
--
|
|
--
|
|
464
|
Environmental
contingencies
|
|
51
|
|
10
|
|
--
|
|
14
|
|
47
|
Deferred
tax valuation allowance
|
|
197
|
|
(67)
|
|
--
|
|
--
|
|
130
|
|
$
|
715
|
$
|
(43)
|
$
|
--
|
$
|
16
|
$
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
Charged
to Cost and Expense
|
|
Charged
to Other Accounts
|
|
Deductions
|
|
Balance
at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for:
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns
|
$
|
15
|
$
|
(1)
|
$
|
--
|
$
|
8
|
$
|
6
|
LIFO
Inventory
|
|
464
|
|
46
|
|
--
|
|
--
|
|
510
|
Environmental
contingencies
|
|
47
|
|
3
|
|
--
|
|
8
|
|
42
|
Deferred
tax valuation allowance
|
|
130
|
|
8
|
|
8
|
|
--
|
|
146
|
|
$
|
656
|
$
|
56
|
$
|
8
|
$
|
16
|
$
|
704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
Charged
to Cost and Expense
|
|
Charged
to Other Accounts
|
|
Deductions
|
|
Balance
at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for:
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns
|
$
|
6
|
$
|
6
|
$
|
--
|
$
|
4
|
$
|
8
|
LIFO
Inventory
|
|
510
|
|
15
|
|
--
|
|
--
|
|
525
|
Environmental
contingencies
|
|
42
|
|
5
|
|
--
|
|
6
|
|
41
|
Deferred
tax valuation allowance
|
|
146
|
|
(10)
|
|
(5)
|
|
--
|
|
131
|
|
$
|
704
|
$
|
16
|
$
|
(5)
|
$
|
10
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
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 Company’s management, including its
principal executive and principal financial officers 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 as of December 31, 2008, the Company’s disclosure controls and procedures
were effective to ensure that information required to be disclosed was
accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure.
Management’s Report on
Internal Control Over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over
financial reporting is a process designed under the supervision of the Company’s
CEO and CFO to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles.
The
Company’s internal control over financial reporting includes policies and
procedures that:
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets of the
Company;
|
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and the directors of the Company;
and
|
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the Company’s financial
statements.
|
Management
has assessed the effectiveness of its internal control over financial reporting
as of December 31, 2008 based on the framework established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on this assessment, management
has determined that the Company’s internal control over financial reporting was
effective as of December 31, 2008.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
Changes in Internal Control
Over Financial Reporting
There has
been no change in the Company’s internal control over financial reporting that
occurred during the fourth quarter of 2008 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
None.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors" to (but not including) the subheading "Information
About the Board of Directors and Corporate Governance" and under the subheading
"Board Committees--Audit Committee" (except for the material under the
subheading "Board Committees--Audit Committee--Audit Committee Report", which is
not incorporated by reference herein), each as included and to be
filed in the 2009 Proxy Statement, is incorporated by reference herein in
response to this Item. Certain information concerning executive officers
of the Company is set forth under the heading "Executive Officers of the
Company" in Part I of this Annual Report.
The
Company has adopted a Code of Ethics and Business Conduct applicable to the
Chief Executive Officer, the Chief Financial Officer, and the Controller of the
Company. See “Part I - Item 1. Business - Available Information - SEC Filings
and Corporate Governance Materials”.
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors—Board Committees – Compensation and Management
Development Committee – Compensation Committee Report", under the subheading
"Director Compensation", and under the heading "Executive Compensation", each as
included and to be filed in the 2009 Proxy Statement, is incorporated by
reference herein in response to this Item.
The
material under the headings "Stock Ownership of Directors and Executive
Officers--Common Stock" and "Principal Stockholders " as included and to be
filed in the 2009 Proxy Statement is incorporated by reference herein in
response to this Item.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity
Compensation Plans Approved by Stockholders
Stockholders
approved the Company’s 1994, 1997, 2002, and 2007 Omnibus Long-Term Compensation
Plans; the 1994, 1999, and 2002 Director Long-Term Compensation Plans; and the
1996 Non-Employee Director Stock Option Plan. Although stock and
stock-based awards are still outstanding under the 1997 and 2002 Omnibus
Long-Term Compensation Plans, as well as the 1999 and 2002 Director Long-Term
Compensation Plans, and the 1996 Non-Employee Director Stock Option Plan, no new
shares are available under these plans for future awards. All future
share-based awards will be made from the 2007 Omnibus Long-Term Compensation
Plan and the 2008 Director Long-Term Compensation Subplan, a component of the
2007 Omnibus Plan.
Equity
Compensation Plans Not Approved by Stockholders
Stockholders
have approved all compensation plans under which shares of Eastman common stock
are authorized for issuance.
Summary
Equity Compensation Plan Information Table
The
following table sets forth certain information as of December 31, 2008 with
respect to compensation plans under which shares of Eastman common stock may be
issued.
Plan
Category
|
|
Number
of Securities to be Issued upon Exercise of Outstanding
Options
(a)
|
|
Weighted-Average
Exercise Price of Outstanding Options
(b)
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities reflected in Column
(a))
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders
|
|
4,217,700
|
(1)
|
$54
|
|
2,545,400
|
(2)
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by stockholders
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
4,217,700
|
|
$54
|
|
2,545,400
|
|
|
(1)
Represents shares of common stock issuable upon exercise of
outstanding options granted under Eastman Chemical Company’s 1997, 2002,
and 2007 Omnibus Long-Term Compensation Plans; the 1999 and 2002 Director
Long-Term Compensation Plans; the 1996 Non-Employee Director Stock Option
Plan and 2007 Director Long Term Compensation
Subplan.
|
|
(2)
Shares of common stock available for future awards under the
Company’s 2007 Omnibus Long-Term Compensation Plan including the 2008
Director Long-Term Compensation Subplan, a component of the 2007 Omnibus
Long-Term Compensation Plan.
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors ", subheadings "Director Independence " and
"Transactions with Directors, Executive Officers, and Related Persons", each as
included and to be filed in the 2009 Proxy Statement, is incorporated by
reference herein in response to this Item.
The
information concerning amounts billed for professional services rendered by the
principal accountant and pre-approval of such services by the Audit Committee of
the Company’s Board of Directors under the heading "Item 2 - Ratification of
Appointment of Independent Auditors" as included and to be filed in the
2009 Proxy Statement is incorporated by reference herein in response to
this Item.
PART
IV
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
Page
|
(a)
|
1.
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
2.
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
The
Exhibit Index and required Exhibits to this report are included beginning
at page 137
|
|
|
|
|
|
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Eastman
Chemical Company
|
|
|
|
|
|
|
By:
|
/s/ J. Brian Ferguson |
|
J.
Brian Ferguson
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
Date:
|
February 25,
2009
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
PRINCIPAL
EXECUTIVE OFFICER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ J. Brian Ferguson |
|
Chairman
of the Board of Directors
|
|
February 25, 2009
|
J.
Brian Ferguson
|
|
and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRINCIPAL
FINANCIAL OFFICER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Curtis E. Espeland |
|
Senior
Vice President and
|
|
|
Curtis
E. Espeland
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRINCIPAL
ACCOUNTING OFFICER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Scott V. King |
|
Vice
President, Controller and
|
|
|
Scott
V. King
|
|
Chief
Accounting Officer
|
|
|
|
|
|
|
|
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
DIRECTORS:
|
|
|
|
|
|
|
|
|
|
/s/ Gary E. Anderson |
|
Director
|
|
|
Gary
E. Anderson
|
|
|
|
|
|
|
|
|
|
/s/ Michael P. Connors |
|
Director
|
|
|
Michael
P. Connors
|
|
|
|
|
|
|
|
|
|
/s/ Stephen R. Demeritt |
|
Director
|
|
|
Stephen
R. Demeritt
|
|
|
|
|
|
|
|
|
|
/s/ Robert M. Hernandez |
|
Director
|
|
|
Robert
M. Hernandez
|
|
|
|
|
|
|
|
|
|
/s/ Renée
J. Hornbaker |
|
Director
|
|
|
Renée
J. Hornbaker
|
|
|
|
|
|
|
|
|
|
/s/ Lewis M. Kling |
|
Director
|
|
|
Lewis
M. Kling
|
|
|
|
|
|
|
|
|
|
/s/ Howard L. Lance |
|
Director
|
|
|
Howard
L. Lance
|
|
|
|
|
|
|
|
|
|
/s/ Thomas H. McLain |
|
Director
|
|
|
Thomas
H. McLain
|
|
|
|
|
|
|
|
|
|
/s/ David W. Raisbeck |
|
Director
|
|
|
David
W. Raisbeck
|
|
|
|
|
|
|
|
|
|
/s/ James P. Rogers |
|
Director
|
|
|
James
P. Rogers
|
|
|
|
|
|
|
|
|
|
/s/ Peter M. Wood |
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
3.01
|
|
Amended
and Restated Certificate of Incorporation of Eastman Chemical Company, as
amended (incorporated herein by reference to Exhibit 3.01 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001)
|
|
|
|
|
|
|
|
3.02
|
|
Amended
and Restated Bylaws of Eastman Chemical Company, as amended November
9, 2007 (incorporated herein by referenced to Exhibit 3.02 to
Eastman Chemical Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2007 (the “September 30, 2007
10-Q”)
|
|
|
|
|
|
|
|
4.01
|
|
Form
of Eastman Chemical Company common stock certificate as amended February
1, 2001 (incorporated herein by reference to Exhibit 4.01 to Eastman
Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001)
|
|
|
|
|
|
|
|
4.02
|
|
Indenture,
dated as of January 10, 1994, between Eastman Chemical Company and The
Bank of New York, as Trustee (the "Indenture") (incorporated herein by
reference to Exhibit 4(a) to Eastman Chemical Company's Current Report on
Form 8-K dated January 10, 1994 (the "8-K"))
|
|
|
|
|
|
|
|
4.03
|
|
Form
of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K)
|
|
|
|
|
|
|
|
4.04
|
|
Officers’
Certificate pursuant to Sections 201 and 301 of the Indenture
(incorporated herein by reference to Exhibit 4(a) to Eastman Chemical
Company's Current Report on Form 8-K dated June 8, 1994 (the "June
8-K"))
|
|
|
|
|
|
|
|
4.05
|
|
Form
of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference
to Exhibit 4(b) to the June 8-K)
|
|
|
|
|
|
|
|
4.06
|
|
Form
of 7.60% Debentures due February 1, 2027 (incorporated herein by reference
to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (the "1996 10-K"))
|
|
|
|
|
|
|
|
4.07
|
|
Form
of 7% Notes due April 15, 2012 (incorporated herein by reference to
Exhibit 4.09 to Eastman Chemical Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002)
|
|
|
|
|
|
|
|
4.08
|
|
Officer's
Certificate pursuant to Sections 201 and 301 of the Indenture related to
7.60% Debentures due February 1, 2027 (incorporated herein by reference to
Exhibit 4.09 to the 1996 10-K)
|
|
|
|
|
|
|
|
4.09
|
|
$200,000,000
Accounts Receivable Securitization agreement dated April 13, 1999 (amended
April 11, 2000, July 14, 2005, July 9, 2008, and February 18, 2009),
between the Company and The Bank of Tokyo-Mitsubishi UFJ, Ltd., 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 March 31, 2006)
|
|
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
4.11
|
|
Letter
Amendments dated November 16, 2007 and March 10, 2008, to the Credit
Agreement (incorporated herein by reference to Exhibit 4.10 to Eastman
Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008)
|
|
|
|
|
|
|
|
4.12
|
|
Form
of 6.30% Notes due 2018 (incorporated herein by reference to Exhibit 4.14
to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003)
|
|
|
|
|
|
|
|
10.01*
|
|
1996
Non-Employee Director Stock Option Plan (incorporated herein by reference
to Exhibit 10.02 to Eastman Chemical Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996)
|
|
|
|
|
|
|
|
10.02*
|
|
|
|
141
|
|
|
|
|
|
10.03*
|
|
|
|
148
|
|
|
|
|
|
10.04*
|
|
|
|
165
|
|
|
|
|
|
10.05*
|
|
2002
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.02 to the September 30, 2007
10-Q)
|
|
|
|
|
|
|
|
10.06*
|
|
2002
Director Long-Term Compensation Plan, as amended (incorporated herein by
reference to Appendix B to Eastman Chemical Company’s 2002 Annual Meeting
Proxy Statement)
|
|
|
|
|
|
|
|
10.07*
|
|
Amended
and Restated Eastman Chemical Company Benefit Security Trust dated January
2, 2002 (incorporated herein by reference to Exhibit 10.04 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, (the "September 30, 2002 10-Q")
|
|
|
|
|
|
|
|
10.08*
|
|
Amended
and Restated Warrant to Purchase Shares of Common Stock of Eastman
Chemical Company, dated January 2, 2002 (incorporated herein by reference
to Exhibit 10.02 to the September 30, 2002 10-Q)
|
|
|
|
|
|
|
|
10.09*
|
|
Amended
and Restated Registration Rights Agreement, dated January 2, 2002
(incorporated herein by reference to Exhibit 10.03 to the September 30,
2002 10-Q)
|
|
|
|
|
|
|
|
10.10*
|
|
Notice
of Restricted Stock Awarded October 7, 2002 (incorporated herein by
reference to Exhibit 10.01 to the September 30, 2002 10-Q)
|
|
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
10.11*
|
|
|
|
172
|
|
|
|
|
|
10.12*
|
|
|
|
188
|
|
|
|
|
|
10.13*
|
|
Eastman
Unit Performance Plan as amended and restated January 1, 2004
(incorporated herein by reference to Exhibit 10.09 to Eastman Chemical
Company's Annual Report on Form 10-K for the year ended December 31, 2003
(the "2003 10-K"))
|
|
|
|
|
|
|
|
10.14*
|
|
Form
of Indemnification Agreements with Directors and Executive Officers
(incorporated herein by reference to Exhibit 10.25 to the 2003
10-K)
|
|
|
|
|
|
|
|
10.15*
|
|
Form
of Performance Share Awards to Executive Officers (2006 – 2008 Performance
Period) (incorporated herein by reference to Exhibit 10.04 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005)
|
|
|
|
|
|
|
|
10.16*
|
|
Unit
Performance Plan ("UPP") performance measures and goals, specific target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool if the
performance goals are attained, and the eligibility criteria for employee
participation in the UPP, for the 2008 performance year (incorporated
herein by reference to Eastman Chemical Company’s Current Report on Form
8-K dated December 5, 2007)
|
|
|
|
|
|
|
|
10.17*
|
|
Employment
Agreement between Eastman Chemical Company and Mark J. Costa dated May 4,
2006 (incorporated herein by reference to Exhibit 10.01 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006 (the "June 30, 2006 10-Q")
|
|
|
|
|
|
|
|
10.18*
|
|
Notice
of Restricted Stock Awarded to Mark J. Costa on June 1, 2006 (incorporated
herein by reference to Exhibit 10.02 to the June 30, 2006
10-Q)
|
|
|
|
|
|
|
|
10.19*
|
|
Notice
of Stock Option Granted to Mark J. Costa on June 1, 2006 (incorporated
herein by reference to Exhibit 10.03 to the June 30, 2006
10-Q)
|
|
|
|
|
|
|
|
10.20*
|
|
Form
of Award Notice for Stock Options Granted to Executive Officers under the
2002 Omnibus Long-Term Compensation Plan (incorporated herein by reference
to Exhibit 10.01 to Eastman Chemical Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 (the “September 30, 2006
10-Q”))
|
|
|
|
|
|
|
|
10.21*
|
|
Forms
of Award Notice for Stock Options Granted to Executive Officers under the
2007 Omnibus Long-Term Compensation Plan (incorporated herein by reference
to Exhibit 10.08 to the September 30, 2007 10-Q and Exhibit 10.01 to
Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2008 (the “September 30, 2008 10-Q”) )
|
|
|
|
|
|
|
|
10.22*
|
|
Forms
of Award Notice for Stock Options Granted to Mark J. Costa (incorporated
herein by reference to Exhibit 10.02 to the September 30, 2006 10-Q and
Exhibit 10.02 to the September 30, 2008 10-Q)
|
|
|
|
|
|
|
|
10.23*
|
|
Form
of Performance Share Awards to Executive Officers (2007 – 2009 Performance
Period) (incorporated herein by reference to Exhibit 10.03 to the
September 30, 2006 10-Q)
|
|
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
10.24*
|
|
Form
of Performance Share Awards to Mark J. Costa (2007-2009 Performance
Period) (incorporated herein by reference to Exhibit 10.04 to the
September 30, 2006 10-Q)
|
|
|
|
|
|
|
|
10.25*
|
|
1997
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.03 to the September 30, 2007
10-Q)
|
|
|
|
|
|
|
|
10.26*
|
|
2007
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.01 to the September 30, 2007
10-Q)
|
|
|
|
|
|
|
|
10.27*
|
|
Forms
of Performance Share Awards to Executive Officers (2008 – 2010 Performance
Period) (incorporated herein by reference to Exhibit 10.09 to the
September 30, 2007 10-Q)
|
|
|
|
|
|
|
|
10.28*
|
|
Forms
of Performance Share Awards to Executive Officers (2009 – 2011 Performance
Period) (incorporated herein by reference to Exhibit 10.03 and 10.04 to
the September 30, 2008 10-Q)
|
|
|
|
|
|
|
|
10.29*
|
|
2007
Director Long-Term Compensation Subplan of the 2007 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.10 to
the September 30, 2007 10-Q)
|
|
|
|
|
|
|
|
10.30*
|
|
2008
Director Long-Term Compensation Subplan of the 2007 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.05 to
the September 30, 2008 10-Q)
|
|
|
|
|
|
|
|
10.31*
|
|
Unit
Performance Plan ("UPP") performance measures and goals, specific target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool if the
performance goals are attained, and the eligibility criteria for employee
participation in the UPP, for the 2009 performance year (incorporated
herein by reference to Eastman Chemical Company’s Current Report on Form
8-K dated December 4, 2008)
|
|
|
|
|
|
|
|
10.32*
|
|
|
|
197
|
|
|
|
|
|
12.01
|
|
|
|
203
|
|
|
|
|
|
21.01
|
|
|
|
204
|
|
|
|
|
|
23.01
|
|
|
|
206
|
|
|
|
|
|
31.01
|
|
|
|
207
|
|
|
|
|
|
31.02
|
|
|
|
208
|
|
|
|
|
|
32.01
|
|
|
|
209
|
|
|
|
|
|
32.02
|
|
|
|
210
|
|
|
|
|
|
* Management contract or
compensatory plan or arrangement filed pursuant to Item 601(b) (10) (iii)
of Regulation S-K.
|
140