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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

 [X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
or
 [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________

Commission File Number: 1-12626

EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
62-1539359
(I.R.S. Employer Identification No.)

100 N. Eastman Road, Kingsport, Tennessee
(Address of principal executive offices)

37660
(Zip Code)
Registrant’s telephone number, including area code: (423) 229-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 

Class

 Common Stock, par value $0.01 per share
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
Number of Shares Outstanding at
September 30, 2003
 
77,366,746
 

 PAGE 1 OF 58 TOTAL SEQUENTIALLY NUMBERED PAGES

 EXHIBIT INDEX ON PAGE 57

 
 
 
     

 
 
TABLE OF CONTENTS
 
 
 ITEM

   PAGE

 
PART I. FINANCIAL INFORMATION

 1. 

Financial Statements   
 
Unaudited Consolidated Statements of Earnings (Loss), Comprehensive Income (Loss), and Retained
Earnings
3
 
Consolidated Statements of Financial Position
4
 
Unaudited Consolidated Statements of Cash Flows
5
 
Notes to Unaudited Consolidated Financial Statements
6-24

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 
25-52
4. 
Controls and Procedures
53


PART II. OTHER INFORMATION

1.
Legal Proceedings
54-55
5.
Other Events
55
6.
Exhibits and Reports on Form 8-K
55

SIGNATURES

 
Signatures
56


 2

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS), COMPREHENSIVE
INCOME (LOSS), AND RETAINED EARNINGS

 
 
Third Quarter
 
First Nine Months
(Dollars in millions, except per share amounts)
 
2003
 
2002
 
2003
 
2002




 
 
 
 
 
 
 
 
 
Sales
$
1,444
$
1,374
$
4,366
$
4,005
Cost of sales
 
1,244
 
1,172
 
3,741
 
3,369
   
 
 
  
 
  
 
  
Gross profit
 
200
 
202
 
625
 
636
 
 
 
 
 
 
 
 
 
Selling and general administrative expenses
 
100
 
100
 
308
 
300
Research and development expenses
 
44
 
42
 
129
 
118
Asset impairments and restructuring charges, net
 
462
 
(1)
 
480
 
(1)
Goodwill impairment
 
34
 
--
 
34
 
--
Other operating income
 
--
 
--
 
(20)
 
--
   
  
 
  
 
  
 
  
Operating earnings (loss)
 
(440)
 
61
 
(306)
 
219
 
 
 
 
 
 
 
 
 
Interest expense, net
 
30
 
30
 
92
 
91
Other (income) charges, net
 
1
 
3
 
(5)
 
7
   
  
 
  
 
  
 
  
Earnings (loss) before income taxes and cumulative effect of changes in accounting principles
 
(471)
 
28
 
(393)
 
 
121
Provision (benefit) for income taxes
 
(135)
 
4
 
(110)
 
29




Earnings (loss) before cumulative effect of changes in accounting principles
 
(336)
 
24
 
(283)
 
 
92
Cumulative effect of changes in accounting principles, net
 
--
 
--
 
3
 
(18)




    Net earnings (loss)
$
(336)
$
24
$
(280)
$
74




 
 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
 
   Basic
 
 
 
 
 
 
 
 
  Before cumulative effect of changes in accounting
 
 
 
 
 
 
 
 
   principles
$
(4.35)
$
0.31
$
(3.66)
$
1.19
  Cumulative effect of changes in accounting principles, net
 
--
 
--
 
0.04
 
(0.23)




      Net earnings (loss) per share
$
(4.35)
$
0.31
$
(3.62)
$
0.96




 
 
 
 
 
 
 
 
 
   Diluted
 
 
 
 
 
 
 
 
  Before cumulative effect of changes in accounting
 
 
 
 
 
 
 
 
           principles
$
(4.35)
$
0.31
$
(3.66)
$
1.19
  Cumulative effect of changes in accounting principles, net
 
--
 
--
 
0.04
 
(0.23)




      Net earnings (loss) per share
$
(4.35)
$
0.31
$
(3.62)
$
0.96




 
 
 
 
 
 
 
 
 
Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Net earnings (loss)
$
(336)
$
24
$
(280)
$
74
Other comprehensive income (loss)
 
 
 
 
 
 
 
  Change in cumulative translation adjustment
 
25
 
--
 
98
 
86
  Change in unrealized gains (losses) on investments, net of tax
 
1
 
(2)
 
(1)
 
(2)
  Change in unrealized gains (losses) on derivative
 
 
 
 
 
 
 
 
   instruments, net of tax
 
4
 
9
 
(1)
 
8




      Total other comprehensive income
 
30
 
7
 
96
 
92




Comprehensive income (loss)
$
(306)
$
31
$
(184)
$
166




 
 
 
 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
 
 
 
Retained earnings at beginning of period
$
1,870
$
1,938
$
1,882
$
1,956
Net earnings (loss)
 
(336)
 
24
 
(280)
 
74
Cash dividends declared
 
(34)
 
(34)
 
(102)
 
(102)




Retained earnings at end of period
$
1,500
$
1,928
$
1,500
$
1,928






The accompanying notes are an integral part of these financial statements.
 

 3

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 
September 30,
December 31,
(Dollars in millions, except per share amounts)
 
2003
 
2002


 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets
 
 
  Cash and cash equivalents
$
53
$
77
  Trade receivables, net of allowance of $29 and $32
 
608
 
532
  Miscellaneous receivables
 
78
 
127
  Inventories
 
709
 
713
  Other current assets
 
66
 
80


    Total current assets
 
1,514
 
1,529


 
 
 
 
 
Properties
 
 
 
  Properties and equipment at cost
 
9,806
 
9,660
  Less: Accumulated depreciation
 
6,393
 
5,907


    Net properties
 
3,413
 
3,753


 
 
 
 
 
Goodwill
 
314
 
344
Other intangibles, net of accumulated amortization of $235 and $51
 
45
 
229
Other noncurrent assets
 
416
 
418


Total assets
$
5,702
$
6,273


 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
  Payables and other current liabilities
$
916
$
1,221
  Borrowings due within one year
 
506
 
3


    Total current liabilities
 
1,422
 
1,224


 
 
 
 
 
Long-term borrowings
 
1,703
 
2,054
Deferred income tax liabilities
 
316
 
484
Postemployment obligations
 
1,138
 
1,109
Other long-term liabilities
 
135
 
131


  Total liabilities
 
4,714
 
5,002


 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
  Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 85,155,567 and 85,135,117)
 
1
 
1
  Additional paid-in capital
 
122
 
119
  Retained earnings
 
1,500
 
1,882
  Accumulated other comprehensive loss
 
(199)
 
(295)


 
 
1,424
 
1,707
  Less: Treasury stock at cost (7,933,646 shares)
 
436
 
436


 
 
 
 
 
  Total stockholders’ equity
 
988
 
1,271


 
 
 
 
 
Total liabilities and stockholders’ equity
$
5,702
$
6,273




The accompanying notes are an integral part of these financial statements.
 

 4

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
First Nine Months
(Dollars in millions)
 
2003
 
2002


 
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
    Net earnings (loss)
$
(280)
$
74


 
 
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
 
 
 
 
  Depreciation and amortization
 
280
 
297
  Cumulative effect of changes in accounting principles, net
 
(3)
 
18
  Asset impairments
 
497
 
--
  Gains on sale of assets
 
(20)
 
--
  Provision (benefit) for deferred income taxes
 
(151)
 
70
Changes in operating assets and liabilities, net of effect of acquisitions:
 
 
 
 
  Increase in receivables
 
(25)
 
(18)
  (Increase) decrease in inventories
 
6
 
(30)
  Increase (decrease) in trade payables
 
(41)
 
41
  Increase (decrease) in liabilities for employee benefits and incentive pay
 
(217)
 
53
  Other items, net
 
--
 
36


 
 
 
 
 
    Net cash provided by operating activities
 
46
 
541


 
 
 
 
 
Cash flows from investing activities
 
 
 
 
  Additions to properties and equipment
 
(159)
 
(162)
  Proceeds from sale of assets
 
28
 
7
  Acquisitions, net of cash acquired
 
--
 
(6)
  Additions to capitalized software
 
(11)
 
(13)
  Other items, net
 
16
 
(14)
 
 

 
 

 
    Net cash used in investing activities
 
(126)
 
(188)


 
 
 
 
 
Cash flows from financing activities
 
 
 
 
  Net decrease in commercial paper and other short-term borrowings
 
(88)
 
(615)
  Proceeds from long-term borrowings
 
248
 
394
  Repayment of borrowings
 
(5)
 
(8)
  Dividends paid to stockholders
 
(102)
 
(102)
  Other items
 
3
 
--


 
 
 
 
 
    Net cash provided by (used in) financing activities
 
56
 
(331)


 
 
 
 
 
    Net change in cash and cash equivalents
 
(24)
 
22
 
 
 
 
 
Cash and cash equivalents at beginning of period
 
77
 
66


 
 
 
 
 
Cash and cash equivalents at end of period
$
53
$
88








The accompanying notes are an integral part of these financial statements.

5
     


EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
1.  BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company (the "Company" or "Eastman") in accordance and consistent with the accounting policies stated in the Company's 2002 Annual Report on Form 10-K and should be read in conjunction with the audited consolidated financial statements appearing in the Form 10-K. In the opinion of the Company, all normal recurring adjustments necessary for a fair presentation have been included in the unaudited consolidated financial statements. The unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and of necessity include some amounts that are based upon management estimates and judgments. Future actual results cou ld differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, revenues and expenses of all majority-owned subsidiaries. Eastman accounts for 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.
 
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 Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." Upon the initial adoption of SFAS No. 143, entities are required to recognize a liability for any existing asset retirement obligations adjusted for cumulative accretion to the date of adoption of this Statement, an asset retirement cost capitalized as an increase to the carrying amount of the associated long-lived asset, and accumulated depreciation on that capitalized cost. See Note 12 to the Company’s unaudited consolidated financial statements for information regarding the impact to the Company of the adoption of SFA S No. 143.
 
Also effective January 1, 2003, the Company’s method of accounting for initial recognition and measurement of guarantees changed as a result of the adoption of Financial Accounting Standards Board ("FASB") Interpretation No. 45 ("FIN 45") "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The interpretation expands on the accounting guidance of FASB Statements No. 5, 57 and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. Under the provisions of FIN 45, at the time a guarantee is issued, the Company will recognize a liability for the fair value or market value of the obligation it assumes. The adoption of FIN 45 did not have a material impact on the Co mpany’s financial position, liquidity or results of operations. See Note 16 to the Company’s unaudited consolidated financial statements for additional information regarding the Company’s guarantees.
 
Effective July 1, 2003, the Company’s method of accounting for arrangements containing a lease changed as a result of the adoption of Emerging Issues Task Force ("EITF") Issue No. 01-08, "Determining Whether an Arrangement Contains a Lease." EITF Issue No. 01-08 provides guidance on how to determine if an arrangement contains a lease that is within the scope of SFAS No. 13, "Accounting for Leases." The provisions of EITF Issue No. 01-08 apply primarily to arrangements agreed to or committed to after the beginning of an entity’s next reporting period beginning after May 28, 2003, or previous arrangements modified after the beginning of an entity’s next reporting period beginning after May 28, 2003. The adoption of EITF Issue No. 01-08 did not have a material impact on the Company’s financial position, liquidity or results of operations.
The Company has reclassified certain 2002 amounts to conform to the 2003 presentation.
 

 6

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
2. STOCK OPTIONS

As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," Eastman continues to apply intrinsic value accounting for its employee stock options. Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Eastman has adopted disclosure-only provisions of SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB Statement No. 123. The Company’s pro forma net earnings and pro forma earnings per share based upon the fair value at the grant dates for awards of Eastman’s employee stock options are disclosed below.

If the Company had elected to recognize compensation expense based upon the fair value at the grant dates of these awards, the Company's net earnings and earnings per share would have been reduced as follows:

 
Third Quarter
 
First Nine Months
(Dollars in millions, except per share amounts)
2003
 
2002
 
2003
 
2002




 
 
 
 
 
 
 
 
Net earnings, as reported
$
(336)
$
24
$
(280)
$
74
 
 
 
 
 
 
 
 
 
Add: Stock-based employee compensation
 
 
 
 
 
 
 
 
  expense included in net earnings, as reported
 
--
 
--
 
--
 
--
 
 
 
 
 
 
 
 
 
Deduct: Total additional stock-based employee
 
 
 
 
 
 
 
 
  compensation cost, net of tax, that would
 
 
 
 
 
 
 
 
  have been included in net earnings under
 
 
 
 
 
 
 
 
  fair value method
 
2
 
3
 
8
 
9




Pro forma net earnings
$
(338)
$
21
$
(288)
$
65




 
 
 
 
 
 
 
 
 
Basic earnings per share
As reported
$ (4.35)
 
$ 0.31
 
$ (3.62)
 
$ 0.96
 
Pro forma
$ (4.39)
 
$ 0.27
 
$ (3.74)
 
$ 0.85
 
 
 
 
 
 
 
 
 
Diluted earnings per share
As reported
$ (4.35)
 
$ 0.31
 
$ (3.62)
 
$ 0.96
 
Pro forma
$ (4.39)
 
$ 0.27
 
$ (3.74)
 
$ 0.85
 
3.  INVENTORIES
 
 
September 30,
 
December 31,
(Dollars in millions)
2003
 
2002


 
 
 
 
At average cost (which approximates FIFO)
 
 
 
  Finished goods
$
588
$
582
  Work in process
176
 
175
  Raw materials and supplies
224
 
229


    Total inventories
988
 
986
  Reduction to LIFO value
(279)
 
(273)


Total inventories at LIFO value
$
709
$
713



Inventories valued on the LIFO method were approximately 70% of total inventories at each period end.
 

 7

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
4.  GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." Under the provisions of SFAS No. 142, amortization of goodwill and indefinite-lived intangible assets is prohibited. Also, SFAS No. 142 established two broad categories of intangible assets: definite-lived intangible assets which are subject to amortization and indefinite-lived intangible assets which are not subject to amortization. For additional information on the impact to the Company of the adoption of SFAS No. 142, see Note 12 to the Company’s unaudited consolidated financial statements.

Following are the Company’s amortizable intangible assets and indefinite-lived intangible assets. The difference between the gross carrying amount and net carrying amount for each item presented can be attributed to impairments and accumulated amortization.

 
As of September 30, 2003
 
As of December 31, 2002
 
 
(Dollars in millions)
Gross Carrying Amount
 
Net Carrying Amount
 
Gross Carrying Amount
 
Net Carrying Amount




 
 
 
 
 
 
 
 
Amortizable intangible assets
 
 
 
 
 
 
 
  Developed technology
$
124
$
12
$
124
$
96
  Customer lists
62
 
9
 
62
 
48
  Other
18
 
2
 
18
 
15




    Total
$
204
 
23
$
204
 
159




 
 
 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
 
 
  Trademarks
 
 
22
 
 
 
70


 
 
 
 
 
 
 
 
  Total other intangible assets
 
$
45
 
 
$
229



Changes in the carrying amount of goodwill follow:
 
 
 
(Dollars in millions)
 
CASPI Segment
 
 
Other Segments
 
 
 
Total



 
 
 
 
 
 
Reported goodwill balance at December 31, 2002
$
333
$
11
$
344
Impairment of goodwill
(34)
 
--
 
(34)
Adjustments and foreign currency translation effect
4
 
--
 
4
   
 
  
 
  
Reported goodwill balance at September 30, 2003
$
303
$
11
$
314



 
 
 
 
 
 

Amortization expense for definite-lived intangible assets was approximately $1 million and $4 million for the third quarters 2003 and 2002, respectively. Amortization expense for definite-lived intangible assets was approximately $9 million and $11 million for the first nine months 2003 and 2002, respectively. Estimated amortization expense for each of the five succeeding years is expected to be approximately $3 million per year.

Additional information regarding the impairment of intangibles and goodwill is available in Note 8 to the Company’s unaudited consolidated financial statements.
 

 8

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
5.  PAYABLES AND OTHER CURRENT LIABILITIES
 
 
 
September 30,
 
December 31,
(Dollars in millions)
 
2003
 
2002


 
 
 
Trade creditors
$
429
$
470
Accrued payrolls, vacation, and variable-incentive compensation
 
127
 
195
Accrued taxes
 
111
 
71
Interest payable
 
36
 
48
Current portion of U.S. defined benefit pension plan liabilities
 
--
 
220
Bank overdrafts
 
35
 
39
Other
 
178
 
178


  Total
$
916
$
1,221



The current portion of U.S. defined benefit pension plan liabilities is an estimate of the Company’s anticipated funding within one year.
 
6. BORROWINGS
 
 
September 30,
 
December 31,
(Dollars in millions)
2003
 
2002


 
 
Borrowings consisted of:
 
 
 
  6 3/8% notes due 2004
$
505
$
513
  3 1/4% notes due 2008
250
 
--
  7% notes due 2012
399
 
397
  7 1/4% debentures due 2024
496
 
496
  7 5/8% debentures due 2024
200
 
200
  7.60% debentures due 2027
297
 
297
  Commercial paper borrowings
55
 
143
  Other
7
 
11


    Total borrowings
2,209
 
2,057
  Borrowings due within one year
(506)
 
(3)


  Long-term borrowings
$
1,703
$
2,054



Eastman has access to a $600 million revolving credit facility (the "Credit Facility") expiring in July 2005. Any borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates, principally LIBOR. The Credit Facility requires facility fees on the total commitment that vary based on Eastman's credit rating. The rate for such fees was 0.15% as of September 30, 2003 and December 31, 2002. The Credit Facility contains a number of covenants and events of default, including the maintenance of certain financial ratios.
 
Eastman typically utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Because the Credit Facility expires in July 2005, the commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings on a long-term basis. At September 30, 2003, the Company’s commercial paper borrowings were $55 million at an effective interest rate of 1.18%. At December 31, 2002, the Company's commercial paper borrowings were $143 million at an effective interest rate of 1.66%.
 

 9

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On April 3, 2002, the Company issued notes in the principal amount of $400 million due 2012 and bearing interest at 7% per annum. Proceeds from the sale of the notes, net of $3 million in transaction fees, were $394 million and were used to repay portions of outstanding borrowings under the Credit Facility and commercial paper borrowings.
 
On June 16, 2003, the Company issued notes in the principal amount of $250 million due 2008 and bearing interest at 3 1/4% per annum. Proceeds from the sale of the notes, net of $2 million in transaction fees, were $248 million and were used to repay portions of commercial paper borrowings.
 
See Note 18 to the Company’s unaudited consolidated financial statements for further information regarding debt issued on November 12, 2003.
 
In the first quarter 2002, the Company entered into interest rate swaps that converted the effective interest rate of the notes due in 2004 to a variable rate.  These original interest rate swaps were settled during the fourth quarter 2002, resulting in $13 million cash proceeds being received by the Company.  The gain resulting from the settlement of the swaps is reflected as an increase in the current portion of long-term borrowings and will be amortized into earnings as a reduction to interest expense through the maturity of the notes in January 2004.  In conjunction with the settlement of the original interest rate swaps, new interest rate swaps were entered into in the fourth quarter 2002, converting the effective interest rate on the notes due in 2004 to variable rates that averaged 3.37% at September 30, 2003 and 4.07% at December 31, 2002.  In the t hird quarter 2003, the Company entered into interest rate swaps that converted the effective interest rate of a portion of the notes due in 2012 to variable rates such that the average rate was 6.54% at September 30, 2003. The recording of the fair value of the interest rate swaps and the corresponding debt resulted in increases of $4 million in other current assets and the current portion of long-term borrowings at September 30, 2003.
 
7. EARNINGS AND DIVIDENDS PER SHARE
 
 
Third Quarter
 
First Nine Months
 
2003
 
2002
 
2003
 
2002




 
 
 
 
 
 
 
 
Shares used for earnings per share calculation:
 
 
 
 
 
 
 
    Basic
77.2
 
77.1
 
77.1
 
77.0
    Diluted
77.2
 
77.2
 
77.1
 
77.2
 
 
 
 
 
 
 
 

As a result of the net loss reported for the third quarter and first nine months 2003, common shares underlying options to purchase 10,345,607 shares of common stock at a range of prices from $29.90 to $73.94 have been excluded from the calculation of diluted earnings (loss) per share. Certain shares underlying options to purchase 7,087,254 and 6,970,729 shares of common stock at a range of prices from $40.10 to $73.94 during the third quarter and the first nine months 2002 were excluded from the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares during those periods.
 
Additionally, 200,000 shares underlying an option issued to the former Chief Executive Officer in 1997 were excluded from diluted earnings per share calculations for the third quarter and the first nine months 2002 because the stock price conditions to exercise had not been met as to any of the shares as of September 30, 2002. The entire option was cancelled and forfeited on September 16, 2002, as none of the price vesting conditions had been met.

The Company declared cash dividends of $0.44 per share in the third quarters 2003 and 2002 and $1.32 per share in the first nine months 2003 and 2002.
 

 10

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
8.  IMPAIRMENTS AND RESTRUCTURING CHARGES, NET
 
During the third quarter 2003, the Company recognized pre-tax impairments and restructuring charges of $496 million, consisting of $482 million in non-cash impairment charges, and severance charges of $14 million. For the first nine months 2003, pre-tax impairments and restructuring charges totaled $514 million, with non-cash impairment charges and severance charges totaling $497 million and $17 million, respectively. The following table summarizes the 2003 and 2002 charges:
 
 
 
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
2003
 
2002




 
 
 
 
 
 
 
 
Eastman Division segments:
 
 
 
 
 
 
 
CASPI segment:
 
 
 
 
 
 
 
Fixed asset impairments
$
194
$
--
$
194
$
--
Intangible asset impairments
175
 
--
 
175
 
--
Goodwill impairments
34
 
--
 
34
 
--
Severance costs
8
 
--
 
11
 
--
Site closure costs
--
 
(1)
 
--
 
(1)
 
  
 
  
 
  
 
  
Total – CASPI segment
411
 
(1)
 
414
 
(1)
 
 
 
 
 
 
 
 
PCI segment:
 
 
 
 
 
 
 
Fixed asset impairments
79
 
--
 
94
 
--
Severance costs
4
 
--
 
4
 
--




Total – PCI segment
83
 
--
 
98
 
--
 
 
 
 
 
 
 
 
SP segment:
 
 
 
 
 
 
 
Severance costs
1
 
--
 
1
 
--




Total – SP segment
1
 
--
 
1
 
--
 
 
 
 
 
 
 
 
Total Eastman Division
495
 
(1)
 
513
 
(1)




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Voridian Division segments:
 
 
 
 
 
 
 
Polymers segment
 
 
 
 
 
 
 
Severance costs
1
 
--
 
1
 
--




Total – Polymers segment
1
 
--
 
1
 
--
 
 
 
 
 
 
 
 
Total Voridian Division
1
 
--
 
1
 
--




 
 
 
 
 
 
 
 
Total Eastman Chemical Company
$
496
$
(1)
$
514
$
(1)




 
 
 
 
 
 
 
 
 
Total goodwill impairment
 
34
 
--
 
34
 
--
Total asset impairments and restructuring charges
 
462
 
(1)
 
480
 
(1)




 
 
 
 
 
 
 
 
 
Total Eastman Chemical Company
$
496
$
(1)
$
514
$
(1)






 11

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") Segment
 
In the third quarter 2003, the Company reorganized the operating structure within its CASPI segment and changed the segment’s business strategy in response to the financial performance of certain underlying product lines. Those product lines include: acrylate ester monomers; composites (unsaturated polyester resins); inks and graphic arts raw materials; liquid resins; powder resins; and textile chemicals. Prior to the third quarter 2003, management was pursuing growth strategies aimed at significantly improving the financial performance of these product lines. However, due to the continued operating losses and deteriorating market conditions, management decided to pursue alternative strategies including restructuring, divestiture, and consolidation. This change affected both the manner in which certain assets are used and the financial outlook for these product lines, thus triggering the impairments and certain restructuring charges.

The third quarter 2003 fixed asset impairments charges of $194 million primarily relate to assets associated with the above mentioned product lines, and primarily impact manufacturing sites in the North American and European regions that were part of the Lawter International, Inc. ("Lawter"), McWhorter Technologies, Inc ("McWhorter"), and Chemicke Zavody Sokolov ("Sokolov") acquisitions. Within these product lines, nine sites in North America and six sites in Europe were impaired. As the undiscounted future cash flows could not support the carrying value of the assets, the fixed assets were written down to fair value, as established primarily by appraisal.

The third quarter 2003 intangible asset impairments charges relate to definite-lived intangible assets of approximately $128 million and indefinite-lived intangibles of approximately $47 million. The definite-lived intangibles relate primarily to developed technology and customer lists, and the indefinite-lived intangibles primarily relate to trademarks. These intangible assets were primarily associated with the acquisitions of Lawter and McWhorter. As the undiscounted future cash flows could not support the carrying value of the definite-lived intangible assets, these assets were written down to fair value, as established primarily by appraisal. Indefinite-lived intangible assets were written down to fair value, as established by appraisal.

Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," the Company defined reporting units as one level below the operating segment level and considered the criteria set forth in SFAS No. 142 in aggregating the reporting units. This resulted in the CASPI segment being deemed a single reporting unit. In the third quarter 2003, the reorganization of the operating structure within the CASPI segment resulted in new reporting units one level below the operating segment. Due to the change in strategy and lack of similar economic characteristics, these reporting units did not meet the criteria necessary for aggregation. As a result, the goodwill associated with the CASPI segment was reassigned to the new reporting units based upon relative fair values. The reporting unit that contained the above-mentioned product lines was assigned $34 million of goodwill out of the total CASPI segment goodwill of $333 million. Because the Company determined that this reporting unit could no longer support the carrying value of its assigned goodwill, the full amount of that goodwill was impaired. The fair value of the other reporting unit within CASPI was sufficient to support the carrying value of the remainder of the goodwill.

The third quarter 2003 severance costs of $8 million are discussed in further detail below.

In the first six months 2003, total asset impairments and restructuring charges of approximately $3 million were recognized. These charges primarily relate to employee severance costs and changes in estimates for previously accrued amounts.

In third quarter 2002, earnings were positively impacted by $1 million as a result of a favorable change in the estimate related to previously recognized restructuring costs in the CASPI segment.

 12

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Performance Chemicals and Intermediates ("PCI") Segment
 
The PCI segment’s charges of $79 million relate to the impairment of fixed assets used in certain commodity and specialty organic chemicals product lines as a result of increased competition and changes in business strategy in response to a change in market conditions and the financial performance of these product lines. Within the commodity product lines, the fixed asset impairments charge relates to assets at the Sokolov, Czech Republic facility. Within the specialty organic chemicals product lines, the fixed asset impairments charge relates to assets located at the Kingsport, Tennessee facility. As the undiscounted future cash flows could not support the carrying value of the assets, the fixed assets were written down to fair value, as established primarily by appraisal.
 
The third quarter 2003 severance costs of $4 million are discussed in further detail below.

In the second quarter 2003, the Company recorded an asset impairments charge of approximately $15 million related to the impairment of certain fixed assets used in the PCI segment’s fine chemicals product lines that are located in Llangefni, Wales. In response to industry conditions, during the second quarter 2003 the Company revised its strategy and the earnings forecast for the products manufactured by these assets. As the undiscounted future cash flows could not support the carrying value of the asset, the fixed assets were written down to fair value, as established primarily by discounted future cash flows of the impacted assets.

Severance charges
 
In the third quarter 2003, the Company recognized $14 million in restructuring charges related to the actual and probable involuntary separations of approximately 300 employees. These workforce reductions are the result of decisions made as part of the restructuring of the CASPI segment discussed above, the Company’s annual budgeting process, and site closure costs associated with the PCI segment.
 
The following table summarizes the charges and changes in estimates described above, other asset impairments and restructuring charges, the noncash 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, 2002
 
Provision/ Adjustments
 
Noncash Reductions
 
Cash Reductions
 
Balance at
December 31, 2002
 
 

 
 

 
 

 
 

 
 

 
Noncash charges
$
--
$
2
$
(2)
$
--
$
--
Severance costs
 
10
 
2
 
--
 
(10)
 
2
Site closure costs
 
13
 
3
 
--
 
(9)
 
7





  Total
$
23
$
7
$
(2)
$
(19)
$
9





 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
January 1, 2003
 
Provision/ Adjustments
 
Noncash Reductions
 
Cash Reductions
 
Balance at
September 30,2003





 
 
 
 
 
 
 
 
 
 
 
Noncash charges
$
--
$
497
$
(497)
$
--
$
--
Severance costs
 
2
 
17
 
--
 
(3)
 
16
Site closure costs
 
7
 
--
 
--
 
(3)
 
4





  Total
$
9
$
514
$
(497)
$
(6)
$
20






Substantially all severance and site closure costs are expected to be applied to the reserves within one year.

 13

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
9.  ACQUISITIONS
 
Ariel Research Corporation
 
In January 2002, Eastman acquired Ariel Research Corporation ("Ariel") for approximately $8 million, including $6 million cash paid at closing and a $2 million promissory note paid in January 2003. Ariel is a provider of worldwide regulatory information, software products and services that enable corporations to manage product safety and stewardship functions, including requirements for workplace, environmental and dangerous goods compliance.
 
The transaction, which was financed with available cash and commercial paper borrowings, was accounted for by the purchase method of accounting and, accordingly, the results of Ariel for the period from the acquisition date are included in the accompanying unaudited consolidated financial statements and reported in the Developing Businesses segment. Tangible assets acquired were recorded at their fair values. Definite-lived intangible assets of approximately $7 million are being amortized on a straight-line basis over 3 to 10 years. Assuming this transaction had been made at January 1, 2002, the consolidated pro forma results for the first nine months 2002 would not have been materially different from reported results.
 
10. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
 
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. Financial instruments held as part of each hedging program are more fully described in Note 8 "Fair Value of Financial Ins truments" to the Company’s audited consolidated financial statements contained in the 2002 Annual Report on Form 10-K.
 
At September 30, 2003, mark-to-market losses from currency, raw material and energy and certain interest rate hedges that were included in accumulated other comprehensive loss totaled approximately $2 million. If realized, approximately $1 million of this balance 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 recognized in cost of sales or other income and charges immediately. Such amounts did not have a material impact on earnings for all periods presented.
 
11. OTHER OPERATING INCOME AND OTHER (INCOME) CHARGES, NET
 
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
2003
 
2002




 
 
 
 
 
 
 
 
Other operating income
$
--
$
--
$
(20)
$
--




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income
$
(4)
$
(4)
$
(20)
$
(7)
Other charges
5
 
7
 
15
 
14




Other (income) charges, net
$
1
$
3
$
(5)
$
7




 

 14

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Other Operating Income

Other operating income includes gains and losses on sales of assets that are not a component of an entity. Other operating income for the first nine months 2003 reflected a gain of $20 million on the sale of the Company’s high-performance crystalline plastics assets, which were formerly a part of the Company’s SP segment.

Other (Income) Charges

Included in other income are the Company’s portion of earnings from its equity investments, gains on sales of non-operating assets, royalty income, gains on foreign exchange transactions and other miscellaneous items. Included in other charges are losses from foreign exchange transactions, the Company’s portion of losses from its equity investments, losses on sales of nonoperating assets, fees on securitized receivables and other miscellaneous items.

Other income for each period included net gains on foreign currency transactions, net of hedging, primarily attributed to the strengthening of the euro, and results from the Company’s equity investments.

Other charges for the third quarter and the first nine months 2002 included the write-down to fair value of certain technology business venture investments. Results for the first nine months 2002 also reflected a loss of $12 million due to remeasurement of an Argentine peso-denominated tax receivable.

12.  CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX
 
SFAS No. 143
 
In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations," the Company recorded asset retirement obligations primarily related to closure and post-closure environmental liabilities associated with certain property, plant and equipment. This resulted in the Company recording asset retirement obligations of $28 million and an after-tax credit to earnings of $3 million during the first quarter 2003.
 
If the asset retirement obligation measurement and recognition provisions of SFAS No. 143 had been in effect on January 1, 2002, the aggregate carrying amount of those obligations on that date would have been $27 million. If the amortization of asset retirement cost and accretion of asset retirement obligation provisions of SFAS No. 143 had been in effect during 2002, the impact on "Earnings before cumulative effect of changes in accounting principle" in 2002 would have been immaterial.
 
SFAS No. 142
 
The Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets; require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment; require reporting units to be identified for the purpose of assessing potential future impairments of goodwill; and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.
 

 15

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In connection with the adoption of SFAS No. 142, the Company completed in the first quarter 2002 the impairment test for intangible assets with indefinite useful lives other than goodwill. As a result of this impairment test, it was determined that the fair value of certain trademarks related to the CASPI segment, as established by appraisal and based on discounted future cash flows, was less than the recorded value. Accordingly, the Company recognized an after-tax impairment charge of approximately $18 million in the first quarter of 2002 to reflect lower than previously expected cash flows from certain related products. This charge is reported in the Unaudited Consolidated Statements of Earnings (Loss), Comprehensive Income (Loss), and Retained Earnings as the cumulative effect of a change in accounting principle. Additionally, the Company reclassified $12 million of its intangible assets related to assembled workforce and the related deferred tax liabilities of approximately $5 million to goodwill. During the second quarter 2002, the Company performed the transitional impairment test on its goodwill as required upon adoption of this Statement, and determined that no impairment of goodwill existed as of January 1, 2002. The Company completed its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter 2002 and determined that no impairment existed as of September 30, 2002. The Company plans to continue 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.

In the third quarter 2003, the Company impaired certain goodwill and indefinite-lived intangible assets in the CASPI segment as discussed in Note 8 above. Additionally, the Company completed its annual impairment review of the remaining goodwill and indefinite-lived intangible assets. No further impairment of goodwill or indefinite-lived intangible assets was required due to this review.
 
13.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
(Dollars in millions)
 
 
Cumulative Translation Adjustment
 
 
Unfunded Minimum Pension Liability
 
 
Unrealized Gains (Losses) on Investments
 
Unrealized Gains (Losses) on Derivative Instruments
 
 
Accumulated Other Comprehensive Income (Loss)





 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2001
$
(133)
$
(116)
$
--
$
(2)
$
(251)
Period change
102
 
(145)
 
(2)
 
1
 
(44)





Balance at December 31, 2002
(31)
 
(261)
 
(2)
 
(1)
 
(295)
Period change
98
 
--
 
(1)
 
(1)
 
96





Balance at September 30, 2003
$
67
$
(261)
$
(3)
$
(2)
$
(199)






Except for cumulative translation adjustment, amounts of other comprehensive income (loss) are presented net of applicable taxes. Because cumulative translation adjustment is considered a component of permanently invested unremitted earnings of subsidiaries outside the United States, no taxes are provided on such amounts.
 
14. SEGMENT INFORMATION
 
The Company’s products and operations are managed and reported in six operating segments. Effective January 1, 2003, the Company realigned its divisional structure into three divisions. Eastman Division consists of the CASPI segment, the PCI segment and the SP segment. Voridian Division contains the Polymers segment and the Fibers segment. Developing Businesses Division contains the Developing Businesses segment.

 16

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The CASPI segment manufactures raw materials, additives and specialty polymers, primarily for the paints and coatings, inks and graphic arts, adhesives and other markets. The CASPI segment's products consist of binders and resins, liquid vehicles, pigment concentrates and additives, unsaturated polyester resins and polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as key components in paints and inks to form a protective coating or film, and bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol solvents, maintain the binders in liquid form for ease of application. Pigment concentrates and additives, such as cellulosic polymers, Texanol? coalescing aid and chlori nated polyolefins, provide different properties or performance enhancements to the end product. Unsaturated polyester resins are used primarily in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions are traditionally used as textile sizes to protect fibers during processing in textile manufacturing, and the technology is also used in water-based paints, coatings and inks. Additional products are developed in response to, or in anticipation of, new applications where the Company believes significant value can be achieved.

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. The PCI segment also offers custom manufacturing services through its custom synthesis business.

The SP segment produces highly specialized copolyesters, cellulosic plastics and compounded polyethylene plastics that possess unique performance properties for value-added end uses such as appliances, store fixtures and displays, building and construction, electronics and electronic packaging, medical packaging, personal care and cosmetics, performance films, tape and labels, biodegradeables, cups and lids, fiber and strapping, photographic and optical, graphic arts and general packaging. The SP segment’s key products include engineering and specialty polymers, specialty film and sheet products, and packaging film and fiber products.
 
The Polymers segment manufactures and supplies PET polymers for use in beverage and food packaging and other applications such as custom-care and cosmetics packaging, health care and pharmaceutical uses, household products and industrial. PET polymers serve as source products for packaging a wide variety of products including carbonated soft drinks, water, beer and personal care items and food containers that are suitable for both conventional and microwave oven use. The Polymers segment also manufactures low-density polyethylene and linear low-density polyethylene, which are used primarily for packaging and film applications and in extrusion coated containers such as milk and juice cartons.
 
The Fibers segment manufactures Estron? acetate tow and Estrobond? triacetin plasticizers which are used primarily in cigarette filters; Estron? and Chromspun? acetate yarns for use in apparel, home furnishings and industrial fabrics; and acetyl chemicals.

The Developing Businesses segment includes new businesses and certain investments in non-traditional growth opportunities that leverage the Company’s technology expertise, intellectual property and know-how into business models that extend to new customers and markets. The segment includes, among other new and developing businesses, Cendian Corporation ("Cendian"), a logistics provider for chemical and plastics companies; Ariel Research Corporation ("Ariel"), a provider of international chemical and regulatory compliance solutions for environmental, health and safety operations; and Eastman’s gasification services.

The Company’s divisional structure allows it to align costs more directly with the activities and businesses that generate them. Goods and services are transferred between the three divisions at predetermined prices which may be in excess of cost. Accordingly, the divisional structure results in the recognition of interdivisional sales revenue and operating earnings. Such interdivisional transactions are eliminated in the Company’s unaudited consolidated financial statements.

 17

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Effective January 1, 2003, sales, operating results and assets for developing businesses activities were moved from the CASPI, PCI and SP segments to the Developing Businesses segment. Accordingly, amounts for 2002 have been reclassified to reflect this change. In addition, during the second quarter of 2003, the Company revised the Assets by Division and Segment as of December 31, 2002 to appropriately reflect the allocation of certain assets shared by the segments comprising Eastman Division. These revisions had no effect on the consolidated financial statements.

 
Third Quarter, 2003
(Dollars in millions)
 
External Sales
 
Interdivisional Sales
 
 
Total Sales



Sales by Division and Segment
 
 
 
 
 
 
    Eastman Division
 
 
 
 
 
 
  Coatings, Adhesives, Specialty Polymers, and Inks
$
400
$
--
$
400
  Performance Chemicals and Intermediates
 
283
 
120
 
403
  Specialty Plastics
 
135
 
14
 
149



  Total Eastman Division
 
818
 
134
 
952



 
 
 
 
 
 
 
    Voridian Division
 
 
 
 
 
 
  Polymers
 
442
 
14
 
456
  Fibers
 
163
 
20
 
183



  Total Voridian Division
 
605
 
34
 
639



 
 
 
 
 
 
 
    Developing Businesses Division
 
 
 
 
 
 
  Developing Businesses
 
21
 
104
 
125
   
  
 
  
 
  
  Total Developing Businesses Division
 
21
 
104
 
125
   
  
 
  
 
  
             
Total Eastman Chemical Company
$
1,444
$
272
$
1,716



 
 
 
 
 
 
 

 
Third Quarter, 2002*
 
 
External Sales
 
Interdivisional Sales
 
 
Total Sales



Sales by Division and Segment
 
 
 
 
 
 
    Eastman Division
 
 
 
 
 
 
  Coatings, Adhesives, Specialty Polymers, and Inks
$
401
$
--
$
401
  Performance Chemicals and Intermediates
 
281
 
98
 
379
  Specialty Plastics
 
141
 
12
 
153



  Total Eastman Division
 
823
 
110
 
933



 
 
 
 
 
 
 
    Voridian Division
 
 
 
 
 
 
  Polymers
 
382
 
16
 
398
  Fibers
 
165
 
17
 
182



  Total Voridian Division
 
547
 
33
 
580



 
 
 
 
 
 
 
    Developing Businesses Division
 
 
 
 
 
 
   Developing Businesses
 
4
 
89
 
93
   
  
 
  
 
  
  Total Developing Businesses Division
 
4
 
89
 
93
 
 

 
 

 
 

 
             
Total Eastman Chemical Company
$
1,374
$
232
$
1,606




*Sales revenue for 2002 has been reclassified to reflect the Company’s new organizational structure and segments effective in the first quarter 2003.

 18

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
First Nine Months, 2003
(Dollars in millions)
 
External Sales
 
Interdivisional Sales
 
 
Total Sales



Sales by Division and Segment
 
 
 
 
 
 
    Eastman Division
 
 
 
 
 
 
  Coatings, Adhesives, Specialty Polymers, and Inks
$
1,209
$
--
$
1,209
  Performance Chemicals and Intermediates
 
909
 
360
 
1,269
  Specialty Plastics
 
417
 
40
 
457



  Total Eastman Division
 
2,535
 
400
 
2,935



 
 
 
 
 
 
 
    Voridian Division
 
 
 
 
 
 
  Polymers
 
1,306
 
54
 
1,360
  Fibers
 
475
 
60
 
535



  Total Voridian Division
 
1,781
 
114
 
1,895



 
 
 
 
 
 
 
    Developing Businesses Division
 
 
 
 
 
 
  Developing Businesses
 
50
 
296
 
346
   
  
 
  
 
  
   Total Developing Businesses Division
 
50
 
296
 
346
   
  
 
  
 
  
 
 
 
 
 
 
 
Total Eastman Chemical Company
$
4,366
$
810
$
5,176





 
First Nine Months, 2002*
 
 
External Sales
 
Interdivisional Sales
 
 
Total Sales



Sales by Division and Segment
 
 
 
 
 
 
    Eastman Division
 
 
 
 
 
 
  Coatings, Adhesives, Specialty Polymers, and Inks
$
1,178
$
--
$
1,178
  Performance Chemicals and Intermediates
 
816
 
277
 
1,093
  Specialty Plastics
 
394
 
36
 
430



  Total Eastman Division
 
2,388
 
313
 
2,701



 
 
 
 
 
 
 
    Voridian Division
 
 
 
 
 
 
  Polymers
 
1,123
 
39
 
1,162
  Fibers
 
486
 
55
 
541



  Total Voridian Division
 
1,609
 
94
 
1,703



 
 
 
 
 
 
 
    Developing Businesses Division
 
 
 
 
 
 
  Developing Businesses
 
8
 
236
 
244
   
  
 
  
 
  
  Total Developing Businesses Division
 
8
 
236
 
244
   
  
 
  
 
  
Total Eastman Chemical Company
$
4,005
$
643
$
4,648




*Sales revenues for 2002 has been reclassified to reflect the Company’s new organizational structure and segments effective in the first quarter 2003.
 

 19

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002 (3)
 
2003
 
2002 (3)




 
 
 
 
 
 
 
 
Operating Earnings (Loss) by Division and
 
 
 
 
 
 
 
    Segment
 
 
 
 
 
 
 
  Eastman Division
 
 
 
 
 
    Coatings, Adhesives, Specialty
 
 
 
 
 
 
 
      Polymers, and Inks (1) (2)
$
(395)
$
22
$
(376)
$
72
    Performance Chemicals and
 
 
 
 
 
 
 
    Intermediates (1) (2)
(83)
 
11
 
(77)
 
12
    Specialty Plastics (1) (2)
12
 
12
 
53
 
30




      Total Eastman Division
(466)
 
45
 
(400)
 
114




 
 
 
 
 
 
 
 
  Voridian Division
 
 
 
 
 
 
 
    Polymers (1) (2)
2
 
(3)
 
56
 
49
    Fibers
34
 
36
 
95
 
109




      Total Voridian Division
36
 
33
 
151
 
158




 
 
 
 
 
 
 
 
  Developing Businesses Division
 
 
 
 
 
 
 
    Developing Businesses
(13)
 
(17)
 
(52)
 
(50)




      Total Developing Businesses Division
(13)
 
(17)
 
(52)
 
(50)
 

 
 

 
 

 
 

 
Eliminations
3
 
--
 
(5)
 
(3)




Total Eastman Chemical Company
$
(440)
$
61
$
(306)
$
219




 
(1) Third quarter 2003 operating results for the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment included impairment and restructuring charges of approximately $411 million. Third quarter 2002 operating results for the CASPI segment included a $1 million favorable change in estimate related to previously recorded restructuring reserves. Third quarter 2003 operating results for the Performance Chemicals and Intermediates segment included impairment and restructuring charges of approximately $83 million. Third quarter 2003 operating earnings for the Specialty Plastics segment included restructuring charges of approximately $1 million. Third quarter 2003 operating earnings for the Polymers segment included restructuring charges of approximately $1 million.
 
(2) First nine months 2003 operating results for the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment included impairment and restructuring charges of approximately $414 million. First nine months 2002 operating results for the CASPI segment included a $1 million favorable change in estimate related to previously recorded restructuring reserves. First nine months 2003 operating results for the Performance Chemicals and Intermediates segment included impairment and restructuring charges of approximately $98 million. First nine months 2003 operating earnings for the Specialty Plastics segment included a gain of $20 million for the sale of the Company’s high-performance crystalline plastics assets and restructuring charges of approximately $1 million. First nine months 2003 operating earnings for the Polymers segment included restructuring charges of approximately $1 million.

(3) Operating earnings (loss) for 2002 have been reclassified to reflect the Company’s new organizational structure and segments effective in the first quarter of 2003.




 20

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 

 
 
September 30,
 
December 31,
(Dollars in millions)
 
2003
 
2002


 
 
 
 
 
Assets by Division and Segment
 
 
 
 
  Eastman Division
 
 
    Coatings, Adhesives, Specialty Polymers, and Inks
$
1,482
$
1,978
    Performance Chemicals and Intermediates
 
1,576
 
1,657
    Specialty Plastics
 
763
 
795


      Total Eastman Division
 
3,821
 
4,430


 
 
 
 
 
  Voridian Division
 
 
 
    Polymers
 
1,275
 
1,253
    Fibers
 
560
 
548


      Total Voridian Division
 
1,835
 
1,801


 
 
 
 
 
  Developing Businesses Division
 
 
 
 
    Developing Businesses
 
46
 
42


      Total Developing Businesses Division
 
46
 
42


 
 
 
 
 
Total Eastman Chemical Company
$
5,702
$
6,273


 
 
 
 
 
 
15.  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, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters, including the sorbates litigation and the asbestos litigation described in the following paragraphs, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could negatively impact earnings or cash flows in a particular future period.
 
Sorbates Litigation
 
As previously reported, on September 30, 1998, the Company entered into a voluntary plea agreement with the U.S. Department of Justice and agreed to pay an $11 million fine to resolve a charge brought against the Company for violation of Section One of the Sherman Act. Under the agreement, the Company entered a plea of guilty to one count of price-fixing for sorbates, a class of food preservatives, from January 1995 through June 1997. The plea agreement was approved by the United States District Court for the Northern District of California on October 21, 1998. The Company recognized the entire fine as a charge against earnings in the third quarter of 1998 and paid the fine in installments over a period of five years. On October 26, 1999, the Company pleaded guilty in a Federal Court of Canada to a violation of the Competition Act of Canada and was fined $780,000 (Canadian). The plea in Canada admitted that the same conduct that was the subject of the United States guilty plea had occurred with respect to sorbates sold in Canada, and prohibited repetition of the conduct and provides for future monitoring. The Canadian fine has been paid and was recognized as a charge against earnings in the fourth quarter of 1999.
 

 21

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Following the September 30, 1998 plea agreement, the Company, along with other defendants, was sued in federal, state and Canadian courts in more than twenty putative class action lawsuits filed on behalf of purchasers of sorbates and products containing sorbates, claiming those purchasers paid more for sorbates and for products containing sorbates than they would have paid in the absence of the defendants’ price-fixing. All but three of these lawsuits have been resolved via settlement. No class has been certified in any of the three unresolved private cases, and the trial court in one of them decided in Octobe r 2002 that the case would not proceed as a class action, though that decision has been appealed by the plaintiff.
 
In addition, six states have sued the Company and other defendants in connection with the sorbates matter, seeking damages, restitution and civil penalties on behalf of consumers of sorbates in those respective states. One of those six cases has been tentatively settled; defense motions to dismiss are pending in three cases; and two motions to dismiss have been granted.  Seven other states have advised the Company that they intend to bring similar actions against the Company and others. A settlement with those states has also tentatively been reached.
 
The Company has recognized charges to earnings in 2003 and each of the past four years for estimated and actual costs, including legal fees and expenses, related to the sorbates fine and litigation. While the Company intends to continue to defend vigorously the remaining sorbates actions unless they can be settled on acceptable terms, the ultimate outcome of the matters still pending and of additional claims that could be made is not expected to 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.
 
Asbestos Litigation    

Over the years, Eastman was named as a defendant, along with numerous other defendants, in lawsuits in various state courts in which plaintiffs alleged injury due to exposure to asbestos at Eastman’s manufacturing sites and sought unspecified monetary damages and other relief. Historically, these cases were dismissed or settled without a material effect on Eastman’s financial condition, results of operations, or cash flows.
 
As previously reported, Eastman, like many other companies, has recently experienced an increase in the number of asbestos claims against it.  Currently, there are approximately 11,000 claims asserted against the Company in 33 cases that also involve hundreds of other defendants. By far, the majority of these claims are in Mississippi. In the recently filed cases in Mississippi, plaintiffs allege expo sure to asbestos-containing products allegedly made by Eastman.  Based on its investigation to date, the Company has information that it manufactured limited amounts of an asbestos-containing plastic product between the mid-1960's and the early 1970's.  The Company's investigation has found no evidence that any of the Mississippi plaintiffs worked with or around any such product alleged to have been manufactured by the Company. The Company intends to defend vigorously all of these actions or to settle them on acceptable terms.
 
The Company continues to evaluate the allegations and claims made in recent asbestos-related lawsuits and its insurance coverages. Based on such evaluation to date, the Company continues to believe that the ultimate resolution of asbestos cases 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. To date, costs incurred by the Company related to the recent asbestos-related lawsuits have not been material, and in the case of the Mississippi claims have been limited to legal fees and expenses.
 

 22

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
16.  COMMITMENTS
 
Accounts Receivable Securitization Program

In 1999, the Company entered into an agreement that allows the Company to sell certain domestic accounts receivable under a planned continuous sale program to a third party. The agreement permits the sale of undivided interests in domestic trade accounts receivable. Receivables sold to the third party totaled $200 million at September 30, 2003 and at December 31, 2002. Undivided interests in designated receivable pools were sold to the purchaser with recourse limited to the purchased interest in the receivable pools. Fees paid by the Company under this agreement are based on certain variable market rate indices and totaled approximately $1 million in the third quarters 2003 and 2002 and approximately $3 million in the first nine months 2003 and 2002. Average monthly proceeds from collections re invested in the continuous sale program were approximately $253 million and $266 million in the third quarters 2003 and 2002, respectively, and approximately $252 million and $250 million in the first nine months 2003 and 2002, respectively. The portion that continues to be recognized in the Consolidated Statements of Financial Position is domestic trade receivables of $152 million and $93 million at September 30, 2003 and December 31, 2002, respectively.
 
Guarantees

The Company had the following obligations of equity affiliates and residual value guarantees at September 30, 2003:

(Dollars in millions)
 
 
 
 
 
Obligations of equity affiliates
$
137
Residual value guarantees
 
83

Total
$
220


Obligations of Equity Affiliates

Eastman has long-term commitments relating to joint ventures and guarantees of up to $137 million of the principal amount of the joint ventures’ third-party borrowings. The Company believes, based on current facts and circumstances and the structure of the ventures, that the likelihood of a payment pursuant to such guarantees is remote.

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 September 30, 2003 totaled approximately $83 million. The Company believes, based on current facts and circumstances, that the likelihood of a material payment pursuant to such guarantees is remote.
 
17.  RECENTLY ISSUED ACCOUNTING STANDARDS
 
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.
 

 23

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. All companies with variable interests in variable interest entities ("VIE’s") created after January 31, 2003, must apply the provisions of this Interpretation to those entities immediately. A public company with a variable interest in a VIE created before February 1, 2003, must apply the provis ions of this Interpretation to that entity by the end of the first interim or annual reporting period ending after December 15, 2003. The Company is currently evaluating the effect FIN 46 will have on its consolidated financial position, liquidity, or results of operations for VIE’s created before February 1, 2003.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 amends SFAS No. 133 to require contracts with comparable characteristics be accounted for similarly. SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment qualifies as a derivative and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003, where the guidance should be applied prospectively. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain financial instruments, which under previous guidance were accounted for as equity, be classified as liabilities or assets in statements of financial position. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.
 
18.  SUBSEQUENT EVENTS
 
On November 12, 2003, the Company issued notes in the principal amount of $250 million due 2018 and bearing interest at 6.3% per annum. Proceeds from the sale of the notes, net of approximately $2 million in transaction fees, were $246 million and will be used, along with cash generated from business activities and other borrowings, for the repayment of the Company’s outstanding $500 million 6 3/8% notes due on January 15, 2004.
 

 24

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
      ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                        AND RESULTS OF OPERATIONS
 
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's audited consolidated financial statements, including related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the 2002 Annual Report on Form 10-K, and the unaudited consolidated financial statements included elsewhere in this report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.
 
RESULTS OF OPERATIONS
 
SUMMARY OF CONSOLIDATED RESULTS
 
The Company’s results of operations as presented in the Company’s unaudited consolidated financial statements of this Form 10-Q are described below:
 
Earnings (Loss)
 
 
Third Quarter
 
First Nine Months
(Dollars in millions, except per share amounts)
2003
 
2002
 
2003
 
2002




 
 
 
 
 
 
 
 
Operating earnings (loss)
$
(440)
$
61
$
(306)
$
219
Net earnings (loss) before cumulative effect of changes in
 
 
 
 
 
 
 
  accounting principles
(336)
 
24
 
(283)
 
92
Net earnings (loss)
(336)
 
24
 
(280)
 
74
 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
    Basic
 
 
 
 
 
 
 
  Before cumulative effect of changes in accounting
 
 
 
 
 
 
 
    principles
$
(4.35)
$
0.31
$
(3.66)
$
1.19
  Cumulative effect of changes in accounting principles, net
--
 
--
 
0.04
 
(0.23)




    Net earnings (loss) per share
$
(4.35)
$
0.31
$
(3.62)
$
0.96




 
 
 
 
 
 
 
 
    Diluted
 
 
 
 
 
 
 
  Before cumulative effect of changes in accounting
 
 
 
 
 
 
 
    principles
$
(4.35)
$
0.31
$
(3.66)
$
1.19
  Cumulative effect of changes in accounting principles, net
--
 
--
 
0.04
 
(0.23)




    Net earnings (loss) per share
$
(4.35)
$
0.31
$
(3.62)
$
0.96





Operating results for the third quarter 2003 declined to a loss of $440 million compared to operating earnings for the third quarter 2002 of $61 million. The decline in operating earnings was primarily attributable to asset impairments and restructuring charges of approximately $496 million and higher raw material and energy costs partially offset by higher selling prices and the continued impact of cost reduction measures. Operating earnings for the third quarter 2003 were positively impacted by approximately $11 million due to the previously reported change in vacation policy.

 25

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Operating results for the first nine months 2003 declined to a loss of $306 million compared with operating earnings for the first nine months 2002 of $219 million. The decline in operating earnings was primarily attributable to asset impairments and restructuring charges of $514 million and higher raw material and energy costs partially offset by higher selling prices and the continued impact of cost reduction measures. Operating results for the first nine months were also positively impacted by:
Net earnings for the first nine months 2002 included the write-down to fair value of certain technology business venture investments and a loss of $12 million due to remeasurement of an Argentine peso-denominated tax receivable.

 
Third Quarter
 
 
Volume Effect
 
 
 
Price Effect
 
 
Product
Mix Effect
 
Exchange
Rate
Effect
(Dollars in millions)
2003
 
2002
 
Change
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Sales
$
1,444
$
1,374
 
5 %
 
(1)%
 
3 %
 
-- %
 
3 %

The increase in sales revenue for the third quarter 2003 compared to the third quarter 2002 was primarily due to higher selling prices and favorable foreign currency exchange rates, particularly for the euro. The increase in selling prices and foreign currency exchange rates had a positive impact on sales revenue of $40 million and $36 million, respectively.

 
First Nine Months
 
 
Volume Effect
 
 
 
Price Effect
 
 
Product
Mix Effect
 
Exchange
Rate
Effect
(Dollars in millions)
2003
 
2002
 
Change
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Sales
$
4,366
$
4,005
 
9 %
 
(1)%
 
6 %
 
-- %
 
4 %

The increase in sales revenue for the first nine months 2003 compared to the first nine months 2002 was primarily due to higher selling prices and favorable foreign currency exchange rates which had a positive impact on sales revenue of $223 million and $141 million, respectively.

 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit
$
200
$
202
 
(1) %
$
625
$
636
 
(2)%
  As a percentage of sales
13.9%
 
14.7%
 
 
 
14.3%
 
15.9%
 
 

Gross profit for the third quarter and first nine months 2003 decreased slightly compared to the third quarter and first nine months 2002 primarily due to higher raw material and energy costs and lower sales volume that were partially offset by higher selling prices and the continued impact of cost reduction measures. The higher raw material and energy costs were primarily attributable to the following raw materials: propane, paraxylene, ethylene glycol, and natural gas.

 26

     

 
 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The Company expects that higher raw material and energy costs combined with a difficult market environment will continue to negatively impact operating results for the remainder of 2003, mitigated to the extent the Company is able to continue to offset this impact in part through higher selling prices for certain of its products and through various cost reduction measures.

The insurance settlement of approximately $14 million related to the previously disclosed 2002 operational disruptions at the Company’s plants in Rotterdam, the Netherlands and Columbia, South Carolina had a positive impact on gross profit in the first nine months 2003.

The Company continues to implement a variety of cost control measures to manage discretionary spending. Of the measures taken, a change in vacation policy favorably impacted the third quarter and the first nine months 2003 results by approximately $11 million and $29 million, respectively, and is expected to have a similar impact for the fourth quarter of 2003 only. The Company expects that the other cost control measures implemented during 2003 will continue to positively impact its results going forward.

The Company is also working on other measures to improve its cost structure and profitability. Included in that effort is a review of the Company’s portfolio of products and businesses, primarily in the Eastman Division. The Company expects during the fourth quarter 2003 to continue to identify and pursue implementation of restructuring, divestiture, and consolidation alternatives for certain identified portions of the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment to improve profitability.

 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
Selling and General
 
 
 
 
 
 
 
 
 
 
 
  Administrative Expenses
$
100
$
100
 
-- %
$
308
$
300
 
3 %
Research and Development
 
 
 
 
 
 
 
 
 
 
 
  Expenses
44
 
42
 
5 %
 
129
 
118
 
9 %




 
$
144
$
142
 
 
$
437
$
418
 
 




  As a percentage of sales
9.9%
 
10.3%
 
 
 
10.0%
 
10.4%
 
 

Selling and general administrative expenses ("SG&A expenses") for the third quarter 2003 compared to the third quarter 2002 were flat.

The increase in SG&A expenses for the first nine months 2003 compared to the first nine months 2002 was primarily due to higher costs associated with the Company’s growth initiatives, including the business-building efforts within the Developing Businesses segment.

Research and development expenses for the third quarter and the first nine months 2003 were higher compared to the third quarter and the first nine months 2002 primarily due to the Company’s increased efforts to develop certain operational efficiencies and efforts associated with new business initiatives. The Company expects full year 2003 research and development expense to be higher than full year 2002 for the same reasons.

Combined costs related to selling and general administrative expenses and research and development expenses are expected to continue to be at or below 11% of sales revenue.
 

 27

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Impairments and Restructuring Charges, net

During the third quarter 2003, the Company recognized pre-tax impairments and restructuring charges of $496 million, consisting of $482 million in non-cash impairment charges, and severance charges of $14 million. For the first nine months 2003, pre-tax impairments and restructuring charges totaled $514 million, with non-cash impairment charges and severance charges totaling $497 million and $17 million, respectively. The following table summarizes the 2003 and 2002 charges:

 
 
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
2003
 
2002




 
 
 
 
 
 
 
 
Eastman Division segments:
 
 
 
 
 
 
 
CASPI segment:
 
 
 
 
 
 
 
Fixed asset impairments
$
194
$
--
$
194
$
--
Intangible asset impairments
175
 
--
 
175
 
--
Goodwill impairments
34
 
--
 
34
 
--
Severance costs
8
 
--
 
11
 
--
Site closure costs
--
 
(1)
 
--
 
(1)
 
  
 
  
 
  
 
  
Total – CASPI segment
411
 
(1)
 
414
 
(1)
 
 
 
 
 
 
 
 
PCI segment:
 
 
 
 
 
 
 
Fixed asset impairments
79
 
--
 
94
 
--
Severance costs
4
 
--
 
4
 
--




Total – PCI segment
83
 
--
 
98
 
--
 
 
 
 
 
 
 
 
SP segment:
 
 
 
 
 
 
 
Severance costs
1
 
--
 
1
 
--




Total – SP segment
1
 
--
 
1
 
--
 
 
 
 
 
 
 
 
Total Eastman Division
495
 
(1)
 
513
 
(1)




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Voridian Division segments:
 
 
 
 
 
 
 
Polymers segment
 
 
 
 
 
 
 
Severance costs
1
 
--
 
1
 
--




Total – Polymers segment
1
 
--
 
1
 
--
 
 
 
 
 
 
 
 
Total Voridian Division
1
 
--
 
1
 
--




 
 
 
 
 
 
 
 
Total Eastman Chemical Company
$
496
$
(1)
$
514
$
(1)




 
 
 
 
 
 
 
 
 
Total goodwill impairment
 
34
 
--
 
34
 
--
Total asset impairments and restructuring charges
 
462
 
(1)
 
480
 
(1)




 
 
 
 
 
 
 
 
 
Total Eastman Chemical Company
$
496
$
(1)
$
514
$
(1)





 28

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") Segment
 
In the third quarter 2003, the Company reorganized the operating structure within its CASPI segment and changed the segment’s business strategy in response to the financial performance of certain underlying product lines. Those product lines include: acrylate ester monomers; composites (unsaturated polyester resins); inks and graphic arts raw materials; liquid resins; powder resins; and textile chemicals. Prior to the third quarter 2003, management was pursuing growth strategies aimed at significantly improving the financial performance of these product lines. However, due to the continued operating losses and deteriorating market conditions, management decided to pursue alternative strategies including restructuring, divestiture, and consolidation. This change affected both the manner in which certain assets are used and the financial outlook for these product lines, thus triggering the impairments and certain restructuring charges.

The third quarter 2003 fixed asset impairments charges of $194 million primarily relate to assets associated with the above mentioned product lines, and primarily impact manufacturing sites in the North American and European regions that were part of the Lawter International, Inc. ("Lawter"), McWhorter Technologies, Inc ("McWhorter"), and Chemicke Zavody Sokolov ("Sokolov") acquisitions. Within these product lines, nine sites in North America and six sites in Europe were impaired. As the undiscounted future cash flows could not support the carrying value of the assets, the fixed assets were written down to fair value, as established primarily by appraisal.

The third quarter 2003 intangible asset impairments charges relate to definite-lived intangible assets of approximately $128 million and indefinite-lived intangibles of approximately $47 million. The definite-lived intangibles relate primarily to developed technology and customer lists, and the indefinite-lived intangibles primarily relate to trademarks. These intangible assets were primarily associated with the acquisitions of Lawter and McWhorter. As the undiscounted future cash flows could not support the carrying value of the definite-lived intangible assets, these assets were written down to fair value, as established primarily by appraisal. Indefinite-lived intangible assets were written down to fair value, as established by appraisal.

Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," the Company defined reporting units as one level below the operating segment level and considered the criteria set forth in SFAS No. 142 in aggregating the reporting units. This resulted in the CASPI segment being deemed a single reporting unit. In the third quarter 2003, the reorganization of the operating structure within the CASPI segment resulted in new reporting units one level below the operating segment. Due to the change in strategy and lack of similar economic characteristics, these reporting units did not meet the criteria necessary for aggregation. As a result, the goodwill associated with the CASPI segment was reassigned to the new reporting units based upon relative fair values. The reporting unit that contained the above-mentioned product lines was assigned $34 million of goodwill out of the total CASPI segment goodwill of $333 million. Because the Company determined that this reporting unit could no longer support the carrying value of its assigned goodwill, the full amount of that goodwill was impaired. The fair value of the other reporting unit within CASPI was sufficient to support the carrying value of the remainder of the goodwill.

The third quarter 2003 severance costs of $8 million are discussed in further detail below.

In the first six months 2003, total asset impairments and restructuring charges of approximately $3 million were recognized. These charges primarily relate to employee severance costs and changes in estimates for previously accrued amounts.

In third quarter 2002, earnings were positively impacted by $1 million as a result of a favorable change in the estimate related to previously recognized restructuring costs in the CASPI segment.

 29

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Performance Chemicals and Intermediates ("PCI") Segment

The PCI segment’s charges of $79 million relate to the impairment of fixed assets used in certain commodity and specialty organic chemicals product lines as a result of increased competition and changes in business strategy in response to a change in market conditions and the financial performance of these product lines. Within the commodity product lines, the fixed asset impairments charge relates to assets at the Sokolov, Czech Republic facility. Within the specialty organic chemicals product lines, the fixed asset impairments charge relates to assets located at the Kingsport, Tennessee facility. As the undiscounted future cash flows could not support the carrying value of the assets, the fixed assets were written down to fair value, as established primarily by appraisal.
 
The third quarter 2003 severance costs of $4 million are discussed in further detail below.

In the second quarter 2003, the Company recorded an asset impairments charge of approximately $15 million related to the impairment of certain fixed assets used in the PCI segment’s fine chemicals product lines that are located in Llangefni, Wales. In response to industry conditions, during the second quarter 2003 the Company revised its strategy and the earnings forecast for the products manufactured by these assets. As the undiscounted future cash flows could not support the carrying value of the asset, the fixed assets were written down to fair value, as established primarily by discounted future cash flows of the impacted assets.

Severance charges

In the third quarter 2003, the Company recognized $14 million in restructuring charges related to the actual and probable involuntary separations of approximately 300 employees. These workforce reductions are the result of decisions made as part of the restructuring of the CASPI segment discussed above, the Company’s annual budgeting process, and site closure costs associated with the PCI segment.

The following table summarizes the charges and changes in estimates described above, other asset impairments and restructuring charges, the noncash 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, 2002
 
Provision/ Adjustments
 
Noncash Reductions
 
Cash Reductions
 
Balance at
December 31, 2002
 
 

 
 

 
 

 
 

 
 

 
Noncash charges
$
--
$
2
$
(2)
$
--
$
--
Severance costs
 
10
 
2
 
--
 
(10)
 
2
Site closure costs
 
13
 
3
 
--
 
(9)
 
7





  Total
$
23
$
7
$
(2)
$
(19)
$
9





 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
January 1, 2003
 
Provision/ Adjustments
 
Noncash Reductions
 
Cash Reductions
 
Balance at
September 30,2003





 
 
 
 
 
 
 
 
 
 
 
Noncash charges
$
--
$
497
$
(497)
$
--
$
--
Severance costs
 
2
 
17
 
--
 
(3)
 
16
Site closure costs
 
7
 
--
 
--
 
(3)
 
4





  Total
$
9
$
514
$
(497)
$
(6)
$
20






Substantially all severance and site closure costs are expected to be applied to the reserves within one year.
 

 30

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Interest Expense, Net

 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
Gross interest costs
$
32
$
34
 
 
$
99
$
99
 
 
Less capitalized interest
1
 
2
 
 
 
3
 
4
 
 




Interest expense
31
 
32
 
(3) %
 
96
 
95
 
1 %
Interest income
1
 
2
 
 
 
4
 
4
 
 




Interest expense, net
$
30
$
30
 
-- %
$
92
$
91
 
1 %




 
 
 
 
 
 
 
 
 
 
 
 

Net interest expense for the third quarter 2003 compared to the third quarter 2002 was flat as a result of lower interest rates, offset by an increase in total borrowings less cash and cash equivalents ("Net Debt").

Net interest expense for the first nine months 2003 compared to the first nine months 2002 increased slightly primarily due to an increase in Net Debt partially offset by lower interest rates. The Company expects Net Debt at the end of 2003 will be similar to or slightly higher than Net Debt at year-end 2002.

Other Operating Income and Other (Income) Charges, Net

 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
Other operating income
$
--
$
--
 
N/A
$
(20)
$
--
 
N/A




 
 
 
 
 
 
 
 
 
 
 
 
Other income
$
(4)
$
(4)
 
N/A
$
(20)
$
(7)
 
>100%
Other charges
5
 
7
 
(29)%
 
15
 
14
 
7 %




Other (income) charges, net
$
1
$
3
 
 
$
(5)
$
7
 
 




 
 
 
 
 
 
 
 
 
 
 
 

Other Operating Income

Other operating income includes gains and losses on sales of assets that are not a component of an entity. Other operating income for the first nine months 2003 reflected a gain of $20 million on the sale of the Company’s high-performance crystalline plastics assets, which were formerly a part of the Company’s SP segment.

Other (Income) Charges

Included in other income are the Company’s portion of earnings from its equity investments, gains on sales of non-operating assets, royalty income, gains on foreign exchange transactions and other miscellaneous items. Included in other charges are losses from foreign exchange transactions, the Company’s portion of losses from its equity investments, losses on sales of nonoperating assets, fees on securitized receivables and other miscellaneous items.

Other income for each period included net gains on foreign currency transactions, net of hedging, primarily attributed to the strengthening of the euro, and results from the Company’s equity investments.

Other charges for the third quarter and the first nine months 2002 included the write-down to fair value of certain technology business venture investments. Results for the first nine months 2002 also reflected a loss of $12 million due to remeasurement of an Argentine peso-denominated tax receivable.
 

 31

     

 
 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Provision for Income Taxes

 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
Provision (benefit) for
  income taxes
$
(135)
$
4
 
>(100)%
$
(110)
$
29
 
>(100)%
  Effective tax rate
28%
 
14%
 
 
 
28%
 
24%
 
 

The expected tax benefit rate of 28% for the quarter and first nine months 2003 was primarily due to the estimated impact of the treatment of third quarter impairment and restructuring charges.

Historically, the Company recorded benefits from a foreign sales corporation or extraterritorial income exclusion. The Company expects benefits from the extraterritorial income exclusion to continue at least through 2003 and that its annual effective tax rate in 2003 will be similar to the effective tax rate for the third quarter and first nine months.

Cumulative Effect of Change in Accounting Principles, Net of Tax
 
 
 
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
2003
 
2002




 
 
 
 
 
 
 
 
Cumulative effect of change in accounting principles, net
$
--
$
--
$
3
$
(18)

SFAS No. 143
 
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," at January 1, 2003 the Company recorded asset retirement obligations primarily related to closure and post closure environmental liabilities associated with certain property, plant and equipment. This resulted in the Company recording asset retirement obligations of $28 million and an after-tax credit to earnings of $3 million during the first quarter 2003.
 
If the asset retirement obligation measurement and recognition provisions of SFAS No. 143 had been in effect on January 1, 2002, the aggregate carrying amount of those obligations on that date would have been $27 million. If the amortization of asset retirement cost and accretion of asset retirement obligation provisions of SFAS No. 143 had been in effect during 2002, the impact on "Earnings before cumulative effect of changes in accounting principle" in 2002 would have been immaterial.
 
SFAS No. 142
 
The Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets; require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment; require reporting units to be identified for the purpose of assessing potential future impairments of goodwill; and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.
 

 32

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

In connection with the adoption of SFAS No. 142, the Company completed in the first quarter 2002 the impairment test for intangible assets with indefinite useful lives other than goodwill. As a result of this impairment test, it was determined that the fair value of certain trademarks related to the CASPI segment, as established by appraisal and based on discounted future cash flows, was less than the recorded value. Accordingly, the Company recognized an after-tax impairment charge of approximately $18 million in the first quarter of 2002 to reflect lower than previously expected cash flows from certain related products. This charge is reported in the Unaudited Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings as the cumulative effect of a change in accounting pr inciple. Additionally, the Company reclassified $12 million of its intangible assets related to assembled workforce and the related deferred tax liabilities of approximately $5 million to goodwill. During the second quarter 2002, the Company performed the transitional impairment test on its goodwill as required upon adoption of this Statement, and determined that no impairment of goodwill existed as of January 1, 2002. The Company completed its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter 2002 and determined that no impairment existed as of September 30, 2002. The Company plans to continue 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.
 
In the third quarter 2003, the Company impaired certain goodwill and indefinite-lived intangible assets in the CASPI segment as discussed in Note 8 above. Additionally, the Company completed its annual impairment review of the remaining goodwill and indefinite-lived intangible assets. No further impairment of goodwill or indefinite-lived intangible assets was required due to this review.
 
SUMMARY BY OPERATING SEGMENT

The Company’s products and operations are managed and reported in six operating segments. Effective January 1, 2003, the Company realigned its divisional structure into three divisions. Eastman Division consists of the CASPI segment, the PCI segment and the SP segment. Voridian Division contains the Polymers segment and the Fibers segment. Developing Businesses Division contains the Developing Businesses segment.

The CASPI segment manufactures raw materials, additives and specialty polymers, primarily for the paints and coatings, inks and graphic arts, adhesives and other markets. The CASPI segment's products consist of binders and resins, liquid vehicles, pigment concentrates and additives, unsaturated polyester resins and polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as key components in paints and inks to form a protective coating or film, and bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol solvents, maintain the binders in liquid form for ease of application. Pigment concentrates and additives, such as cellulosic polymers, Texanol? coalescing aid and chlori nated polyolefins, provide different properties or performance enhancements to the end product. Unsaturated polyester resins are used primarily in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions are traditionally used as textile sizes to protect fibers during processing in textile manufacturing, and the technology is also used in water-based paints, coatings and inks. Additional products are developed in response to, or in anticipation of, new applications where the Company believes significant value can be achieved.

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. The PCI segment also offers custom manufacturing services through its custom synthesis business.

 33

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The SP segment produces highly specialized copolyesters, cellulosic plastics and compounded polyethylene plastics that possess unique performance properties for value-added end uses such as appliances, store fixtures and displays, building and construction, electronics and electronic packaging, medical packaging, personal care and cosmetics, performance films, tape and labels, biodegradeables, cups and lids, fiber and strapping, photographic and optical, graphic arts and general packaging. The SP segment’s key products include engineering and specialty polymers, specialty film and sheet products, and packaging film and fiber products.

The Polymers segment manufactures and supplies PET polymers for use in beverage and food packaging and other applications such as custom-care and cosmetics packaging, health care and pharmaceutical uses, household products and industrial. PET polymers serve as source products for packaging a wide variety of products including carbonated soft drinks, water, beer and personal care items and food containers that are suitable for both conventional and microwave oven use. The Polymers segment also manufactures low-density polyethylene and linear low-density polyethylene, which are used primarily for packaging and film applications and in extrusion coated containers such as milk and juice cartons.

The Fibers segment manufactures Estron? acetate tow and Estrobond? triacetin plasticizers which are used primarily in cigarette filters; Estron? and Chromspun? acetate yarns for use in apparel, home furnishings and industrial fabrics; and acetyl chemicals.

The Developing Businesses segment includes new businesses and certain investments in non-traditional growth opportunities that leverage the Company’s technology expertise, intellectual property and know-how into business models that extend to new customers and markets. The segment includes, among other new and developing businesses, Cendian Corporation ("Cendian"), a logistics provider for chemical and plastics companies; Ariel Research Corporation ("Ariel"), a provider of international chemical and regulatory compliance solutions for environmental, health and safety operations; and Eastman’s gasification services.

The Company’s divisional structure allows it to align costs more directly with the activities and businesses that generate them. Goods and services are transferred between the three divisions at predetermined prices which may be in excess of cost. Accordingly, the divisional structure results in the recognition of interdivisional sales revenue and operating earnings. Such interdivisional transactions are eliminated in the Company’s consolidated financial statements.

Effective January 1, 2003, sales and operating results for developing businesses activities were moved from the CASPI, PCI and SP segments to the Developing Businesses segment. Accordingly, amounts for 2002 have been reclassified to reflect this change.

Due to the fact that interdivisional sales are eliminated in the Company’s consolidated financial statements, the following segment discussions pertain primarily to external sales revenue. For additional information concerning the results for the Company’s operating segments, see Note 14 to the Company’s unaudited consolidated financial statements and Exhibit 99.01 to this Form 10-Q.

 34

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

EASTMAN DIVISION

CASPI Segment
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
External sales
$
400
$
401
 
-- %
$
1,209
$
1,178
 
3 %
 
Volume effect
 
 
 
 
(10) %
 
 
 
 
 
(7)%
 
Price effect
 
 
 
 
3 %
 
 
 
 
 
2 %
 
Product mix effect
 
 
 
 
4 %
 
 
 
 
 
3 %
 
Exchange rate effect
 
 
 
 
3 %
 
 
 
 
 
5 %
 
 
 
 
 
 
 
 
 
 
 
 
Interdivisional sales
--
 
--
 
-- %
 
--
 
--
 
-- %
 
 
 
 
 
 
 
 
 
 
 
 
Operating earnings
(395)
 
22
 
>(100)%
 
(376)
 
72
 
>(100)%
 
 
 
 
 
 
 
 
 
 
 
 
Impairments and
 
 
 
 
 
 
 
 
 
 
 
  restructuring charges, net
411
 
(1)
 
 
 
414
 
(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 

External sales revenue for the third quarter 2003 compared to the third quarter 2002 was flat primarily due to favorable shifts in foreign currency exchange rates and product mix and an increase in selling prices that were offset by a decrease in sales volume. Higher selling prices contributed approximately $13 million to sales revenue. Foreign currency exchange rates had a positive impact on sales revenue for the third quarter 2003 of $13 million primarily due to the strengthening of the euro. A favorable shift in product mix towards higher margin products had a positive impact on sales revenue for the third quarter 2003 of $11 million. The decline in sales volume, which had a negative impact on sales revenue for the third quarter 2003 of $39 million, was primarily attributable to forgoing sal es of certain low-margin products and reduced sales to customers in the coatings resins market who met some of their product requirements internally as a result of lower demand.

The increase in external sales revenue for the first nine months 2003 compared to the first nine months 2002 was primarily due to favorable shifts in foreign currency exchange rates and product mix and higher selling prices that more than offset the decrease in sales volume. Foreign currency exchange rates had a positive impact on sales revenue for the first nine months 2003 of $57 million primarily due to the strengthening of the euro. A favorable shift in product mix towards higher margin products had a positive impact on sales revenue for the third quarter 2003 of $44 million. The decline in sales volume, which had a negative impact on sales revenue for the first nine months 2003 of $88 million, was primarily attributable to forgoing sales of certain low-margin products and an increasingly c ompetitive global business environment.

Operating earnings for the third quarter and first nine months 2003 declined significantly compared to the third quarter 2002 primarily due to the asset impairments and restructuring charges related to this segment of approximately $411 million. For more information on the asset impairments and restructuring charges see the discussion of impairments and restructuring charges above and in Note 8 to the Company’s unaudited consolidated financial statements. Additionally, higher raw materials costs, which were partially offset by higher selling prices and cost reduction measures, contributed to the decrease in operating earnings.


 35

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

PCI Segment
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
External sales
$
283
$
281
 
1 %
$
909
$
816
 
11 %
 
Volume effect
 
 
 
 
(6)%
 
 
 
 
 
1 %
 
Price effect
 
 
 
 
5 %
 
 
 
 
 
9 %
 
Product mix effect
 
 
 
 
1 %
 
 
 
 
 
(1)%
 
Exchange rate effect
 
 
 
 
1 %
 
 
 
 
 
2 %
 
 
 
 
 
 
 
 
 
 
 
 
Interdivisional sales
120
 
98
 
23 %
 
360
 
277
 
30 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating earnings
(83)
 
11
 
>(100)%
 
(77)
 
12
 
>(100)%
 
 
 
 
 
 
 
 
 
 
 
 
Impairments and
 
 
 
 
 
 
 
 
 
 
 
  restructuring charges, net
83
 
--
 
 
 
98
 
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The slight increase in external sales revenue for the third quarter 2003 compared to the third quarter 2002 was primarily attributed to higher selling prices and favorable shifts in product mix and foreign currency exchange rates that more than offset a decline in sales volume. The increase in selling prices, mostly for intermediate chemicals, had a positive impact on sales revenue of $13 million and was primarily attributable to higher raw material and energy costs. The decline in sales volume had a negative impact on sales revenue of $18 million and was primarily attributed to an increasingly competitive global business environment. The increase in interdivisional sales revenue for the third quarter 2003 was primarily due to higher selling prices driven by higher raw material and energy costs .

The increase in external sales revenue for the first nine months 2003 compared to the first nine months 2002 was primarily attributable to higher selling prices and a favorable shift in foreign currency exchange rates. The increase in selling prices had a positive impact on sales revenue of $76 million and was primarily attributable to oxo chemical prices that increased consistent with higher raw material and energy costs. Foreign currency exchange rates also had a positive impact on sales revenue of $18 million primarily due to the strengthening of the euro. The increase in interdivisional sales revenue for the first nine months 2003 was primarily due to higher selling prices driven by higher raw material and energy costs.

The decrease in operating earnings for the third quarter and the first nine months 2003 compared to the third quarter and the first nine months 2002 was primarily due to asset impairments and restructuring charge of approximately $83 million. Additionally, lower sales volume and higher raw material and energy costs were partially offset by higher selling prices and cost reduction measures. For more information on the asset impairments and restructuring charges see the discussion of impairments and restructuring charges above and Note 8 to the Company’s unaudited consolidated financial statements.

During 2001, the Company reported that a large customer of the PCI segment did not intend to renew its contract for a custom synthesis product beyond June 30, 2002. As a consequence, impairment charges totaling approximately $70 million related to the impacted assets were recorded during 2001 as part of the restructuring of the fine chemicals product lines. Subsequently, the customer initiated discussions with the Company which resulted in two amendments to the agreement to extend the custom synthesis product contract through June 2004 based on renegotiated terms. Effective July 1, 2003, Eastman and the customer entered into a multi-year agreement in which the Company will remain the sole global supplier for the customer's custom synthesis product.

 36

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

SP Segment
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
External sales
$
135
$
141
 
(4)%
$
417
$
394
 
6 %
 
Volume effect
 
 
 
 
(8)%
 
 
 
 
 
2 %
 
Price effect
 
 
 
 
1 %
 
 
 
 
 
(1)%
 
Product mix effect
 
 
 
 
1 %
 
 
 
 
 
1 %
 
Exchange rate effect
 
 
 
 
2 %
 
 
 
 
 
4 %
 
 
 
 
 
 
 
 
 
 
 
 
Interdivisional sales
14
 
12
 
14 %
 
40
 
36
 
13 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating earnings
12
 
12
 
--%
 
53
 
30
 
77 %
 
 
 
 
 
 
 
 
 
 
 
 
Impairments and
 
 
 
 
 
 
 
 
 
 
 
  restructuring charges, net
1
 
--
 
 
 
1
 
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating income
--
 
--
 
 
 
20
 
--
 
 

The decrease in external sales revenue for the third quarter 2003 compared to the third quarter 2002 was primarily due to lower sales volume, primarily attributed to reduced demand for packaging, film, and fiber products with photographic applications that were partially offset by a favorable shift in foreign currency exchange rates. The decrease in sales volume had a negative impact on sales revenue of approximately $12 million. The favorable shifts in foreign currency exchange rates, in the amount of approximately $3 million, were primarily the result of the strengthening of the euro.
 
External sales revenue for the first nine months 2003 increased compared to the first nine months 2002 primarily due to the positive impact of foreign currency exchange rates and higher sales volume. Favorable shifts in foreign currency exchange rates, primarily due to the strengthening of the euro, contributed to increased sales revenue in the amount of $14 million. The increase in sales volume, primarily for specialty film and sheet products, had a positive impact on sales revenue of $8 million.

Operating earnings for the third quarter 2003 were flat compared to the third quarter 2002 primarily due to lower sales volume and restructuring charges, which were offset by cost reduction efforts and a favorable shift in foreign currency exchange rates.

Operating earnings for the first nine months 2003 increased compared to the first nine months 2002 primarily due to a gain on the sales of the segment’s high-performance crystalline plastics assets in the amount of $20 million and cost reduction measures. Additionally, positive changes in sales volume and foreign currency exchange rates were partially offset by lower selling prices, with higher raw material and energy costs, and restructuring charges.

New competitors in Asia and Europe continue to negatively impact results for copolyesters. However, the Company is committed to maintaining cost advantages obtained from its scale of operations and manufacturing experience and to increasing utilization of its current capacity.

 37

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

VORIDIAN DIVISION

Polymers Segment
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
External sales
$
442
$
382
 
16 %
$
1,306
$
1,123
 
16 %
 
Volume effect
 
 
 
 
9 %
 
 
 
 
 
1 %
 
Price effect
 
 
 
 
3 %
 
 
 
 
 
11 %
 
Product mix effect
 
 
 
 
1 %
 
 
 
 
 
-- %
 
Exchange rate effect
 
 
 
 
3 %
 
 
 
 
 
4 %
 
 
 
 
 
 
 
 
 
 
 
 
Interdivisional sales
14
 
16
 
(3)%
 
54
 
39
 
41 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating earnings
2
 
(3)
 
>100%
 
56
 
49
 
14 %
 
 
 
 
 
 
 
 
 
 
 
 
Impairments and
 
 
 
 
 
 
 
 
 
 
 
  restructuring charges, net
1
 
--
 
 
 
1
 
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The increase in external sales revenue for the third quarter 2003 compared to the third quarter 2002 was due in large part to higher sales volume, for both PET polymers and polyethylene, which had a positive impact on sales revenue of $35 million. An increase in selling prices, which were primarily the result of higher raw material and energy costs, also contributed to sales revenue in the amount of approximately $12 million. A favorable shift in foreign currency exchange rates, primarily as a result of the strengthening of the euro, also had a positive impact on sales revenue of $13 million.

The increase in external sales revenue for the first nine months 2003 compared to the first nine months 2002 was due in large part to higher selling prices, for both PET polymers and polyethylene, which had a positive impact on sales revenue of $128 million. A favorable shift in foreign currency exchange rates, particularly for the euro, also had a positive impact on sales revenue of $40 million.
 
Operating earnings in the third quarter 2003 increased compared to the third quarter of 2002 primarily due to lower operating costs, higher sales volume and higher selling prices that more than offset higher raw material and energy costs, and $1 million in restructuring charges. Third quarter 2002 operating results included approximately $23 million in costs related to operational disruptions.

Operating earnings for the first nine months 2003 increased compared to the first nine months 2002 primarily due to higher selling prices, in particular for PET polymers and polyethylene, and the positive impact of a favorable shift in foreign currency exchange rates, primarily for the euro. In addition, 2003 operating earnings were positively impacted by the $14 million insurance settlement for the 2002 operational disruptions. The changes in selling prices and foreign currency exchange rates were partially offset by higher raw material and energy costs and a restructuring charge of $1 million. First nine months 2002 operating earnings included approximately $28 million in costs related to operational disruptions.


 38

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Fibers Segment
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
External sales
$
163
$
165
 
(1)%
$
475
$
486
 
(2)%
 
Volume effect
 
 
 
 
15 %
 
 
 
 
 
2 %
 
Price effect
 
 
 
 
-- %
 
 
 
 
 
1 %
 
Product mix effect
 
 
 
 
(18)%
 
 
 
 
 
(7)%
 
Exchange rate effect
 
 
 
 
2 %
 
 
 
 
 
2 %
 
 
 
 
 
 
 
 
 
 
 
 
Interdivisional sales
20
 
17
 
15 %
 
60
 
55
 
9 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating earnings (loss)
34
 
36
 
(6)%
 
95
 
109
 
(13)%
 
 
 
 
 
 
 
 
 
 
 
 

The slight decrease in external sales revenue for the third quarter 2003 compared to the third quarter 2002 was due to an unfavorable shift in product mix that was mostly offset by an increase in sales volume and a favorable shift in foreign currency exchange rates. The unfavorable shift in product mix was due to higher sales volume of lower margin products that had a negative impact on sales revenue of approximately $29 million. Foreign currency exchange rates had a positive impact on sales revenue of $3 million that was primarily due to the strengthening of the euro. An increase in sales volume, primarily for acetyl chemicals, had a positive impact on sales revenue of $25 million. The increase in interdivisional sales revenue for the first nine months 2003 was primarily due to higher selling prices resulting from higher raw material and energy costs.

The slight decrease in external sales revenue for the first nine months 2003 compared to the first nine months 2002 was primarily due to an unfavorable shift in product mix, which had a negative impact on sales revenue of $37 million. The unfavorable shift in product mix was primarily due to higher sales volume of lower margin products. The unfavorable shift in product mix was partially offset by increases in sales volume, primarily for acetyl chemicals, and favorable shifts in foreign currency exchange rates, primarily due to the strengthening of the euro, of $10 million and $12 million, respectively. The increase in interdivisional sales revenue for the first nine months 2003 was primarily due to higher selling prices resulting from higher raw material and energy costs.

The decline in operating earnings for the third quarter 2003 compared to the third quarter 2002 was primarily due to an unfavorable shift in product mix that was mostly offset by higher sales volume, a favorable shift in foreign currency exchange rates, and cost reduction measures.

The decline in operating earnings for the first nine months 2003 compared to the first nine months 2002 was primarily due to an unfavorable shift in product mix, which resulted mainly from the timing of acetate tow sales to China and a decline of acetate tow demand in North America, that was partially offset by increased sales volume of acetyl chemicals.

The Company continues to expect 2003 operating earnings for the Fibers segment to be about 5% lower than 2002 operating earnings.
 

 39

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

DEVELOPING BUSINESSES DIVISION

Developing Businesses Segment
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2003
 
2002
 
Change
 
2003
 
2002
 
Change






 
 
 
 
 
 
 
 
 
 
 
 
External sales
$
21
$
4
 
>100 %
$
50
$
8
 
>100 %
 
 
 
 
 
 
 
 
 
 
 
 
Interdivisional sales
104
 
89
 
16 %
 
296
 
236
 
25 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating loss
(13)
 
(17)
 
27 %
 
(52)
 
(50)
 
(4)%

The increase in external sales revenue for the third quarter and the first nine months 2003 compared to the third quarter and the first nine months 2002 was primarily due to the continued implementation of customer contracts by Cendian and the implementation of gasification services contracts. The increase in interdivisional sales revenue for the third quarter and the first nine months 2003 compared to the third quarter and the first nine months 2002 was primarily due to geographic expansion of the logistics services provided by Cendian to Eastman Division and Voridian Division.
 
Operating results for the Developing Businesses segment improved by $4 million in the third quarter 2003 compared with the third quarter 2002 primarily due to increased sales revenue related to Cendian that more than offset costs associated with efforts to increase external sales revenue.

Operating results for the Developing Businesses segment decreased in the first nine months 2003 compared to the first nine months 2002, primarily due to an increase in SG&A expenses associated with business building efforts partially offset by improved operating results related to Cendian.
 
For 2003, the Company expects to invest approximately 1% of sales revenue in new, growth-oriented business opportunities in the Developing Businesses segment.
 

 40

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

SUMMARY BY CUSTOMER LOCATION

Sales Revenue

 
Third Quarter
 
 
Volume Effect
 
 
 
Price Effect
 
 
Product
Mix Effect
 
Exchange
Rate
Effect
(Dollars in millions)
 
2003
 
2002
 
Change
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
United States and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Canada
$
832
$
788
 
6 %
 
1 %
 
5 %
 
-- %
 
-- %
Europe, Middle
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  East, and Africa
 
336
 
300
 
12 %
 
3 %
 
(4) %
 
2 %
 
11 %
Asia Pacific
 
157
 
168
 
(7)%
 
(11)%
 
2 %
 
2 %
 
-- %
Latin America
 
119
 
118
 
1 %
 
(5)%
 
5 %
 
-- %
 
1 %


Total
$
1,444
$
1,374
 
5 %
 
(1)%
 
3 %
 
-- %
 
3 %



Third quarter 2003 sales revenue in the United States and Canada increased $44 million compared to the third quarter 2002 primarily due to higher selling prices, particularly in the Polymers and PCI segments, which had a positive impact on sales revenue of $42 million.
 
The increase in sales revenue in Europe, the Middle East, and Africa for the third quarter 2003 compared to the third quarter 2002 was primarily due to favorable shifts in foreign currency exchange rates, which had a positive impact on sales revenue of $34 million, primarily due to the strengthening of the euro.

The decrease in sales revenue in the Asia Pacific region in the third quarter 2003 compared to the third quarter 2002 was primarily due to decreased sales volume partially offset by higher selling prices. The decrease in sales volume, primarily for the PCI and Fibers segments, had a negative impact on sales revenue of $19 million. Favorable shifts in product mix, in particular for the PCI segment, partially offset the decrease in sales volume in the amount of approximately $4 million.

Third quarter 2003 sales revenue in Latin America increased slightly compared to the third quarter 2002 primarily due to higher selling prices, particularly in the Polymers segment, in the amount of $6 million, which were partially offset by a decrease in sales volume, primarily in the PCI segment, of $5 million.
 

 41

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

 
First Nine Months
 
 
Volume Effect
 
 
 
Price Effect
 
 
Product
Mix Effect
 
Exchange
Rate
Effect
(Dollars in millions)
 
2003
 
2002
 
Change
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
United States and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Canada
$
2,505
$
2,303
 
9 %
 
-- %
 
7 %
 
2 %
 
-- %
Europe, Middle
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  East, and Africa
 
1,033
 
886
 
17 %
 
(1)%
 
(1) %
 
2 %
 
17 %
Asia Pacific
 
478
 
471
 
2 %
 
(4) %
 
4 %
 
1 %
 
1 %
Latin America
 
350
 
345
 
2 %
 
(9)%
 
13 %
 
1 %
 
(3) %



Total
$
4,366
$
4,005
 
9 %
 
(1)%
 
6 %
 
-- %
 
4 %




The increase in sales revenue in the United States and Canada for the first nine months 2003 compared to the first nine months 2002 was primarily due to higher selling prices, particularly for the Polymers segment, which had a positive impact on sales revenue of $168 million.
 
First nine months 2003 sales revenue in Europe, the Middle East, and Africa increased compared to the first nine months 2002 primarily due to foreign currency exchange rates which had a positive impact on sales revenue of $147 million, primarily due to the strengthening of the euro.

First nine months 2003 sales revenue in the Asia Pacific region increased slightly compared to the first nine months 2002 primarily due to higher selling prices partially offset by lower sales volume, particularly for the PCI segment, in the amount of approximately $18 million and $17 million, respectively.

First nine months 2003 sales revenue in Latin America increased compared to the first nine months 2002 primarily due to higher selling prices, particularly for the Polymers segment, which had a positive impact on sales revenue of $46 million and were partially offset by a decrease in sales volume, primarily attributable to the Polymers segment, in the amount of approximately $31 million.

With a substantial portion of sales to customers outside the United States of America, Eastman is subject to the risks associated with operating in international markets. To mitigate its exchange rate risks, the Company frequently seeks to negotiate payment terms in U.S. dollars. In addition, where it deems such actions advisable, the Company engages in foreign currency hedging transactions and requires letters of credit and prepayment for shipments where its assessment of individual customer and country risks indicates their use is appropriate. See Note 10 to the Company’s unaudited consolidated financial statements for additional information on the Company’s foreign currency hedging transactions.

 42

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA

 
First Nine Months
(Dollars in millions)
 
2003
 
2002


 
 
 
 
 
Net cash provided by (used in):
 
 
 
  Operating activities
$
46
$
541
  Investing activities
 
(126)
 
(188)
  Financing activities
 
56
 
(331)


Net change in cash and cash equivalents
$
(24)
$
22


 
 
 
 
Cash and cash equivalents at end of period
$
53
$
88



Cash Flows

Cash used in operating activities in the first nine months 2003 reflected a $60 million net decrease in Net Working Capital, which is defined as the net change in receivables, inventory and trade payables, and a significant decrease in liabilities for employee benefits and incentive pay which included a contribution of $238 million to the Company’s U.S. defined benefit pension plans.
 
Cash used in investing activities in the first nine months 2003 decreased primarily due to proceeds from the sale of the Company’s high performance crystalline plastics assets of $28 million, and a return of a deposit on equipment obtained with lease financing in 2003 of approximately $15 million, included as part of other items, net.

Cash provided by financing activities in the first nine months 2003 totaled $56 million due primarily to proceeds from long term borrowings of $248 million partially offset by a decrease in commercial paper borrowings of $88 million and dividend payments to stockholders in the amount of $102 million. The Company expects total borrowings less cash and cash equivalents ("Net Debt") at the end of 2003 will be similar to or slightly higher than Net Debt at year-end 2002.

Liquidity

Eastman has access to a $600 million revolving credit facility (the "Credit Facility") expiring in July 2005. Any borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates, principally LIBOR. The Credit Facility requires facility fees on the total commitment that vary based on Eastman's credit rating. The rate for such fees was 0.15% as of September 30, 2003 and December 31, 2002. The Credit Facility contains a number of covenants and events of default, including the maintenance of certain financial ratios. Eastman was in compliance with all such covenants for all periods presented.
 
Eastman typically utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Because the Credit Facility expires in July 2005, the commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings on a long-term basis. At September 30, 2003, the Company’s commercial paper borrowings were $55 million at an effective interest rate of 1.18%. At December 31, 2002, the Company's commercial paper borrowings were $143 million at an effective interest rate of 1.66%.
 

 43

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The Company has an effective registration statement on file with the Securities and Exchange Commission to issue up to $1 billion of debt or equity securities. On April 3, 2002, Eastman issued notes in the principal amount of $400 million due 2012 and bearing interest at 7% per annum. Net proceeds from the sale of the notes were $394 million and were used to repay portions of outstanding borrowings under the Credit Facility and commercial paper borrowings. On June 16, 2003, the Company issued notes in the principal amount of $250 million due 2008 and bearing interest at 3 1/4% per annum. Proceeds from the sale of the notes, net of $2 million in transaction fees, were $248 million and were used to repay portions of commercial paper borrowings.
 
The Company has $500 million of 6 3/8% coupon debt maturing January 15, 2004, which is reflected in borrowings due within one year in the unaudited Consolidated Statements of Financial Position at September 30, 2003. The Company expects to retire and refinance this debt from a combination of cash generated from business activities, new long-term borrowings, and available short-term borrowing capacity.

On November 12, 2003, the Company issued notes in the principal amount of $250 million due 2018 and bearing interest at 6.3% per annum. Proceeds from the sale of the notes, net of approximately $2 million in transaction fees, were $246 million and will be used, along with cash generated from business activities and other borrowings, for the repayment of the Company’s outstanding notes due on January 15, 2004.
 
In the first quarter 2002, the Company entered into interest rate swaps that converted the effective interest rates of the notes due in 2004 to variable rate.  These original interest rate swaps were settled during the fourth quarter 2002, resulting in $13 million cash proceeds being received by the Company.  The gain resulting from the settlement of the swaps is reflected as an increase in the current portion of long-term borrowings and will be amortized into earnings as a reduction to interest expense through the maturity of the notes in January 2004.  In conjunction with the settlement of the original interest rate swaps, new interest rate swaps were entered into in the fourth quarter 2002, converting the effective interest rates on the notes due in 2004 to variable rates that averaged 3.37% at September 30, 2003 and 4.07% at December 31, 2002.  The recording of the fair value of the interest rate swaps and the corresponding debt resulted in increases of $4 million in other current assets and the current portion of long-term borrowings at September 30, 2003. In the third quarter 2003, the Company entered into interest rate swaps that converted the effective interest rate of a portion of the notes due in 2012 to variable rates such that the average rate was 6.54% at September 30, 2003. The recording of the fair value of the interest rate swaps and the corresponding debt resulted in increases of $4 million in other current assets and the current portion of long-term borrowings at September 30, 2003.
 
The Company contributed $98 million to its U.S. defined benefit pension plans in the third quarter 2003 and contributed $238 million to its U.S. defined benefit pension plans during the first nine months 2003, thus completing its expected funding of these pension plans for 2003. The Company anticipates that additional funding of $0 to $40 million may be required in 2004, although the amount of such additional funding will be dependent upon interest rates, actual return on plan assets, retirement and attrition rates of employees, and other factors.
 
The expected return on assets and assumed discount rate used to calculate the Company’s pension and other postemployment 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 assumed discount rate is based upon an index of high-quality, long-term corporate borrowing rates. The following table illustrates the sensitivity to a change in the expected return on assets and assumed discount rate for U.S. pension plans and other postretirement welfare plans:
 

 44

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Change in
Assumption
 
Impact on
2003 Pre-tax
Pension Expense
Impact on
December 31, 2002 Projected Benefit Obligation for U.S. Pension Plans
Impact on
December 31, 2002 Benefit Obligation for Other U.S. Postretirement Plans




 
 
 
 
25 basis point
decrease in discount
rate
 
 
+$5 Million
 
 
+$43 Million
 
 
+$35 Million
 
 
 
 
25 basis point
increase in discount
rate
 
 
-$5 Million
 
 
-$41 Million
 
 
-$34 Million
 
 
 
 
25 basis point
decrease in expected return on assets
 
 
+$2 Million
 
 
No Impact
 
 
N/A
 
 
 
 
25 basis point
increase in expected
return on assets
 
 
-$2 Million
 
 
No Impact
 
 
N/A





The Company does not anticipate that a change in postemployment obligations caused by a change in the assumed discount rate will impact the benefits expense recognized or cash contributions made to the pension plans during 2003. However, an after-tax charge or credit will be recorded directly to other comprehensive income, a component of stockholders’ equity, as of December 31, 2003 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 and attrition rates of employees, and other factors.

Cash flows from operations and the sources of liquidity described above are expected to be available and sufficient to meet foreseeable cash flow requirements. However, the Company’s cash flows from operations can be affected by numerous factors including risks associated with global operations, raw materials 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.

Capital Expenditures

Capital expenditures were $159 million and $162 million for the first nine months 2003 and 2002, respectively. The Company continues its emphasis on cash flow management and, for 2003, expects that capital spending and other directed investments for small acquisitions and other ventures will be at or below $260 million. Long-term commitments related to planned capital expenditures are not material.

Other Commitments

At September 30, 2003, the Company’s obligations related to notes and debentures totaled $2.2 billion to be paid over a period of 24 years, including $500 million maturing within one year. Other borrowings, related primarily to commercial paper borrowings, totaled approximately $55 million.

 45

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The Company had various purchase obligations at September 30, 2003 totaling approximately $1.5 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 $220 million over a period of several years. Of the total lease commitments, approximately 24% relate to machinery and equipment, including computer and communications equipment and production equipment; approximately 43% relate to real property, including office space, storage facilities and land; and approximately 33% relate to railcars. The obligations described above are summarized in the following table:

(Dollars in millions)
 
Payments Due For

 
 
 
Period
 
 
 
Notes and Debentures
 
Commercial Paper and Other Borrowings
 
 
 
Purchase Obligations
 
 
 
Operating Leases
 
 
 
 
Total






 
 
 
 
 
 
 
 
 
 
 
2003
$
--
$
--
$
52
$
13
$
65
2004
 
506
 
--
 
210
 
36
 
752
2005
 
--
 
55
 
211
 
29
 
295
2006
 
--
 
--
 
207
 
27
 
234
2007
 
--
 
--
 
204
 
22
 
226
2008-2012
 
649
 
--
 
491
 
57
 
1,197
Beyond 2012
 
999
 
--
 
159
 
36
 
1,194





Total
$
2,154
$
55
$
1,534
$
220
$
3,963






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. The Company believes, based on current facts and circumstances, that a material payment pursuant to such guarantees in excess of the payments included above is remote. Under these operating leases, the residual value guarantees at September 30, 2003 totaled approximately $83 million.

As described in Note 16 to the Company’s unaudited consolidated financial statements, Eastman entered into an agreement in 1999 that allows it to sell 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 September 30, 2003 and December 31, 2002. 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, often referred to as 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.

Treasury Stock Transactions

The Company is currently authorized to repurchase up to $400 million of its common stock. No shares of Eastman common stock were repurchased by the Company during the first nine months 2003. A total of 2,746,869 shares of common stock at a cost of approximately $112 million, or an average price of approximately $41 per share, have been repurchased under the authorization. Repurchased shares may be used to meet common stock requirements for compensation and benefit plans and other corporate purposes. In the first quarter 2002, the Company issued 126,614 previously repurchased shares as the annual Company contribution to the Eastman Investment and Employee Stock Ownership Plan.
 

 46

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Dividends    

The Company declared cash dividends of $0.44 per share in the third quarters 2003 and 2002 and $1.32 per share in the first nine months 2003 and 2002.
 
RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. All companies with variable interests in variable interest entities ("VIE’s") created after January 31, 2003, must apply the provisions of this Interpretation to those entities immediately. A public company with a variable interest in a VIE created before February 1, 2003, must apply the provis ions of this Interpretation to that entity by the end of the first interim or annual reporting period ending after December 15, 2003. The Company is currently evaluating the effect FIN 46 will have on its consolidated financial position, liquidity, or results of operations for VIE’s created before February 1, 2003.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 amends SFAS No. 133 to require contracts with comparable characteristics be accounted for similarly. SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment qualifies as a derivative and clarifies when a derivative contains a fin ancing component that warrants special reporting in the statement of cash flows. This Statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003, where the guidance should be applied prospectively. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain financial instruments, which under previous guidance were accounted for as equity, be classified as liabilities or assets in statements of financial position. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.


 47

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OUTLOOK

For 2003, the Company expects:

 

 48

     

 
 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
The Company continues to work towards achieving the goal of earning a return over the cost of capital. However, a number of factors have been negatively impacting efforts to achieve this goal. These factors include higher raw material and energy costs, a continued lack of pricing power for some of the Company’s products, and a difficult market environment, particularly for manufacturing.
 
The Company does not expect to achieve its goal of earning a return over the cost of capital for the full year 2003. However, the Company will continue to work towards this goal on a quarter-by-quarter basis by taking action in a number of areas, including:

The above expectations of the Company should be read in conjunction with the longer-term expectations provided in its 2002 Annual Report on Form 10-K.
 
See "Forward-Looking Statements and Risk Factors" below.







 49

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

The expectations under "Outlook" and certain other statements in this report 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 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 exp ected financial conditions; expectations, strategies, and plans for individual products, businesses, segments and divisions as well as for the whole of Eastman Chemical Company; cash requirements and uses of available cash; financing plans; pension expenses and funding; credit rating; cost reduction and control efforts and targets; integration of acquired businesses; development, production, commercialization and acceptance of new products, services and technologies and related costs; and asset and product portfolio changes.

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 c ause the Company's actual results to differ materially from those in any such forward-looking statements:
 

 50

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

 51

     

 
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 report 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.

52

     


EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
ITEM 4. CONTROLS AND PROCEDURES
 
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. 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 our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2003.

There has been no change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.




53
     


EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
 
ITEM 1. 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, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters, including the sorbates litigation and the asbestos litigation described in the following paragraphs, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could negatively impact earnings or cash flows in a particular future period.
 
Sorbates Litigation
 
As previously reported, on September 30, 1998, the Company entered into a voluntary plea agreement with the U.S. Department of Justice and agreed to pay an $11 million fine to resolve a charge brought against the Company for violation of Section One of the Sherman Act. Under the agreement, the Company entered a plea of guilty to one count of price-fixing for sorbates, a class of food preservatives, from January 1995 through June 1997. The plea agreement was approved by the United States District Court for the Northern District of California on October 21, 1998. The Company recognized the entire fine as a charge against earnings in the third quarter of 1998 and paid the fine in installments over a period of five years. On October 26, 1999, the Company pleaded guilty in a Federal Court of Canada to a violation of the Competition Act of Canada and was fined $780,000 (Canadian). The plea in Canada admitted that the same conduct that was the subject of the United States guilty plea had occurred with respect to sorbates sold in Canada, and prohibited repetition of the conduct and provides for future monitoring. The Canadian fine has been paid and was recognized as a charge against earnings in the fourth quarter of 1999.
 
Following the September 30, 1998 plea agreement, the Company, along with other defendants, was sued in federal, state and Canadian courts in more than twenty putative class action lawsuits filed on behalf of purchasers of sorbates and products containing sorbates, claiming those purchasers paid more for sorbates and for products containing sorbates than they would have paid in the absence of the defendants’ price-fixing. All but three of these lawsuits have been resolved via settlement. No class has been certified in any of the three unresolved private cases, and the trial court in one of them decided in Octobe r 2002 that the case would not proceed as a class action, though that decision has been appealed by the plaintiff.

In addition, six states have sued the Company and other defendants in connection with the sorbates matter, seeking damages, restitution and civil penalties on behalf of consumers of sorbates in those respective states. One of those six cases has been tentatively settled; defense motions to dismiss are pending in three cases; and two motions to dismiss have been granted.  Seven other states have advised the Company that they intend to bring similar actions against the Company and others. A settlement with those states has also tentatively been reached.

The Company has recognized charges to earnings in 2003 and each of the past four years for estimated and actual costs, including legal fees and expenses, related to the sorbates fine and litigation. While the Company intends to continue to defend vigorously the remaining sorbates actions unless they can be settled on acceptable terms, the ultimate outcome of the matters still pending and of additional claims that could be made is not expected to 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.

54

     


EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
 
Asbestos Litigation  
 
Over the years, Eastman was named as a defendant, along with numerous other defendants, in lawsuits in various state courts in which plaintiffs alleged injury due to exposure to asbestos at Eastman’s manufacturing sites and sought unspecified monetary damages and other relief. Historically, these cases were dismissed or settled without a material effect on Eastman’s financial condition, results of operations, or cash flows.
 
As previously reported, Eastman, like many other companies, has recently experienced an increase in the number of asbestos claims against it.  Currently, there are approximately 11,000 claims asserted against the Company in 33 cases that also involve hundreds of other defendants. By far, the majority of these claims are in Mississippi. In the recently filed cases in Mississippi, plaintiffs allege expo sure to asbestos-containing products allegedly made by Eastman.  Based on its investigation to date, the Company has information that it manufactured limited amounts of an asbestos-containing plastic product between the mid-1960's and the early 1970's.  The Company's investigation has found no evidence that any of the Mississippi plaintiffs worked with or around any such product alleged to have been manufactured by the Company. The Company intends to defend vigorously all of these actions or to settle them on acceptable terms.
 
The Company continues to evaluate the allegations and claims made in recent asbestos-related lawsuits and its insurance coverages. Based on such evaluation to date, the Company continues to believe that the ultimate resolution of asbestos cases 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. To date, costs incurred by the Company related to the recent asbestos-related lawsuits have not been material, and in the case of the Mississippi claims have been limited to legal fees and expenses.

ITEM 5. OTHER EVENTS

On October 29, 2003, the Company announced two executive appointments, both of which will be effective November 15, 2003. Richard A. Lorraine was named senior vice president and chief financial officer. He will succeed James P. Rogers, who was named executive vice president and president of the Eastman Division. Mr. Lorraine was most recently executive vice president and chief financial officer for Occidental Chemical Corporation in Dallas, Texas. Mr. Rogers has served as the Company’s chief financial officer since joining Eastman in 1999 and has served as chief operations officer of the Eastman Division since 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 57.
 
(b)   On July 24, 2003, the Company furnished under Item 12 of Form 8-K the text of its publicly released financial results for the second quarter of 2003.
 
      On August 20, 2003, the Company furnished under Item 12 of Form 8-K the text of its publicly released additional financial information for the Coatings, Adhesives, Specialty Polymers

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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.                    

       Eastman Chemical Company
       
       
Date: November 13, 2003
 
By:
/s/ James P. Rogers

 
 
 
James P. Rogers
 
 
 
Senior Vice President and
Chief Financial Officer


56

     


EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

EXHIBIT INDEX
Exhibit
 
 
 
Sequential
Number
 
Description
 
Page Number



 
 
 
 
 
3.01
 
Amended and Restated Certificate of Incorporation of Eastman Chemical Company, as amended (incorporated 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 December 5, 2002 (incorporated herein by reference to Exhibit 3.02 to Eastman Chemical Company’s Annual Report on Form 10-K for the year ended December 31, 2002)
 
 
 
 
 
 
 
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 (the "March 31, 2001 10-Q"))
 
 
 
 
 
 
 
4.02
 
Stockholder Protection Rights Agreement dated as of December 13, 1993, between Eastman Chemical Company and American Stock Transfer, as Rights Agent (incorporated herein by reference to Exhibit 4.4 to Eastman Chemical Company's Registration Statement on Form S-8 relating to the Eastman Investment Plan, File No. 33-73810)
 
 
 
 
 
 
 
4.03
 
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"))
 
 
 
 
 
 
 
4.04
 
Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by reference to Exhibit 4(c) to the 8-K)
 
 
 
 
 
 
 
4.05
 
Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the 8-K)
 
 
 
 
 
 
 
4.06
 
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"))
 
 
 
 
 
 
 
4.07
 
Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the June 8-K)
 
 
 
 
 
 
 
4.08
 
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"))
 
 
 
 
 
 
 


57

     


EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Exhibit
 
 
 
Sequential
Number
 
Description
 
Page Number



 
 
 
 
 
4.09
 
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)
 
 
 
 
 
 
 
4.10
 
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)
 
 
 
 
 
 
 
4.11
 
$200,000,000 Accounts Receivable Securitization agreement dated April 13, 1999 (amended April 11, 2000), between the Company and Bank One, NA, 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.
 
 
 
 
 
 
 
4.12
 
Credit Agreement, dated as of July 13, 2000 (the "Credit Agreement") among Eastman Chemical Company, the Lenders named therein, and Citibank, N.A. as Agent (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, 2000)
 
 
 
 
 
 
 
4.13
 
Form of 3 1/4% 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 ending June 30, 2003)
 
 
 
 
 
 
 
4.14
 
Form of 6.30% notes due 2018  
 
59-65
 
 
 
 
 
12.01
 
Statement re: Computation of Ratios of Earnings to Fixed Charges
 
66
 
 
 
 
 
31.01
 
Rule 13a – 14(a) Certification
 
67
 
 
by J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, for the quarter ended September 30, 2003
 
 
 
 
 
 
 
31.02
 
Rule 13a – 14(a) Certification
by James P. Rogers, Senior Vice President and Chief Financial Officer, for the quarter ended September 30, 2003
 
68
 
 
 
 
 
32.01
 
Section 1350 Certification by J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, for the quarter ended September 30, 2003
 
69
 
 
 
 
 
32.02
 
Section 1350 Certification by James P. Rogers, Senior Vice President and Chief Financial Officer, for the quarter ended September 30, 2003
 
70
 
 
 
 
99.01
 
Operating Segment Information, External Sales Revenue Change, Volume Effect, Price Effect and Interdivisional Effect
 
71-72


58