UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
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(Mark
One)
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2007
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to
______________
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Commission
file number 1-12626
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EASTMAN
CHEMICAL COMPANY
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(Exact
name of registrant as specified in its
charter)
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Delaware
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62-1539359
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
no.)
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200
South Wilcox Drive
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Kingsport,
Tennessee
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37662
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (423)
229-2000
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $0.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
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____________________________________________________________________________________________
PAGE 1 OF
139 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 135
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Yes
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No
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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[X]
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Yes
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No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act.
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[X]
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Yes
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No
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Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
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[X]
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Yes
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No
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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[X]
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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)
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Yes
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No
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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[X]
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The
aggregate market value (based upon the closing price on the New York Stock
Exchange on June 29, 2007) of the 79,245,773 shares of common equity held by
non-affiliates as of December 31, 2007 was approximately $5,097,880,577, 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, 2007 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 79,753,015 shares of common stock of the
registrant were outstanding at December 31, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement relating to the 2008 Annual
Meeting of Stockholders (the "2008 Proxy Statement"), to be filed with the
Securities and Exchange Commission, are incorporated by reference in Part III,
Items 10 to 14 of this Annual Report on Form 10-K (the "Annual Report") as
indicated herein.
FORWARD-LOOKING
STATEMENTS
Certain
statements in this Annual Report are forward-looking in nature as defined in the
Private Securities Litigation Reform Act of 1995. These statements, and other
written and oral forward-looking statements made by the Company from time to
time, may relate to, among other things, such matters as planned and expected
capacity increases and utilization; anticipated capital spending; expected
depreciation and amortization; environmental matters; legal proceedings;
exposure to, and effects of hedging of, raw material and energy costs and
foreign currencies; global and regional economic, political, and business
conditions; competition; growth opportunities; supply and demand, volume, price,
cost, margin, and sales; earnings, cash flow, dividends, and other expected
financial results and conditions; expectations, strategies, and plans for
individual assets and products, businesses, and segments, as well as for the
whole of Eastman Chemical Company; cash requirements and uses of available cash;
financing plans; pension expenses and funding; credit ratings; anticipated
restructuring, divestiture, and consolidation activities; cost reduction and
control efforts and targets; integration of 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.
2
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 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 on Form 10-K.
3
TABLE OF
CONTENTS
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ITEM
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PAGE
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PART
I
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1.
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5
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1A.
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22
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1B.
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23
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2.
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25
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3.
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26
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4.
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27
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PART II
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5.
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28
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6.
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30
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7.
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32
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7A.
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75
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8.
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76
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9.
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130
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9A.
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130
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9B.
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130
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PART
III
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10.
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131
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11.
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131
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12.
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131
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13.
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132
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14.
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132
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PART
IV
SIGNATURES
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134
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4
PART
I
ITEM
1. BUSINESS
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 thirteen manufacturing sites in eight 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 2007,
the Company had sales revenue of $6.8 billion, operating earnings of $504
million, and earnings from continuing operations of $321
million. Earnings per diluted share from continuing operations were
$3.84 in 2007. Included in 2007 operating earnings were accelerated
depreciation costs related to restructuring decisions of $49 million and asset
impairments and restructuring charges of $112 million.
The
Company’s products and operations are managed and reported in five operating
segments: the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI")
segment, the Fibers segment, the Performance Chemicals and Intermediates ("PCI")
segment, the Performance Polymers segment and the Specialty Plastics ("SP")
segment. A segment is determined primarily by the customer markets to
which it sells its products and services. For additional information
related to the Company’s operating segments, see Note 23 "Segment Information"
to the Company’s consolidated financial statements in Part II, Item 8 of this
2007 Annual Report on Form 10-K.
In
addition to the segments, the Company manages certain costs and initiatives at
the corporate level including certain research and development costs not
allocated to any one operating segment. Industrial gasification,
including chemicals from coal, is 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 drive growth, meet increasing demand and
create new opportunities for the Company's products in key markets. The Company
has implemented a number of corporate actions to reposition the Company in key
markets and geographies and management believes the Company is well-positioned
for sustained success.
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In
the CASPI segment, Eastman has completed a 25 percent expansion of its
hydrogenated hydrocarbon resins manufacturing capacity in Middelburg, the
Netherlands and has begun an additional 30 percent expansion which is
expected to be complete in early
2009.
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In
the Fibers segment, the Company is expanding its acetate tow plant in
Workington, England, which will serve existing customers in Western Europe
and the growing demand in Eastern Europe. This expansion is
expected to be complete in the second half of
2008.
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In
the SP segment, in 2007, Eastman commercialized new high-temperature
copolyester products, based on Eastman TritanTM
copolyester. The segment also had continued sales revenue
growth from cellulosic and copolyester products sold in the liquid crystal
displays market.
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The
PCI segment has been restructured to improve long term profitability.
Eastman divested its Batesville, Arkansas manufacturing facility and
related assets and its specialty organic chemicals product lines in 2006
and is implementing a staged phase-out of its three older cracking units
in Longview, Texas. Eastman shut down the first of these
cracking units in fourth quarter
2007.
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The
Performance Polymers segment is being restructured and the Company expects
substantially to improve the segment's profitability, in part enabled by
IntegRexTM
technology. In 2007, the Company began transforming the
Columbia, South Carolina polyethylene terephthalate ("PET") facility
through a planned shutdown of higher cost PET assets; divested its PET
manufacturing facilities in San Roque, Spain; Cosoleacaque, Mexico and
Zarate, Argentina; and entered into definitive agreements to sell its PET
polymers and purified terephthalic acid ("PTA") facility in the
Netherlands and the PET facility in the United Kingdom and related
businesses. Eastman divested its polyethylene ("PE")
business and related assets in
2006.
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As a
result of these and other actions, the Company expects continued strong cash
flow and less cyclical financial performance with a sustainable corporate
operating margin of 10 percent or greater.
5
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.
Manufacturing
Streams
As stated
above, Eastman's objective is to leverage its heritage of expertise and
innovation in acetyl, polyester, and olefins chemistries to drive growth in key
markets including packaging, tobacco, durable goods, building and construction,
and others. For each of these chemistries, Eastman has developed a
combination of assets and technologies that are operated within three
manufacturing "streams".
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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. Therefore, the Company is pursuing opportunities
further to leverage its coal-based process know-how in a corporate
initiative referred to as "chemicals from coal". Expanding the
products derived from industrial gasification-based raw materials rather
than natural gas and crude oil are expected to enable Eastman to
achieve lower, more stable costs.
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In
the polyester stream, the Company begins with purchased paraxylene and
produces 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. This backward integration of its
polyester manufacturing is a competitive advantage, giving Eastman
a low cost position, as well as surety of intermediate
supply. In addition, Eastman adds specialty monomers for
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.
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In
the olefins stream, the Company begins primarily with propane and ethane,
which are then cracked at its facility in Longview, Texas into propylene
and ethylene. The Company also purchases propylene for use at
its Longview facility and its facilities outside the
U.S. The propylene is used in oxo derivative products, while
the ethylene is used in oxo derivatives, acetaldehyde and ethylene glycol
production and also sold. 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.
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The
following chart shows the Company's sites at which the streams are primarily
employed.
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SITE
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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Kingsport,
Tennessee
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X
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X
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X
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Longview,
Texas
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X
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X
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Columbia,
South Carolina
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X
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Rotterdam,
the Netherlands *
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X
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Workington,
England *
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X
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X
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Kuantan,
Malaysia
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X
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Singapore
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X
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*
Rotterdam, the Netherlands and the Performance Polymers portion of the
Workington, England site are included in assets held for sale at December 31,
2007.
6
The
following chart shows significant Eastman products, markets, and end
uses by segment and manufacturing stream.
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SEGMENT
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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KEY
PRODUCTS, MARKETS AND
END
USES
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CASPI
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X
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X
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Adhesives
ingredients (tape, label, nonwovens), paint and coatings (architectural,
automotive, industrial, and original equipment manufacturing
("OEM"))
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Fibers
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X
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Acetate
fibers for filter products and textiles
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PCI
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X
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X
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X
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Intermediate
chemicals for agrochemical, automotive, beverages, nutrition,
pharmaceuticals, coatings, medical devices, toys, photographic and
imaging, household products, polymers, textiles, and consumer and
industrial products and uses
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Performance
Polymers
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X
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X
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PET
for beverage and food packaging, custom-care and cosmetic packaging,
health care and pharmaceutical uses, household products, and industrial
packaging applications
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SP
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X
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X
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X
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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
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Cyclicality
and Seasonality
Certain
segments, particularly the PCI and Performance Polymers segments, are impacted
by the cyclicality of key products and markets, while other segments are more
sensitive to global economic conditions. Supply and demand dynamics
determine profitability at different stages of cycles and global economic
conditions affect the length of each cycle. Despite some sensitivity
to global economic conditions, many of the products in the Fibers, CASPI, and SP
segments provide a 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 the Northern
hemisphere, while demand typically weakens during the late third and fourth
quarters.
7
CASPI
SEGMENT
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·
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Overview
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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
durable goods, packaged goods, automobiles, and housing. Growth in Asia,
Eastern Europe, and Latin America is substantially 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 continue to have operating margins in the range of 15 percent to 20
percent. In 2007, the CASPI segment had sales revenue of $1.5
billion, 21 percent of Eastman’s total sales.
The
profitability of the CASPI segment is sensitive to the global economy, foreign
currency exchange rates, market trends, and broader chemical cycles,
particularly the olefins cycle. The CASPI segment's specialty
products, which include coatings additives, coalescents, and selected
hydrocarbon resins, are less sensitive to the olefins cycle due to their
functional performance attributes. The commodity products, which
include commodity solvents and polymers, are 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.
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·
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Products
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Ø
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Coatings
Additives, Coalescents, and
Solvents
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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
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 in compliance with state and regional
regulations. A significant portion of Eastman’s coatings additives,
coalescents, and solvents are currently used in compliant
coatings. Additional products are under development to meet the
growing demand for low VOC coatings. Coatings additives, coalescents,
and solvents comprised 60 percent of the CASPI segment’s total sales for
2007.
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Ø
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Adhesives
Raw Materials
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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. Demand for many adhesives products is growing faster than
general economic growth, driven by use in consumable markets and substitution of
other fasteners such as nails and screws with formulated
adhesives. Adhesives raw materials comprised 40 percent of the CASPI
segment’s total sales for 2007.
8
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·
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Strategy
and Innovation
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A key
element of the CASPI segment growth strategy is the continued development of
innovative product offerings, building on proprietary technologies in
high-growth markets and regions that meet customers’ evolving needs and improve
the quality and performance of customers’ end products. Management
believes that its ability to leverage the CASPI segment's broad product line and
Eastman's research and development capabilities makes it uniquely capable of
offering a broad array of solutions for new and emerging markets. The
Company is making, and plans to make, high value, incremental expansions of
existing CASPI manufacturing assets in an effort to ensure adequate capacity to
meet growing demand for the segment's differentiated products.
The CASPI
segment is focused on the expansion of 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 of high industrial growth, particularly
in Asia from its facility in Singapore and joint venture operations in
China.
The CASPI
segment is also focused on the expansion of the adhesives raw materials product
offerings into high-growth markets and regions by leveraging applications
technology and increasing production capacity. The segment is
capturing growth in demand for specialty hydrocarbon resins through a 25 percent
expansion of the Company's hydrogenated hydrocarbon resins manufacturing
capacity in Middelburg, the Netherlands completed in 2006. A second
expansion, adding 30 percent more capacity, is expected to be complete in early
2009. Additionally, the CASPI segment has increased profitability
within this group of product lines through cost reduction initiatives,
leveraging of best manufacturing practices, and improved product
mix.
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 may be successfully shared across multiple end-uses
and markets.
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·
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Customers
and Markets
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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 over 1,000 customers around
the world, and approximately 80 percent of its sales revenue in 2007 was
attributable to approximately 80 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 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 durable goods, packaged
goods, automobiles, and housing.
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·
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Competition
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Competition
within the CASPI segment's markets varies widely depending on the specific
product or product group. Because of the depth and breadth of its
product offerings, Eastman does not believe any one of its competitors presently
offers all the products it manufactures within the CASPI segment. The
Company’s major competitors in the CASPI segment's markets include larger
companies such as Dow Chemical Company ("Dow"), BASF 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. The Company believes its
competitive advantages include its level of vertical integration, breadth of
product and technology offerings, low-cost manufacturing position, consistent
product quality, and process and market knowledge. In addition,
Eastman attempts to leverage its strong customer base and long-standing customer
relationships to promote substantial recurring business, further strengthening
its competitive position.
9
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 producing the product 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 is currently being
expanded. In 2007, the Fibers segment had sales revenue of $999
million, 14 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 continue to 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 uses
multiple sources of wood pulp as raw material. As a result, the
segment has qualified all major high-purity wood pulp suppliers that make pulp
suitable for acetate fibers. Despite consolidation in the fiber-grade
pulp market in recent years, the Fibers segment believes it 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 the strengths to improve the
strategic position of its Fibers segment.
Profitability
in the Fibers segment is largely driven by industry structure with relatively
limited numbers of customers and suppliers. While the Fibers segment is affected
by customer buying patterns on a quarter to quarter basis, the segment has
generated and is expected to continue to generate consistently strong annual
cash flow and operating earnings.
|
·
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Products
|
|
Ø
|
Acetate
Tow
|
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 approximately 3 percent per
year through 2010, with higher growth rates in Asia and Eastern Europe, further
contributing to the already high capacity utilization rates in the
industry.
Ø
Acetate
Yarn
The
Company manufactures acetate filament yarn under the EstronTM and
ChromspunTM
trademarks in a wide variety of specifications. Consisting of pure
cellulose acetate, 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 containing acetate yarn are noted for their rich colors, silky feel,
supple drape, breathability, and comfort.
10
|
|
Ø
|
Acetyl Chemical
Products
|
The
Fibers segment's acetyl chemical products sold primarily to other acetate fiber
producers 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.
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·
|
Strategy and
Innovation
|
|
|
Ø
|
Growth
|
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, announced in 2006, is underway and expected to be
completed in the second half of 2008, expanding Eastman's world-wide capacity by
five percent. The location of this site will serve existing customers
in Western Europe and the growing demand in Eastern Europe. The
acetate flake for the capacity expansion will be supplied by existing flake
capacity in Kingsport, Tennessee. The Company is also exploring
options for new acetate tow capacity in Asia, a major growth
region. The Company would plan to supply acetate flake for this
expansion from its Kingsport, Tennessee site.
|
|
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 successes are fiber product advancements that allow improved
processability on customers’ equipment and improved packaging
designs. 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.
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·
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Customers and
Markets
|
The
customer base in the Fibers segment is relatively concentrated, consisting of
approximately 170 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
2007. 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
Chemicals Co. ("SK"), Ltd., 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 begun in 2007 included Eastman's Workington, England
expansion and an expansion by a Japanese acetate tow
manufacturer. However, current global capacity utilization
rates are expected to remain high as the rate of world-wide growth in demand for
acetate tow is projected to exceed the announced capacity
expansions.
11
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 production and
the only acetate yarn producer vertically integrated to acetate flake
production, the main raw material for acetate fiber
production. Eastman is the only acetate yarn producer in North
America.
PCI
SEGMENT
|
·
|
Overview
|
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 stream and the olefins stream. In 2007, the PCI segment
had sales revenue of $2.1 billion, 31 percent of Eastman’s total
sales.
Many of
the segment's products are affected by the olefins cycle. This
cyclicality is caused by periods of supply and demand imbalance, either when
incremental capacity additions are not offset by corresponding increases in
demand, or when demand exceeds existing supply. Demand, in turn, is
based on general economic conditions, raw material and energy prices, 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 older cracking units in Longview, Texas in fourth quarter
2007. Shutdown timing for the remaining two units will depend on
market conditions and is expected to result in continued accelerated
depreciation costs over the next twelve months. 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 reported in the PCI
segment.
|
·
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Products
|
The PCI
segment offers over 135 products that include intermediates based on oxo and
acetyl chemistries, and performance chemicals. The PCI segment's 2007
sales revenue was approximately 65 percent olefin-based, 15 percent
acetyl-based, and 20 percent from performance and other
chemicals. Approximately 74 percent of the PCI segment's sales
revenue is generated in North America. Sales in all regions are
generated through a mix of the Company’s direct sales force and a network of
distributors. The Company's PCI segment is the largest marketer of
acetic anhydride in the United States, an intermediate that is a critical
component of analgesics and other pharmaceutical and agricultural products, and
is the only U.S. producer of acetaldehyde, a key intermediate in the production
of vitamins and other specialty products. Eastman manufactures one of
the world's broadest ranges of products derived from oxo
aldehydes. The PCI segment’s other intermediate products include
plasticizers and glycols. Many of the intermediates products in the
PCI segment are priced based on supply and demand of substitute and competing
products. In order to maintain a competitive position, the Company
strives to operate with a low cost manufacturing base.
The PCI
segment also manufactures performance chemicals, 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.
12
|
·
|
Strategy
and Innovation
|
To build
on and maintain its status as a low cost producer, the PCI segment continuously
focuses on cost control, operational efficiency, and capacity utilization to
maximize earnings. Through the PCI segment, the Company maximizes the
advantage of its highly integrated and world-scale manufacturing
facilities. For
example, the Kingsport, Tennessee manufacturing 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. The Company
engages in customer-focused research and development initiatives in order to
develop new PCI products and find additional applications for existing products.
The Company is currently focusing these efforts on applications in the personal
care market and markets using plasticizers. The Company also
evaluates licensing opportunities for acetic acid and oxo derivatives on a
selective basis, and has recently licensed technology to produce acetyl products
to Saudi International Petrochemical Company in Saudi Arabia and to Chang Chung
Petrochemical Company in Taiwan.
|
·
|
Customers
and Markets
|
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 is being positively affected by the current
olefins upcycle. However, the strength of product-specific olefin
derivative markets will vary widely based upon prevailing supply and demand
conditions. An important trend within the PCI segment's markets is a
tendency toward increased regionalization of key markets, especially for 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 2007 was from 90 out of approximately 1,120
customers worldwide.
|
·
|
Competition
|
Historically,
there have been significant barriers to entry for potential competitors in the
PCI segment's major product lines, 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
|
·
|
Overview
|
In 2007,
the Performance Polymers segment had sales revenue of $1.4 billion, 21 percent
of the Company’s total sales. The segment is comprised primarily of
the Company's PET product lines, and also includes various polymer intermediate
derivatives.
The
segment is being restructured and the Company expects substantially to improve
the segment's profitability, in part enabled by IntegRexTM
technology.
13
The
Company continues to make significant progress with its proprietary
IntegRexTM
technology for manufacturing PET. In the first quarter 2007, the
Company's new PET manufacturing facility utilizing IntegRexTM technology became fully
operational after coming online during fourth quarter 2006. In
2007, with this new IntegRexTM
technology, the Company validated its earlier estimates of conversion and
capital cost savings of approximately 50 percent compared to conventional PET
technology. In addition, the Company demonstrated an operating rate
for its PET manufacturing facility utilizing IntegRexTM technology of greater
than 120 percent of the nameplate capacity of 350,000 metric
tons. ParaStarTM PET
resins, enabled by IntegRexTM technology, were widely
accepted in the marketplace during 2007. The Company is also actively
pursing licensing opportunities of its IntegRexTM
technology.
In 2007,
the Company also made significant progress on strategic actions for
underperforming PET assets outside the United States. In the second
quarter, the Company completed the divestiture of its PET manufacturing site in
Spain. During the fourth quarter 2007, the Company entered into
definitive agreements to divest its PET polymers and PTA facilities in the
Netherlands and the PET facility in the United Kingdom and related businesses,
and expects to complete the sale in first quarter 2008. Because the
Company is exiting the PET business in the European region, results from sales
of PET products manufactured at the Spain, the Netherlands, and United Kingdom
sites are presented as discontinued operations and are not included in results
from continuing operations. Also during the fourth quarter 2007, the
Company completed the divestiture of its PET manufacturing sites in Mexico and
Argentina. In 2007, sales revenue from the Mexico and Argentina PET
manufacturing facilities was $413 million and the operating loss from those
sales was $127 million, which included $115 million in asset impairments and
restructuring charges. Combined, the PET manufacturing facilities
outside the U.S. being divested represent over 850,000 metric tons,
approximately 55 percent of Eastman's PET capacity. After divesting
the PET manufacturing facilities in the Netherlands and England, Eastman will
have no PET manufacturing capacity outside the United States. For
2007, the segment's operating loss from continuing operations was $207 million,
including accelerated depreciation costs of $29 million and asset impairments
and restructuring charges of $113 million.
In 2008,
the Company expects to continue to take actions to improve the operating results
of the Performance Polymers segment through innovation and strategic
actions. The Company expects to shut down 300,000 metric tons of
higher cost assets by mid-year 2008 after having shut down 100,000 metric tons
of higher cost PET assets during 2007, some of which will be converted to SP
segment production. As a result of the changes in the asset base at
the South Carolina facility, the Company expects to reduce annual costs at the
South Carolina site by more than $30 million. The Company also
expects to debottleneck the PET capacity using IntegRexTM
technology in South Carolina by 50 percent above nameplate capacity which will
add an additional 175,000 metric tons of new capacity by year end
2008. As a result of these actions, the Performance Polymers segment
will have total PET capacity of approximately 735,000 metric tons, all based in
North America. Of the remaining capacity, over 60 percent will be
based on IntegRexTM
technology which provides an advantaged cost position in the
industry. Following these actions, Eastman expects typical
Performance Polymers segment operating margins of approximately 10
percent.
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 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.
|
·
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Products
|
|
Ø
|
PET
|
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, 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.
14
|
·
|
Strategy
and Innovation
|
|
Ø
|
Growth
|
In first
quarter 2007, the Company's PET manufacturing facility based on IntegRexTM
technology became fully operational with a capacity of 350,000 metric
tons. The facility produces ParaStarTM, the next generation PET
resins. The facility has demonstrated run-rates above nameplate capacity and the
Company plans to debottleneck it by the end of 2008 by 175,000 metric tons
for a total capacity of 525,000 metric tons of ParaStarTM
PET. The Company continues to pursue options to create value from its
IntegRexTM
technology, primarily by actively pursing licensing opportunities.
|
Ø
|
Innovation
|
The
Performance Polymers segment expects to continue to provide customers with
innovative new products and incremental improvements in existing
products. Eastman currently maintains the industry’s broadest product
offering for PET polymers including ParaStarTM next
generation PET resins for carbonated soft drink packaging enabled by
IntegRexTM
technology, AquaTM polymer
for the water bottle market, HeatwaveTM polymer
for hotfill markets, and VitivaTM polymer
for ultraviolet light sensitive applications.
|
Ø
|
Research
and Development
|
Eastman
directs its research and development efforts in the Performance Polymers segment
toward three key objectives:
|
·
|
Lowering
manufacturing costs through process technology innovations and process
improvement efforts;
|
|
·
|
Developing
new products and services in PET polymers that both meet customers'
fitness for use requirements and are protective of the environment through
applications research and customer feedback;
and
|
|
·
|
Enhancing
product quality by improvements in manufacturing technology and
processes.
|
The
Company's Performance Polymers research and development efforts resulted in its
IntegRexTM
technology, a breakthrough innovation in the integrated manufacturing of
paraxylene to PET resin, specifically designed for packaging
applications. During 2007, the Company validated that PET produced
utilizing IntegRexTM
technology yields over 50 percent manufacturing cost savings and 50 percent
capital cost savings compared to conventional PET manufacturing and capital
costs.
Enabled
by IntegRexTM technology,
ParaStarTM next
generation PET resins offer Eastman's customers significant advantages in the
performance and delivered cost of their packages, including higher clarity and
lower energy use in conversion from pellets to containers.
|
·
|
Customers
and Markets
|
Approximately
40 PET customers within the Performance Polymers segment accounted for more than
80 percent of the segment’s total sales revenue from continuing operations in
2007. With the completion of strategic actions, the segment will
primarily serve customers in the NAFTA market. These customers are
primarily PET container suppliers to large volume beverage markets such as
carbonated soft drinks, water, and juice, with strong participation in custom
areas such as food, liquor, sport and fruit beverages, health and beauty aids,
and household products. In 2007, the worldwide market for PET,
including containers, film and sheet, was approximately 14 million metric tons
including 4 million metric tons in the NAFTA market. Demand for PET
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. PET has already made significant inroads in soft drink and
water bottles, and producers are currently targeting markets such as hot-fill
soups and sauces and containers for beer. Demand in the NAFTA market
for PET is expected to grow by approximately 200 thousand metric tons annually
over the next several years.
|
·
|
Competition
|
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.
15
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 markets. 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
|
·
|
Overview
|
In the SP
segment, the Company produces and markets highly specialized copolyesters and
cellulosic plastics that possess differentiated performance properties for
value-added end uses. In 2007, the SP segment had sales revenue of
$872 million, approximately 13 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. In addition, the SP
segment has a long history of manufacturing excellence with strong process
improvement programs providing continuing cost reduction.
The
Company expects the SP segment to have gross margins of approximately 25 percent
with sales revenue growth of 7 to 8 percent annually. In 2007, the
operating margin for the SP segment was 7 percent as the Company continued to
invest in growth initiatives. Over time, management expects SP
segment operating margins of 10 to 15 percent.
|
·
|
Products
|
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 economic growth due to
ongoing specialty copolyester material innovations and displacement
opportunities. Eastman believes that cellulosic materials will grow
at the rate of the economy in general, with the strong demand for cellulose
esters in liquid crystal displays more than offsetting the decline in legacy
photographic markets. The SP segment's specialty copolyesters are
currently produced in Kingsport, Tennessee and Kuantan,
Malaysia. Rationalized PET lines are currently being converted to
produce specialty copolyesters in Columbia, South
Carolina. Cellulosics products are produced in Kingsport,
Tennessee.
|
Ø
|
Specialty
Copolyesters
|
Specialty
copolyesters accounted for approximately 79 percent of the SP segment’s 2007
sales revenue. Eastman’s specialty copolyesters, which generally are
based on Eastman's market leading supply of cyclohexane dimethanol ("CHDM")
modified polymers, typically fill a market position between polycarbonates and
acrylics. Polycarbonates traditionally have had some superior
performance characteristics, while acrylics have been less
expensive. Specialty copolyesters combine superior performance with
competitive pricing and are being substituted for both polycarbonates and
acrylics.
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 liquid crystal displays
("LCD").
16
In
November 2007, Eastman commercialized a new family of high-temperature
copolyester products, Eastman TritanTM
copolyester. This new copolyester innovation offers a combination of
chemical and temperature resistance that enables the SP segment to create new
material solutions in markets and applications that the SP segment's current
copolyesters have insufficient properties to meet.
|
Ø
|
Cellulosic
Plastics
|
Cellulosics
and cellulosic plastics accounted for approximately 21 percent of the SP
segment’s 2007 sales revenue. Sold under the TeniteTM brand,
these products are known for their excellent balance of properties - 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. Sales from these products continued to grow at
double digit rates through 2007 and are expected to show similar growth in
2008.
|
·
|
Strategy
and Innovation
|
The SP
segment is focused on delivering consistent gross margins and reinvesting 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. The Company is also
pursuing options to increase capacity for its cellulose ester products to
support continued demand in key markets such as LCD.
The SP
segment continues to pursue growth by investing in marketing, research and
development, and manufacturing to meet the needs of the global
marketplace. Recent innovations include VisualizeTM cellulose
esters for the LCD market and Eastman TritanTM
copolyester for
markets and applications requiring the advantages of traditional copolyesters,
such as clarity and chemical resistance, along with higher heat resistance,
improved design flexibility, and ease of processing.
The LCD
market is a developing growth market for the SP segment. The Company
is investing in the development of copolyester and cellulosic-based product
solutions for this high-growth market, with the objective of becoming a
strategic raw material supplier in the LCD market.
|
·
|
Customers
and Markets
|
The
customer base in the SP segment is broad and diverse, consisting of
approximately 640 companies worldwide in a variety of
industries. Approximately 80 percent of the SP segment’s 2007 sales
revenue was attributable to approximately 70 customers. The SP
segment seeks to develop mutually beneficial relationships with its customers
throughout various stages of product life cycles. By doing so, it is
better able to understand its customers’ needs as those customers develop new
products, and more effectively bring new solutions to market.
17
|
·
|
Competition
|
The SP
segment competes in the market for plastics that meet specific performance
criteria, typically determined on an application-by-application basis and often
by OEMs rather than by resin converters. Product development in the
SP segment is dependent upon Eastman’s ability to design plastics products that
achieve performance characteristics specified by its customers, while providing
a better value proposition than alternative materials such as polycarbonate and
acrylic. Increases in market share are gained through the development
of new applications, substitution of plastic for other materials, and
displacement of other plastic resins in existing applications.
Competition
in the SP segment varies as a function of where the products are in their life
cycle. 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 receiving sales revenue from multiple sources, as well as
retaining customers from long-term relationships. As products become
price sensitive, the SP segment can take advantage of Eastman's scale of
operations, including conversion of rationalized PET assets, and vertical
integration to maintain a superior product conversion cost
position.
Eastman’s
primary competitors for copolyesters include Bayer AG, Dow, SK Chemical
Industries, Saudi Basic Industries Corporation ("SABIC"), and Nova Chemicals
Corporation. Competition for cellulose esters is primarily from other
producers of cellulose ester polymers such as Acetati SpA and
Daicel.
CORPORATE
INITIATIVES - INDUSTRIAL GASIFICATION
In
addition to the 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 coal or petroleum coke. 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 has announced its role in two major industrial
gasification projects. One of these will be located in Beaumont, Texas and
will use petroleum coke as the primary feedstock to produce hydrogen, methanol,
and ammonia. Eastman is the developer of the project and is co-investor
with Green Rock Energy, L.L.C., a company formed by the D.E. Shaw Group and
Goldman, Sachs & Co. Capital costs for the total project are
expected to be approximately $1.6 billion, and Eastman and Green Rock each has a
50 percent equity stake in the project. Eastman will be responsible for
operating, maintaining, and providing other site management services for the
facility. Air Products and Chemicals, Inc. has signed a letter of intent
to purchase hydrogen produced by the facility and Eastman intends to purchase
synthesis gas for methanol production, both on a long-term basis. The
project entity has signed a letter of intent with a company that intends to take
the carbon dioxide and use it for enhanced oil recovery, which would then be
sequestered. Front-end engineering and design, being provided by Fluor
Corporation, is expected to be completed in the second half of 2008.
Project financing is expected to be obtained by the end of 2008.
Construction is scheduled to begin in early 2009, with the project expected to
be online in 2011.
Eastman
also plans to participate in a project sponsored by Faustina Hydrogen Products,
L.L.C. which will use petroleum coke as the primary feedstock to make anhydrous
ammonia and methanol. Faustina Hydrogen Products is primarily owned
by Green Rock Energy, L.L.C. The Company intends to take a 25 percent or
greater equity position in the project, provide operations, maintenance, and
other site management services, and purchase methanol under a long-term
contract. Capital costs for the facility are estimated to be approximately
$1.6 billion. Project financing is expected to be obtained by the end of
2008. The facility will be built in St. James Parish, Louisiana and is
expected to be complete by 2011.
18
The
Company also continues work on 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 2007,
funding for corporate initiatives was $47 million compared with $43 million in
2006.
EASTMAN
CHEMICAL COMPANY GENERAL INFORMATION
Sales, Marketing, and
Distribution
The
Company markets products primarily through a global sales organization which has
a presence in the United States and in over 35 other countries around the
world. Eastman has a number of broad product lines which require a
sales and marketing strategy that is tailored to specific customers in order to
deliver high quality products and high levels of service to all of its customers
worldwide. Technical expertise and process knowledge are critical in
determining the application of products for a particular
customer. Through a highly skilled and specialized sales force that
is capable of providing customized business solutions for each of its five
operating segments, Eastman is able to establish long-term customer
relationships and strives to become the preferred supplier of specialty
chemicals and plastics.
The
Company's products are 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 Company's customers throughout the
world have the choice of obtaining products and services through Eastman's
website, www.eastman.com, through any of its global customer service centers, or
through any of Eastman's direct sales force or independent
distributors.
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 Materials and Energy
Eastman
purchases a substantial portion, estimated to be approximately 80 percent, of
its key raw materials and energy through long-term contracts, generally of three
to five years initial duration with renewal or cancellation options for each
party. Most of 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, although derivative financial instruments,
valued at quoted market prices, have been utilized to mitigate the impact of
short-term market price fluctuations. Key raw materials and purchased
energy include propane, ethane, paraxylene, ethylene glycol, PTA, natural gas,
coal, cellulose, methanol, electricity, and a wide variety of precursors for
specialty organic chemicals. The Company has multiple suppliers for
most key raw materials and energy and uses quality management principles, such
as the establishment of long-term relationships with suppliers and on-going
performance assessment and benchmarking, as part of the supplier selection
process. When appropriate, the Company purchases raw materials from a
single source supplier to maximize quality and cost improvements, and has
developed contingency plans 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 cost of raw materials and energy as a percent
of total cost of operations was estimated to be approximately 70 percent for
2007, compared with 70 percent in 2006 and 65 percent in 2005.
19
Capital
Expenditures
Capital
expenditures were $518 million, $389 million, and $343 million for 2007, 2006,
and 2005, respectively. The increased capital spending in 2007 was
primarily due to investment in strategic initiatives, particularly in the
Performance Polymers and SP segments. The Company expects that 2008
capital spending will be above $600 million as it funds previously disclosed
growth projects. These initiatives include debottlenecking the
South Carolina manufacturing facility utilizing IntegRexTM technology, completing
the front end engineering and design for the two industrial gasification
projects, increasing capacity of cellulose triacetate ("CTA") for LCD
screens and increased capacity for Eastman TritanTM
copolyester in the
SP segment, and completing the acetate tow expansion in Workington, England in
the Fibers segment.
Employees
Eastman
employs approximately 10,800 men and women worldwide, including approximately
300 associated with discontinued operations. Approximately 5 percent
of the total worldwide labor force is represented by unions, mostly outside the
United States.
Customers
Eastman
has an extensive customer base and, while it is not dependent on any one
customer, loss of certain top customers could adversely affect the Company until
such business is replaced. The top 100 customers accounted for
approximately 65 percent of the Company's 2007 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 800 active United States
patents and more than 1,500 active foreign patents, expiring at various times
over several years, and also owns over 3,000 active worldwide trademark
applications and registrations. The Company’s intellectual property
relates to a wide variety of products and processes. With two recent
significant research and development innovations, Eastman continues actively to
protect its intellectual property. In support of the development of
the IntegRexTM
technology, the Company has filed over 165 patent
applications. In support of the development of Eastman
TritanTM
copolyester, the Company has filed over 70 patent
applications. Eastman cannot assure that a patent will be granted
from every application filed. As the laws of many countries do not
protect intellectual property to the same extent as the laws of the United
States, Eastman cannot assure that it will be able to adequately protect its
intellectual property assets.
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 centered on acetyls technology in the PCI segment. The
Company is actively pursing licensing opportunities for its IntegRexTM
technology in the Performance Polymers segment.
Research
and Development
For 2007,
2006, and 2005, Eastman’s research and development expenses totaled $156
million, $155 million, and $150 million, respectively. Research and
development expenses in 2008 are expected to remain consistent with 2007 as the
Company continues to progress on corporate initiatives.
20
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 $209 million, $214 million, and $198 million
in 2007, 2006, and 2005, 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 2007 Annual Report on Form
10-K.
On
January 1, 2008, Eastman’s backlog of firm sales orders was estimated to be
approximately $367 million compared with approximately $290 million at January
1, 2007. All orders are expected to be filled in 2008. 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 2007 Annual Report on Form 10-K.
21
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 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 1, 2008
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 2007,
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, 2007, 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 2007 Annual Report on Form
10-K.
22
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
23
EXECUTIVE
OFFICERS OF THE COMPANY
Certain
information about the Company's executive officers is provided
below:
J. Brian
Ferguson, age 53, is Chairman of the Board and Chief Executive
Officer. Mr. Ferguson joined the Company in 1977. He was
named Vice President, Industry and Federal Affairs in 1994, became Managing
Director, Greater China in 1996, was named President, Eastman Chemical Asia
Pacific in 1998, became President, Polymers Group in 1999, became President,
Chemicals Group in 2001, and was elected to his current position in
2002.
James P.
Rogers, age 56, is President of Eastman Chemical Company and Chemicals &
Fibers Business Group Head. Mr. Rogers was appointed Executive Vice
President of the Company and President of Eastman Division effective November
2003. Mr. Rogers joined the Company in 1999 as Senior Vice President
and Chief Financial Officer and in 2002, was also appointed Chief Operations
Officer of Eastman Division. He was appointed to his current position
in 2006. Mr. Rogers served previously as Executive Vice President and
Chief Financial Officer of GAF Materials Corporation ("GAF"). He also
served as Executive Vice President, Finance, of International Specialty
Products, Inc., which was spun off from GAF in 1997.
Gregory
O. Nelson, age 56, is Executive Vice President and Polymers Business Group
Head. Dr. Nelson joined Eastman in 1982 as a research chemist and
held a number of positions in the research and development
organization. He became Director, Polymers Research Division in 1995
and was named Vice President, Polymers Technology in 1997. He was
appointed as Chief Technology Officer in 2001 and named Senior Vice President in
2002. He was appointed to his present position in 2006.
Mark J.
Costa, age 41, is Senior Vice President, Corporate Strategy &
Marketing. Prior to joining Eastman on June 1, 2006, Mr. Costa was a
senior partner within Monitor Group's integrated North American and global
client service networks. He joined Monitor in 1988 and his experience included
corporate and business unit strategies, asset portfolio strategies, innovation
and marketing, and channel strategies across a wide range of industries,
including specialty and commodity chemicals, electricity, natural gas and
truck/auto manufacturing.
Theresa
K. Lee, age 55, is Senior Vice President, Chief Legal Officer and Corporate
Secretary. Ms. Lee joined Eastman as a staff attorney in 1987, served
as Assistant General Counsel for the health, safety, and environmental legal
staff from 1993 to 1995, and served as Assistant General Counsel for the
corporate legal staff from 1995 until her appointment as Vice President,
Associate General Counsel and Secretary in 1997. She became Vice
President, General Counsel, and Corporate Secretary of Eastman in 2000 and was
appointed to her current position in 2002.
Richard
A. Lorraine, age 62, joined Eastman in November 2003 as Senior Vice President
and Chief Financial Officer. Mr. Lorraine served as Executive Vice
President and Chief Financial Officer of Occidental Chemical Corporation from
1995 until 2003, and at ITT Automotive Group as President of the Aftermarket
Group from 1990 to 1995 and Vice President and Chief Financial Officer from 1985
to 1990. Mr. Lorraine started his career with Westinghouse Electric
Corporation, where he held various financial positions.
Ronald C.
Lindsay, age 49, is Senior Vice President and Chief Technology
Officer. He joined Eastman in 1980 and held a number of positions in
manufacturing and business organizations. In 2003, Mr. Lindsay was
appointed Vice President and General Manager of the Intermediates Business
Organization and in 2005 he became Vice President, Performance Chemicals
Business. He was appointed to his current position in April
2006.
Norris P.
Sneed, age 52, is Senior Vice President, Human Resources, Communications and
Public Affairs. Mr. Sneed joined the Company in 1979 as a chemical
engineer. In 1989, he was assigned to Eastman’s Arkansas Operations
where he was superintendent for different manufacturing and new business
development departments. In 1997, he served as assistant to the Chief
Executive Officer. He was named managing director for Eastman’s
Argentina operations in 1999, Vice President of Organization Effectiveness in
2001, and was appointed to his current position in June 2003.
Curtis E. Espeland, age 43, is Vice
President, Finance, and Chief Accounting Officer. Mr. Espeland joined
Eastman in 1996, and has served in various financial management positions,
including Controller; Director of Corporate Planning and Forecasting; Director
of Financial Services, Asia Pacific; and Director of Internal
Auditing. He has served as the Company's Chief Accounting Officer
since December 2002. Prior to joining Eastman, Mr. Espeland was an
audit and business advisory manager with Arthur Andersen
LLP.
24
ITEM
2. PROPERTIES
PROPERTIES
At
December 31, 2007, Eastman operated thirteen manufacturing sites in eight
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
|
||
|
Franklin,
Virginia(1)
|
x
|
||||
|
Europe
|
|||||
|
Workington,
England (2)
|
x
|
x
|
|||
|
Middelburg,
the Netherlands
|
x
|
||||
|
Rotterdam,
the Netherlands (1)
(2)
|
x
|
||||
|
Llangefni,
Wales
|
x
|
||||
|
Asia
Pacific
|
|||||
|
Kuantan,
Malaysia (1)
|
x
|
||||
|
Jurong
Island, Singapore (1)
|
x
|
x
|
|||
|
Zibo
City, China(3)
|
x
|
x
|
|||
|
Latin
America
|
|||||
|
Uruapan,
Mexico
|
x
|
||||
|
|
(1)
|
Indicates
a location that Eastman leases from a third
party.
|
|
(2)
|
Rotterdam,
the Netherlands and the Performance Polymers portion of the Workington,
England facility are included in assets held for sale at December 31,
2007.
|
|
|
(3)
|
Eastman
holds a 51 percent share in the joint venture Qilu Eastman Specialty
Chemical Ltd.
|
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.
A summary
of properties, classified by type, is included in Note 4,
"Properties and Accumulated Depreciation", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2007 Annual Report
on Form 10-K.
25
ITEM
3. LEGAL PROCEEDINGS
General
From time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
being handled and defended in the ordinary course of business. While
the Company is unable to predict the outcome of these matters, it does not
believe, based upon currently available facts, that the ultimate resolution of
any such pending matters, including the asbestos litigation (described below),
will have a material adverse effect on its overall financial condition, results
of operations or cash flows. However, adverse developments could
negatively impact earnings or cash flows in a particular future
period.
Asbestos
Litigation
Over the
years, Eastman has been named as a defendant, along with numerous other
defendants, in lawsuits in various state courts in which plaintiffs have alleged
injury due to exposure to asbestos at Eastman’s manufacturing
sites. More recently, certain plaintiffs have claimed exposure to an
asbestos-containing plastic, which Eastman manufactured in limited amounts
between the mid-1960s and the early 1970s.
To date,
the Company has obtained dismissals or settlements of its asbestos-related
lawsuits with no material effect on its financial condition, results of
operations or cash flows, and over the past several years, has substantially
reduced its number of pending asbestos-related claims. The Company
has also obtained insurance coverage that applies to a portion of certain of the
Company’s defense costs and payments of settlements or judgments in connection
with asbestos-related lawsuits.
Based on
an ongoing evaluation, the Company believes that the resolution of its pending
asbestos claims will not have a material impact on the Company’s financial
condition, results of operations, or cash flows, although these matters could
result in the Company being subject to monetary damages, costs or expenses, and
charges against earnings in particular periods.
Middelburg
(Netherlands) Environmental Proceeding
In June
2005, Eastman Chemical Middelburg, B.V., a wholly owned subsidiary of the
Company (the "Subsidiary"), received a summons from the Middelburg (Netherlands)
District Court Office to appear before the economic magistrate of that District
and respond to allegations that the Subsidiary's manufacturing facility in
Middelburg had exceeded certain conditions in the permit that allows the
facility to discharge wastewater into the municipal wastewater treatment system.
The summons proposed penalties in excess of $100,000 as a result of the alleged
violations. A hearing in this matter took place on July 28, 2005, at which time
the magistrate bifurcated the proceeding into two phases: a compliance phase and
an economic benefit phase. With respect to the compliance phase, the magistrate
levied a fine of less than $100,000. With respect to the economic benefit phase,
where the prosecutor proposed a penalty in excess of $100,000, the district
court in November 2006 assessed against the Subsidiary a penalty of less than
$100,000. The prosecutor has appealed this ruling, and the appeal is
pending. This disclosure is made pursuant to SEC Regulation S-K, Item
103, Instruction 5.C., which requires disclosure of administrative proceedings
commenced under environmental laws that involve governmental authorities as
parties and potential monetary sanctions in excess of $100,000. The
Company believes that the ultimate resolution of this proceeding
will not have a material impact on the Company’s financial condition, results of
operations, or cash flows.
26
Jefferson
(Pennsylvania) Environmental Proceeding
In
December 2005, Eastman Chemical Resins, Inc., a wholly-owned subsidiary of the
Company (the "ECR Subsidiary"), received a Notice of Violation ("NOV") from the
United States Environmental Protection Agency's Region III Office ("EPA")
alleging that the ECR Subsidiary's West Elizabeth, Jefferson Borough, Allegheny
County, Pennsylvania manufacturing operation (the "Jefferson Facility") violated
certain federally enforceable local air quality regulations and certain
provisions in a number of air quality-related permits. The NOV did
not assess a civil penalty and EPA has to date not proposed any specific civil
penalty amount. In October 2006, EPA referred the matter to the
United States Department of Justice's Environmental Enforcement Section
("DOJ"). Company representatives met with EPA and DOJ in November,
2006 and 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 the
fourth quarter of 2007.
27
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 2007 and 2006.
|
High
|
Low
|
Cash
Dividends Declared
|
|||||
|
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
|
||||
|
2006
|
First
Quarter
|
$
|
53.83
|
$
|
47.30
|
$
|
0.44
|
|
Second
Quarter
|
58.15
|
50.00
|
0.44
|
||||
|
Third
Quarter
|
54.69
|
48.72
|
0.44
|
||||
|
Fourth
Quarter
|
61.29
|
53.62
|
0.44
|
||||
As of
December 31, 2007, there were 79,753,015 shares of the Company's common stock
issued and outstanding, which shares were held by 26,539 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 2008, payable on April 1, 2008 to stockholders of record on March 17,
2008. 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 2007 Annual Report on Form 10-K for the information
required by Item 201(d) of Regulation S-K.
(b) Not
applicable.
28
(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, 2007
|
3,405
|
$
|
68.00
|
0
|
$
|
700
|
|
|
November
1-30, 2007
|
768,200
|
60.89
|
768,200
|
653
|
|||
|
December
1-31, 2007
|
556,800
|
63.08
|
556,800
|
|
618
|
||
|
Total
|
1,328,405
|
61.83
|
1,325,000
|
|
(1)
|
Shares
purchased as part of the Company's repurchase plan and
shares surrendered to the Company by employees to satisfy individual tax
withholding obligations upon vesting of previously issued shares of
restricted common stock.
|
|
(2)
|
Average
price paid per share reflects the individual trade price of repurchases
under the authorized Company repurchase plan and the weighted average of
the closing price of Eastman common stock on the business days the shares
were surrendered by the employee stockholders 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, 2007, a total of 1.3 million
shares have been repurchased under this authorization for a total amount
of $82 million. For
additional information, see Note 15, "Stockholders' Equity", to the
Company’s consolidated financial statements in Part II, Item 8 of this
2007 Annual Report on Form 10-K.
|
29
During
2007, 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. In fourth quarter
2007, the Company entered into definitive agreements to sell its PET polymers
and purified terephthalic acid ("PTA") facilities in the Netherlands and the PET
facility in the United Kingdom and related businesses. 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 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"; 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 consolidated financial
statements.
|
Summary
of Operating Data
|
Year Ended December 31, | |||||||||
|
(Dollars
in millions, except per share amounts)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||
|
Sales
|
$
|
6,830
|
$
|
6,779
|
$
|
6,460
|
$
|
6,019
|
$
|
5,377
|
|
Operating
earnings (loss)
|
504
|
654
|
740
|
146
|
(275)
|
|||||
|
Earnings
(loss) from continuing operations
|
321
|
427
|
541
|
146
|
(276)
|
|||||
|
Earnings
(loss) from discontinued operations
|
(10)
|
(18)
|
16
|
24
|
3
|
|||||
|
Loss
from disposal of discontinued operations
|
(11)
|
--
|
--
|
--
|
--
|
|||||
|
Cumulative
effect of change in accounting principles, net
|
--
|
--
|
--
|
--
|
3
|
|||||
|
Net
earnings (loss)
|
$
|
300
|
$
|
409
|
$
|
557
|
$
|
170
|
$
|
(270)
|
|
Basic
earnings per share
|
||||||||||
|
Earnings
(loss) from continuing operations
|
$
|
3.89
|
$
|
5.20
|
$
|
6.70
|
$
|
1.88
|
$
|
(3.58)
|
|
Earnings
(loss) from discontinued operations
|
(0.26)
|
(0.22)
|
0.20
|
0.32
|
0.04
|
|||||
|
Cumulative
effect of change in accounting principles, net
|
--
|
--
|
--
|
--
|
0.04
|
|||||
|
Net
earnings (loss)
|
$
|
3.63
|
$
|
4.98
|
$
|
6.90
|
$
|
2.20
|
$
|
(3.50)
|
|
Diluted
earnings per share
|
||||||||||
|
Earnings
(loss) from continuing operations
|
$
|
3.84
|
$
|
5.12
|
$
|
6.61
|
$
|
1.86
|
$
|
(3.58)
|
|
Earnings
(loss) from discontinued operations
|
(0.26)
|
(0.21)
|
0.20
|
0.32
|
0.04
|
|||||
|
Cumulative
effect of change in accounting principles, net
|
--
|
--
|
--
|
--
|
0.04
|
|||||
|
Net
earnings (loss)
|
$
|
3.58
|
$
|
4.91
|
$
|
6.81
|
$
|
2.18
|
$
|
(3.50)
|
|
Statement
of Financial Position Data
|
||||||||||
|
Current
assets
|
$
|
2,293
|
$
|
2,422
|
$
|
1,924
|
$
|
1,768
|
$
|
2,010
|
|
Net
properties
|
2,846
|
3,069
|
3,162
|
3,192
|
3,419
|
|||||
|
Total
assets
|
6,009
|
6,132
|
5,773
|
5,839
|
6,244
|
|||||
|
Current
liabilities
|
1,122
|
1,059
|
1,051
|
1,099
|
1,477
|
|||||
|
Long-term
borrowings
|
1,535
|
1,589
|
1,621
|
2,061
|
2,089
|
|||||
|
Total
liabilities
|
3,927
|
4,103
|
4,161
|
4,655
|
5,201
|
|||||
|
Total
stockholders’ equity
|
2,082
|
2,029
|
1,612
|
1,184
|
1,043
|
|||||
|
Dividends
declared per share
|
1.76
|
1.76
|
1.76
|
1.76
|
1.76
|
|||||
30
In second
quarter 2007, the Company completed the sale of its San Roque, Spain PET
manufacturing facility. During the 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 2007
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
2007 Annual Report on Form 10-K.
In second
quarter 2005, the Company completed the early repayment of $500 million of its
outstanding long-term bonds. For more information, refer to Note 9,
"Early Extinguishment of Debt", to the Company's consolidated
financial statements in Part II, Item 8 of this 2007 Annual Report on Form
10-K.
In second
quarter 2005, the Company completed the sale of its equity investment in
Genencor International, Inc. ("Genencor"). For more information,
refer to Note 6, "Equity Investments", to the Company's consolidated financial
statements in Part II, Item 8 of this 2007 Annual Report on Form
10-K.
On July
31, 2004, the Company completed the sale of certain businesses, product lines
and related assets within the CASPI segment. For more information regarding the
impact of this divestiture on financial results, refer to the CASPI segment
discussion of Part II, Item 7 – "Management Discussion and Analysis" of the 2006
Annual Report on Form 10-K.
Effective
January 1, 2003, the Company’s method of accounting for environmental closure
and post-closure costs changed as a result of the adoption of Statement of
Accounting Standards ("SFAS") No. 143, “Accounting for Asset Retirement
Obligations” resulting in a cumulative effect of change in accounting principles
of $3 million. If the provisions of SFAS No. 143 had been in effect
in prior years, the impact on the Company’s financial results would have been
immaterial. For additional information see Note 12, "Environmental Matters", to
the Company’s consolidated financial statements in Part II, Item 8 of the 2005
Annual Report on Form 10-K.
31
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
ITEM
|
Page
|
|
33
|
|
|
36
|
|
|
37
|
|
|
38
|
|
|
43
|
|
|
50
|
|
|
51
|
|
|
55
|
|
|
61
|
|
|
62
|
|
|
66
|
|
|
68
|
|
|
68
|
|
|
69
|
|
|
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.
During
second quarter 2007, the Company completed the sale of its polyethylene
terephthalate ("PET") manufacturing facility in Spain. In
fourth quarter 2007, the Company entered into definitive agreements to sell its
PET polymers and purified terephthalic acid ("PTA") manufacturing facilities in
the Netherlands and its PET manufacturing facility in the United Kingdom and the
related businesses. Because the Company is exiting the PET business
in the European region, results related to sales of PET products manufactured at
the Spain, the Netherlands, and the United Kingdom sites are presented as
discontinued operations for all periods presented and are therefore not included
in results from continuing operations under GAAP. 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 2007
Annual Report on Form 10-K. Also in 2007, the Company sold its
Mexico and Argentina PET manufacturing sites. Sales from these sites
are not presented as discontinued operations due to the Performance Polymers
segment's continuing involvement in the Latin America region and raw material
sales to the divested facilities.
32
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 impaired assets, environmental costs, U.S.
pension and other post-employment benefits, litigation and contingent
liabilities, and income taxes. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company’s
management believes the critical accounting 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.
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.
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 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. The Company recognized fixed (tangible) asset
impairment costs of $61 million and definite-lived intangible asset impairment
costs of $1 million in results from continuing operations during
2006.
33
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 $13 million to the maximum of
$17 million at December 31, 2007.
In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations," the
Company also establishes reserves for closure/postclosure costs associated with
the environmental and other assets it maintains. Environmental assets, as
defined in SFAS No. 143, include but are not limited to waste management units,
such as landfills, water treatment facilities, and ash ponds. When these types
of assets are constructed or installed, a reserve is established for the future
costs anticipated to be associated with the retirement or closure of the asset
based on an expected life of the environmental assets and the applicable
regulatory closure requirements. These future expenses are charged
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 for environmental contingencies was $42 million at December
31, 2007 and $47 million at December 31, 2006, 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.
United
States Pension and Other Post-employment Benefits
The
Company maintains defined benefit pension plans that provide eligible employees
with retirement benefits. Additionally, Eastman provides life insurance and
health care benefits for eligible retirees and health care benefits for
retirees’ eligible survivors. The costs and obligations related to these
benefits reflect the Company’s assumptions related to general economic
conditions (particularly interest rates) and expected return on plan assets. At
December 31, 2007, the Company assumed a discount rate of 6.16 percent on
its defined benefit pension plan, 6.21 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.
34
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
following table illustrates the sensitivity to a change in the expected return
on assets and assumed discount rate for U.S. pension plan and other
postretirement welfare plans:
|
Change
in
Assumption
|
Impact
on
2008
Pre-tax U.S.
Benefits
Expense
|
Impact
on
December
31, 2007
Projected
Benefit Obligation for
U.S.
Pension Plan
|
Impact
on
December
31, 2007
Benefit
Obligation for
Other
U.S. Postretirement Plans
|
|
25
basis point
decrease
in discount
rate
|
+$5
Million
|
+$41
Million
|
+$20
Million
|
|
25
basis point
increase
in discount
rate
|
-$5
Million
|
-$39
Million
|
-$19
Million
|
|
25
basis point
decrease
in expected
return
on assets
|
+$3
Million
|
No
Impact
|
N/A
|
|
25
basis point
increase
in expected
return
on assets
|
-$3
Million
|
No
Impact
|
N/A
|
The
expected return on assets and assumed discount rate used to calculate the
Company’s pension and other post-employment benefit obligations are established
each December 31. The expected return on assets is based upon the long-term
expected returns in the markets in which the pension trust invests its funds,
primarily the domestic, international, and private equities
markets. The actual return on assets has exceeded the expected return
for the last 5 years. The assumed discount rate is based upon a
portfolio of high-grade corporate bonds, which are used to develop a yield
curve. This yield curve is applied to the expected durations of the
pension and post-employment benefit obligations. 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.
If actual
experience differs from these assumptions, the difference is recorded as an
unrecognized actuarial gain (loss) and then amortized into earnings over a
period of time, which may cause the expense related to providing these benefits
to increase or decrease. The charges applied to earnings in 2007,
2006, and 2005 due to the amortization of these unrecognized actuarial losses,
largely due to actual experience versus assumptions of discount rates, were $47
million, $54 million, and $56 million, respectively.
The
Company does not anticipate that a change in pension and other post-employment
obligations caused by a change in the assumed discount rate will impact the cash
contributions to be made to the pension plans during 2008. 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, 2008 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 2007 Annual Report on Form 10-K.
35
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Litigation
and Contingent Liabilities
From time
to time, the Company and its operations are parties to or targets of lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
handled and defended in the ordinary course of business. The Company accrues a
liability for such matters when it is probable that a liability has been
incurred and the amount can be reasonably estimated. When a single
amount cannot be reasonably estimated but the cost can be estimated within a
range, the Company accrues the minimum amount. The Company expenses
legal costs, including those expected to be incurred in connection with a loss
contingency, as incurred. The Company believes the amounts reserved
are adequate for such pending matters; however, results of operations could be
affected by 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, 2007, a valuation allowance
of $146 million has been provided against the deferred tax assets.
During
2007, the Company took strategic actions in its Performance Polymers segment to
address its underperforming PET manufacturing facilities outside the United
States. In second quarter 2007, the Company completed the sale of its PET
manufacturing facility in Spain. In fourth quarter 2007, the Company entered
into definitive agreements to sell its PET polymers and PTA manufacturing
facility in the Netherlands and the PET manufacturing facility in the United
Kingdom and related businesses. Because the Company is exiting the
PET manufacturing business in the European region, results from the sales of PET
products manufactured at the Spain, the Netherlands and the United Kingdom
manufacturing sites are presented as discontinued operations and are therefore
not included in results from continuing operations under GAAP. Also
in 2007, the Company sold its Mexico and Argentina PET manufacturing
sites. Sales from
these sites are not presented as discontinued operations due to the Performance
Polymers segment's continuing involvement in the Latin America region and raw
material sales to the divested facilities. In order to provide
a better understanding of the impact on Performance Polymers segment results of
the 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.. For more information on discontinued
operations, refer to Note 2, "Discontinued Operations and Assets Held for Sale",
to the Company's consolidated financial statements in Part II, Item 8 of this
2007 Annual Report on Form 10-K. Asset impairments and restructuring
charges resulting from these actions were $15 million net of tax for the Spain
divestiture reported in discontinued operations and $115 million before tax for
the Latin American manufacturing sites reported in continuing operations in
2007.
36
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In fourth
quarter 2006, the Company sold its Batesville, Arkansas manufacturing facility
and related assets in the Performance Chemicals and Intermediates ("PCI")
segment and its polyethylene ("PE") and EpoleneTM polymer
businesses and related assets of the Performance Polymers and Coatings,
Adhesives, Specialty Polymers, and Inks ("CASPI") segments. For 2006,
sales revenue of $811 million and operating earnings of $124 million were
attributed to these divested product lines. Asset impairments and
restructuring charges from the divested Arkansas manufacturing facility were $18
million in 2006. Other operating (income) charges, net were a charge
of $7 million from the divestiture of the Arkansas manufacturing facility and
income of $75 million from the divestiture of the PE and EpoleneTM polymer
product lines. As part of the PE divestiture, the Company entered
into a transition agreement for contract ethylene sales, sales revenue and
operating earnings from which are included in PCI segment results in
2007.
Also 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. Accelerated
depreciation costs resulting from these decisions were $49 million and $10
million in 2007 and 2006, respectively. For more information on
accelerated depreciation, refer to "Gross Profit" in the "Results of Operations"
section of this Management's Discussion and Analysis.
This
Management's Discussion and Analysis includes the following non-GAAP financial
measures and accompanying reconciliations to the most directly comparable GAAP
financial measures:
|
·
|
Company
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 PE product lines divested in
2006;
|
|
·
|
Company
sales and segment sales and results from continuing operations excluding
sales revenue and operating results from the product lines
divested in 2006; and
|
|
·
|
Company
and segment gross profit, operating earnings, and net earnings excluding
accelerated depreciation costs, asset impairments and restructuring
charges (gains), and other operating (income) loss,
net.
|
Eastman's
management believes that contract ethylene sales under the transition agreement
related to the divestiture of the PE product lines do not reflect the continuing
and expected future business of the PCI segment. 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 other operating (income) loss, 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 divested
product lines and 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's sales revenue was $6.8
billion for both full year 2007 and 2006. Excluding contract
ethylene sales and sales from divested PET facilities in Mexico and Argentina
for both periods and sales from the divested PE product line for 2006, sales
revenue increased 11 percent in 2007.
37
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
strategic decisions and actions described above resulted in accelerated
depreciation costs of $49 million and asset impairments and restructuring
charges of $112 million in 2007 and accelerated depreciation costs of $10
million, asset impairments and restructuring charges of $101 million, and other
operating income of $68 million in 2006. Operating earnings were $504
million in 2007, a $150 million decrease compared with
2006. Excluding accelerated depreciation costs, asset impairments and
restructuring charges and other operating income, operating earnings were $665
million in 2007 compared with $697 million in 2006. Earnings from
continuing operations were $321 million for 2007 compared with $427
million for 2006. Excluding accelerated depreciation costs,
asset impairments and restructuring charges and other operating income, earnings
from continuing operations were $423 million and $434 million for 2007 and 2006,
respectively. The Company's broad base of businesses continues to achieve
strong financial results, with the decline in earnings primarily due to the
operating loss in the Performance Polymers segment.
The
Company generated $732 million in cash from operating activities during 2007
compared to $609 million in 2006. The increase was due primarily to a
reduction in working capital. During 2007, the Company reduced
working capital $86 million primarily related to reductions in
inventories. The Company contributed $100 million and $75 million to
its U.S. defined benefit pension plan in 2007 and 2006,
respectively. The Company does not plan to make additional
contributions to its U.S. defined benefit pension plans in
2008. Priorities for use of available cash are paying the quarterly
cash dividend, funding targeted growth initiatives, and repurchasing shares. In
2007, the Company repurchased shares for a total of $382 million at an
average price of $64 per share.
In
addition to achieving the above results, Eastman continued to progress on its
overall growth objectives including the announcement in July 2007 of two
industrial gasification projects in the U.S. Gulf Coast and actions to improve
the performance of its Performance Polymers segment.
The
gasification project announcements are an important milestone in the Company's
continuing efforts to leverage its technology and operational expertise for
future growth. In October 2007, the Company announced it has entered
into an agreement with Green Rock Energy, L.L.C. ("Green Rock"), a company
formed by the D. E. Shaw Group and Goldman, Sachs & Co., to
jointly develop the approximately $1.6 billion industrial gasification facility
in Beaumont, Texas. The Beaumont, Texas project is expected to be
operational in 2011 and will produce hydrogen, methanol, and
ammonia. The Company will be an investor, developer, service
provider, and customer for this project. The Company also announced
an agreement with Green Rock to invest in its St. James Parish, Louisiana
project. This project is expected to be operational in 2011 and will
produce anhydrous ammonia and methanol. The Company will be an
investor, service provider and customer for this project.
In
addition to the Performance Polymers divestitures described under "Strategic
Actions and Related Presentation of Non-GAAP Financial Measures", in 2007 the
Company started-up the new 350,000 metric ton PET facility using IntegRexTM technology in Columbia,
South Carolina, which was fully operational in the first quarter of
2007. ParaStarTM PET
resins, enabled by IntegRexTM technology, were widely
accepted in the marketplace during 2007. The Company plans to
increase capacity at this facility to over 525,000 metric tons of ParaStarTM next
generation PET resins by the end of 2008 and to reduce the annual costs at this
facility by $30 million.
The
Company’s results of operations as presented in the Company’s consolidated
financial statements in Part II, Item 8 of this 2007 Annual Report on Form 10-K
are summarized and analyzed below.
38
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
As a
result of the Company's strategic actions in the Performance Polymers segment,
the discussion below reflects results from continuing operations. 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 2007 Annual Report on Form 10-K.
|
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 the 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
|
17.5
%
|
18.7
%
|
||||
|
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
|
18.2
%
|
18.8
%
|
39
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 materials 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
|
8.4%
|
8.5%
|
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 2007 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 Specialty Plastics ("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 the 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 cyclohexane dimethanol ("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 2007
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 2007 Annual Report on Form 10-K.
40
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating Earnings
|
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.
For 2008,
the Company expects net interest expense to increase compared with 2007
primarily due to lower interest income, driven by declining interest
rates.
Other
(Income) Charges, Net
|
(Dollars
in millions)
|
2007
|
2006
|
Change
|
|||
|
Other
income
|
$
|
(33)
|
$
|
(25)
|
$
|
(8)
|
|
Other
charges
|
5
|
8
|
(3)
|
|||
|
Other
(income) charges, net
|
$
|
(28)
|
$
|
(17)
|
$
|
(11)
|
Included
in other (income) charges, net are the Company’s portion of net earnings from
its equity investments, gains on the sale of certain technology business venture
investments, royalty income, net gains on foreign exchange transactions, and
other non-operating income related to Holston Defense Corporation
("HDC"). Included in other charges are net losses on foreign exchange
transactions, the Company’s portion of losses from its equity investments,
write-downs to fair value of certain technology business venture investments due
to other than temporary declines in value, and fees on securitized
receivables.
Included
in 2007 other income is $11 million of income from investments and $7 million in
net gains on foreign exchange transactions. Other income 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 2007 Annual Report on Form 10-K.
41
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.
The Company expects
its effective tax rate in 2008 will be approximately 34 percent.
|
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 $11 million is from the
sale of the Company's San Roque, Spain PET manufacturing facility in the
Performance Polymer's segment. Net proceeds from the sale of the San
Roque site were approximately $43 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 2007 Annual Report
on Form 10-K.
42
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 2007 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.
43
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.
44
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 the 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.
|
45
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.
46
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 2007 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.
|
47
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.
48
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. The Company plans to increase capacity at this
facility to over 525,000 metric tons of ParaStarTM next
generation PET resins by the end of 2008 and to reduce annual costs at this
facility by $30 million.
During
the 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.
49
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)
%
|
--
%
|
|||||
|
Europe,
Middle East, and Africa
|
932
|
816
|
14
%
|
3
%
|
3
%
|
2
%
|
6
%
|
|||||||
|
Asia
Pacific
|
1,103
|
941
|
17
%
|
3
%
|
8
%
|
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 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 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 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 plans to continue to sell a
limited set of PET products manufactured in the U.S. in certain Latin American
markets.
50
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
With a
substantial portion of sales to customers outside the United States, Eastman is
subject to the risks associated with operating in international
markets. To mitigate its exchange rate risks, the Company frequently
seeks to negotiate payment terms in U.S. dollars and euros. In
addition, where it deems such actions advisable, the Company engages in foreign
currency hedging transactions and requires letters of credit and prepayment for
shipments where its assessment of individual customer and country risks
indicates their use is appropriate. For more information on these
practices see Note 10, "Fair Value of Financial Instruments", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2007 Annual Report
on Form 10-K and Part II, Item 7A--"Quantitative and Qualitative Disclosures
About Market Risk."
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||||||||||
|
Sales
|
$
|
6,779
|
$
|
6,460
|
5
%
|
1
%
|
5
%
|
(1)
%
|
--
%
|
|||||
|
Sales
– 2006 divested product lines (1)
|
811
|
786
|
||||||||||||
|
Sales
- sales from Mexico and
Argentina PET manufacturing facilities (2)
|
440
|
427
|
||||||||||||
|
Sales
– excluding listed items
|
$
|
5,528
|
$
|
5,247
|
5
%
|
--
%
|
6
%
|
(1)
%
|
--
%
|
|||||
|
(1)
|
Included in 2006 and 2005
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.
|
|
(2)
|
Included in 2006 and 2005 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 2006 compared to 2005 increased $319 million. Excluding
sales from divested product lines and sales from the Mexico and Argentina PET
manufacturing facilities, sales revenue increased 5 percent primarily due to
higher selling prices in response to both higher raw material and energy costs
and continued strong economic conditions.
51
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||
|
Gross
Profit
|
$
|
1,265
|
$
|
1,360
|
(7)
%
|
|
|
As
a percentage of sales
|
18.7
%
|
21.1
%
|
||||
|
Accelerated
depreciation included in cost of goods sold
|
10
|
--
|
||||
|
Gross
Profit excluding accelerated depreciation costs
|
1,275
|
1,360
|
(6)
%
|
|||
|
As
a percentage of sales
|
18.8
%
|
21.1
%
|
Gross
profit and gross profit as a percentage of sales for 2006 decreased,
particularly in the Performance Polymers segment, compared with 2005 primarily
due to increased raw material and energy costs and operational disruptions that
were partially offset by higher selling prices. In 2006, raw material and energy
costs increased by approximately $400 million compared to the prior year,
compared to a selling price increase of $323 million. In
addition, 2006 included $10 million of accelerated depreciation costs resulting
from the scheduled shutdown of cracking units in Longview, Texas and of higher
cost PET polymer assets in Columbia, South Carolina.
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||
|
SG&A
Expenses
|
$
|
423
|
$
|
439
|
(4)
%
|
|
|
R&D
Expenses
|
155
|
150
|
(3)
%
|
|||
|
$
|
578
|
$
|
589
|
(2)
%
|
||
|
As
a percentage of sales
|
8.5%
|
9.1%
|
SG&A
expenses in 2006 decreased compared to 2005 primarily due to lower incentive
compensation expense in 2006, which included compensation expense recorded under
SFAS No. 123 Revised December 2004 ("SFAS No. 123(R)"), "Share-Based
Payment". For more information concerning SFAS No. 123(R), see Note
16, "Share Based Compensation Plans and Awards", to the Company’s consolidated
financial statements in Part II, Item 8 of this 2007 Annual Report on Form
10-K.
R&D
expenses for 2006 increased compared with 2005 primarily due to increased
spending on growth initiatives, particularly in the SP segment, which more than
offset decreased expenses in the Performance Polymers segment related to the
IntegRexTM technology.
Asset
Impairments and Restructuring Charges, Net
Asset
impairments and restructuring charges totaled $101 million and $33 million in
2006 and 2005, respectively. 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. Asset
impairments and restructuring charges in 2005 were primarily related to the
shutdown of Cendian Corporation, the Company's logistics subsidiary and fixed
asset impairments related to the Company's PCI manufacturing facilities outside
the United States. For more information regarding asset impairments
and restructuring charges, see Note 18, "Asset Impairments and Restructuring
Charges, Net", to the Company’s consolidated financial statements in
Part II, Item 8 of this 2007 Annual Report on Form 10-K.
52
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 charges of
approximately $7 million related to the sale of the Company's Batesville,
Arkansas manufacturing facility and its related assets and product
lines. For more information concerning divestitures, see Note 17,
"Divestitures", to the Company’s consolidated financial statements in Part II,
Item 8 of this 2007 Annual Report on Form 10-K.
Other
operating income for 2005 reflects a $2 million gain related to the 2004
divestiture of certain businesses and product lines within the CASPI
segment.
|
Operating
Earnings
|
||||||
|
2006
|
2005
|
Change
|
||||
|
(Dollars
in millions)
|
||||||
|
Operating
earnings
|
$
|
654
|
$
|
740
|
(12)
%
|
|
|
Accelerated
depreciation included in cost of goods sold
|
10
|
--
|
||||
|
Asset
impairments and restructuring charges, net
|
101
|
33
|
||||
|
Other
operating income, net
|
(68)
|
(2)
|
||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairment and
restructuring charges, net, and other operating income,
net
|
$
|
697
|
$
|
771
|
(10)
%
|
|
Interest
Expense, Net
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||
|
Gross
interest costs
|
$
|
109
|
$
|
118
|
||
|
Less:
capitalized interest
|
7
|
5
|
||||
|
Interest
expense
|
102
|
113
|
(10)
%
|
|||
|
Interest
income
|
25
|
13
|
||||
|
Interest
expense, net
|
$
|
77
|
$
|
100
|
(23)
%
|
Lower
gross interest costs for 2006 compared to 2005 reflected lower average
borrowings that more than offset higher average interest rates.
Higher
interest income for 2006 compared to 2005 reflected higher invested
cash balances as well as higher average interest rates, resulting in lower net
interest expense.
Income
from Equity Investment in Genencor
For 2005,
income from equity investment in Genencor International, Inc. ("Genencor")
includes the Company's portion of earnings from its equity investment in
Genencor. In second quarter 2005, the Company completed the sale of
its equity interest in Genencor for net cash proceeds of approximately $417
million. The book value of the investment prior to sale was $246
million resulting in a pre-tax gain on the sale of $171 million.
53
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Early
Debt Extinguishment Costs
In the
second quarter 2005, the Company completed the early repayment of $500 million
of its outstanding long-term debt for $544 million in cash and recorded a charge
of $46 million for early debt extinguishment costs including $2 million in
unamortized bond issuance costs. The book value of the purchased debt
was $500 million.
Other
(Income) Charges, Net
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||
|
Other
income
|
$
|
(25)
|
$
|
(8)
|
$
|
(17)
|
|
Other
charges
|
8
|
12
|
(4)
|
|||
|
Other
(income) charges, net
|
$
|
(17)
|
$
|
4
|
$
|
(21)
|
Included
in other income are the Company’s portion of net earnings from its equity
investments (excluding Genencor), gains on the sale of certain technology
business venture investments, royalty income, net gains on foreign exchange
transactions and other non-operating income related HDC. Included in
other charges are net losses on foreign exchange transactions, the Company’s
portion of losses from its equity investments (excluding Genencor), write-downs
to fair value of certain technology business venture investments due to other
than temporary declines in value, and fees on securitized
receivables.
Included
in 2006 other income is a $12 million gain 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 2007 Annual Report on Form 10-K.
Provision
for Income Taxes
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||
|
Provision
for income taxes
|
$
|
167
|
$
|
222
|
(25)
%
|
|
|
Effective
tax rate
|
28
%
|
29
%
|
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.
The 2005
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before
income tax, excluding discrete items, of 30 percent. The effective
tax rate was impacted by $13 million of deferred tax benefit resulting from the
reversal of capital loss carryforward valuation reserves, $14 million of tax
benefit resulting from the change in reserves for tax contingencies due to the
favorable resolution of prior periods' tax contingencies, and a $11 million
charge resulting from the repatriation of $321 million of foreign earnings and
capital pursuant to provisions of the American Jobs Creation Act of
2004.
54
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Earnings
from Continuing Operations
|
||||
|
(Dollars
in millions)
|
2006
|
2005
|
||
|
Earnings
from continuing operations
|
$
|
427
|
$
|
541
|
|
Accelerated
depreciation included in cost of goods sold, net of tax
|
6
|
--
|
||
|
Asset
impairments and restructuring charges, net of tax
|
69
|
23
|
||
|
Other
operating income
|
(68)
|
(1)
|
||
|
Gain
on sale of investment in Genencor
|
--
|
(111)
|
||
|
Early
extinguishment of debt costs
|
--
|
28
|
||
|
Net
deferred tax benefit related to sale of certain businesses, product lines,
and assets in the CASPI segment
|
--
|
(12)
|
||
|
Earnings
from continuing operations excluding listed items
|
$
|
434
|
$
|
468
|
Net
Earnings
|
(Dollars
in millions)
|
2006
|
2005
|
||
|
Earnings
from continuing operations
|
$
|
427
|
$
|
541
|
|
Earnings
(loss) from discontinued operations, net of tax
|
(18)
|
16
|
||
|
Net
earnings
|
$
|
409
|
$
|
557
|
|
CASPI
Segment
|
|||||||||||||
|
Change
|
|||||||||||||
|
(Dollars
in millions)
|
2006
|
2005
|
$
|
%
|
|||||||||
|
Sales
|
$
|
1,421
|
$
|
1,299
|
$
|
122
|
9
%
|
||||||
|
Volume
effect
|
6
|
--
%
|
|||||||||||
|
Price
effect
|
115
|
9
%
|
|||||||||||
|
Product
mix effect
|
4
|
--
%
|
|||||||||||
|
Exchange
rate effect
|
(3)
|
--
%
|
|||||||||||
|
Operating
earnings
|
229
|
228
|
1
|
--
%
|
|||||||||
|
Asset
impairments and restructuring charges, net
|
13
|
4
|
9
|
||||||||||
|
Operating
earnings excluding asset impairments and restructuring charges,
net
|
242
|
232
|
10
|
4
%
|
|||||||||
Sales
revenue increased $122 million in 2006 compared to 2005 due to an increase in
selling prices in response to higher raw material and energy costs.
55
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings increased $1 million for 2006 compared to 2005 including increased
asset impairments and restructuring charges. Asset impairments and
restructuring charges of $13 million for 2006 related to previously closed
manufacturing facilities and severance costs related to a voluntary reduction in
force. Asset impairments and restructuring charges of $4 million for
2005 related primarily to previously closed manufacturing
facilities. These charges are more fully described in Note 18, "Asset
Impairments and Restructuring Charges, Net", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2007 Annual Report
on Form 10-K. Excluding these items, operating earnings increased due
to an increase in selling prices that more than offset higher raw material and
energy costs, and favorable product mix that resulted from higher sales volume
for specialty coatings.
In
November 2006, the Company sold the CASPI segment's EpoleneTM polymer
businesses and related assets. CASPI sales revenue and operating
earnings attributed to the divested businesses were $65 million and $3 million,
respectively, for 2006.
|
Fibers
Segment
|
|||||||||||||
|
Change
|
|||||||||||||
|
(Dollars
in millions)
|
2006
|
2005
|
$
|
%
|
|||||||||
|
Sales
|
$
|
910
|
$
|
869
|
$
|
41
|
5
%
|
||||||
|
Volume
effect
|
17
|
2
%
|
|||||||||||
|
Price
effect
|
55
|
6
%
|
|||||||||||
|
Product
mix effect
|
(31)
|
(3)
%
|
|||||||||||
|
Exchange
rate effect
|
--
|
--
%
|
|||||||||||
|
Operating
earnings
|
226
|
216
|
10
|
5
%
|
|||||||||
|
Asset
impairments and restructuring charges, net
|
2
|
--
|
2
|
||||||||||
|
Operating
earnings excluding asset impairments and restructuring charges,
net
|
228
|
216
|
12
|
6
%
|
|||||||||
Sales
revenue increased $41 million in 2006 compared to 2005 primarily due to higher
selling prices and higher sales volume that were partially offset by an
unfavorable shift in product mix. The higher selling
prices were in response to higher raw material and energy costs as well as
continued strong demand for and limited supply of acetate yarn and acetyl
chemical products. The increased sales volume and shift in product
mix were due to strong demand for acetyl chemical products attributed to
strengthened global acetate tow demand.
Operating
earnings for 2006 compared to 2005 increased $10 million as higher selling
prices and increased sales volume more than offset higher raw material and
energy costs. Asset impairments and restructuring charges of $2
million in 2006 related primarily to severance costs of a voluntary reduction in
force.
56
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
PCI
Segment
|
||||||||||
|
Change
|
||||||||||
|
(Dollars
in millions)
|
2006
|
2005
|
$
|
%
|
||||||
|
Sales
|
$
|
1,659
|
$
|
1,560
|
$
|
99
|
6
%
|
|||
|
Volume
effect
|
1
|
--
%
|
||||||||
|
Price
effect
|
118
|
7
%
|
||||||||
|
Product
mix effect
|
(19)
|
(1)
%
|
||||||||
|
Exchange
rate effect
|
(1)
|
--
%
|
||||||||
|
Sales
– contract ethylene sales (1)
|
27
|
--
|
27
|
|||||||
|
Sales
– divested product lines (2)
|
111
|
104
|
7
|
|||||||
|
Sales
– excluding listed items
|
1,521
|
1,456
|
65
|
4
%
|
||||||
|
Volume
effect
|
(41)
|
(3)
%
|
||||||||
|
Price
effect
|
118
|
8
%
|
||||||||
|
Product
mix effect
|
(11)
|
(1)
%
|
||||||||
|
Exchange
rate effect
|
(1)
|
--
%
|
||||||||
|
Operating
earnings
|
132
|
143
|
(11)
|
(8)
%
|
||||||
|
Operating
earnings (loss) – divested product lines (2)(3)
|
(15)
|
--
|
(15)
|
--
%
|
||||||
|
Operating
earnings – excluding divested product lines (3)
|
147
|
143
|
(4)
|
(3)
%
|
||||||
|
Operating
earnings excluding certain items (3)(4)
|
161
|
154
|
7
|
5
%
|
||||||
|
Operating
earnings excluding certain items (4)
– divested product lines (2)(3)
|
3
|
3
|
--
|
--
%
|
||||||
|
Operating
earnings excluding certain items (4)
– excluding divested product lines (3)
|
158
|
151
|
7
|
5
%
|
||||||
|
|
(1)
Sales revenue for 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 and 2005 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, net and other operating charges,
net. Accelerated depreciation costs, asset impairments and
restructuring charges, and other operating charges for 2006 were $2
million, $20 million, and $7 million, respectively. Asset impairments and
restructuring charges for 2005 were $11 million related to previously
impaired sites. The other operating charges resulted from the
Batesville, Arkansas fourth quarter 2006
divestiture.
|
Sales
revenue for 2006 compared to 2005 increased $99 million primarily due to higher
selling prices, particularly in the intermediates product lines, in response to
increases in raw material and energy costs.
57
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings decreased $11 million in 2006 as compared to 2005. Excluding asset
impairments and restructuring charges and other operating charges, operating
earnings increased compared with 2005 as higher selling prices more than offset
higher raw material and energy costs. The 2005 operating earnings
included $10 million of operating earnings from the achievement of certain
milestones under an acetyls technology licensing agreement with
SipChem. PCI sales revenue and operating loss attributed to the
divested product lines were $111 million and $15 million, respectively, for
2006.
|
Performance
Polymers Segment
|
||||||||||
|
Change
|
||||||||||
|
(Dollars in
millions)
|
2006
|
2005
|
$
|
%
|
||||||
|
Sales
|
$
|
1,971
|
$
|
1,987
|
$
|
(16)
|
(1)
%
|
|||
|
Volume
effect
|
(38)
|
(2)
%
|
||||||||
|
Price
effect
|
12
|
1
%
|
||||||||
|
Product
mix effect
|
10
|
--
%
|
||||||||
|
Exchange
rate effect
|
--
|
--
%
|
||||||||
|
Sales
– divested PE product line (1)
|
635
|
618
|
17
|
3
%
|
||||||
|
Sales
from Mexico and Argentina PET manufacturing facilities (2)
|
440
|
427
|
13
|
3
%
|
||||||
|
Sales
- U.S. PET manufacturing facilities
|
896
|
942
|
(46)
|
(5)%
|
||||||
|
Volume
effect
|
(91)
|
(10)%
|
||||||||
|
Price
effect
|
37
|
4%
|
||||||||
|
Product
mix effect
|
8
|
1
%
|
||||||||
|
Exchange
rate effect
|
--
|
--
%
|
||||||||
|
Operating
earnings (3)
|
68
|
159
|
(91)
|
(57)
%
|
||||||
|
Operating
earnings – divested PE product line (1)
(4)
|
136
|
75
|
61
|
81
%
|
||||||
|
Operating
earnings (loss) - from sales from Mexico and
Argentina PET manufacturing facilities (2)(4)
|
(12)
|
24
|
(36)
|
(150)
%
|
||||||
|
Operating
earnings (loss) - U.S. PET manufacturing facilities (3)(4)
|
(56)
|
60
|
(116)
|
(193)
%
|
||||||
|
(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 2006 and 2005 include sales revenue from
PET manufacturing facilities and related business 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.
|
58
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Performance
Polymers Segment
|
||||||||
|
Change
|
||||||||
|
(Dollars
in millions)
|
2006
|
2005
|
$
|
%
|
||||
|
Operating
earnings excluding certain items (1)(2)
|
$
|
46
|
$
|
159
|
$
|
(113)
|
(71)
%
|
|
|
Operating
earnings excluding certain items (3)
- divested PE product line (4)
|
61
|
75
|
(14)
|
(19)
%
|
||||
|
Operating
earnings (loss) -
from sales from Mexico and Argentina PET manufacturing facilities (5)
|
(12)
|
24
|
(36)
|
(150)
%
|
||||
|
Operating
earnings (loss) excluding certain items (6)
- U.S. PET manufacturing facilities (1)
|
(3)
|
60
|
(63)
|
(105)
%
|
||||
|
(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 and asset impairment and restructuring
charges, net. Asset impairments and restructuring charges of
$46 million for 2006 were primarily related to 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 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
costs of $7 million in 2006 related to the restructuring decisions in
association with cracking units in Longview, Texas, and higher cost PET
polymer intermediates assets in Columbia, South Carolina, which are
scheduled for shutdown. Other operating income 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 fourth quarter
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)
|
Operating
results include operating results from PET manufacturing facilities
in Cosoleacaque, Mexico and Zarate, Argentina divested in fourth quarter
2007. These operating results 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.
|
|
(6)
|
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 were
$46 million and accelerated depreciation costs were $7 million in
2006.
|
Sales
revenue decreased $16 million for 2006 compared to 2005 primarily due to the
effect of divested product lines and lower sales volume for PET polymers in
North America attributed to lower industry capacity utilization rates partially
offset by higher sales volume, particularly for PET polymers in Latin
America. For U.S. PET manufacturing facilities, sales revenue
decreased $46 million.
59
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings decreased $91 million for 2006 compared to 2005 primarily due to higher
and continued volatile raw material and energy costs, lower selling prices for
PET polymers globally, increased asset impairments and restructuring charges,
and increased accelerated depreciation costs more than offsetting other
operating income and increased sales volume. Asset impairments and
restructuring charges of $46 million for 2006 were primarily related to the
shutdown of a research and development Kingsport, Tennessee pilot plant,
discontinued production of CHDM modified polymers in San Roque, Spain and
severance related to a reduction in force in the U.S. and
Spain. CHDM, an internal intermediate product primarily used in
copolyester and PET production, was discontinued in San Roque, Spain to gain
operational efficiencies at other facilities. Accelerated
depreciation of $7 million for 2006 related to restructuring decisions in
association with cracking units in Longview, Texas, and higher cost PET polymer
intermediates assets in Columbia, South Carolina, which are scheduled for
shutdown. For U.S. PET manufacturing facilities, operating earnings
decreased $116 million.
|
SP
Segment
|
||||||||||
|
Change
|
||||||||||
|
(Dollars
in millions)
|
2006
|
2005
|
$
|
%
|
||||||
|
Sales
|
$
|
818
|
$
|
718
|
$
|
100
|
14
%
|
|||
|
Volume
effect
|
81
|
11
%
|
||||||||
|
Price
effect
|
34
|
5
%
|
||||||||
|
Product
mix effect
|
(11)
|
(1)
%
|
||||||||
|
Exchange
rate effect
|
(4)
|
(1)
%
|
||||||||
|
Operating
earnings
|
46
|
64
|
(18)
|
(28)
%
|
||||||
|
Accelerated
depreciation included in cost of goods sold
|
1
|
--
|
1
|
|||||||
|
Asset
impairments and restructuring charges, net
|
16
|
--
|
16
|
|||||||
|
Operating
earnings excluding accelerated depreciation costs and asset impairments
and restructuring charges, net
|
63
|
64
|
(1)
|
(2)
%
|
||||||
Sales
revenue for 2006 increased $100 million compared to 2005 due primarily to
increased sales volume and higher selling prices. The increased sales
volume was primarily attributed to continued market development efforts,
particularly in copolyester product lines. Selling prices increased
to offset higher raw material and energy costs with increases limited by
competitive industry dynamics.
Operating
earnings for 2006 decreased $18 million compared with 2005 primarily due to
asset impairments and restructuring charges, increased expenditures related to
growth initiatives, and higher raw material and energy costs slightly more than
offsetting increased sales volume and higher selling prices. Asset impairments and
restructuring charges of $16 million in 2006 were related to the discontinued
production of CHDM, an internal intermediate product primarily used in
copolyester and PET production, in San Roque, Spain to gain operational
efficiencies at other facilities. Accelerated depreciation costs of
$1 million for 2006 related primarily to South Carolina
operations.
60
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
Revenue
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||
|
United
States and Canada
|
$
|
4,221
|
$
|
4,098
|
3
%
|
(1)
%
|
5
%
|
(1)
%
|
--
%
|
|||||
|
Europe,
Middle East, and Africa
|
816
|
753
|
8
%
|
3
%
|
5
%
|
1
%
|
(1)
%
|
|||||||
|
Asia
Pacific
|
941
|
930
|
1
%
|
(4)
%
|
8
%
|
(2)
%
|
(1)
%
|
|||||||
|
Latin
America
|
801
|
679
|
18
%
|
18
%
|
(1)
%
|
1
%
|
--
%
|
|||||||
|
$
|
6,779
|
$
|
6,460
|
5
%
|
1
%
|
5
%
|
(1)
%
|
--
%
|
Sales
revenue in the United States and Canada increased primarily due to higher
selling prices, particularly in the PCI segment, which had a $78 million
positive impact on sales revenue. The higher selling prices were
primarily in response to increases in raw material and energy
costs.
Sales
revenue in Europe, the Middle East and Africa increased primarily due to higher
selling prices, particularly in the CASPI segment, and higher volumes particularly in the SP
segment. The higher
selling prices were primarily in response to increases in raw material and
energy costs.
Sales
revenue in Asia Pacific increased primarily due to higher selling prices,
partially offset by lower sales volume and changes in mix. Higher
selling prices, particularly in the Fibers segment, had a $76 million positive
impact on sales revenue. Lower sales volume and negative mix,
particularly for the Fibers segment, had a $61 million negative impact on sales
revenue.
Sales
revenue in Latin America increased primarily due to higher sales volume,
particularly in the Performance Polymers segment.
61
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Cash
Flows
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Net
cash provided by (used in):
|
||||||
|
Operating
activities
|
$
|
732
|
$
|
609
|
$
|
769
|
|
Investing
activities
|
(335)
|
(94)
|
(18)
|
|||
|
Financing
activities
|
(448)
|
(101)
|
(547)
|
|||
|
Effect
of exchange rate changes on cash and cash equivalents
|
--
|
1
|
(5)
|
|||
|
Net
change in cash and cash equivalents
|
$
|
(51)
|
$
|
415
|
$
|
199
|
|
Cash
and cash equivalents at end of period
|
$
|
888
|
$
|
939
|
$
|
524
|
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 $86 million, primarily reductions in
inventory. Cash provided by operating activities decreased $160
million in 2006 compared with 2005 primarily due to an increase in working
capital requirements related to a higher mix of sales in Latin America and
Europe, where customer credit terms are longer as compared to North America,
partially offset by lower 2006 cash contributions to its U.S. defined benefit
pension plan. The Company contributed $100 million, $75 million, and $165
million to its U.S. defined benefit pension plan in 2007, 2006, and 2005,
respectively.
Cash used
in investing activities totaled $335 million, $94 million, and $18 million in
2007, 2006, and 2005, respectively. 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. In 2005, the Company received $417
million net cash proceeds from the sale of its equity investment in
Genencor. For more information concerning divestitures, see Note 6
"Equity Investments" and Note 17, "Divestitures", to the Company’s consolidated
financial statements in Part II, Item 8 of this 2007 Annual Report on Form
10-K. Capital spending of $518 million, $389 million, and $343
million in 2007, 2006, and 2005, respectively, is discussed below.
Cash used
in financing activities totaled $448 million, $101 million, and $547 million in
2007, 2006, and 2005 respectively. 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. Financing activities in 2005 included the Company's early
repayment of $500 million of its outstanding long-term debt, and a decrease in
credit facility and other borrowings, including bank overdrafts, of $150
million, offset by cash received from stock option exercises of $98
million. See Note 9, "Early Extinguishment of Debt", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2007 Annual Report
on Form 10-K for information regarding the early extinguishment of
debt. In addition, the Company borrowed $191 million from a new
credit facility in the fourth quarter 2005, the proceeds of which provided a
significant part of the funding for the repatriation of undistributed foreign
earnings under the provisions of the American Jobs Creation Act.
The
payment of dividends is also reflected in financing activities in all
periods.
62
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Liquidity
At
December 31, 2007, the Company had credit facilities with various U.S. and
foreign banks totaling approximately $888 million. These credit
facilities consist of a $700 million revolving credit facility (the "Credit
Facility") expiring in April 2012, as well as a 128 million euro credit facility
("Euro Facility") which expires in December 2012. The Credit Facility has a
remaining option for a one-year extension. 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, 2007, the Company’s credit facility
borrowings totaled $188 million at an effective interest rate of 4.79
percent. At December 31, 2006, the Company's credit facility
borrowings were $185 million at an effective interest rate of 4.00
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 2012, any
commercial paper borrowings supported by the Credit Facility are classified as
long-term borrowings because the Company has the ability to refinance such
borrowings on a long-term basis.
For more
information regarding interest rates, see Note 8, "Borrowings", to
the Company’s consolidated financial statements in Part II, Item 8 of this 2007
Annual Report on Form 10-K.
The
Company has effective shelf registration statements filed with the Securities
and Exchange Commission to issue a combined $1.1 billion of debt and equity
securities.
In 2007,
the Company made a $100 million contribution to its U.S. defined benefit pension
plan. The Company has no plans to make a contribution to its
U.S. defined benefit pension plan in 2008.
Cash
flows from operations and the sources of capital described above are expected to
be available and sufficient to meet foreseeable cash flow
requirements. However, the Company’s cash flows from operations can
be affected by numerous factors including risks associated with global
operations, raw material availability and cost, demand for and pricing of
Eastman’s products, capacity utilization, and other factors described under
"Forward-Looking Statements and Risk Factors" below. The Company
believes maintaining a financial profile consistent with an investment grade
company is important to its long term strategic and financial
flexibility.
Capital
Expenditures
Capital
expenditures were $518 million, $389 million, and $343 million for 2007, 2006,
and 2005, respectively. The increase of $129 million in 2007 compared
with 2006 was primarily due to spending on expansion of acetate tow and
copolyester intermediates manufacturing capacity, enhancements to the PET
facilities in South Carolina utilizing IntegRexTM technology, and other
growth initiatives. The Company expects that 2008 capital
spending will be more than $600 million. In 2008, the Company
will continue to pursue targeted growth initiatives, including debottlenecking
the South Carolina manufacturing facility utilizing IntegRexTM technology, completing
front-end engineering and design for the two industrial gasification projects,
increasing capacity of cellulose triacetate ("CTA") for LCD screens, increasing
manufacturing capacity for Eastman TritanTM
copolyester, and completing the acetate tow capacity expansion in Workington,
England.
63
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Other
Commitments
At
December 31, 2007, the Company’s obligations related to notes and debentures
totaled approximately $1.4 billion to be paid over a period of approximately 20
years. Other borrowings, related primarily to credit facility
borrowings, totaled approximately $200 million.
The
Company had various purchase obligations at December 31, 2007 totaling
approximately $2.3 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 $177 million over a period of several years. Of the total lease
commitments, approximately 10 percent relate to machinery and equipment,
including computer and communications equipment and production equipment;
approximately 55 percent relate to real property, including office space,
storage facilities, and land; and approximately 35 percent relate to
railcars.
In
addition, the Company had other liabilities at December 31, 2007 totaling
approximately $1.0 billion related primarily to pension, retiree medical, other
post-employment obligations, and environmental reserves.
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
|
|||||||
|
2008
|
$
|
72
|
$
|
--
|
$
|
98
|
$
|
508
|
$
|
32
|
$
|
148
|
$
|
858
|
|
2009
|
--
|
14
|
96
|
460
|
26
|
73
|
669
|
|||||||
|
2010
|
--
|
--
|
96
|
420
|
22
|
70
|
608
|
|||||||
|
2011
|
2
|
--
|
96
|
253
|
20
|
59
|
430
|
|||||||
|
2012
|
148
|
188
|
84
|
246
|
12
|
55
|
733
|
|||||||
|
2013
and beyond
|
1,183
|
--
|
945
|
403
|
65
|
653
|
3,249
|
|||||||
|
Total
|
$
|
1,405
|
$
|
202
|
$
|
1,415
|
$
|
2,290
|
$
|
177
|
$
|
1,058
|
$
|
6,547
|
(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, 2007 totaled $155 million and consisted primarily of leases for
railcars, company aircraft, and other equipment. Leases with guarantee amounts
totaling $29 million, $11 million, and $115 million will expire in 2008, 2011,
and 2012, respectively. The Company believes, based on current facts and
circumstances, that the likelihood of a material payment pursuant to such
guarantees is remote.
64
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
As
described in Note 6, "Equity Investments ", to the Company’s consolidated
financial statements in Part II, Item 8 of this 2007 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, 2007 and 2006 was approximately $43 million and $47 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 2007 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, 2007 and 2006. Undivided interests in designated
receivable pools were sold to the purchaser with recourse limited to the
purchased interest in the receivable pools.
The
Company did not have any other material relationships with unconsolidated
entities or financial partnerships, including special purpose entities, for the
purpose of facilitating off-balance sheet arrangements with contractually narrow
or limited purposes. Thus, Eastman is not materially exposed to any financing,
liquidity, market, or credit risk related to the above or any other such
relationships.
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not Variable Interest
Entities (“VIEs”) or, in the case of Primester, the Company is not the primary
beneficiary of the VIE. As such, in accordance with FASB
Interpretation Number 46, "Consolidation of Variable Interest Entities" ("FIN 46R"), the
Company is not required to consolidate these entities. In addition,
the Company has evaluated long-term purchase obligations with two entities that
may be VIEs at December 31, 2007. These potential VIEs are joint ventures from
which the Company has purchased raw materials and utilities for several years
and purchases approximately $60 million of raw materials and utilities on an
annual basis. The Company has no equity interest in these entities and has
confirmed that one party to each of these joint ventures does consolidate the
potential VIE. However, due to competitive and other reasons, the Company has
not been able to obtain the necessary financial information to determine whether
the entities are VIEs, and if one or both are VIEs, whether or not the Company
is the primary beneficiary.
The
Company purchased equity interests in two development stage joint ventures
related to the industrial gasification initiatives and accounts for these
investments under the equity method of accounting. As these joint
ventures evolve and enter into material contractual relationships with the
Company, its co-investors in the joint ventures, and third parties, the Company
will evaluate whether the joint ventures are VIEs and whether 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 2007 Annual Report on Form 10-K for off-balance sheet
post-employment benefit obligations.
65
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 was 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, 2007, a total of 1.3 million shares have
been repurchased under this authorization for a total amount of approximately
$82 million. Additional shares are expected to be repurchased under
this authorization in 2008.
Dividends
The
Company declared quarterly cash dividends of $0.44 per share for a total of
$1.76 per share in 2007, 2006, and 2005.
Preferred
Stock Purchase Rights
During
the fourth quarter of 2006, the Board of Directors of the Company redeemed all
of the outstanding preferred stock purchase rights issuable pursuant to the
Stockholder Protection Rights Agreement and terminated the Stockholder
Protection Rights Agreement. The payment of $0.01 per share of common
stock was made January 2, 2007.
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 2007
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.
66
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 $13 million to the maximum of $17 million at
December 31, 2007.
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.
FASB
Interpretation No 47, "Accounting for Conditional Asset Retirement
Obligations" ("
FIN 47") requires an entity to recognize a liability for a conditional asset
retirement obligation when incurred if the liability can be reasonably
estimated. The Interpretation also clarifies that the term Conditional Asset
Retirement Obligation ("CARO") refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
Company performed a thorough examination of various asset categories. Although
it may have CAROs
at certain of its facilities, including, but not limited to, the
potential for asbestos abatement activities, the Company is unable to determine
potential settlement dates to be used in fair value calculations for estimating
these obligations as a result of an absence of plans or expectations to
undertake a major renovation or demolition project that would require the
removal of asbestos. The Company continues to monitor these
conditional obligations, as well as any new ones that may
develop, and will record reserves associated with them when and to
the extent that more detailed information becomes available concerning
applicable retirement costs. The recorded
obligations did not have a material impact on its consolidated financial
position, results of operations and cash flows.
Reserves
related to environmental assets accounted for approximately 70 percent of the
total environmental reserve at December 31, 2007. 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 $209 million, $214 million, and $198 million in 2007, 2006,
and 2005, 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.
67
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 2007 Annual Report on Form
10-K.
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 is currently evaluating the effect SFAS No. 160
will have on its consolidated financial position, liquidity, or results of
operations.
68
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," ("SFAS
No. 157") which addresses the measurement of fair value by companies when they
are required to use a fair value measure for recognition or disclosure purposes
under GAAP. SFAS No. 157 provides a common definition of fair value
to be used throughout GAAP which is intended to make the measurement of fair
value more consistent and comparable and improve disclosures about those
measures. SFAS No. 157 will be effective for an entity's financial
statements issued for fiscal years beginning after November 15,
2007. However, on February 6, 2008, the FASB issued FASB Staff
Position FAS 157-2 ("FSP FAS 157-2") which delays the effective
date of SFAS No. 157 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). FSP FAS
157-2 partially defers the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008. Effective for first
quarter 2008, the Company plans to adopt SFAS No. 157 except as it
applies to those nonfinancial assets and nonfinancial liabilities as noted in
FSP FAS 157-2. The Company is currently evaluating the
effect SFAS No. 157 will have on its consolidated financial position, liquidity,
or results of operations.
In
February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115," ("SFAS No. 159"). SFAS No. 159 permits companies
to choose to measure many financial instruments and certain other items at fair
value at specified election dates. Upon adoption, an entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. Most of
the provisions apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," applies to all entities with
available for sale and trading securities. SFAS No. 159 will be
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Company is currently evaluating the effect
SFAS No. 159 will have on its consolidated financial position, liquidity, or
results of operations.
For 2008,
the Company expects:
|
·
|
to
maintain strong volumes due to continued substitution of Eastman products
for other materials, and new applications for existing
products despite uncertain prospects for the U.S. and global
economies;
|
|
·
|
the
volatility of raw material and energy costs to continue and that the
Company will continue to use pricing strategies and ongoing cost control
initiatives to offset the effects on gross
profit;
|
|
·
|
to
improve the profitability of its PET product lines in the Performance
Polymers segment, including completing the divestiture of its
underperforming PET manufacturing facilities outside the United States;
debottlenecking the new South Carolina PET facility utilizing
IntegRexTM technology by the
end of 2008 for a total capacity of 525,000 metric tons of ParaStarTM
PET; shutting down another 300,000 metric tons of conventional PET
polymers capacity at the South Carolina manufacturing facility by
mid-year; eliminating approximately $30 million of annual costs at the
South Carolina site by the middle of 2008; and continuing to pursue
options to create additional value from its IntegRexTM technology,
primarily by actively pursing licensing
opportunities;
|
|
·
|
to
improve SP segment results by completing the conversion of 50,000 metric
tons of PET capacity to copolyester by the middle of 2008 and continue
progress with the commercialization of its new copolyester, Eastman
TritanTM
copolyester;
|
|
·
|
that
the staged phase-out of older cracking units in Longview, Texas and a
planned shut down of higher cost PET assets in Columbia, South Carolina
will result in accelerated depreciation costs of approximately $10
million;
|
|
·
|
ethylene
volumes to decline in the PCI segment due to the staged phase-out of older
cracking units at the Company's Longview, Texas
facility;
|
69
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
·
|
modest
sales volume growth for acetate tow in the Fibers segment, to complete the
expansion of its acetate tow plant in Workington, England, in the second
half of 2008, and to announce plans for new acetate tow capacity in
Asia;
|
|
·
|
the
PCI segment to have operating margins at the high end of the 5 to 10
percent range;
|
|
·
|
the
CASPI segment to maintain solid earnings at the low end of the 15 to
20 percent operating margin range and expects continued weakness in the
U.S. housing and automotive sectors to be
offset by strength in Europe and
Asia;
|
|
·
|
front-end
engineering and design for its two industrial gasification projects in
Beaumont, Texas, and St. James Parish, Louisiana to be completed in the
second half of 2008, and project financing to be obtained by the end of
the year;
|
|
·
|
net
interest expense to increase compared with 2007 primarily due to lower
interest income, driven by declining interest
rates;
|
|
·
|
the
effective tax rate to be approximately 34
percent;
|
|
·
|
capital
spending will be above $600 million as it funds targeted growth efforts,
including the debottlenecking of the South Carolina manufacturing
facility utilizing IntegRexTM
technology, the completion of front-end engineering and design for the two
industrial gasification projects, increased capacity of CTA for LCD
screens, increased capacity for Eastman TritanTM
copolyester, and the completion of the acetate tow expansion in
Workington, England; and
|
|
·
|
priorities
for uses of available cash to be to pay the quarterly cash dividend, fund
targeted growth initiatives, and repurchase
shares.
|
As a
result of the expectations listed above and strategic and other actions taken in
recent years to improve profitability, the Company expects full-year 2008
earnings per share to be similar to 2007 earnings per share excluding gains and
charges in both periods related to strategic decisions and actions.
In
addition to the above, the Company expects significantly to improve earnings
though strategic efforts in industrial gasification and growth initiatives in
existing businesses over the next five years, and expects:
|
·
|
its
industrial gasification projects in Texas and Louisiana to break
ground in early 2009, with the facilities online by 2011, and expects
these projects to contribute significantly to earnings in
2012;
|
|
·
|
the
SP segment further to improve earnings by completing the conversion of an
additional 50,000 metric tons of PET to be converted by 2010, increasing
sales revenue from cellulose esters used in LCD screens and continued
progress with the commercialization 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 growth opportunities in Asia for acetate tow in the Fibers segment;
and
|
|
·
|
to
complete an additional 30 percent expansion of its CASPI segment's
hydrogenated hydrocarbon resins manufacturing capacity in Middelburg, the
Netherlands in early 2009.
|
See
“Forward-Looking Statements and Risk Factors" below.
70
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
expectations under "Outlook" and certain other statements in this Annual Report
on Form 10-K may be forward-looking in nature as defined in the Private
Securities Litigation Reform Act of 1995. These statements and other written and
oral forward-looking statements made by the Company from time to time may relate
to, among other things, such matters as planned and expected capacity increases
and utilization; anticipated capital spending; expected depreciation and
amortization; environmental matters; legal proceedings; exposure to, and effects
of hedging of, raw material and energy costs, foreign currencies and interest
rates; global and regional economic, political, and business conditions;
competition; growth opportunities; supply and demand, volume, price, cost,
margin, and sales; earnings, cash flow, dividends and other expected financial
results and conditions; expectations, strategies, and plans for individual
assets and products, businesses and segments as well as for the whole of Eastman
Chemical Company; cash requirements and uses of available cash; financing plans;
pension expenses and funding; credit ratings; anticipated restructuring,
divestiture, and consolidation activities; cost reduction and control efforts
and targets; integration of acquired businesses; strategic initiatives and
development, production, commercialization, and acceptance of new products,
services and technologies and related costs; asset, business and product
portfolio changes; and expected tax rates and net interest costs.
These
plans and expectations are based upon certain underlying assumptions, including
those mentioned with the specific statements. Such assumptions are in
turn based upon internal estimates and analyses of current market conditions and
trends, management plans and strategies, economic conditions and other
factors. These plans and expectations and the assumptions underlying
them are necessarily subject to risks and uncertainties inherent in projecting
future conditions and results. Actual results could differ materially
from expectations expressed in the forward-looking statements if one or more of
the underlying assumptions and expectations proves to be inaccurate or is
unrealized. In addition to the factors described in this report, the
following are some of the important factors that could cause the Company's
actual results to differ materially from those in any such forward-looking
statements:
|
·
|
The
Company is reliant on certain strategic raw materials and energy
commodities for its operations and utilizes risk management tools,
including hedging, as appropriate, to mitigate short-term market
fluctuations in raw material and energy costs. There can be no
assurance, however, that such measures will result in cost savings or that
all market fluctuation exposure will be eliminated. In
addition, natural disasters, changes in laws or regulations, war or other
outbreak of hostilities or terrorism or other political factors in any of
the countries or regions in which the Company operates or does business or
in countries or regions that are key suppliers of strategic raw materials
and energy commodities, or breakdown or degradation of transportation
infrastructure used for delivery of strategic raw materials and energy
commodities, could affect availability and costs of raw materials and
energy commodities.
|
|
·
|
While
temporary shortages of raw materials and energy may occasionally occur,
these items have historically been sufficiently available to cover current
and projected requirements. However, their continuous
availability and price are impacted by natural disasters, plant
interruptions occurring during periods of high demand, domestic and world
market and political conditions, changes in government regulation, war or
other outbreak of hostilities or terrorism, and breakdown or degradation
of transportation infrastructure. Eastman’s operations or
products may, at times, be adversely affected by these
factors.
|
71
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
·
|
The
Company's competitive position in the markets in which it participates is,
in part, subject to external factors in addition to those that the Company
can impact. Natural disasters, pandemic illnesses, changes in
laws or regulations, war or other outbreak of hostilities or terrorism, or
other political factors in any of the countries or regions in which the
Company operates or does business or in countries or regions that are key
suppliers of strategic raw materials, and breakdown or degradation of
transportation infrastructure used for delivery of raw
materials and energy supplies to the Company and for delivery of the
Company's products to customers, could negatively impact the Company’s
competitive position and its ability to maintain market
share. For example, supply and demand for certain of the
Company's products is driven by end-use markets and worldwide capacities
which, in turn, impact demand for and pricing of the Company's
products.
|
|
·
|
Limitation
of the Company's available manufacturing capacity due to significant
disruption in its manufacturing operations, including natural disasters,
pandemic illnesses, changes in laws or regulations, war or other outbreak
of hostilities or terrorism, or other political factors in any of the
countries or regions in which the Company operates or does business, or
breakdown or degradation of transportation infrastructure used for
delivery of raw materials and energy supplies to the Company
and for delivery of the Company's products to customers, could have a
material adverse affect on sales revenue, costs and results of operations
and financial condition.
|
|
·
|
The
Company has an extensive customer base; however, loss of, or material
financial weakness of, certain of the largest customers could adversely
affect the Company's financial condition and results of operations until
such business is replaced and no assurances can be made that the Company
would be able to regain or replace any lost
customers.
|
|
·
|
The
Company has efforts underway to exploit growth opportunities in certain
core businesses by developing new products and technologies, expanding
into new markets, and tailoring product offerings to customer
needs. Current examples include IntegRexTM
technology and new PET polymers products and copolyester product
innovations. There can be no assurance that such efforts will result in
financially successful commercialization of such products or acceptance by
existing or new customers or new markets or that large capital projects
for such growth efforts can be completed within the time or at the costs
projected due, among other things, to demand for and availability of
construction materials and labor.
|
|
·
|
The
Company has made, and intends to continue making, strategic investments,
including 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 materials
and energy cost and supply position, and maintain high utilization of
manufacturing assets. There can be no assurance that such
investments and alliances will achieve their underlying strategic business
objectives or that they will be beneficial to the Company's results of
operations or that large capital projects for such growth efforts can be
completed within the time or at the costs projected due, among other
things, to demand for and availability of construction materials and labor
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
inability to obtain such approvals or to reach such agreements on
acceptable terms could negatively affect the returns from these strategic
investments and projects.
|
72
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
·
|
The
Company anticipates obtaining non-recourse financing for the two
industrial gasification projects. 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 projects,
due to any circumstance, change, or condition in the loan syndication,
financial, or capital markets generally 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 projects or the terms of such
financing, if available, including the nature and terms of any recourse
back to the Company or other project equity
owners.
|
|
·
|
In
addition to productivity and cost reduction initiatives, the Company is
striving to improve margins on its products through price increases where
warranted and accepted by the market; however, the Company's earnings
could be negatively impacted should such increases be unrealized, not be
sufficient to cover increased raw material and energy costs, or have a
negative impact on demand and volume. There can be no
assurances that price increases will be realized or will be realized
within the Company's anticipated
timeframe.
|
|
·
|
The
Company has undertaken and expects to continue to undertake productivity
and cost reduction initiatives and organizational restructurings to
improve performance and generate cost savings. There can be no
assurance that these will be completed as planned or beneficial or that
estimated cost savings from such activities will be
realized.
|
|
·
|
The
Company's facilities and businesses are subject to complex health, safety
and environmental laws and regulations, which require and will continue to
require significant expenditures to remain in compliance with such laws
and regulations currently and in the future. The Company's
accruals for such costs and associated liabilities are subject to changes
in estimates on which the accruals are based. The amount
accrued reflects the Company’s assumptions about remediation requirements
at the contaminated site, the nature of the remedy, the outcome of
discussions with regulatory agencies and other potentially responsible
parties at multi-party sites, and the number and financial viability of
other potentially responsible parties. Changes in the estimates
on which the accruals are based, unanticipated government enforcement
action, or changes in health, safety, environmental, chemical control
regulations, and testing requirements could result in higher or lower
costs.
|
|
·
|
The
Company and its operations from time to time are parties to or targets of
lawsuits, claims, investigations, and proceedings, including product
liability, personal injury, asbestos, patent and intellectual property,
commercial, contract, environmental, antitrust, health and safety, and
employment matters, which are handled and defended in the ordinary course
of business. The Company believes amounts reserved are adequate
for such pending matters; however, results of operations could be affected
by significant litigation adverse to the
Company.
|
|
·
|
The
Company has deferred tax assets related to capital and operating
losses. The Company establishes valuation allowances to reduce
these deferred tax assets to an amount that is more likely than not to be
realized. The Company’s ability to utilize these deferred tax
assets depends on projected future operating results, the reversal of
existing temporary differences, and the availability of tax planning
strategies. Realization of these assets is expected to occur
over an extended period of time. As a result, changes in tax laws,
assumptions with respect to future taxable income, and tax planning
strategies could result in adjustments to these
assets.
|
73
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
·
|
Due
to the Company's global sales, earnings, and asset profile, it is exposed
to volatility in foreign currency exchange rates and interest
rates. The Company may use derivative financial instruments,
including swaps, options and forwards, to mitigate the impact of changes
in exchange rates and interest rates on its financial
results. However, there can be no assurance that these efforts
will be successful and operating results could be affected by significant
adverse changes in currency exchange rates or interest
rates.
|
The
foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure,
including that under "Outlook" and "Forward-Looking Statements and Risk
Factors," and other forward-looking statements and related disclosures made by
the Company in this 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.
74
ITEM
7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
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 absolute shift in interest rates. For 2007
and 2006, the market risks associated with the fair value of
interest-rate-sensitive instruments, assuming an instantaneous absolute shift in
interest rates of 1 percent were approximately $104 million and $126 million,
respectively. This exposure is primarily related to long-term debt
with fixed interest rates.
The
Company's operating cash flows and borrowings denominated in foreign currencies
are exposed to changes in foreign currency exchange rates. The
Company continually evaluates its foreign currency exposure based on current
market conditions and the locations in which the Company conducts
business. In order to mitigate the effect of foreign currency risk,
the Company enters into currency options to hedge probable anticipated but not
yet committed export sales and purchase transactions expected within no more
than five years and denominated in foreign currencies and forward exchange
contracts to hedge certain firm commitments denominated in foreign
currencies. The gains and losses on these contracts offset changes in
the value of related exposures. It is the Company's policy to enter
into foreign currency transactions only to the extent considered necessary to
meet its objectives as stated above. The Company does not enter into
foreign currency transactions for speculative purposes. For 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 forwards and options contracts. For 2007 and 2006, the
market risks associated with forwards and options for feedstock and natural gas
assuming an instantaneous parallel shift in the underlying commodity price of 10
percent were $20 million and $6 million, respectively, and an additional $2
million for each one percentage point move in closing prices thereafter for both
periods.
75
|
ITEM
|
Page
|
|
77
|
|
|
78
|
|
|
80
|
|
|
81
|
|
|
82
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|
83
|
|
|
89
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90
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91
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91
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92
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92
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93
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94
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94
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96
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103
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105
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105
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106
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108
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112
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114
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116
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117
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117
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120
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121
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|
125
|
|
|
127
|
|
|
129
|
|
76
MANAGEMENT'S
RESPONSIBILITY FOR FINANCIAL STATEMENTS
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/
Richard A. Lorraine
|
|
|
J.
Brian Ferguson
|
Richard
A. Lorraine
|
|
|
Chairman
of the Board and
|
Senior
Vice President and
|
|
|
Chief
Executive Officer
|
Chief
Financial Officer
|
|
|
February 28 ,
2008
|
77
To the
Board of Directors and Stockholders of
Eastman
Chemical Company
In our
opinion, the accompanying 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, 2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007 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,
2007, 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, 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 plans as of December 31, 2006,
and as discussed in Note 16 to the consolidated financial statements, the
Company changed the manner in which it accounts for share-based payments as of
January 1, 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.
78
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Philadelphia,
Pennsylvania
February
28, 2008
79
COMPREHENSIVE
INCOME and RETAINED EARNINGS
|
For
years ended December 31,
|
||||||
|
(Dollars
in millions, except per share amounts)
|
2007
|
2006
|
2005
|
|||
|
Sales
|
$
|
6,830
|
$
|
6,779
|
$
|
6,460
|
|
Cost
of sales
|
5,638
|
5,514
|
5,100
|
|||
|
Gross
profit
|
1,192
|
1,265
|
1,360
|
|||
|
Selling,
general and administrative expenses
|
420
|
423
|
439
|
|||
|
Research
and development expenses
|
156
|
155
|
150
|
|||
|
Asset
impairments and restructuring charges, net
|
112
|
101
|
33
|
|||
|
Other
operating income, net
|
--
|
(68)
|
(2)
|
|||
|
Operating
earnings
|
504
|
654
|
740
|
|||
|
Interest
expense, net
|
62
|
77
|
100
|
|||
|
Income
from equity investment in Genencor
|
--
|
--
|
(173)
|
|||
|
Early
debt extinguishment costs
|
--
|
--
|
46
|
|||
|
Other
(income) charges, net
|
(28)
|
(17)
|
4
|
|||
|
Earnings
from continuing operations before income taxes
|
470
|
594
|
763
|
|||
|
Provision
(benefit) for income taxes from continuing operations
|
149
|
167
|
222
|
|||
|
Earnings
from continuing operations
|
321
|
427
|
541
|
|||
|
Earnings
(loss) from discontinued operations, net of tax
|
(10)
|
(18)
|
16
|
|||
|
Loss
from disposal of discontinued operations, net of tax
|
(11)
|
--
|
--
|
|||
|
Net
earnings
|
$
|
300
|
$
|
409
|
$
|
557
|
|
Basic
earnings per share
|
||||||
|
Earnings
from continuing operations
|
$
|
3.89
|
$
|
5.20
|
$
|
6.70
|
|
Earnings
(loss) from discontinued operations
|
(0.26)
|
(0.22)
|
0.20
|
|||
|
Basic
earnings per share
|
$
|
3.63
|
$
|
4.98
|
$
|
6.90
|
|
Diluted
earnings per share
|
||||||
|
Earnings
from continuing operations
|
$
|
3.84
|
$
|
5.12
|
$
|
6.61
|
|
Earnings
(loss) from discontinued operations
|
(0.26)
|
(0.21)
|
0.20
|
|||
|
Diluted
earnings per share
|
$
|
3.58
|
$
|
4.91
|
$
|
6.81
|
|
Comprehensive
Income
|
||||||
|
Net
earnings
|
$
|
300
|
$
|
409
|
$
|
557
|
|
Other
comprehensive income (loss)
|
||||||
|
Change
in cumulative translation adjustment, net of tax
|
36
|
60
|
(94)
|
|||
|
Change
in pension liability, net of tax
|
15
|
48
|
(7)
|
|||
|
Change
in unrealized gains (losses) on derivative instruments, net of
tax
|
3
|
(1)
|
3
|
|||
|
Change
in unrealized gains on investments, net of tax
|
1
|
--
|
1
|
|||
|
Total
other comprehensive income (loss)
|
55
|
107
|
( 97)
|
|||
|
Comprehensive
income
|
$
|
355
|
$
|
516
|
$
|
460
|
|
Retained
Earnings
|
||||||
|
Retained
earnings at beginning of period
|
$
|
2,186
|
$
|
1,923
|
$
|
1,509
|
|
Net
earnings
|
300
|
409
|
557
|
|||
|
Cash
dividends declared
|
(145)
|
(146)
|
(143)
|
|||
|
Effect
of adoption of FIN 48
|
8
|
--
|
--
|
|||
|
Retained
earnings at end of period
|
$
|
2,349
|
$
|
2,186
|
$
|
1,923
|
The
accompanying notes are an integral part of these consolidated financial
statements.
80
|
December
31,
|
December
31,
|
|||
|
(Dollars
in millions, except per share amounts)
|
2007
|
2006
|
||
|
Assets
|
||||
|
Current
assets
|
||||
|
Cash
and cash equivalents
|
$
|
888
|
$
|
939
|
|
Trade
receivables, net of allowance of $6 and $15
|
546
|
682
|
||
|
Miscellaneous
receivables
|
112
|
72
|
||
|
Inventories
|
539
|
682
|
||
|
Other
current assets
|
74
|
47
|
||
|
Current
assets held for sale
|
134
|
--
|
||
|
Total
current assets
|
2,293
|
2,422
|
||
|
Properties
|
||||
|
Properties
and equipment at cost
|
8,152
|
8,844
|
||
|
Less: Accumulated
depreciation
|
5,306
|
5,775
|
||
|
Net
properties
|
2,846
|
3,069
|
||
|
Goodwill
|
316
|
314
|
||
|
Other
noncurrent assets
|
313
|
327
|
||
|
Noncurrent
assets held for sale
|
241
|
--
|
||
|
Total
assets
|
$
|
6,009
|
$
|
6,132
|
|
Liabilities
and Stockholders’ Equity
|
||||
|
Current
liabilities
|
||||
|
Payables
and other current liabilities
|
$
|
1,013
|
$
|
1,056
|
|
Borrowings
due within one year
|
72
|
3
|
||
|
Current
liabilities related to assets held for sale
|
37
|
--
|
||
|
Total
current liabilities
|
1,122
|
1,059
|
||
|
Long-term
borrowings
|
1,535
|
1,589
|
||
|
Deferred
income tax liabilities
|
300
|
269
|
||
|
Post-employment
obligations
|
852
|
1,084
|
||
|
Other
long-term liabilities
|
118
|
102
|
||
|
Total
liabilities
|
3,927
|
4,103
|
||
|
Stockholders’
equity
|
||||
|
Common
stock ($0.01 par value – 350,000,000 shares authorized; shares issued –
93,630,292 and 91,579,294 for 2007 and 2006, respectively)
|
1
|
1
|
||
|
Additional
paid-in capital
|
573
|
448
|
||
|
Retained
earnings
|
2,349
|
2,186
|
||
|
Accumulated
other comprehensive loss
|
(28)
|
(174)
|
||
|
2,895
|
2,461
|
|||
|
Less:
Treasury stock at cost (13,959,951 shares for 2007 and 8,048,442 shares
for 2006)
|
813
|
432
|
||
|
Total
stockholders’ equity
|
2,082
|
2,029
|
||
|
Total
liabilities and stockholders’ equity
|
$
|
6,009
|
$
|
6,132
|
The
accompanying notes are an integral part of these consolidated financial
statements.
81
|
For
years ended December 31,
|
||||||
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Cash
flows from operating activities
|
||||||
|
Net
earnings
|
$
|
300
|
$
|
409
|
$
|
557
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
||||||
|
Depreciation
and amortization
|
327
|
308
|
304
|
|||
|
Asset
impairments
|
138
|
62
|
12
|
|||
|
Gains
on sale of assets
|
(8)
|
(74)
|
--
|
|||
|
Income
from equity investment in Genencor
|
--
|
--
|
(173)
|
|||
|
Early
debt extinguishment costs
|
--
|
--
|
46
|
|||
|
Provision
(benefit) for deferred income taxes
|
(9)
|
7
|
115
|
|||
|
Changes
in operating assets and liabilities, net of effect of acquisitions and
divestitures:
|
||||||
|
(Increase)
decrease in trade receivables
|
(28)
|
(82)
|
60
|
|||
|
(Increase)
decrease in inventories
|
66
|
(99)
|
(110)
|
|||
|
Increase
(decrease) in trade payables
|
48
|
53
|
71
|
|||
|
Increase
(decrease) in liabilities for employee benefits and incentive
pay
|
(55)
|
(44)
|
(63)
|
|||
|
Other
items, net
|
(47)
|
69
|
(50)
|
|||
|
Net
cash provided by operating activities
|
732
|
609
|
769
|
|||
|
Cash
flows from investing activities
|
||||||
|
Additions
to properties and equipment
|
(518)
|
(389)
|
(343)
|
|||
|
Proceeds
from sale of assets and investments
|
202
|
322
|
50
|
|||
|
Proceeds
from the sale of equity investment in Genencor, net
|
--
|
--
|
417
|
|||
|
Acquisitions
and investments in joint ventures
|
(40)
|
--
|
(125)
|
|||
|
Additions
to capitalized software
|
(11)
|
(16)
|
(11)
|
|||
|
Other
items, net
|
32
|
(11)
|
(6)
|
|||
|
Net
cash used in investing activities
|
(335)
|
(94)
|
(18)
|
|||
|
Cash
flows from financing activities
|
||||||
|
Net
decrease in commercial paper, credit facility, and other
borrowings
|
(22)
|
(50)
|
(150)
|
|||
|
Proceeds
from long-term borrowings
|
--
|
--
|
189
|
|||
|
Repayment
of long-term borrowings
|
--
|
--
|
(544)
|
|||
|
Dividends
paid to stockholders
|
(147)
|
(144)
|
(142)
|
|||
|
Treasury
stock purchases
|
(382)
|
--
|
--
|
|||
|
Proceeds
from stock option exercises and other items
|
103
|
93
|
100
|
|||
|
Net
cash used in financing activities
|
(448)
|
(101)
|
(547)
|
|||
|
Effect
of exchange rate changes on cash and cash equivalents
|
--
|
1
|
(5)
|
|||
|
Net
change in cash and cash equivalents
|
(51)
|
415
|
199
|
|||
|
Cash
and cash equivalents at beginning of period
|
939
|
524
|
325
|
|||
|
Cash
and cash equivalents at end of period
|
$
|
888
|
$
|
939
|
$
|
524
|
The
accompanying notes are an integral part of these consolidated financial
statements.
82
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.
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.
83
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 2007, 2006, and 2005 was approximately $11 million, $17
million, and $11 million, respectively. During those same periods,
approximately $13 million, $13 million, and $16 million, respectively, of
previously capitalized costs were amortized. At December 31, 2007 and
2006, the unamortized capitalized software costs were $24 million and $28
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.
Investments
The
consolidated financial statements include the accounts in which the Company is a
primary beneficiary of a variable interest entity, if applicable, or the
accounts of the Company and all its subsidiaries in which a controlling interest
is maintained. For those consolidated subsidiaries in which the
Company’s ownership is less than 100 percent, the interests of the other
stockholders are included in other long-term liabilities.
Investments
in affiliates over which the Company has significant influence but not a
controlling interest are carried on the equity basis. Under the
equity method of accounting, these investments are included in other noncurrent
assets. The Company includes its share of earnings and losses of such
investments in other income and charges and its share of other comprehensive
income (loss) in the appropriate component of other accumulated comprehensive
income (loss) in stockholders’ equity.
Marketable
securities held by the Company, currently common or preferred stock, are deemed
by management to be available-for-sale and are reported at fair value, with net
unrealized gains or losses reported as a component of other accumulated
comprehensive income (loss) in stockholders' equity. Realized gains
and losses are included in earnings and are derived using the specific
identification method for determining the cost of securities. The
Company includes these investments in other noncurrent assets.
84
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other
equity investments, for which fair values are not readily determinable, are
carried at historical cost and are included in other noncurrent
assets.
The
Company records an investment impairment charge when it believes an investment,
accounted for by the Company as a marketable security or recorded at historical
cost, has experienced a decline in value that is other than
temporary.
Pension
and Other Post-employment Benefits
The
Company maintains defined benefit plans that provide eligible employees with
retirement benefits. Additionally, Eastman provides life insurance
and health care benefits for eligible retirees and health care benefits for
retirees’ eligible survivors. The costs and obligations related to
these benefits reflect the Company’s assumptions related to general economic
conditions (particularly interest rates), expected return on plan assets, rate
of compensation increase for employees, and health care cost
trends. The cost of providing plan benefits depends on demographic
assumptions including retirements, mortality, turnover, and plan
participation.
In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 158, "Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans", which changes the accounting for pension and other
postretirement benefit plans. This Standard was adopted by Eastman
for the year ended December 31, 2006. For additional information, see
Note 11, "Retirement Plans".
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can be
reasonably estimated. When a single amount cannot be reasonably
estimated but the cost can be estimated within a range, the Company accrues the
minimum amount. This undiscounted accrued amount reflects the
Company’s assumptions about remediation requirements at the contaminated site,
the nature of the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites, and the number
and financial viability of other potentially responsible
parties. Changes in the estimates on which the accruals are based,
unanticipated government enforcement action, or changes in health, safety,
environmental, and chemical control regulations and testing requirements could
result in higher or lower costs.
The
Company also establishes reserves for closure/postclosure costs associated with
the environmental and other assets it maintains. Environmental assets
include but are not limited to waste management units, such as landfills, water
treatment facilities, and ash ponds. When these types of assets are
constructed or installed, a reserve is established for the future costs
anticipated to be associated with the closure of the site based on an expected
life of the environmental assets and the applicable regulatory closure
requirements. These expenses are charged into earnings over the
estimated useful life of the assets. Currently, the Company estimates
the useful life of each individual asset up to 50 years. If the
Company changes its estimate of the asset retirement obligation costs or its
estimate of the useful lives of these assets, the expenses to be charged into
earnings could increase or decrease.
In
accordance with Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” ("FIN 47"), the Company also monitors conditional
obligations and will record reserves associated with them when and to the extent
that more detailed information becomes available concerning applicable
retirement costs.
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.
85
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company's cash expenditures related to environmental protection and improvement
were approximately $209 million, $214 million, and $198 million in 2007, 2006,
and 2005, 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 materials and energy costs, and
interest rates. Such instruments are used to mitigate the risk that
changes in exchange rates, interest rates or raw materials and energy costs will
adversely affect the eventual dollar cash flows resulting from the hedged
transactions.
The
Company enters into currency options and forwards 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, the Japanese yen, and the Canadian dollar) and forward exchange
contracts to hedge certain firm commitments denominated in foreign
currencies. To mitigate short-term fluctuations in market prices for
propane and natural gas (major raw materials and energy used in the
manufacturing process), the Company enters into forwards and options
contracts. From time to time, the Company also utilizes interest rate
derivative instruments, primarily swaps, to hedge the Company's exposure to
movements in interest rates.
The
Company's qualifying forwards and options contracts are accounted for as hedges
because the derivative instruments are designated and effective as hedges and
reduce the Company's exposure to identified risks. Gains and losses
resulting from effective hedges of existing 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.
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.
86
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue
Recognition and Customer Incentives
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price to the customer
is fixed or determinable, and collectability is reasonably assured.
The
Company records estimated obligations for customer programs and incentive
offerings, which consist primarily of revenue or volume-based amounts that a
customer must achieve over a specified period of time, as a reduction of revenue
to each underlying revenue transaction as the customer progresses toward
reaching goals specified in incentive agreements. These estimates are
based on a combination of forecast of customer sales and actual sales volumes
and revenues against established goals, the customer’s current level of
purchases, Eastman’s knowledge of customer purchasing habits, and industry
pricing practice. The incentive payment rate may be variable, based
upon the customer reaching higher sales volume or revenue levels over a
specified period of time in order to receive an agreed upon incentive
payment.
Shipping
and Handling Fees and Costs
Shipping
and handling fees related to sales transactions are billed to customers and are
recorded as sales revenue. Shipping and handling costs incurred are
recorded in cost of sales.
Restructuring
of Operations
The
Company records restructuring charges incurred in connection with consolidation
of operations, exited business
lines, or shutdowns of specific sites that are expected to be substantially
completed within 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
Effective
January 1, 2006, the Company implemented SFAS No. 123 (Revised 2004),
"Share-Based Payment" ("SFAS No. 123(R)") and related interpretations and began
recognizing compensation expense in the financial statements for stock options
based upon the grant-date fair value over the substantive vesting
period. Prior to January 1, 2006, the Company applied Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, as permitted under SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
no compensation expense was recognized in the financial statements for employee
stock options granted at an exercise price equal to the market value of the
underlying common stock at the date of grant. For additional
information, see Note 16, "Share-Based Compensation Plans and
Awards."
87
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
accordance with the implementation requirements of SFAS No. 123(R) under the
modified prospective method, the Company did not restate prior fiscal periods
and is required to continue the same disclosure-only requirements of SFAS No.
123 for comparative purposes until all periods reported are on the same
basis. The following table illustrates the comparable effect on net
earnings and earnings per share as formerly provided under SFAS No. 123 for
2005:
|
(Dollars
in millions, except per share amounts)
|
2005
|
||
|
Earnings
from continuing operations, as reported
|
$
|
541
|
|
|
Add: Stock-based
employee compensation expense included in earnings from continuing
operations, as reported
|
10
|
||
|
Deduct: Total
additional stock-based employee compensation cost, net of tax, that would
have been included in earnings from continuing operations under fair value
method
|
14
|
||
|
Pro
forma earnings from continuing operations
|
$
|
537
|
|
|
Basic
earnings from continuing operations per share
|
As
reported
|
$6.70
|
|
|
Pro
forma
|
$6.65
|
||
|
Diluted
earnings from continuing operations per share
|
As
reported
|
$6.61
|
|
|
Pro
forma
|
$6.57
|
||
Compensated
Absences
The
Company accrues compensated absences and related benefits as current charges to
earnings in the period earned.
Research
and Development
All costs
identified as research and development costs are charged to expense when
incurred with the exception of third-party reimbursed and government-funded
research and development. Expenses for third-party reimbursed and
government-funded research and development are deferred until reimbursement is
received to ensure appropriate matching of revenue and expense, provided
specific criteria are met.
Other
Income and Other Charges
Included
in other income and other charges are results from equity investments, gains on
the sale of certain technology business venture investments, royalty income,
gains or losses on foreign exchange transactions, write-downs to fair value of
certain technology business venture investments due to other than temporary
declines in value, certain litigation costs, fees on securitized receivables,
other non-operating income, other non-operating income or charges related to
Holston Defense Corporation ("HDC"), and other miscellaneous items.
88
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach,
deferred taxes represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable for the
current year plus the change in deferred taxes during the
year. Deferred taxes result from differences between the financial
and tax bases of the Company’s assets and liabilities and are adjusted for
changes in tax rates and tax laws when changes are enacted. Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized. Provision has been
made for income taxes on unremitted earnings of subsidiaries and affiliates,
except for subsidiaries in which earnings are deemed to be permanently
reinvested.
|
DISCONTINUED
OPERATIONS AND ASSETS HELD FOR SALE
|
In fourth
quarter 2007, the Company entered into definitive agreements to sell its
polyethylene terephthalate ("PET") polymers and purified terephthalic acid
("PTA") production facilities in the Netherlands and the United Kingdom and
related businesses for anticipated cash proceed of approximately $330 million,
subject to working capital adjustments. The transaction is expected
to close during the first quarter of 2008. As a result, the assets
and liabilities related to these businesses have been reclassified as assets
held for sale at December 31, 2007. During second quarter 2007, the
Company completed the sale of its PET manufacturing facility in
Spain. 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 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," 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 consolidated financial statements.
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)
|
2007
|
2006
|
2005
|
|||
|
Sales
|
$
|
542
|
$
|
671
|
$
|
599
|
|
Earnings
(loss) before income taxes
|
(9)
|
(18)
|
20
|
|||
|
Earnings
(loss) from discontinued operations, net of tax
|
(10)
|
(18)
|
16
|
|||
|
Loss
on disposal, net of tax
|
(11)
|
--
|
--
|
|||
The loss
on disposal is from the sale of the Company's San Roque, Spain PET manufacturing
facility in the Performance Polymer's segment Net proceeds from
the sale of the San Roque 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.
89
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
|
In
addition, the Company anticipates the recognition of a gain on deferred currency
translation adjustments of approximately $40 million.
|
INVENTORIES
|
|
December
31,
|
||||
|
(Dollars
in millions)
|
2007
|
2006
|
||
|
At
FIFO or average cost (approximates current cost)
|
||||
|
Finished
goods
|
$
|
607
|
$
|
660
|
|
Work
in process
|
195
|
206
|
||
|
Raw
materials and supplies
|
247
|
280
|
||
|
Total
inventories
|
1,049
|
1,146
|
||
|
LIF O
Reserve
|
(510)
|
(464)
|
||
|
Total
inventories
|
$
|
539
|
$
|
682
|
Inventories
valued on the LIFO method were approximately 70 percent of total inventories in
each of the periods.
90
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
PROPERTIES
AND ACCUMULATED DEPRECIATION
|
|
December
31,
|
||||
|
(Dollars
in millions)
|
2007
|
2006
|
||
|
Properties
|
||||
|
Land
|
$
|
46
|
$
|
42
|
|
Buildings
and building equipment
|
782
|
824
|
||
|
Machinery
and equipment
|
7,009
|
7,819
|
||
|
Construction
in progress
|
315
|
159
|
||
|
Properties
and equipment at cost
|
$
|
8,152
|
$
|
8,844
|
|
Less: Accumulated
depreciation
|
5,306
|
5,775
|
||
|
Net
properties
|
$
|
2,846
|
$
|
3,069
|
Cumulative
construction-period interest of $224 million and $311 million, reduced by
accumulated depreciation of $146 million and $216 million, is included in net
properties at December 31, 2007 and 2006, respectively.
Interest
capitalized during 2007, 2006, and 2005 was $10 million, $7 million, and $5
million, respectively.
Depreciation
expense related to continuing operations was $313 million, $294 million, and
$287 million for 2007, 2006, and 2005, respectively. Depreciation
expense for the years ended December 31, 2007 and 2006 included $49 million
and $10 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,
which are scheduled for shutdown.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Intangible
assets include developed technology, customer lists, patents and patent
licenses, and trademarks with a net book value of $16 million in 2007 and $17
million in 2006. During 2006, the Company recorded approximately $6
million in intangible asset impairments related to patents associated with
abandoned businesses. Other intangible assets are included in other noncurrent
assets on the balance sheet.
Changes
in the carrying amount of goodwill follow:
|
(Dollars
in millions)
|
CASPI
Segment
|
Other
Segments
|
Total
Eastman Chemical
|
|||
|
Reported
balance at December 31, 2005
|
$
|
306
|
$
|
6
|
$
|
312
|
|
Currency
translation adjustments
|
2
|
--
|
2
|
|||
|
Reported
balance at December 31, 2006
|
308
|
6
|
314
|
|||
|
Currency
translation adjustments
|
2
|
--
|
2
|
|||
|
Reported
balance at December 31, 2007
|
$
|
310
|
$
|
6
|
$
|
316
|
91
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
EQUITY
INVESTMENTS
|
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, 2007 and 2006 was approximately $43 million and $47 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, 2007 and 2006, the Company’s
investment in Nanjing was approximately $7 million and $5 million,
respectively.
In
October 2007, the Company entered into an agreement with Green Rock Energy,
L.L.C. ("Green Rock"), a company formed by the D. E. Shaw Group and
Goldman, Sachs & Co., to jointly develop the industrial gasification
facility in Beaumont, Texas through TX Energy, LLC ("TX Energy"). Eastman owns a
50 percent interest in TX Energy, which is expected to be operational in 2011
and will produce intermediate chemicals, such as hydrogen, methanol, and ammonia
from petroleum coke. This joint venture in the development stage is accounted
for under the equity method, and is included in other noncurrent
assets. At December 31, 2007, the Company’s investment in TX Energy
was approximately $26 million.
Eastman
also plans to participate in a project sponsored by Faustina Hydrogen Products,
L.L.C. which will use petroleum coke as the primary feedstock to make anhydrous
ammonia and methanol. Faustina Hydrogen Products is primarily owned
by Green Rock. The Company intends to take a 25 percent or greater equity
position in the project, provide operations, maintenance, and other site
management services, and purchase methanol under a long-term contract.
Capital costs for the facility are estimated to be approximately $1.6
billion. Project financing is expected to be obtained by the end of
2008. The facility will be built in St. James Parish, Louisiana and is
expected to be complete by 2011.
On April
21, 2005, the Company completed the sale of its equity investment in Genencor
International, Inc. ("Genencor") for cash proceeds of approximately $417
million, net of $2 million in fees. The book value of the investment
prior to sale was $246 million, and the Company recorded a pre-tax gain on the
sale of $171 million.
|
PAYABLES
AND OTHER CURRENT
LIABILITIES
|
|
December
31,
|
||||
|
(Dollars
in millions)
|
2007
|
2006
|
||
|
Trade
creditors
|
$
|
578
|
$
|
581
|
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
138
|
126
|
||
|
Accrued
taxes
|
36
|
59
|
||
|
Post-employment
obligations
|
60
|
63
|
||
|
Interest
payable
|
31
|
31
|
||
|
Bank
overdrafts
|
6
|
11
|
||
|
Other
|
164
|
185
|
||
|
Total
payables and other current liabilities
|
$
|
1,013
|
$
|
1,056
|
The
current portion of post-employment obligations is an estimate of current year
payments in excess of plan assets.
92
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
BORROWINGS
|
|
December
31,
|
||||
|
(Dollars
in millions)
|
2007
|
2006
|
||
|
Borrowings
consisted of:
|
||||
|
3
1/4% notes due 2008
|
$
|
72
|
$
|
72
|
|
6.30%
notes due 2018
|
188
|
182
|
||
|
7%
notes due 2012
|
148
|
141
|
||
|
7
1/4% debentures due 2024
|
497
|
497
|
||
|
7
5/8% debentures due 2024
|
200
|
200
|
||
|
7.60%
debentures due 2027
|
298
|
297
|
||
|
Credit
facility borrowings
|
188
|
185
|
||
|
Other
|
16
|
18
|
||
|
Total
borrowings
|
1,607
|
1,592
|
||
|
Borrowings
due within one year
|
(72)
|
(3)
|
||
|
Long-term
borrowings
|
$
|
1,535
|
$
|
1,589
|
At
December 31, 2007, the Company had credit facilities with various U.S. and
foreign banks totaling approximately $888 million. These credit
facilities consist of a $700 million revolving credit facility (the "Credit
Facility") expiring in April 2012, as well as a 128 million Euro credit facility
("Euro Facility") which expires in December 2012. The Credit Facility
has a remaining option for a one-year extension. 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, 2007, the Company’s credit
facility borrowings totaled $188 million at an effective interest rate of 4.79
percent. At December 31, 2006, the Company's credit facility
borrowings were $185 million at an effective interest rate of 4.00
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 2012, 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.
At
December 31, 2007 and December 31, 2006, the Company had outstanding interest
rate swaps associated with the entire outstanding principle of the 7% notes due
in 2012 and $150 million of the outstanding principle of the 6.30% notes due in
2018 to convert the notes from fixed rate to variable rate
borrowings. The average variable interest rate on the 7% notes was
7.12 percent and
7.89 percent for December 31, 2007 and December 31, 2006,
respectively. The average variable interest rate on the 6.30% notes
was 5.52 percent
and 6.30 percent for December 31, 2007 and December 31, 2006,
respectively.
93
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
EARLY
EXTINGUISHMENT OF DEBT
|
In the
second quarter 2005, the Company completed the early repayment of $500 million
of its outstanding long-term bonds for $544 million in cash, which resulted in a
charge of $46 million for early debt extinguishment costs including $2 million
in unamortized bond issuance costs. The book value of the purchased
debt was $500 million, as follows:
|
(Dollars
in millions)
|
Book
Value
|
|
|
3
1/4% notes due 2008
|
$
|
178
|
|
6.30%
notes due 2018
|
68
|
|
|
7%
notes due 2012
|
254
|
|
|
Total
|
$
|
500
|
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
|
December
31, 2007
|
December
31, 2006
|
|||||||
|
(Dollars
in millions)
|
Recorded
Amount
|
Fair
Value
|
Recorded
Amount
|
Fair
Value
|
||||
|
Long-term
borrowings
|
$
|
1,535
|
$
|
1,637
|
$
|
1,589
|
$
|
1,715
|
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.
Currency
Rate Hedging
The
Company manufactures and sells its products in a number of countries throughout
the world and, as a result, is exposed to movements in foreign currency exchange
rates. To manage the volatility relating to these exposures, the
Company nets the exposures on a consolidated basis to take advantage of natural
offsets. To manage the remaining exposure, the Company enters into
currency options 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, the Japanese yen and the Canadian dollar) and forward exchange contracts
to hedge certain firm commitments denominated in foreign
currencies. These contracts are designated as cash flow
hedges. The mark-to-market gains or losses on qualifying hedges are
included in accumulated other comprehensive income (loss) to the extent
effective, and reclassified into sales in the period during which the hedged
transaction affects earnings.
94
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Raw
Material and Energy Hedging
Raw
materials and energy sources used by the Company are subject to price volatility
caused by weather, supply conditions, economic variables and other unpredictable
factors. To mitigate short-term fluctuations in market prices for
propane, natural gas and paraxylene, the Company enters into forwards and
options contracts. These contracts are designated as cash flow
hedges. The mark-to-market gains or losses on qualifying hedges are
included in accumulated other comprehensive income (loss) to the extent
effective, and reclassified into cost of sales in the period during which the
hedged transaction affects earnings.
Interest
Rate Hedging
The
Company's policy is to manage interest cost using a mix of fixed and variable
rate debt. To manage this mix in a cost-efficient manner, the Company
enters into interest rate swaps in which the Company agrees to exchange the
difference between fixed and variable interest amounts calculated by reference
to an agreed upon notional principal amount. These swaps are
designated to hedge the fair value of underlying debt obligations with the
interest rate differential reflected as an adjustment to interest expense over
the life of the swaps. As these instruments are 100 percent
effective, there is no impact on earnings due to hedge
ineffectiveness.
From time
to time, the Company also utilizes interest rate derivative instruments,
primarily 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.
At
December 31, 2007, mark-to-market losses from raw material, currency, energy,
and certain interest rate hedges that were included in accumulated other
comprehensive income (loss) totaled approximately $(3) million. If
realized, substantially all of these losses will be reclassified into
earnings during the next 12 months. The mark-to-market gains or
losses on non-qualifying, excluded and ineffective portions of hedges are
immediately recognized in cost of sales or other income and
charges. The Company recognized a $3 million net gain during
2007.
At
December 31, 2006, mark-to-market losses from raw material, currency, energy,
and certain interest rate hedges that were included in accumulated other
comprehensive income (loss) totaled approximately $(6) 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 $1 million net loss during
2006.
95
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
RETIREMENT
PLANS
|
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 international operations is provided, to the
extent deemed appropriate, through separate plans. The Company systematically
provides for obligations under such plans by depositing funds with trustees,
under insurance policies, or by book reserves.
Eastman
has adopted the provisions of SFAS No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement
No. 87, 88, 106, and 132 (R)" ("SFAS No. 158"), as of December 31,
2006. The table below summarizes the incremental effects of SFAS No.
158 adoption on the individual line items in the Statement of Financial Position
at December 31, 2006 for defined benefit retirement plans.
|
December
31, 2006
|
||||||
|
(Dollars
in millions)
|
Pre-SFAS
No.
158
|
Adjustment
to initially apply FAS 158
|
Post
SFAS
No.
158 Adjustment
|
|||
|
Intangible
asset
|
$ |
21
|
$
|
(21)
|
$
|
--
|
|
Deferred
tax asset
|
119
|
42
|
161
|
|||
|
Accrued
pension liability
|
(241)
|
(105)
|
(346)
|
|||
|
Accumulated
other comprehensive loss, net of tax
|
(207)
|
(84)
|
(291)
|
|||
96
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Below is
a summary balance sheet of the change in plan assets during 2007 and 2006, 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 international defined benefit pension plans are also
provided in the following tables.
|
Summary
Balance Sheet
|
||||
|
(Dollars
in millions)
|
2007
|
2006
|
||
|
Change
in projected benefit obligation:
|
||||
|
Benefit
obligation, beginning of year
|
$
|
1,593
|
$
|
1,477
|
|
Service
cost
|
48
|
44
|
||
|
Interest
cost
|
90
|
82
|
||
|
Actuarial
(gain)/loss
|
(58)
|
12
|
||
|
Plan
amendments and other
|
(55)
|
71
|
||
|
Effect
of currency exchange
|
16
|
26
|
||
|
Benefits
paid
|
(164)
|
(119)
|
||
|
Benefit
obligation, end of year
|
$
|
1,470
|
$
|
1,593
|
|
Change
in plan assets:
|
||||
|
Fair
value of plan assets, beginning of year
|
$
|
1,247
|
$
|
1,054
|
|
Actual
return on plan assets
|
115
|
162
|
||
|
Plan
amendments and other
|
1
|
46
|
||
|
Effect
of currency exchange
|
12
|
17
|
||
|
Company
contributions
|
135
|
87
|
||
|
Benefits
paid
|
(164)
|
(119)
|
||
|
Fair
value of plan assets, end of year
|
$
|
1,346
|
$
|
1,247
|
|
Funded
Status at end of year
|
$
|
(124)
|
$
|
(346)
|
|
Amounts
recognized in the Statements of Financial Position consist
of:
|
||||
|
Noncurrent
Asset
|
$
|
2
|
$
|
--
|
|
Current
liability
|
(3)
|
(3)
|
||
|
Noncurrent
liability
|
(123)
|
(343)
|
||
|
Net
amount recognized, end of year
|
$
|
(124)
|
$
|
(346)
|
|
Amounts
recognized in accumulated other comprehensive income consist
of:
|
||||
|
Net
actuarial loss (gain)
|
$
|
360
|
$
|
462
|
|
Prior
service costs (credit)
|
(58)
|
(10)
|
||
|
Accumulated
other comprehensive loss
|
$
|
302
|
$
|
452
|
The
accumulated benefit obligation basis at the end of 2007 and 2006 was $1,358
million and $1,489 million, respectively.
97
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 international defined benefit pension plans
follows:
|
Summary
of Benefit Costs and Other Amounts Recognized in Other Comprehensive
Income
|
||||||
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Components
of net periodic benefit cost:
|
||||||
|
Service
cost
|
$
|
48
|
$
|
44
|
$
|
43
|
|
Interest
cost
|
90
|
82
|
80
|
|||
|
Expected
return on assets
|
(105)
|
(88)
|
(79)
|
|||
|
Curtailment
charge
|
4
|
--
|
--
|
|||
|
Amortization
of:
|
||||||
|
Prior
service credit
|
(9)
|
(10)
|
(9)
|
|||
|
Actuarial
loss
|
35
|
39
|
36
|
|||
|
Net
periodic benefit cost
|
$
|
63
|
$
|
67
|
$
|
71
|
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income:
|
||||||
|
Curtailment
effect
|
$
|
10
|
$
|
--
|
$
|
--
|
|
Current
year actuarial gains
|
68
|
--
|
--
|
|||
|
Current
year prior service credit
|
49
|
|||||
|
Amortization
of:
|
||||||
|
Prior
service credit
|
(9)
|
(10)
|
(10)
|
|||
|
Actuarial
loss
|
35
|
39
|
36
|
|||
|
Effect
of currency exchange
|
(3)
|
--
|
--
|
|||
|
Total
|
$
|
150
|
$
|
29
|
$
|
26
|
|
2007
|
2006
|
2005
|
|||
|
Weighted-average
assumptions used to determine benefit obligations for years ended December
31:
|
|||||
|
Discount
rate
|
6.03%
|
5.66%
|
5.51%
|
||
|
Expected
return on assets
|
8.57%
|
8.53%
|
8.59%
|
||
|
Rate
of compensation increase
|
3.83%
|
3.78%
|
3.75%
|
||
|
Weighted-average
assumptions used to determine net periodic pension cost for years ended
December 31:
|
|||||
|
Discount
rate
|
5.66%
|
5.51%
|
5.67%
|
||
|
Expected
return on assets
|
8.53%
|
8.59%
|
8.65%
|
||
|
Rate
of compensation increase
|
3.78%
|
3.75%
|
3.78%
|
||
The fair
value of plan assets for domestic plans at December 31, 2007 and 2006 was $1,107
million and $1,052 million, respectively, while the fair value of plan assets at
December 31, 2007 and 2006 for international plans was $239 million and $195
million, respectively. At December 31, 2007 and 2006, 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 international plan assets was 5.75 percent
and 5.24 percent at December 31, 2007 and 2006, respectively. The target
allocation for the Company’s U.S. pension plan for 2008 and the asset allocation
at December 31, 2007 and 2006, by asset category, is as follows:
98
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
Target
Allocation
|
Plan
Assets at December 31,
2007
|
Plan
Assets at December 31, 2006
|
|
|
Asset
category
|
|||
|
Equity
securities
|
59%
|
69%
|
75%
|
|
Debt
securities
|
12%
|
9%
|
8%
|
|
Real
estate
|
9%
|
8%
|
5%
|
|
Other
investments
|
20%
|
14%
|
12%
|
|
Total
|
100%
|
100%
|
100%
|
The asset
allocation for the Company’s international pension plans at December 31, 2007
and 2006, and the target allocation for 2008, by asset category, is as
follows:
|
Target
Allocation
|
Plan
Assets at December 31,
2007
|
Plan
Assets at December 31, 2006
|
|
|
Asset
category
|
|||
|
Equity
securities
|
34%
|
34%
|
35%
|
|
Debt
securities
|
57%
|
57%
|
56%
|
|
Other
investments
|
9%
|
9%
|
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)
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013-2017
|
|
U.S.
plan
|
$90
|
$90
|
$93
|
$99
|
$105
|
$627
|
|
International
plans
|
$6
|
$6
|
$6
|
$7
|
$7
|
$46
|
99
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
1,540,303; 1,721,199; and 1,980,906 shares as of December 31, 2007, 2006, and
2005, 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 $34 million, $35 million, and
$33 million for 2007, 2006, and 2005, respectively.
POSTRETIREMENT
WELFARE PLANS
Eastman
provides life insurance and health care benefits for eligible retirees, and
health care benefits for retirees' eligible survivors. In general,
Eastman provides those benefits to retirees eligible under the Company's U.S.
pension plans. Similar benefits are also provided to retirees of 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
post-retirement 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 and
$12 million for 2007 and 2006, respectively, reflecting a portion of the
unrecognized gain resulting from the award. Employees hired on or
after January 1, 2007 will have access to post-retirement health care benefits
only, while Eastman will not provide a company contribution toward the premium
cost of post-retirement benefits for those employees.
A few of
the Company's international operations have supplemental health benefit plans
for certain retirees, the cost of which is not significant to the
Company.
100
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Below is
a summary balance sheet of the change in plan assets during 2007 and 2006, 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)
|
2007
|
2006
|
||
|
Change
in benefit obligation:
|
||||
|
Benefit
obligation, beginning of year
|
$
|
731
|
$
|
779
|
|
Service
cost
|
7
|
8
|
||
|
Interest
cost
|
43
|
41
|
||
|
Plan
participants’ contributions
|
16
|
18
|
||
|
Actuarial
(gain) loss
|
(16)
|
(57)
|
||
|
Benefits
paid
|
(59)
|
(58)
|
||
|
Plan
amendments
|
(6)
|
--
|
||
|
Benefit
obligation, end of year
|
$
|
716
|
$
|
731
|
|
Change
in plan assets:
|
||||
|
Fair
value of plan assets, beginning of year
|
$
|
57
|
$
|
6
|
|
Actual
return on plan assets
|
2
|
1
|
||
|
Company
contributions
|
37
|
34
|
||
|
Third
party contributions
|
--
|
95
|
||
|
Reserve
for third party contributions
|
3
|
(39)
|
||
|
Plan
participants’ contributions
|
16
|
18
|
||
|
Benefits
paid
|
(59)
|
(58)
|
||
|
Fair
value of plan assets, end of year
|
$
|
56
|
$
|
57
|
|
Funded
status
|
$
|
(660)
|
$
|
(674)
|
|
Amounts
recognized in the Statements of Financial Position consist
of:
|
||||
|
Current
liabilities
|
$
|
(40)
|
$
|
(38)
|
|
Non-current
liabilities
|
(620)
|
(636)
|
||
|
Net
amount recognized, end of year
|
$
|
(660)
|
$
|
(674)
|
|
Amounts
recognized in accumulated other comprehensive income consist
of:
|
||||
|
Actuarial
(gain) loss
|
$
|
176
|
$
|
206
|
|
Prior
service (credit) cost
|
(194)
|
(211)
|
||
|
Accumulated
other comprehensive income
|
$
|
(18)
|
$
|
(5)
|
101
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)
|
2007
|
2006
|
2005
|
|||
|
Components
of net periodic benefit cost:
|
||||||
|
Service
cost
|
$
|
7
|
$
|
8
|
$
|
8
|
|
Interest
cost
|
43
|
41
|
43
|
|||
|
Expected
return on assets
|
(3)
|
--
|
--
|
|||
|
Other
|
--
|
(12)
|
--
|
|||
|
Amortization
of:
|
||||||
|
Prior
service credit
|
(23)
|
(22)
|
(23)
|
|||
|
Actuarial
loss
|
12
|
15
|
20
|
|||
|
Net
periodic benefit cost
|
$
|
36
|
$
|
30
|
$
|
48
|
|
Weighted-average
assumptions used to determine end of year benefit
obligations:
|
2007
|
2006
|
2005
|
||
|
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
|
|
Weighted-average
assumptions used to determine end of year net benefit
cost:
|
2007
|
2006
|
2005
|
||
|
Discount
rate
|
5.86%
|
5.62%
|
5.75%
|
||
|
Rate
of compensation increase
|
3.75%
|
3.75%
|
3.75%
|
||
|
Health
care cost trend
|
|||||
|
Initial
|
9.00%
|
8.00%
|
9.00%
|
||
|
Decreasing
to ultimate trend of
|
5.00%
|
5.00%
|
5.00%
|
||
|
in
year
|
2011
|
2009
|
2009
|
Benefits,
net of participant contributions, expected to be paid for post-employment
obligations are as follows:
(Dollars
in millions)
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013-2017
|
|
|
U.S.
plans
|
$45
|
$45
|
$45
|
$45
|
$45
|
$245
|
A 9
percent rate of increase in per capita cost of covered health care benefits is
assumed for 2008. The rate is assumed to decrease gradually to 5 percent for
2012 and remain at that level thereafter. A 1 percent increase or decrease in
health care trend would have had no material impact on the 2007 service and
interest costs or the 2006 benefit obligation, because the Company's
contributions for benefits are fixed.
102
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
COMMITMENTS
|
Purchase
Obligations and Lease Commitments
At
December 31, 2007, the Company had various purchase obligations totaling
approximately $2.3 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 $177 million over a period of several
years. Of the total lease commitments, approximately 10 percent
relate to machinery and equipment, including computer and communications
equipment and production equipment; approximately 55 percent relate to real
property, including office space, storage facilities and land; and approximately
35 percent relate to railcars. Rental expense, net of sublease
income, was approximately $56 million, $62 million, and $64 million in 2007,
2006, and 2005, 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
|
||||||
|
2008
|
$
|
72
|
$
|
--
|
$
|
98
|
$
|
508
|
$
|
32
|
$
|
710
|
|
2009
|
--
|
14
|
96
|
460
|
26
|
596
|
||||||
|
2010
|
--
|
--
|
96
|
420
|
22
|
538
|
||||||
|
2011
|
2
|
--
|
96
|
253
|
20
|
371
|
||||||
|
2012
|
148
|
188
|
84
|
246
|
12
|
678
|
||||||
|
2013
and beyond
|
1,183
|
--
|
945
|
403
|
65
|
2,596
|
||||||
|
Total
|
$
|
1,405
|
$
|
202
|
$
|
1,415
|
$
|
2,290
|
$
|
177
|
$
|
5,489
|
Accounts
Receivable Securitization Program
In 1999,
the Company entered into an agreement that allows the Company to sell certain
domestic accounts receivable under a planned continuous sale program to a third
party. The agreement permits the sale of undivided interests in domestic trade
accounts receivable. Receivables sold to the third party totaled $200 million at
December 31, 2007 and December 31, 2006. Undivided interests in designated
receivable pools were sold to the purchaser with recourse limited to the
purchased interest in the receivable pools. The purchaser funds its purchases
via the issuance of commercial papers backed by the undivided
interest. Average monthly proceeds from collections reinvested in the
continuous sale program were approximately $308 million and $321 million in 2007
and 2006, 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.
103
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, 2007 totaled $155 million and consisted primarily of leases for
railcars, company aircraft, and other equipment. Leases with guarantee amounts
totaling $29 million, $11 million, and $115 million will expire in 2008, 2011,
and 2012, respectively. The Company believes, based on current facts and
circumstances, that the likelihood of a material payment pursuant to such
guarantees is remote.
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 Variable Interest
Entities (“VIEs”) or, in the case of Primester, a joint venture that
manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the
Company is not the primary beneficiary of the VIE. As such, in
accordance with FASB Interpretation Number 46, "Consolidation of Variable
Interest Entities" ("FIN 46R"), the
Company is not required to consolidate these entities. In addition,
the Company has evaluated long-term purchase obligations with two entities that
may be VIEs at December 31, 2007. These potential VIEs are joint ventures from
which the Company has purchased raw materials and utilities for several years
and purchases approximately $60 million of raw materials and utilities on an
annual basis. The Company has no equity interest in these entities and has
confirmed that one party to each of these joint ventures does consolidate the
potential VIE. However, due to competitive and other reasons, the Company has
not been able to obtain the necessary financial information to determine whether
the entities are VIEs, and if one or both are VIEs, whether or not the Company
is the primary beneficiary.
104
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
ENVIRONMENTAL
MATTERS
|
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of
various hazardous waste sites, the Company, along with many other entities, has
been designated a potentially responsible party ("PRP"), by the U.S.
Environmental Protection Agency under the Comprehensive Environmental Response,
Compensation and Liability Act, which potentially subjects PRPs to joint and
several liability for such cleanup costs. In addition, the Company
will be required to incur costs for environmental remediation and closure and
postclosure under the federal Resource Conservation and Recovery
Act. Reserves for environmental contingencies have been established
in accordance with Eastman’s policies described in Note 1, "Significant
Accounting Policies". Because of expected sharing of costs, the
availability of legal defenses, and the Company’s preliminary assessment of
actions that may be required, management does not believe that the Company's
liability for these environmental matters, individually or in the aggregate,
will be material to the Company’s consolidated financial position, results of
operations or cash flows. The Company’s reserve for environmental
contingencies was $42 million and $47 million at December 31, 2007 and 2006,
respectively, representing the minimum or best estimate for remediation costs
and the best estimate accrued to date over the facilities' estimated useful
lives for asset retirement obligation costs. Estimated future
environmental expenditures for remediation costs range from the minimum or best
estimate of $13 million to the maximum of $17 million at December 31,
2007.
The
following table summarizes the activity in the Company's accrued obligations for
environmental matters for the years ended December 31, 2007 and
2006:
Accrued
Obligations for Environmental Matters
|
(Dollars
in millions)
|
December
31, 2007
|
December
31, 2006
|
||
|
Beginning
environmental liability
|
$
|
47
|
$
|
51
|
|
Liabilities
incurred in current period
|
1
|
7
|
||
|
Liabilities
settled in current period
|
(6)
|
(14)
|
||
|
Accretion
expense
|
2
|
2
|
||
|
Revisions
to estimated cash flow
|
(2)
|
1
|
||
|
Ending
environmental liability
|
$
|
42
|
$
|
47
|
For
additional information, refer to Note 26, "Reserve Rollforwards".
|
LEGAL
MATTERS
|
General
From time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
being handled and defended in the ordinary course of business. While
the Company is unable to predict the outcome of these matters, it does not
believe, based upon currently available facts, that the ultimate resolution of
any such pending matters, including the asbestos litigation (described below),
will have a material adverse effect on its overall financial condition, results
of operations or cash flows. However, adverse developments could
negatively impact earnings or cash flows in a particular future
period.
105
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Asbestos
Litigation
Over the
years, Eastman has been named as a defendant, along with numerous other
defendants, in lawsuits in various state courts in which plaintiffs have alleged
injury due to exposure to asbestos at Eastman’s manufacturing
sites. More recently, certain plaintiffs have claimed exposure to an
asbestos-containing plastic, which Eastman manufactured in limited amounts
between the mid-1960’s and the early 1970’s.
To date,
the Company has obtained dismissals or settlements of its asbestos-related
lawsuits with no material effect on its financial condition, results of
operations or cash flows, and over the past several years, has substantially
reduced its number of pending asbestos-related claims. The Company
has also obtained insurance coverage that applies to a portion of certain of the
Company’s defense costs and payments of settlements or judgments in connection
with asbestos-related lawsuits.
Based on
an ongoing evaluation, the Company believes that the resolution of its pending
asbestos claims will not have a material impact on the Company’s financial
condition, results of operations, or cash flows, although these matters could
result in the Company being subject to monetary damages, costs or expenses, and
charges against earnings in particular periods.
|
STOCKHOLDERS'
EQUITY
|
A
reconciliation of the changes in stockholders’ equity for 2005, 2006, and 2007
is provided below:
|
(Dollars
in millions)
|
Common
Stock
at
Par
Value
$
|
Paid-in
Capital
$
|
Retained
Earnings
$
|
Accumulated
Other Comprehensive
Income
(Loss)
$
|
Treasury
Stock
at
Cost
$
|
Total
Stockholders’
Equity
$
|
|
Balance
at January 1, 2005
|
1
|
210
|
1,509
|
(103)
|
(433)
|
1,184
|
|
Net
Earnings
|
--
|
--
|
557
|
--
|
--
|
557
|
|
Cash
Dividends(1)
|
--
|
--
|
(143)
|
--
|
--
|
(143)
|
|
Other
Comprehensive Income
|
--
|
--
|
--
|
(97)
|
--
|
(97)
|
|
Stock
Option Exercises and Other Items
(2)
|
--
|
110
|
--
|
--
|
1
|
111
|
|
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)
|
|
Stock
Option Exercises and Other Items (2)(3)
|
--
|
128
|
--
|
--
|
--
|
128
|
|
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
|
|
Stock
Option Exercises and Other Items (2)(3)
|
--
|
125
|
--
|
--
|
1
|
126
|
|
Stock
Repurchases
|
--
|
--
|
--
|
--
|
(382)
|
(382)
|
|
Balance
at December 31, 2007
|
1
|
573
|
2,349
|
(28)
|
(813)
|
2,082
|
|
|
(1) Includes
cash dividends paid and dividends declared, but unpaid. Also,
includes the redemption of the outstanding preferred stock purchase
rights.
|
|
|
(2) 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.
|
|
|
(3)
Includes the fair
value of equity share-based awards recognized under SFAS No.
123(R).
|
106
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 2007, 2006, and 2005.
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.
The
additions to paid-in capital for 2007, 2006, and 2005 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, 2007, a total of 1.3 million shares have been repurchased under this
authorization for a total amount of approximately $82 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 2007 and 106,771 shares for 2006 and
2005.
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 2007,
2006, and 2005, the weighted average number of common shares outstanding used to
compute basic earnings per share was 82.8 million, 82.1 million, and 80.7
million, respectively, and for diluted earnings per share was 83.9 million, 83.2
million, and 81.8 million, respectively, reflecting the effect of dilutive
share-based equity awards outstanding. Excluded from the 2007, 2006,
and 2005 calculation of diluted earnings per share were 1,026,284 stock options,
3,284,662 stock options, and 2,094,551 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)
|
2007
|
2006
|
2005
|
|||
|
Balance
at beginning of year
|
91,579,441
|
89,566,115
|
87,257,499
|
|||
|
Issued
for employee compensation and benefit plans
|
2,050,851
|
2,013,326
|
2,308,616
|
|||
|
Balance
at end of year
|
93,630,292
|
91,579,441
|
89,566,115
|
|||
|
(1)
Includes shares held in treasury.
|
107
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
|
(Dollars
in millions)
|
Cumulative
Translation Adjustment
$
|
Unfunded
Additional
Minimum
Pension
Liability
$
|
Unrecognized
Loss
and
Prior
Service
Cost,
net of
taxes
$
|
Unrealized
Gains
(Losses)
on
Cash Flow
Hedges
$
|
Unrealized
Losses
on Investments
$
|
Accumulated
Other
Comprehensive
Income
(Loss)
$
|
|
Balance
at December 31, 2005
|
61
|
(255)
|
--
|
(5)
|
(1)
|
(200)
|
|
Period
change
|
60
|
48
|
--
|
(1)
|
--
|
107
|
|
Pre-SFAS
No. 158 balance at December 31, 2006
|
121
|
(207)
|
--
|
(6)
|
(1)
|
(93)
|
|
Adjustments
to apply SFAS No. 158
|
--
|
207
|
(288)
|
--
|
--
|
(81)
|
|
Balance
at December 31, 2006
|
121
|
--
|
(288)
|
(6)
|
(1)
|
(174)
|
|
Period
change
|
36
|
--
|
106
|
3
|
1
|
146
|
|
Balance
at December 31, 2007
|
157
|
--
|
(182)
|
(3)
|
--
|
(28)
|
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 and includes all shares previously authorized, but unissued under any
previously authorized plan. 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.
108
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
2007
Director Long-Term Compensation Subplan
Eastman's
2007 Director Long-Term Compensation Subplan ("2007 Directors' Subplan"), a
component of the 2007 Omnibus Plan, was adopted by the Board of Directors on
August 2, 2007 and became effective on that date. The 2007 Directors'
Subplan remains in effect until terminated by the Board of Directors or the
earlier termination of the 2007 Omnibus Plan. The 2007 Directors'
Subplan provides for structured grants of nonqualified stock options and
restricted shares to non-employee members of the Board of
Directors. Shares that may be issued are subject to all the same
terms and conditions of the 2007 Omnibus Plan. The 2007 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 the directors' initial term of service and nonqualified stock
options and shares of restricted stock are granted each year on the date of the
annual meeting of stockholders. The 2007 Directors' Plan provides that options
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.
Adoption
of SFAS No. 123(R)
On
January 1, 2006, the Company adopted SFAS No. 123(R). SFAS No. 123(R)
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes
APB No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
"Statement of Cash Flows". Prior to adoption, the Company implemented
the disclosure-only requirements of SFAS No. 123 and continued to implement the
requirements of APB No. 25 for financial statement reporting. Under
the requirements of APB No. 25, the Company was required to recognize
compensation cost for share-based awards when the employee or non-employee
director paid an amount to acquire the awarded shares that was less than the
closing market price of the stock at the measurement date (typically the date of
grant). This requirement resulted in compensation expense recognition
and reporting in the financial statements for most share-based awards, except
stock options. Effective with adoption of SFAS No. 123(R),
compensation expense related to stock option awards are recognized in the
financial statements at their fair value.
The
Company adopted SFAS No. 123(R) using the modified prospective method that
requires compensation expense of all employee and non-employee director
share-based compensation awards to be recognized in the financial statements
based upon their grant date fair value over the requisite service or vesting
period: a) based upon the requirements of SFAS No. 123(R) for all new awards
granted after the effective date of implementation and b) based upon the
requirements of SFAS No. 123 for all awards granted prior to the effective date
of SFAS No. 123(R) that remain unvested on the effective date.
In
November 2005, the FASB also issued FSP No. 123(R) – 3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment
Awards." The FSP provides an elective alternative transition method
to the prescribed method in SFAS No. 123(R) for calculating the pool of excess
tax benefits available to absorb tax deficiencies recognized subsequent to the
adoption of SFAS No. 123(R). The Company determined it did not have
all the data necessary to compute the pool of excess tax benefits as described
in SFAS No 123(R) and has elected to follow the alternative method prescribed
under SFAS No. 123(R) – 3. Based upon the alternative method, the
Company does not have a pool of excess tax benefits at December 31, 2005 to
offset tax shortfalls and, consequently, will record them as current period
income tax expense.
The
Company is authorized by the Board of Directors under the 2007 Omnibus Plan and
2007 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.
109
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
For 2007,
2006, and 2005, total share-based compensation expense (before tax) of
approximately $26 million, $29 million, and $22 million, respectively, was
recognized in selling, general and administrative expense in the consolidated
statement of earnings for all share-based awards of which approximately $13
million, $17 million, and $5 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 2007 and 2006, approximately $3 million and $8
million, respectively, of stock option compensation expense were recognized due
to retirement eligibility preceding the requisite vesting period.
Stock
Option Awards
Option
awards are granted on an annual basis to non-employee directors and to employees
who meet certain eligibility requirements. 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 2007, 2006, and 2005 are provided in the table
below:
|
Assumptions
|
2007
|
2006
|
2005
|
|
Expected
volatility rate
|
20.80%
|
21.40%
|
22.90%
|
|
Expected
dividend yield
|
2.92%
|
3.24%
|
3.29%
|
|
Average
risk-free interest rate
|
4.24%
|
4.62%
|
4.48%
|
|
Expected
forfeiture rate
|
0.75%
|
0.75%
|
Actual
|
|
Expected
term years
|
4.40
|
4.40
|
5.00
|
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.
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.
110
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary
of the activity of the Company's stock option awards for 2007, 2006 and 2005 are
presented below:
|
2007
|
2006
|
2005
|
|||||||||
|
Options
|
Weighted-Average
Exercise Price
|
Options
|
Weighted-Average
Exercise Price
|
Options
|
Weighted-Average
Exercise Price
|
||||||
|
Outstanding
at beginning of year
|
5,866,900
|
$
|
52
|
6,616,800
|
$
|
48
|
8,155,100
|
$
|
47
|
||
|
Granted
|
643,000
|
65
|
1,481,300
|
61
|
1,275,700
|
54
|
|||||
|
Exercised
|
(2,010,100)
|
50
|
(2,001,800)
|
45
|
(2,342,600)
|
43
|
|||||
|
Cancelled,
forfeited or expired
|
(18,500)
|
59
|
(229,400)
|
56
|
(471,400)
|
64
|
|||||
|
Outstanding
at end of year
|
4,481,300
|
$
|
55
|
5,866,900
|
$
|
52
|
6,616,800
|
$
|
48
|
||
|
Options
exercisable at year-end
|
2,686,800
|
3,385,100
|
4,688,000
|
||||||||
|
Available
for grant at end of year
|
3,379,200
|
1,244,900
|
2,954,500
|
||||||||
The
following table provides the remaining contractual term and weighted average
exercise prices of stock options outstanding and exercisable at December 31,
2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||
|
Range
of Exercise Prices
|
Number Outstanding
at 12/31/07
|
Weighted-Average
Remaining Contractual Life (Years)
|
Weighted-Average
Exercise Price
|
Number
Exercisable at 12/31/07
|
Weighted-Average
Exercise Price
|
|||||
|
$30-45
|
380,900
|
4.8
|
$
|
37
|
380,600
|
$
|
37
|
|||
|
$46-52
|
897,800
|
4.6
|
48
|
895,600
|
48
|
|||||
|
$53-59
|
1,274,600
|
7.5
|
54
|
764,600
|
54
|
|||||
|
$60-64
|
1,351,700
|
8.6
|
61
|
507,600
|
61
|
|||||
|
$65-66
|
576,300
|
8.4
|
66
|
138,400
|
66
|
|||||
|
4,481,300
|
7.1
|
$
|
55
|
2,686,800
|
$
|
52
|
||||
The range
of exercise prices of options outstanding at December 31, 2007 is approximately
$30 to $66 per share. The aggregate intrinsic value of total
options outstanding and total options exercisable at December 31, 2007 is $29.8
million and $26.3 million, respectively. Intrinsic value is the
amount by which the closing market price of the stock at December 31, 2007
exceeds the exercise price of the option grants.
The
weighted average remaining contractual life of all exercisable options is 6.0
years.
111
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
weighted average fair value of options granted during 2007, 2006, and 2005 were
$11.12, $10.57, and $10.26, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2007, 2006, and
2005, was $30 million, $27 million, and $33 million,
respectively. Cash proceeds received by the Company from option
exercises and the related tax benefit totals $91 million and $10 million,
respectively for 2007, $83 million and $10 million, respectively, for 2006, and
$98 million and $13 million, respectively, for 2005. The total fair
value of shares vested during the years ended December 31, 2007, 2006, and 2005
was $13 million, $9 million, and $9 million, respectively.
A summary
of the status of the Company's nonvested options as of December 31, 2007 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, 2007
|
2,481,800
|
$
|
10.39
|
|
Granted
|
643,000
|
|
11.12
|
|
Vested
|
(1,320,900)
|
|
10.18
|
|
Forfeited
|
(9,400)
|
|
10.48
|
|
Nonvested
Options at December 31, 2007
|
1,794,500
|
$
|
10.87
|
For
options unvested at December 31, 2007, approximately $9 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,
2007, 2006, and 2005 is approximately $13 million, $12 million, and $17 million,
respectively. The unrecognized compensation expense before tax for
these same awards at December 31, 2007 is $38 million and will be recognized
over a period of approximately three years.
|
DIVESTITURES
|
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 final purchase price is subject to change based
upon working capital and other adjustments. The Company will continue
to produce certain intermediate products for the buyer under supply agreements
with terms up to one year. 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 intermediate
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. Changes in
estimates, if any, will be reflected in future periods.
112
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
November 30, 2006, the Company sold its PE and EpoleneTM polymer businesses and
related assets located at the Longview, Texas site and the Company's ethylene
pipeline in the Coatings, Adhesives, Specialty Polymers and Inks ("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 and an earn-out provision based on biodiesel sales
over the next three years. 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 a $7 million in other operating loss related to this
transaction.
113
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
ASSET
IMPAIRMENTS AND RESTRUCTURING CHARGES,
NET
|
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. Impairments and restructuring charges totaled $33
million during 2005, consisting of non-cash asset impairments of $12 million and
restructuring charges of $21 million.
The
following table summarizes the 2007, 2006, and 2005 charges by
segment:
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|
CASPI:
|
|||
|
Fixed
asset impairments
|
$--
|
$6
|
$--
|
|
Severance
charges
|
(1)
|
4
|
--
|
|
Site
closure and restructuring costs
|
--
|
3
|
4
|
|
Fibers:
|
|||
|
Severance
charges
|
--
|
2
|
--
|
|
PCI:
|
|||
|
Fixed
asset impairments
|
--
|
10
|
8
|
|
Severance
charges
|
(1)
|
6
|
3
|
|
Site
closure and restructuring costs
|
--
|
4
|
--
|
|
Performance
Polymers:
|
|||
|
Fixed
asset impairments
|
118
|
30
|
--
|
|
Severance
charges
|
(5)
|
16
|
--
|
|
Specialty
Plastics (“SP”):
|
|||
|
Fixed
asset impairments
|
2
|
12
|
--
|
|
Severance
charges
|
(2)
|
4
|
--
|
|
Site
closure and restructuring costs
|
1
|
--
|
--
|
|
Other:
|
|||
|
Fixed
asset impairments
|
--
|
3
|
1
|
|
Intangible
asset impairments
|
2
|
1
|
3
|
|
Site
closure and restructuring costs
|
(2)
|
--
|
14
|
|
Total
Eastman Chemical Company
|
|||
|
Fixed
asset impairments
|
$
120
|
$ 61
|
$ 9
|
|
Intangible
asset impairments
|
2
|
1
|
3
|
|
Severance
charges
|
(9)
|
32
|
3
|
|
Site
closure and restructuring costs
|
(1)
|
7
|
18
|
|
Total
Eastman Chemical Company
|
$
112
|
$
101
|
$ 33
|
114
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
2007
In the
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 the third quarter
2007.
In the
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
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 shut down 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 the 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 the
fourth quarter 2006, the Company recorded asset impairments and restructuring
charges of $78 million, consisting of non-cash impairments of $42 million and
restructuring charges of $36 million; and other operating income, net of $68
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 the
third quarter 2006, asset impairments and restructuring charges totaled $13
million. During the third quarter 2006, the Company classified the
Batesville, Arkansas manufacturing facility as an asset group held for sale and
recorded a related $11 million impairment charge to reduce the recorded book
value of the assets to the estimated sales proceeds.
In the
second quarter 2006, asset impairments and restructuring charges totaled $3
million, relating primarily to previously closed manufacturing
facilities.
In the
first quarter 2006, asset impairments and restructuring charges totaled $7
million, relating primarily to the divestiture of a previously closed
manufacturing facility.
2005
During
2005, the Company recorded $33 million in restructuring charges. These charges
consist of approximately $8 million of fixed asset impairments related to the
Company's PCI manufacturing facilities outside the United States, $14 million in
restructuring charges related to the shutdown of Cendian, $4 million of fixed
and intangible asset impairments related to the Company's other category, $3
million in severance charges related to the separation of approximately 90
employees at the Company's Batesville, Arkansas manufacturing facility, and $4
million in site closure costs related to the closures of certain manufacturing
facilities.
115
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, 2005
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
December
31, 2005
|
|||||
|
Noncash
charges
|
$
|
--
|
$
|
12
|
$
|
(12)
|
$
|
--
|
$
|
--
|
|
Severance
costs
|
26
|
3
|
--
|
(26)
|
3
|
|||||
|
Site
closure and restructuring costs
|
9
|
18
|
(1)
|
(19)
|
7
|
|||||
|
Total
|
$
|
35
|
$
|
33
|
$
|
(13)
|
$
|
(45)
|
$
|
10
|
|
Balance
at
January
1, 2006
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
December
31, 2006
|
||||||
|
Noncash
charges
|
$
|
--
|
$
|
62
|
$
|
(62)
|
$
|
--
|
$
|
--
|
|
Severance
costs
|
3
|
32
|
--
|
(1)
|
34
|
|||||
|
Site
closure and restructuring costs
|
7
|
7
|
--
|
--
|
14
|
|||||
|
Total
|
$
|
10
|
$
|
101
|
$
|
(62)
|
$
|
(1)
|
$
|
48
|
|
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
|
A
majority of all severance and site closure costs are expected to be applied to
the reserves within one year.
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. During 2005, the Company accrued for approximately 90
employee separations. As of the end of 2005, substantially all
separations accrued for were completed.
|
OTHER
OPERATING INCOME, NET
|
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Other
operating income, net
|
$
|
--
|
$
|
(68)
|
$
|
(2)
|
Other
operating income, net for 2006 reflects a gain of $75 million on the sale of the
Company's polyethylene ("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".
116
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other
operating income, net for 2005 primarily reflects a gain associated with a
change in estimates for contingencies related to the 2004 divestiture of certain
businesses and product lines within the CASPI segment.
|
OTHER
(INCOME) CHARGES, NET
|
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Other
income
|
$
|
(33)
|
$
|
(25)
|
$
|
(8)
|
|
Other
charges
|
5
|
8
|
12
|
|||
|
Other
(income) charges, net
|
$
|
(28)
|
$
|
(17)
|
$
|
4
|
Included
in other income is the Company’s portion of net earnings from its equity
investments (excluding Genencor) gains on the sale of certain technology
business venture investments, royalty income, net gains on foreign exchange
transactions and other non-operating income related to HDC. Included
in other charges are net losses on foreign exchange transactions, the Company’s
portion of losses from its equity investments (excluding Genencor) write-downs
to fair value of certain technology business venture investments due to other
than temporary declines in value and fees on securitized
receivables.
Other
income for 2007 included $11 million of income from investments and $7 million
in net gains on foreign exchange transactions. Other income for 2007
and 2006 included gains of $4 million and $12 million, respectively, related to
a favorable award from the U.S. Department of the Army regarding a request for
reimbursement for post-employment benefits being provided to retirees of HDC, a
wholly owned subsidiary. These gains reflected a portion of the unrecognized
gain resulting from the award that will be amortized into earnings over future
periods. For additional information, see Note 11,
"Retirement Plans".
|
INCOME
TAXES
|
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)
|
2007
|
2006
|
2005
|
|||
|
Earnings
(loss) from continuing operations before income taxes
|
||||||
|
United
States
|
$
|
489
|
$
|
601
|
$
|
697
|
|
Outside
the United States
|
(19)
|
(7)
|
66
|
|||
|
Total
|
$
|
470
|
$
|
594
|
$
|
763
|
|
Provision
(benefit) for income taxes on earnings from continuing
operations
|
||||||
|
United
States
|
||||||
|
Current
|
$
|
173
|
$
|
135
|
$
|
80
|
|
Deferred
|
(24)
|
22
|
112
|
|||
|
Outside
the United States
|
||||||
|
Current
|
(30)
|
6
|
22
|
|||
|
Deferred
|
21
|
(14)
|
(7)
|
|||
|
State
and other
|
||||||
|
Current
|
10
|
17
|
6
|
|||
|
Deferred
|
(1)
|
1
|
9
|
|||
|
Total
|
$
|
149
|
$
|
167
|
$
|
222
|
117
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)
|
2007
|
2006
|
2005
|
|||
|
Unrecognized
loss and prior service cost
|
$
|
56
|
$
|
(9)
|
$
|
4
|
|
Cumulative
translation adjustment
|
5
|
2
|
--
|
|||
|
Unrealized
gains (losses) on cash flow hedges
|
3
|
(1)
|
(1)
|
|||
|
Total
|
$
|
64
|
$
|
(8)
|
$
|
3
|
Total
income tax expense included in the consolidated financial statements was
composed of the following:
|
2007
|
2006
|
2005
|
||||
|
Continuing
operations
|
$
|
149
|
$
|
167
|
$
|
222
|
|
Discontinued
operations
|
(3)
|
(1)
|
4
|
|||
|
Other
comprehensive income
|
64
|
(8)
|
3
|
|||
|
Total
|
$
|
210
|
$
|
158
|
$
|
229
|
Differences
between the provision (benefit) 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)
|
2007
|
2006
|
2005
|
|||
|
Amount
computed using the statutory rate
|
$
|
165
|
$
|
208
|
$
|
267
|
|
State
income taxes, net
|
8
|
12
|
5
|
|||
|
Foreign
rate variance
|
(3)
|
(2)
|
--
|
|||
|
Extraterritorial
income exclusion
|
--
|
(9)
|
(12)
|
|||
|
Domestic
manufacturing deduction
|
(11)
|
(4)
|
(5)
|
|||
|
ESOP
dividend payout
|
(1)
|
(2)
|
(2)
|
|||
|
Capital
loss benefits
|
(3)
|
(25)
|
(13)
|
|||
|
Change
in reserves for tax contingencies
|
(2)
|
(3)
|
(14)
|
|||
|
Net
operating loss benefits
|
--
|
(11)
|
--
|
|||
|
Donation
of intangibles
|
--
|
--
|
(12)
|
|||
|
Other
|
(4)
|
3
|
8
|
|||
|
Provision
(benefit) for income taxes
|
$
|
149
|
$
|
167
|
$
|
222
|
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.
The 2005
effective tax rate from continuing operations was impacted by a $11 million tax
charge resulting from the repatriation of $321 million of foreign earnings and
capital pursuant to provisions of the American Jobs Creation Act of 2004 ("Jobs
Act"). The Jobs Act created a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85
percent dividends received deduction for certain dividends from controlled
foreign corporations.
118
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
significant components of deferred tax assets and liabilities
follow:
|
December
31,
|
||||
|
(Dollars
in millions)
|
2007
|
2006
|
||
|
Deferred
tax assets
|
||||
|
Post-employment
obligations
|
$
|
343
|
$
|
416
|
|
Net
operating loss carry forwards
|
130
|
115
|
||
|
Capital
loss carry forwards
|
42
|
47
|
||
|
Other
|
42
|
53
|
||
|
Total
deferred tax assets
|
557
|
631
|
||
|
Less
valuation allowance
|
(146)
|
(130)
|
||
|
Deferred
tax assets less valuation allowance
|
$
|
411
|
$
|
501
|
|
Deferred
tax liabilities
|
||||
|
Depreciation
|
$
|
(629)
|
$
|
(639)
|
|
Inventory
reserves
|
(42)
|
(50)
|
||
|
Total
deferred tax liabilities
|
$
|
(671)
|
$
|
(689)
|
|
Net
deferred tax liabilities
|
$
|
(260)
|
$
|
(188)
|
|
As
recorded in the Consolidated Statements of Financial
Position:
|
||||
|
Other
current assets
|
$
|
5
|
$
|
11
|
|
Other
noncurrent assets
|
45
|
83
|
||
|
Payables
and other current liabilities
|
(10)
|
(13)
|
||
|
Deferred
income tax liabilities
|
(300)
|
(269)
|
||
|
Net
deferred tax liabilities
|
$
|
(260)
|
$
|
(188)
|
Unremitted
earnings of subsidiaries outside the United States, considered to be reinvested
indefinitely, totaled $284 million at December 31, 2007. 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 $92 million at December 31, 2007, has
been provided against the deferred tax asset resulting from these operating loss
carryforwards.
At
December 31, 2007, foreign net operating loss carryforwards totaled $472
million. Of this total, $330 million will expire in 3 to 15 years; and $142
million will never expire.
119
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)
|
2007
|
2006
|
||
|
Miscellaneous
receivables
|
$
|
20
|
$
|
--
|
|
Payables
and other current liabilities
|
6
|
25
|
||
|
Other
long-term liabilities
|
24
|
20
|
||
|
Total
income taxes payable
|
$
|
30
|
$
|
45
|
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:
|
(Dollars
in millions)
|
||
|
Balance
at January 1, 2007
|
$
|
28
|
|
Additions
based on tax positions related to current year
|
1
|
|
|
Reductions
for tax positions of prior years
|
(3)
|
|
|
Settlements
|
--
|
|
|
Lapse
of statute of limitations
|
(2)
|
|
|
Balance
at December 31, 2007
|
$
|
24
|
As of
December 31, 2007, $24 million 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, 2007 the Company
had accrued a liability of approximately $3 million for interest, net of tax and
had no accrual for tax penalties. 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 $2 million of unrecognized tax benefits as
a result of the expiration of relevant statutes of limitations.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Cash
paid for interest and income taxes is as follows:
|
||||||
|
Interest,
net of amounts capitalized
|
$
|
108
|
$
|
105
|
$
|
126
|
|
Income
taxes paid
|
173
|
157
|
138
|
Derivative
financial instruments and related gains and losses are included in cash flows
from operating activities.
120
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Non-cash
portion of earnings from the Company’s equity investments was $2 million for
2005. There were no non-cash portions of earnings from the Company's
equity investments in 2007 and 2006.
|
SEGMENT
INFORMATION
|
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.
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.
121
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Sales
by Segment
|
||||||
|
CASPI
|
$
|
1,451
|
$
|
1,421
|
$
|
1,299
|
|
Fibers
|
999
|
910
|
869
|
|||
|
PCI
|
2,095
|
1,659
|
1,560
|
|||
|
Performance
Polymers
|
1,413
|
1,971
|
1,987
|
|||
|
SP
|
872
|
818
|
718
|
|||
|
Total
Sales by Segment
|
6,830
|
6,779
|
6,433
|
|||
|
Other
|
--
|
--
|
27
|
|||
|
Total
Sales
|
$
|
6,830
|
$
|
6,779
|
$
|
6,460
|
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Operating
Earnings (Loss)
|
||||||
|
CASPI
(1)
|
$
|
235
|
$
|
229
|
$
|
228
|
|
Fibers
(2)
|
238
|
226
|
216
|
|||
|
PCI
(3)
|
220
|
132
|
143
|
|||
|
Performance
Polymers (4)
|
(207)
|
68
|
159
|
|||
|
SP
(5)
|
65
|
46
|
64
|
|||
|
Total
Operating Earnings by Segment
|
551
|
701
|
810
|
|||
|
Other
(6)
|
(47)
|
(47)
|
(70)
|
|||
|
Total
Operating Earnings
|
$
|
504
|
$
|
654
|
$
|
740
|
|
(1)
|
CASPI
includes $(1) million, $13 million, and $4 million in 2007, 2006, and
2005, respectively, in asset impairments and restructuring charges (gains)
for previously closed manufacturing facilities and severance costs of a
voluntary reduction in force.
|
|
(2)
|
Fibers
includes $2 million in 2006 in asset impairments and restructuring charges
related to severance costs.
|
|
(3)
|
PCI
includes $(1) million, $20 million, and $11 million in 2007, 2006, and
2005, 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, $19
million and $2 million in 2007 and 2006, respectively, in accelerated
depreciation related to crackers at the Company's Longview, Texas
facility, and other operating charges of $7 million related to the
divestiture of the Batesville, Arkansas
facility.
|
|
(4)
|
Performance
Polymers includes $113 million and $46 million in 2007 and 2006,
respectively, in asset impairments and restructuring charges related to
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, $29 million
and $7 million in 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, and $1 million in both 2007 and 2006 of accelerated
depreciation related to assets in Columbia, South
Carolina.
|
|
(6)
|
Other
includes $4 million and $18 million in 2006 and 2005, respectively
primarily for the shutdown of Cendian's business
activities.
|
122
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Assets
by Segment (1)
|
||||||
|
CASPI
|
$
|
1,114
|
$
|
1,078
|
$
|
1,009
|
|
Fibers
|
692
|
651
|
678
|
|||
|
PCI
|
1,062
|
926
|
872
|
|||
|
Performance
Polymers (2)
|
727
|
1,480
|
1,575
|
|||
|
SP
|
622
|
599
|
574
|
|||
|
Total
Assets by Segment
|
4,217
|
4,734
|
4,708
|
|||
|
Corporate
Assets
|
1,417
|
1,398
|
1,029
|
|||
|
Assets
Held for Sale (2)(3)
|
375
|
--
|
--
|
|||
|
Total
Assets
|
$
|
6,009
|
$
|
6,132
|
$
|
5,737
|
|
(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)
|
2007
|
2006
|
2005
|
|||
|
Depreciation
Expense by Segment (1)
|
||||||
|
CASPI
|
$
|
53
|
$
|
54
|
$
|
55
|
|
Fibers
|
57
|
41
|
35
|
|||
|
PCI
|
70
|
59
|
76
|
|||
|
Performance
Polymers
|
81
|
93
|
74
|
|||
|
SP
|
50
|
47
|
47
|
|||
|
Total
Depreciation Expense by Segment
|
311
|
294
|
287
|
|||
|
Other
|
2
|
--
|
--
|
|||
|
Total
Depreciation Expense
|
$
|
313
|
$
|
294
|
$
|
287
|
|
(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 2007, accelerated depreciation costs resulting
from these decisions 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.
|
123
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Capital
Expenditures by Segment
|
||||||
|
CASPI
|
$
|
73
|
$
|
60
|
$
|
46
|
|
Fibers
|
87
|
44
|
28
|
|||
|
PCI
|
104
|
66
|
63
|
|||
|
Performance
Polymers
|
126
|
125
|
137
|
|||
|
SP
|
111
|
94
|
67
|
|||
|
Total
Capital Expenditures by Segment
|
501
|
389
|
341
|
|||
|
Other
|
17
|
--
|
2
|
|||
|
Total
Capital Expenditures
|
$
|
518
|
$
|
389
|
$
|
343
|
|
(Dollars
in millions)
|
2007
|
2006
|
2005
|
|||
|
Geographic
Information
|
||||||
|
Sales
|
||||||
|
United
States
|
$
|
3,959
|
$
|
4,039
|
$
|
3,886
|
|
All
foreign countries
|
2,871
|
2,740
|
2,574
|
|||
|
Total
|
$
|
6,830
|
$
|
6,779
|
$
|
6,460
|
|
Long-Lived
Assets, Net
|
||||||
|
United
States
|
$
|
2,564
|
$
|
2,407
|
$
|
2,508
|
|
All
foreign countries
|
518
|
662
|
654
|
|||
|
Total
|
$
|
3,082
|
$
|
3,069
|
$
|
3,162
|
124
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(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
|
$
|
(0.20)
|
$
|
0.03
|
$
|
(0.06)
|
$
|
(0.04)
|
|
Diluted
|
$
|
(0.20)
|
$
|
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.
|
125
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
(Dollars
in millions, except per share amounts)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter(2)
|
||||
|
2006
|
||||||||
|
Sales
|
$
|
1,655
|
$
|
1,751
|
$
|
1,779
|
$
|
1,594
|
|
Gross
profit
|
329
|
341
|
310
|
285
|
||||
|
Asset
impairment and restructuring charges
|
7
|
3
|
13
|
78
|
||||
|
Earnings
from continuing operations
|
110
|
116
|
94
|
107
|
||||
|
Earnings
(loss) from discontinued operations, net of tax
|
(5)
|
(2)
|
1
|
(12)
|
||||
|
Net
earnings
|
105
|
114
|
95
|
95
|
||||
|
Earnings
from continuing operations per share (1)
|
||||||||
|
Basic
|
$
|
1.34
|
$
|
1.41
|
$
|
1.15
|
$
|
1.28
|
|
Diluted
|
$
|
1.33
|
$
|
1.39
|
$
|
1.14
|
$
|
1.26
|
|
Earnings
(loss) from discontinued operations per share (1)
|
||||||||
|
Basic
|
$
|
(0.06)
|
$
|
(0.02)
|
$
|
0.01
|
$
|
(0.14)
|
|
Diluted
|
$
|
(0.06)
|
$
|
(0.02)
|
$
|
0.01
|
$
|
(0.14)
|
|
Net
earnings per share (1)
|
||||||||
|
Basic
|
$
|
1.28
|
$
|
1.39
|
$
|
1.16
|
$
|
1.14
|
|
Diluted
|
$
|
1.27
|
$
|
1.37
|
$
|
1.15
|
$
|
1.12
|
|
|
(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 2006, the Company completed the sale of its Batesville,
Arkansas manufacturing site and related businesses and its PE and
EpoleneTM
polymer businesses, related assets and ethylene pipeline located at
Longview, Texas.
|
126
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"), which establishes principles and
requirements for the acquirer in a business combination, including recognition
and measurement in the financial statements of the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in the
acquiree. SFAS 141R also provides guidance for the recognition and
measurement of goodwill acquired in the business combination and for disclosure
to enable financial statement users to evaluate the nature and financial effects
of the business combination. This Statement replaces SFAS No. 141,
"Business Combinations" ("SFAS No. 141"). While SFAS No.
141R retains the fundamental requirements in SFAS No. 141 that the
acquisition method of accounting be used for all business combinations and
for an acquirer to be identified for each business combination, it
also improves the comparability of the information about business
combinations provided in financial reports. In addition, SFAS No.
141R defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control. This Statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.
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 is currently evaluating the effect SFAS No. 160
will have on its consolidated financial position, liquidity, or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," ("SFAS
No. 157") which addresses the measurement of fair value by companies when they
are required to use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles ("GAAP"). SFAS No. 157
provides a common definition of fair value to be used throughout GAAP which is
intended to make the measurement of fair value more consistent and comparable
and improve disclosures about those measures. SFAS No. 157 will be
effective for an entity's financial statements issued for fiscal years beginning
after November 15, 2007. However, on December 14, 2007, the
FASB issued proposed FASB Staff Position FAS 157-2 ("FSP FAS
157-2") which would delay the effective date of SFAS No. 157 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). This FSP partially defers the effective date
of SFAS No. 157 to fiscal years beginning after November 15,
2008. Effective for first quarter 2008, the Company plans to
adopt SFAS No. 157 except as it applies to those nonfinancial assets and
nonfinancial liabilities as noted in FSP FAS 157-2. The Company is
currently evaluating the effect SFAS No. 157 will have on its consolidated
financial position, liquidity, or results of operations.
127
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115," ("SFAS No. 159") SFAS No. 159 permits companies
to choose to measure many financial instruments and certain other items at fair
value at specified election dates. Upon adoption, an entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. Most of
the provisions apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," applies to all entities with
available for sale and trading securities. SFAS No. 159 will be
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Company is currently evaluating the effect
SFAS No. 159 will have on its consolidated financial position, liquidity, or
results of operations.
128
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
RESERVE
ROLLFORWARDS
|
Valuation
and Qualifying Accounts
|
Additions
|
||||||||||
|
(Dollars
in millions)
|
Balance
at
January
1, 2005
|
Charged
to Cost and Expense
|
Charged
to Other Accounts
|
Deductions
|
Balance
at
December
31, 2005
|
|||||
|
Reserve
for:
|
||||||||||
|
Doubtful
accounts and returns
|
$
|
15
|
$
|
9
|
$
|
--
|
$
|
4
|
$
|
20
|
|
LIFO
Inventory
|
355
|
92
|
--
|
--
|
447
|
|||||
|
Environmental
contingencies
|
56
|
4
|
--
|
9
|
51
|
|||||
|
Deferred
tax valuation allowance
|
221
|
(21)
|
(3)
|
--
|
197
|
|||||
|
$
|
647
|
$
|
84
|
$
|
(3)
|
$
|
13
|
$
|
715
|
|
|
Balance
at
January
1, 2006
|
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
|
|
129
None.
|
CONTROLS
AND PROCEDURES
|
Disclosure Controls and
Procedures
Eastman
Chemical Company ("Eastman" or "The Company") maintains a set of disclosure
controls and procedures designed to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported, within the time periods specified in Securities and Exchange
Commission rules and forms. An evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company’s disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded
that the Company's disclosure controls and procedures are effective as of
December 31, 2007.
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, 2007 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, 2007.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007 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 2007 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
|
OTHER
INFORMATION
|
None
130
PART III
|
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 2008 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”.
ITEM
11. EXECUTIVE COMPENSATION
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 2008 Proxy Statement, is incorporated by
reference herein in response to this Item.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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 2008 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 2007 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.
131
Summary
Equity Compensation Plan Information Table
The
following table sets forth certain information as of December 31, 2007 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
|
4,481,300
|
(1)
|
$55
|
3,379,200
|
(2)
|
||
|
Equity
compensation plans not approved by stockholders
|
--
|
--
|
--
|
||||
|
TOTAL
|
4,481,300
|
$55
|
3,379,200
|
|
|
(1)
Represents shares of common stock issuable upon exercise of 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 2007
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 2008 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
2008 Proxy Statement is incorporated by reference herein in response to
this Item.
132
PART
IV
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
Page
|
||||
|
(a)
|
1.
|
Consolidated
Financial Statements:
|
||
|
77
|
||||
|
78
|
||||
|
80
|
||||
|
81
|
||||
|
82
|
||||
|
83
|
||||
|
2.
|
136
|
|||
|
(b)
|
||||
133
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Eastman
Chemical Company
|
||
|
By:
|
\s\ J. Brian Ferguson | |
|
J.
Brian Ferguson
|
||
|
Chairman
of the Board and Chief Executive Officer
|
||
|
Date:
|
February
28, 2008
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
PRINCIPAL
EXECUTIVE OFFICER:
|
||||
| \s\ J. Brian Ferguson |
Chairman
of the Board of Directors
|
February
28, 2008
|
||
|
J.
Brian Ferguson
|
and
Chief Executive Officer
|
|||
|
PRINCIPAL
FINANCIAL OFFICER:
|
||||
| \s\ Richard A. Lorraine |
Senior
Vice President and
|
February
28, 2008
|
||
|
Richard
A. Lorraine
|
Chief
Financial Officer
|
|||
|
PRINCIPAL
ACCOUNTING OFFICER:
|
||||
| \s\ Curtis E. Espeland |
Vice
President, Finance and
|
February
28, 2008
|
||
|
Curtis
E. Espeland
|
Chief
Accounting Officer
|
|||
134
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
DIRECTORS:
|
||||
| /s/ Gary E. Anderon |
Director
|
February
28, 2008
|
||
|
Gary
E. Anderson
|
||||
| /s/ Michael P. Connors |
Director
|
February
28, 2008
|
||
|
Michael
P. Connors
|
||||
| /s/ Stephen R. Demeritt |
Director
|
February
28, 2008
|
||
|
Stephen
R. Demeritt
|
||||
| /s/ Donald W. Griffin |
Director
|
February
28, 2008
|
||
|
Donald
W. Griffin
|
||||
| /s/ Robert M. Hernandez |
Director
|
February
28, 2008
|
||
|
Robert
M. Hernandez
|
||||
| /s/ Renee J. Hornbaker |
Director
|
February
28, 2008
|
||
|
Renẻe
J. Hornbaker
|
||||
| /s/ Lewis M. Kling |
Director
|
February
28, 2008
|
||
|
Lewis
M. Kling
|
||||
| /s/ Howard L. Lance |
Director
|
February
28, 2008
|
||
|
Howard
L. Lance
|
||||
| /s/ Thomas H. McLain |
Director
|
February
28, 2008
|
||
|
Thomas
H. McLain
|
||||
| /s/ David W. Raisbeck |
Director
|
February
28, 2008
|
||
|
David
W. Raisbeck
|
||||
| /s/ Peter M. Wood |
Director
|
February
28, 2008
|
||
135
|
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), between the Company and Bank One, N.A., as agent.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish a copy of such
agreement to the Commission upon request
|
|||
|
4.10
|
Amended
and Restated Credit Agreement, dated as of April 3, 2006 (the "Credit
Agreement") among Eastman Chemical Company, the Lenders named therein, and
Citigroup Global Markets , Inc. and J. P. Morgan Securities Inc.,
as joint lead arrangers (incorporated herein by reference to
Exhibit 4.11 to Eastman Chemical Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006)
|
136
|
EXHIBIT
INDEX
|
Sequential
|
|||
|
Exhibit
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
4.11
|
Form
of 3 ¼% Notes due June 16, 2008 (incorporated herein by reference to
Exhibit 4.13 to Eastman Chemical Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003)
|
|||
|
4.12
|
Form
of 6.30% Notes due 2018 (incorporated herein by reference to Exhibit 4.14
to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003)
|
|||
|
10.01*
|
1996
Non-Employee Director Stock Option Plan (incorporated herein by reference
to Exhibit 10.02 to Eastman Chemical Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996)
|
|||
|
10.02*
|
Employment
Agreement between Eastman Chemical Company and James P. Rogers
(incorporated herein by reference to Exhibit 10.02 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999)
|
|||
|
10.03*
|
Eastman
Excess Retirement Income Plan, amended and restated effective January 1,
2008 (incorporated herein by reference to Exhibit 10.06 to the September
30, 2007 10-Q)
|
|||
|
10.04*
|
Form
of Executive Severance Agreements (incorporated herein by reference to
Exhibit 99.01 to Eastman Chemical Company's Current Report on Form 8-K
dated December 5, 2005)
|
|||
|
10.05*
|
Eastman
Unfunded Retirement Income Plan, amended and restated effective January 1,
2008 (incorporated herein by reference to Exhibit 10.07 to the September
30, 2007 10-Q)
|
|||
|
10.06*
|
2002
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.02 to the September 30, 2007
10-Q)
|
|||
|
10.07*
|
2002
Director Long-Term Compensation Plan, as amended (incorporated herein by
reference to Appendix A to Eastman Chemical Company’s 2002 Annual Meeting
Proxy Statement)
|
|||
|
10.08*
|
Amended
and Restated Eastman Chemical Company Benefit Security Trust dated January
2, 2002 (incorporated herein by reference to Exhibit 10.04 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, (the "September 30, 2002 10-Q")
|
|||
|
10.09*
|
Amended
and Restated Warrant to Purchase Shares of Common Stock of Eastman
Chemical Company, dated January 2, 2002 (incorporated herein by reference
to Exhibit 10.02 to the September 30, 2002 10-Q)
|
|||
|
10.10*
|
Amended
and Restated Registration Rights Agreement, dated January 2, 2002
(incorporated herein by reference to Exhibit 10.03 to the September 30,
2002 10-Q)
|
|||
|
10.11*
|
Notice
of Restricted Stock Granted October 7, 2002 (incorporated herein by
reference to Exhibit 10.01 to the September 30, 2002 10-Q)
|
137
|
EXHIBIT
INDEX
|
Sequential
|
|||
|
Exhibit
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
10.12*
|
Amended
and Restated Eastman Executive Deferred Compensation Plan (incorporated
herein by referenced to Exhibit 10.04 to the September 30, 2007
10-Q)
|
|||
|
10.13*
|
Amended
Directors' Deferred Compensation Plan (incorporated herein by reference to
Exhibit 10.05 to the September 30, 2007 10-Q)
|
|||
|
10.14*
|
Eastman
Unit Performance Plan as amended and restated January 1, 2004
(incorporated herein by reference to Exhibit 10.09 to Eastman Chemical
Company's Annual Report on Form 10-K for the year ended December 31, 2003
(the "2003 10-K"))
|
|||
|
10.15*
|
Form
of Indemnification Agreements with Directors and Executive Officers
(incorporated herein by reference to Exhibit 10.25 to the 2003
10-K)
|
|||
|
10.16*
|
Form
of Performance Share Awards to Executive Officers (2005 – 2007 Performance
Period) (incorporated herein by reference to Exhibit 10.02 to the
September 30, 2004 10-Q)
|
|||
|
10.17*
|
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)
|
|||
|
10.18*
|
Unit
Performance Plan ("UPP") performance measures and goals, specific target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool if the
performance goals are attained, and the eligibility criteria for employee
participation in the UPP, for the 2007 performance year (incorporated
herein by reference to Eastman Chemical Company’s Current Report on Form
8-K dated December 7, 2006)
|
|||
|
10.19*
|
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")
|
|||
|
10.20*
|
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)
|
|||
|
10.21*
|
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)
|
|||
|
10.22*
|
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 )
|
|||
|
10.23*
|
Form
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 )
|
|||
|
10.24*
|
Form
of Award Notice for Stock Option Granted to Mark J. Costa, Senior
Vice-President, Corporate Strategy and Marketing (incorporated herein by
reference to Exhibit 10.02 to the September 30, 2006 10-Q)
|
138
|
EXHIBIT
INDEX
|
Sequential
|
|||
|
Exhibit
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
10.25*
|
Form
of Performance Share Awards to Executive Officers (2007 – 2009 Performance
Period) (incorporated herein by reference to Exhibit 10.03 to the
September 30, 2006 10-Q)
|
|||
|
10.26*
|
Form
of Performance Share Award to Mark J. Costa, Senior Vice-President,
Corporate Strategy and Marketing (2007-2009 Performance Period)
(incorporated herein by reference to Exhibit 10.04 to the September 30,
2006 10-Q)
|
|||
|
10.27*
|
Unit
Performance Plan ("UPP") performance measures and goals, specific target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool if the
performance goals are attained, and the eligibility criteria for employee
participation in the UPP, for the 2007 performance year (incorporated
herein by reference to Eastman Chemical Company’s Current Report on Form
8-K dated December 7, 2006)
|
|||
|
10.28*
|
1997
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.03 to the September 30, 2007
10-Q)
|
|||
|
10.29*
|
2007
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.01 to the September 30, 2007
10-Q)
|
|||
|
10.30*
|
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)
|
|||
|
10.31*
|
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)
|
|||
|
10.32*
|
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)
|
|||
|
12.01
|
140
|
|||
|
21.01
|
141-143
|
|||
|
23.01
|
144
|
|||
|
31.01
|
145
|
|||
|
31.02
|
146
|
|||
|
32.01
|
147
|
|||
|
32.02
|
148
|
|||
|
* Management contract or
compensatory plan or arrangement filed pursuant to Item 601(b) (10) (iii)
of Regulation S-K.
|
||||
139