NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
First Quarter |
|
(Dollars in millions) |
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss) by Division and Segment |
|
|
|
|
Eastman Division |
|
|
|
|
Coatings, Adhesives, Specialty Polymers, and Inks |
$ |
30 |
$ |
(3) |
|
Performance Chemicals and Intermediates |
8 |
|
6 |
|
Specialty Plastics |
(23) |
|
32 |
|
|
|
|
|
Total Eastman Division |
15 |
|
35 |
|
|
|
|
|
|
|
|
|
|
Voridian Division |
|
|
|
|
Polymers |
(12) |
|
28 |
|
Fibers |
33 |
|
25 |
|
|
|
|
|
Total Voridian Division |
21 |
|
53 |
|
|
|
|
|
|
|
|
|
|
Developing Businesses Division |
|
|
|
|
Developing Businesses |
(20) |
|
(23) |
|
|
|
|
|
Total Developing Businesses Division |
(20) |
|
(23) |
|
|
|
|
|
|
Eliminations |
(1) |
|
(6) |
|
|
|
|
|
Total Eastman Chemical Company |
$ |
15 |
$ |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets by Division and Segment |
|
|
|
|
|
Eastman Division |
|
|
|
|
|
Coatings, Adhesives, Specialty Polymers, and Inks |
$ |
1,510 |
$ |
1,700 |
|
Performance Chemicals and Intermediates |
|
1,531 |
|
1,697 |
|
Specialty Plastics |
|
751 |
|
821 |
|
|
|
|
|
|
Total Eastman Division |
|
3,792 |
|
4,218 |
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division |
|
|
|
|
|
Polymers |
|
1,318 |
|
1,347 |
|
Fibers |
|
605 |
|
614 |
|
|
|
|
|
|
Total Voridian Division |
|
1,923 |
|
1,961 |
|
|
|
|
|
|
|
|
|
|
|
|
Developing Businesses Division |
|
|
|
|
|
Developing Businesses |
|
50 |
|
51 |
|
|
|
|
|
|
Total Developing Businesses Division |
|
50 |
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
5,765 |
$ |
6,230 |
|
|
|
|
|
|
|
|
|
|
|
|
19 |
| |
|
|
|
|
 |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters, including the sorbates litigation and the asbestos litigation described in the following paragraphs, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developm
ents 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. Only two of these lawsuits have not been resolved via settlement. One of the cases has been inactive for more than a year. In the other case, the trial court decided in October 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 settled; defense motions to dismiss were granted in four state cases; one of those dismissals has been appealed and none of the other three are yet final. Seven other states have advised the Company that they intend to bring similar actions against the Company and others. A settlement with those seven states has tentatively been reached.
The Company has recognized charges to earnings 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.
|
20 |
| |
|
|
|
|
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Asbestos Litigation
Over the years, Eastman has been named as a defendant, along with numerous other defendants, in lawsuits in various state courts in which plaintiffs 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.
In recently filed cases, plaintiffs allege exposure 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 plaintiffs worked with or around any such product alleged to have been manufactured by the Company.
The Company recently reached an agreement with plaintiffs’ counsel to resolve many of these claims. The Company intends to defend vigorously the approximately 3,000 remaining claims 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.
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 March 31, 2004 and December 31, 2003. 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 first quarters 2004 and 2003. Average monthly proceeds from collections reinvested in the continuous sale program were approximately $234 million and
$237 million in the first quarter 2004 and 2003, respectively. The portion that continues to be recognized in the Statements of Financial Position is domestic trade receivables of $148 million and $91 million at March 31, 2004 and December 31, 2003, respectively.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies," relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The Company adopted the disclosure requirements of the interpretation as of December 31, 2002. Disclosures about each group of similar guarantees are provided below and summarized in the following table:
|
(Dollars in millions) |
|
March 31, 2004 |
|
|
|
|
|
|
|
|
Obligations of equity affiliates |
$ |
131 |
|
Residual value guarantees |
|
84 |
|
|
|
|
Total |
$ |
215 |
|
|
|
|
21 |
| |
|
|
|
|
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Obligations of Equity Affiliates
Eastman has long-term commitments relating to joint ventures and guarantees of up to $131 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. For more information concerning the joint ventures described above, see Note 5 in the notes to the audited financial statements contained in the Company’s 2003 Annual Report on Form 10-K.
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 March 31, 2004 totaled $84 million and consisted primarily of leases for railcars and other equipment. The Company believes, based on current facts and circumstances, that the likelihood of a material payment pursuant to such guarantees is remote.
Variable Interest Entities
The Company has evaluated material relationships including the guarantees related to the third-party borrowings of joint ventures described above and has concluded that the entities are not VIEs or, in the case of Primester, the Company is not the primary beneficiary of the VIE. As such, in accordance with FIN 46R, the Company is not required to consolidate these entities. In addition, the Company has evaluated long-term purchase obligations with two entities that may be VIEs. These potential VIEs are entities from which the Company purchases approximately $40 million of raw materials and utilities on an annual basis. The Company has no equity interest in these entities and has confirmed that ea
ch entity is consolidated by an owner. However, due to competitive and other reasons, the Company has not been able to obtain the necessary financial information to determine whether the entities are VIEs, and if one or both are VIEs, whether or not the Company is the primary beneficiary.
17. SUBSEQUENT EVENTS
In April 2004, the Company announced a voluntary separation program for certain retirement-eligible employees in the United States. This program, which is a result of on-going cost reduction efforts, will be made available to eligible employees in organizations where labor costs need to be reduced. Eligible employees have until May 14, 2004 to decide whether to participate in the program. Although it is likely that this program will result in future employee separations and related costs, the Company cannot reasonably estimate those costs until the number of participants is known.
|
22 |
| |
|
|
|
|
|
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 2003 Annual Report on Form 10-K, and the unaudited interim 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.
OVERVIEW
Over the past several years, key determinants of profitability for the Company have included: generally slow economic growth, particularly for manufacturing; fluctuations in raw material and energy costs, with those costs increasing substantially in late-2002 and remaining at historically high levels through the first quarter of 2004; and the ability to obtain sales price increases for the Company’s products necessary to preserve or expand margins. In addition, certain markets in which Eastman competes have been impacted by substantial capacity additions that led to lower capacity utilization levels and increased competition, limiting the Company’s ability to obtain sales price increases for some of its products. As a result, the Company’s gross profit has been negatively impacte
d.
Company actions that positively impacted operating earnings in the first quarter of 2004 included:
-
an increased focus on more profitable businesses and product lines, particularly in the Company’s Eastman Division;
-
cost reduction measures including labor reductions and the implementation of process improvement technologies; and
-
achieving selling price increases sufficient to offset higher raw material costs across all segments except for the Polymers segment.
In addition to the above, in the first quarter 2004, operating earnings were impacted by asset impairments and restructuring charges and a favorable shift in foreign currency exchange rates. Also, within the Polymers segment, higher raw material and energy costs were offset by the impact of increased sales volume.
The key determinants of operating cash flow have historically been operating earnings, seasonal changes in working capital, and the timing and extent of payments for employee benefits and incentive pay. Typically, the Company generates less operating cash flow in the first quarter of the year largely due to seasonal increases in working capital and the timing of payments for employee benefits and incentive pay. Over the remainder of the year, operating cash flow typically improves as the Company reduces working capital.
The significant factors that affected cash flow and liquidity in the first quarter 2004 included:
-
the repayment of $500 million of 6 3/8% notes;
-
the seasonal increase in working capital requirements, particularly for receivables; and,
-
decreased defined benefit pension plan contributions.
The Company expects profitability and operating cash flows to improve in 2004 compared to 2003 due to the cost reduction measures being implemented across all segments, improved results in the Developing Businesses segment, and generally improved economic conditions. In addition, the Company expects raw material and energy costs to increase slightly in 2004 compared with 2003, and that the ability to obtain sales price increases will be a key driver of profitability.
|
23 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
|
|
First Quarter |
|
Volume Effect |
|
Price Effect |
|
Product
Mix Effect |
|
Exchange
Rate
Effect |
|
(Dollars in millions) |
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
$ |
1,597 |
$ |
1,441 |
|
11 % |
|
6 % |
|
2 % |
|
(1) % |
|
4 % |
The increase in sales revenue for the first quarter 2004 compared to the first quarter 2003 was primarily due to increased sales volume, particularly in the Polymers and Fibers Segments, which had a positive impact on sales revenue of $82 million. Additionally, favorable shifts in foreign currency exchange rates and higher selling prices had a positive impact on sales revenue of $58 million and $28 million, respectively.
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
$ |
235 |
$ |
184 |
|
28 % |
|
As a percentage of sales |
|
14.7 % |
|
12.8 % |
|
|
Gross profit for the first quarter 2004 increased compared to the first quarter 2003 primarily due to an 11% increase in sales revenue and an improvement in gross profit as a percentage of sales. Gross profit as a percentage of sales increased due to:
-
an increased focus on more profitable businesses and product lines;
-
favorable shifts in foreign currency exchange rates, particularly for the euro; and
-
cost reduction measures.
In addition, higher selling prices were more than offset by higher raw material and energy costs resulting in a reduction to gross profit, primarily in the Polymers segment. This reduction was mostly offset by the impact of increased sales volume, primarily in the Polymers and Fibers segments.
The Company expects that higher raw material and energy costs, including paraxylene, ethylene glycol, propane, and natural gas, will continue to negatively impact operating results unless the Company is able to offset this impact in part through price increases for certain of its products and through various cost control measures.
Gross profit for the first quarter 2003 included an insurance settlement of approximately $14 million related to the 2002 operational disruptions at the Company’s Rotterdam, the Netherlands, and Columbia, South Carolina facilities.
The Company continues to implement a variety of cost control measures including labor reductions and continued productivity improvements. As part of these efforts, in March 2004, the Company announced the closing of its manufacturing facility located in Hartlepool, United Kingdom. In April 2004, the Company announced a voluntary separation program for certain retirement-eligible employees in the United States. This program will be made available to eligible employees in organizations where labor costs need to be reduced. The Company expects that these cost control and productivity improvement efforts will continue to positively impact gross profit in 2004.
The Company continues to review its portfolio of products and businesses, which could result in further restructuring, divestiture, and consolidation.
|
24 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and General Administrative Expenses (S&GA) |
$ |
110 |
$ |
100 |
|
10 % |
|
Research and Development Expenses (R&D) |
|
43 |
|
43 |
|
-- % |
|
|
|
|
|
|
|
|
|
$ |
153 |
$ |
143 |
|
|
|
|
|
|
|
|
|
|
As a percentage of sales |
|
9.6 % |
|
9.9 % |
|
|
Selling and general administrative costs for the first quarter 2004 were $110 million compared with $100 million for first quarter 2003 due primarily to higher compensation and employee benefit costs, expenses associated with the restructuring and other efforts by the Company to improve profitability, and the impact of foreign currency exchange rates. These costs were partially offset by recent cost reduction efforts.
For 2004, the Company expects combined costs related to S&GA expenses and R&D expenses to be at or below 10 percent of sales.
|
25 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Impairments and Restructuring Charges, Net
Asset impairments and restructuring charges totaled $67 million in first quarter 2004, with non-cash impairments of $41 million and cash restructuring charges of $26 million. Consolidation and restructuring resulted in a net cash restructuring charge of approximately $2 million in the first quarter 2003.
The following table summarizes both first quarter 2004 and first quarter 2003 charges:
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
|
|
|
|
|
Eastman Division segments: |
|
|
|
|
|
Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment: |
|
|
|
|
|
Fixed asset impairments |
$ |
1 |
$ |
-- |
|
Severance charges |
|
4 |
|
2 |
|
Site closure costs |
|
1 |
|
-- |
|
|
|
|
|
|
|
Performance Chemicals and Intermediates ("PCI") segment: |
|
|
|
|
|
Severance charges |
|
3 |
|
-- |
|
|
|
|
|
|
|
Specialty Plastics ("SP") segment: |
|
|
|
|
|
Fixed asset impairments |
|
40 |
|
-- |
|
Severance charges |
|
6 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Division |
|
55 |
|
2 |
|
|
|
|
|
|
|
Voridian Division segment: |
|
|
|
|
|
Polymers segment: |
|
|
|
|
|
Severance charges |
|
11 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Total Voridian Division |
|
11 |
|
-- |
|
|
|
|
|
|
|
Developing Businesses Division segment: |
|
|
|
|
|
Developing Businesses segment: |
|
|
|
|
|
Severance charges |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Total Developing Businesses Division |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
67 |
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2004
Asset Impairments and Restructuring Charges
In the first quarter 2004, the Company recorded asset impairments of $40 million related to the closure of its copolyester manufacturing facility in Hartlepool, United Kingdom. The decision to close the Hartlepool site, which manufactures products that are within the Company’s Specialty Plastics ("SP") segment’s product lines, was made in order to consolidate production at other sites to create a more integrated and efficient global manufacturing structure. Accordingly, the carrying value of the manufacturing fixed assets was written down to fair value, as established by appraisal and available market data.
|
26 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition, the Company recognized $1 million of fixed asset impairments and $1 million of site closure costs related to additional impairments associated with the CASPI reorganization and changes in estimates for previously accrued amounts.
Severance Charges
In the first quarter 2004, the Company recognized $25 million in restructuring charges related to the actual and probable separations of approximately 500 employees. These workforce reductions and related charges are explained as follows:
-
the decision to close the Hartlepool manufacturing site as discussed above, resulting in severance charges of $5 million within the SP segment;
-
ongoing restructuring efforts within the Company’s CASPI segment, resulting in severance charges of $4 million;
-
ongoing cost reduction efforts throughout the Company, resulting in severance charges to the PCI, SP and Polymers segments of $3 million, $1 million and $11 million, respectively, and
-
streamlining of operations at Cendian Corporation ("Cendian"), the Company’s logistics subsidiary, resulting in a severance charge to the Developing Businesses segment of $1 million.
Additionally, in April 2004, the Company announced a Voluntary Separation Program ("Program") for certain retirement-eligible employees in the United States. This program, which is a result of on-going cost reduction efforts, will be made available to eligible employees in organizations where labor costs need to be reduced. Eligible employees have until May 14, 2004 to decide whether to participate in the program. Although it is likely that this Program will result in future employee separations and related costs, the Company can not reasonably estimate those costs until the number of participants are known.
2003
Asset Impairments and Restructuring Charges
As discussed in Note 14 to the unaudited consolidated financial statements, effective January 1, 2004, certain commodity product lines were transferred from the PCI segment to the CASPI segment, which resulted in the reclassification of asset impairments of $42 million for 2003.
In the third quarter, 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, 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 cer
tain assets are used and the financial outlook for these product lines, thus triggering the impairments and certain restructuring charges.
The third quarter fixed asset impairment charges of $236 million primarily related to assets associated with the above mentioned product lines, and primarily impacted 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.
|
27 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The third quarter intangible asset impairment charges related to definite-lived intangible assets of approximately $128 million and indefinite-lived intangibles of approximately $47 million. The definite-lived intangibles related primarily to developed technology and customer lists, and the indefinite-lived intangibles primarily related 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 containe
d 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.
In the fourth quarter, the Company recognized fixed asset impairments and site closure costs of $1 million and $3 million, respectively. The fixed asset impairments related to additional impairments associated with the CASPI reorganization, as discussed above.
Severance charges of $13 million for 2003 are discussed in further detail below.
In the second quarter, the Company recorded an asset impairment 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, United Kingdom. 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 assets, the fixed assets were written down to fair value, as established primarily by discounted future cash flows of the impacted assets.
In the third and fourth quarter, the PCI segment incurred charges of $38 million related to the impairment of fixed assets used in certain performance 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 performance chemicals product lines, the fixed asset impairments charge related to assets located at the Kingsport, Tennessee facility.
Severance charges of $4 million for 2003 are discussed in further detail below.
|
28 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Severance charges of $1 million for 2003 are discussed in further detail below.
In the fourth quarter, an asset impairment charge of $1 million was recorded related to assets classified as held for sale at the Company’s Kirkby, United Kingdom site. The fair value of these assets was determined using the estimated proceeds from the sale less the cost to sell.
Severance charges of $1 million for 2003 are discussed in further detail below.
Severance Charges
In the first half of the year, severance costs of $3 million were incurred within the CASPI segment related primarily to consolidation and restructuring activities and changes in previously accrued amounts. 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 were 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. During the fourth quarter, severance charges were recorded in the CASPI and Fibers segment totaling $2 million and $1 million, respectively, due to the ongoing restructuring of the CASPI segm
ent and the annual budgeting process discussed above.
The following table summarizes the beginning reserves, charges to and changes in estimates to the reserves as described above, and the cash and non-cash reductions to the reserves attributable to asset impairments and the cash payments for severance and site closure costs:
|
(Dollars in millions) |
|
Balance at
January 1, 2003 |
|
Provision/ Adjustments |
|
Noncash Reductions |
|
Cash Reductions |
|
Balance at
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Non-cash charges |
$ |
-- |
$ |
500 |
$ |
(500) |
$ |
-- |
$ |
-- |
|
Severance costs |
|
2 |
|
20 |
|
-- |
|
(12) |
|
10 |
|
Site closure costs |
|
7 |
|
3 |
|
-- |
|
(5) |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
9 |
$ |
523 |
$ |
(500) |
$ |
(17) |
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1, 2004 |
|
Provision/ Adjustments |
|
Noncash Reductions |
|
Cash Reductions |
|
Balance at
March 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash charges |
$ |
-- |
$ |
41 |
$ |
(41) |
$ |
-- |
$ |
-- |
|
Severance costs |
|
10 |
|
25 |
|
-- |
|
(5) |
|
30 |
|
Site closure costs |
|
5 |
|
1 |
|
-- |
|
-- |
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
15 |
$ |
67 |
$ |
(41) |
$ |
(5) |
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
As of the end of the first quarter 2004, out of approximately 1,000 actual and probable employee separations that were identified and for which charges were recorded during 2003 and the first quarter 2004, approximately 500 were completed. The remaining severance and site closure costs are expected to be applied to the reserves within one year.
|
29 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Expense, Net
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest costs |
$ |
32 |
$ |
33 |
|
|
|
Less: Capitalized interest |
|
1 |
|
1 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
31 |
|
32 |
|
(3) % |
|
Less: Interest income |
|
2 |
|
1 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
$ |
29 |
$ |
31 |
|
(6) % |
|
|
|
|
|
|
|
Slightly lower gross interest costs for the first quarter 2004 compared to the first quarter 2003 reflected lower average interest rates that more than offset higher average borrowings. Higher interest income reflected larger average cash levels in preparation for the repayment of borrowings maturing in January 2004. Due to these factors, net interest expense declined slightly.
For 2004, the Company expects net interest expense to decrease compared to 2003 due to lower expected gross interest costs as a result of lower average interest rates on borrowings and anticipated lower average borrowings.
Other Operating Income and Other (Income) Charges, net
|
|
First Quarter |
|
(Dollars in millions) |
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
Other operating income |
$ |
-- |
$ |
(20) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
$ |
(6) |
$ |
(4) |
|
Other charges |
5 |
|
3 |
|
|
|
|
|
Other (income) charges, net |
$ |
(1) |
$ |
(1) |
|
|
|
|
|
Other operating income for the first quarter 2003 reflected a gain of approximately $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.
Included in other income are the Company’s portion of earnings from its equity investments, royalty income, net gains on foreign exchange transactions and other miscellaneous items. Included in other charges are net losses on foreign exchange transactions, the Company’s portion of losses from its equity investments, fees on securitized receivables and other miscellaneous items.
|
30 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other income for the first quarter 2004 primarily reflected the Company’s portion of earnings from its equity investment in Genencor of approximately $4 million. Other charges for the first quarter of 2004 consist primarily of write downs to fair value of certain technology business venture investments due to other than temporary declines in value and fees on securitized receivables.
Other income for the first quarter 2003 primarily reflected the Company’s portion of earnings from its equity investments and net gains on foreign exchange transactions of approximately $2 million each. Other charges for the first quarter 2003 primarily reflected fees on securitized receivables and other miscellaneous items.
Provision for Income Taxes
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
$ |
(7) |
$ |
11 |
|
N/A |
|
Effective tax rate |
|
54% |
|
39% |
|
|
The first quarter 2004 effective tax rate was impacted by the treatment of the asset impairments and restructuring charges resulting in lower expected tax benefits in certain jurisdictions, the impact of expected favorable foreign rate variances and extraterritorial income exclusion benefits on taxable earnings excluding the asset impairment and restructuring charges, and the relative amount of the above items compared to pretax losses in the period. The first quarter 2003 effective tax rate was impacted by the statutory rate applied to discrete items in the period being higher than the Company's effective tax rate.
As described in Note 18 to the Company's 2003 Annual Report on form 10-K, the Company has significant net operating loss carryforwards and related valuation allowances. Future tax provisions may be positively or negatively impacted to the extent that the realization of these carryforwards is greater or less than anticipated.
The Company expects the benefits of favorable foreign rate variances and the extraterritorial income exclusion to continue for the remainder of 2004 resulting in an effective tax rate at or below 30% on normal taxable earnings.
Cumulative Effect of Change in Accounting Principle, Net of Tax
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle, net |
$ |
-- |
$ |
3 |
SFAS No. 143
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 the provision, entities were 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. In accordance with SFAS No. 143, the Company recorded asset retirement obligations primarily related to closure and post closure environmental liabili
ties 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.
|
31 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY BY OPERATING SEGMENT
The Company’s products and operations are managed and reported in three divisions comprised of six operating segments. Eastman Division consists of the CASPI segment, the PCI segment and the SP segment. Voridian Division contains the Polymers segment and the Fibers segment. The Developing Businesses Division consists of the Developing Businesses Segment. The divisional structure has allowed the Company to align costs more directly with the activities and businesses that generate them.
Goods and services are transferred between the divisions at predetermined prices that 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.
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, 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 and 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. Additives, such as cellulosic polymers, Texanol? ester alcohol and chlorinated 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, comprised of the performance chemicals and intermediates product groups, manufactures a variety of intermediates chemicals based on oxo and acetyl chemistries. The Company is the largest marketer of acetic anhydride in the United States, a critical component of analgesics and other pharmaceutical and agricultural products, and is the only U.S. producer of acetaldehyde, a key intermediate in the production of vitamins and other specialty products. PCI also manufactures the broadest range of oxo aldehyde derivatives products in the world as well as complex organic molecules such as diketene derivatives, specialty ketones, and specialty anhydrides for fiber and food and beverage ingredients, which are typically used in market niche applications. Additionally, performance chemicals
produces nonanoyloxybenzenesulfonate ("NOBS") bleach activator for a key customer.
The SP segment’s key products include engineering and specialty polymers, specialty film and sheet products, and packaging film and fiber products. Included in these are highly specialized copolyesters and cellulosic plastics that possess unique performance properties for value-added end uses such as appliances, store fixtures and displays, building and construction, electronic packaging, medical devices, personal care and cosmetics, performance films, tape and labels, fibers/nonwovens, photographic and optical film, graphic arts and general packaging.
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 and industrial products. 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 in extrusion coating, film and molding applications.
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; acetate flake for use by other acetate tow producers; and acetyl chemicals.
|
32 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
Effective January 1, 2004, certain commodity product lines were transferred from the PCI segment to the CASPI segment. This realignment resulted in approximately $86 million in sales revenue and an operating loss of $45 million, of which $42 million related to asset impairments recorded in the third quarter of 2003, being transferred from PCI to CASPI for 2003. The realignment also resulted in segment assets of $56 million being transferred from PCI to CASPI as of December 31, 2003. In addition, during the first quarter of 2004, the Company reclassified assets within the Voridian Division to reflect the current allocation of certain shared assets. See Exhibit 99.01 for further information regarding the impact of these reclassifications on segment sales, operating earnings, assets, depreciation,
and capital expenditures for 2003, 2002, and 2001. These changes had no effect on the unaudited consolidated financial statements.
|
33 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EASTMAN DIVISION
|
CASPI Segment |
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Sales |
$ |
439 |
$ |
411 |
|
7% |
|
Volume effect |
|
|
|
|
|
1% |
|
Price effect |
|
|
|
|
|
1% |
|
Product mix effect |
|
|
|
|
|
--% |
|
Exchange rate effect |
|
|
|
|
|
5% |
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
30 |
|
(3) |
|
>100% |
|
|
|
|
|
|
|
|
|
Asset impairments and restructuring charges, net |
|
6 |
|
2 |
|
|
The increase in external sales revenue for the first quarter 2004 compared to the first quarter 2003 was primarily due to favorable shifts in foreign currency exchange rates, which had a positive impact on sales revenue of $21 million, and slight increases in sales volume and selling prices. The increase in sales volume resulted from increases in the coatings, additives, and solvents and adhesives raw materials product groups that were mostly offset by decreased sales volume in the resins and monomers and inks and graphic arts product groups.
The increase in operating results throughout the segment for the first quarter 2004 compared to the first quarter 2003 was the result of:
-
achieving selling price increases sufficient to offset higher raw material costs;
-
favorable foreign currency exchange rates, particularly for the euro;
-
an increased focus on more profitable businesses and product lines, including the shutdown and consolidation of several manufacturing sites as well as impairment of certain asset groups, which has resulted in decreased operating costs and lower depreciation and amortization expense; and,
-
the impact of cost reduction efforts, primarily due to labor reductions related to the ongoing restructuring, divestiture, and consolidation activities.
Operating earnings for the first quarter 2004 were negatively impacted by restructuring charges totaling approximately $6 million as more fully described above and in Note 9 to the Company’s unaudited consolidated financial statements.
The Company expects during 2004 to continue to identify and pursue implementation of restructuring, divestiture, and consolidation alternatives for certain identified portions of the CASPI segment to improve profitability. As of March 31, 2004, these activities and continuing cost reduction efforts have begun to contribute to the expected $50 million improvement in operating results in 2004.
|
34 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
PCI Segment |
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Sales |
$ |
290 |
$ |
297 |
|
(2)% |
|
Volume effect |
|
|
|
|
|
(4)% |
|
Price effect |
|
|
|
|
|
3% |
|
Product mix effect |
|
|
|
|
|
(2)% |
|
Exchange rate effect |
|
|
|
|
|
1% |
|
|
|
|
|
|
|
|
|
Interdivisional sales |
|
141 |
|
125 |
|
13% |
|
|
|
|
|
|
|
|
|
Operating earnings |
|
8 |
|
6 |
|
33% |
|
|
|
|
|
|
|
|
|
Asset impairments and restructuring charges, net |
|
3 |
|
-- |
|
|
External sales revenue for the first quarter 2004 decreased $7 million compared to the first quarter 2003 primarily due to lower sales volumes throughout the segment, which had a negative impact on revenues of $13 million, and an unfavorable shift in product mix of $7 million. These impacts were partially offset by higher selling prices, primarily for intermediate chemicals, which had a positive impact on sales revenue of $10 million. The increase in interdivisional sales revenue was primarily due to higher selling prices as a result of higher raw material and energy costs.
First quarter 2004 operating earnings increased $2 million over first quarter 2003 primarily due to achieveing selling price increases sufficient to offset higher raw material and energy costs and an increased focus on more profitable product lines. The PCI segment continues to identify and implement projects to reduce costs and improve the results of underperforming product lines, which could result in further restructuring, divestiture, or consolidation within the segment.
|
35 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
SP Segment |
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Sales |
$ |
157 |
$ |
144 |
|
9% |
|
Volume effect |
|
|
|
|
|
-- |
|
Price effect |
|
|
|
|
|
3% |
|
Product mix effect |
|
|
|
|
|
2% |
|
Exchange rate effect |
|
|
|
|
|
4% |
|
|
|
|
|
|
|
|
|
Interdivisional sales |
|
12 |
|
14 |
|
(14)% |
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
(23) |
|
32 |
|
>100% |
|
|
|
|
|
|
|
|
|
Asset impairments and restructuring charges, net |
|
46 |
|
-- |
|
|
|
Other operating income |
|
-- |
|
20 |
|
|
External sales revenue for the first quarter 2004 increased $13 million compared to the first quarter 2003 due primarily to favorable shifts in foreign currency exchange rates, which had a positive impact of $6 million. Higher selling prices and a favorable shift in product mix also contributed to increased sales revenue.
Operating results for first quarter 2004 declined compared with first quarter 2003 primarily due to asset impairments and restructuring charges of $46 million related to the closure of the Company’s Hartlepool, United Kingdom manufacturing facility in the first quarter of 2004, and a $20 million gain on the sale of the Company’s high performance crystalline plastics assets in the first quarter of 2003. The decision to close the Hartlepool site was made in order to consolidate production at other sites to create a more integrated and efficient global manufacturing structure. Operating earnings were positively impacted by an increased focus on more profitable product lines, higher selling prices obtained primarily through product differentiation, favorable shifts in foreign currency exc
hange rates and cost reduction efforts.
The Company believes that continued emphasis on more profitable product lines, higher selling prices and cost reduction efforts will continue to positively impact earnings in 2004.
|
36 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
VORIDIAN DIVISION
|
Polymers Segment |
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Sales |
$ |
515 |
$ |
430 |
|
20% |
|
Volume effect |
|
|
|
|
|
11% |
|
Price effect |
|
|
|
|
|
3% |
|
Product mix effect |
|
|
|
|
|
-- |
|
Exchange rate effect |
|
|
|
|
|
6% |
|
|
|
|
|
|
|
|
|
Interdivisional sales |
|
18 |
|
21 |
|
(15) % |
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
(12) |
|
28 |
|
>100% |
|
|
|
|
|
|
|
|
|
Asset impairments and restructuring charges, net |
|
11 |
|
-- |
|
|
The increase in external sales revenue for the first quarter 2004 compared to the first quarter 2003 was primarily due to increased sales volume, particularly for PET polymers, which had a positive impact on sales revenue of $49 million. Favorable shifts in foreign currency exchange rates and higher selling prices also had a positive impact on sales revenue of $24 million and $13 million, respectively.
Operating results declined in first quarter 2004 compared with first quarter 2003 due to asset impairments and restructuring charges of $11 million, primarily related to severance. Increases in selling prices were more than offset by higher raw material and energy costs resulting in a reduction to operating earnings. The ability to increase selling prices sufficient to offset higher raw material and energy costs, particularly for paraxylene and ethylene glycol that are used in PET polymers, was limited by the impact of capacity additions in North America in 2003. Operating earnings for the first quarter 2003 were positively impacted by an insurance settlement of approximately $14 million related to the 2002 operational disruptions at the Company’s Rotterdam, the Netherlands, and Columbia,
South Carolina facilities.
For the remainder of 2004, the Polymers segment expects to intensify its focus on lowering costs and expects its PET polymers product line to continue to grow along with overall market demand growth. In addition, operating earnings will continue to be impacted by the Company’s ability to obtain selling price increases to offset higher raw material and energy costs.
|
37 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Fibers Segment |
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Sales |
$ |
172 |
$ |
146 |
|
18% |
|
Volume effect |
|
|
|
|
|
29% |
|
Price effect |
|
|
|
|
|
(3)% |
|
Product mix effect |
|
|
|
|
|
(10)% |
|
Exchange rate effect |
|
|
|
|
|
2% |
|
|
|
|
|
|
|
|
|
Interdivisional sales |
|
21 |
|
21 |
|
-- |
|
|
|
|
|
|
|
|
|
Operating earnings |
|
33 |
|
25 |
|
32% |
|
|
|
|
|
|
|
|
The increase in external sales revenue for the first quarter 2004 compared to the first quarter 2003 was due to significantly increased sales volumes throughout the segment, which had a positive impact on revenues of $42 million. This was offset by an unfavorable shift in product mix of $15 million, due to increased sales volumes of lower unit priced products, particularly acetyl chemicals.
Operating earnings for the first quarter 2004 increased compared to first quarter 2003 due to significantly higher sales volume throughout the segment.
For 2004, the Company expects operating earnings for the Fibers segment to be similar to 2003.
DEVELOPING BUSINESSES DIVISION
|
Developing Businesses Segment |
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Sales |
$ |
24 |
$ |
13 |
|
85 % |
|
|
|
|
|
|
|
|
|
Interdivisional sales |
|
109 |
|
98 |
|
11% |
|
|
|
|
|
|
|
|
|
Operating loss |
|
(20) |
|
(23) |
|
(13%) |
|
|
|
|
|
|
|
|
|
Asset impairments and restructuring charges, net |
|
1 |
|
-- |
|
>100% |
The increase in external sales revenue for the first quarter 2004 compared to the first quarter 2003 was primarily due to ongoing implementation of customer contracts at Cendian. External sales revenue in the Developing Businesses segment is expected to continue to increase in 2004. The increase in interdivisional sales revenue for the first quarter 2004 compared to the first quarter 2003 was primarily due to an increase in logistics services provided by Cendian to Eastman Division and Voridian Division.
Operating results for the segment improved slightly in first quarter 2004 compared with first quarter 2003.
|
38 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY BY CUSTOMER LOCATION
Sales Revenue (excluding interdivisional sales)
|
|
First Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
Change |
|
Volume Effect |
|
Price Effect |
|
Product
Mix Effect |
|
Exchange
Rate
Effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada |
$ |
866 |
$ |
824 |
|
5 % |
|
4 % |
|
4 % |
|
(3) % |
|
-- |
|
Europe, Middle East, and Africa |
|
410 |
|
342 |
|
20 % |
|
5 % |
|
(3) % |
|
3 % |
|
15 % |
|
Asia Pacific |
|
184 |
|
159 |
|
16 % |
|
9 % |
|
2 % |
|
4 % |
|
1 % |
|
Latin America |
|
137 |
|
116 |
|
18 % |
|
13 % |
|
1 % |
|
2 % |
|
2 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,597 |
$ |
1,441 |
|
11 % |
|
6 % |
|
2 % |
|
(1) % |
|
4 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue in the United States and Canada increased for the first quarter 2004 compared to the first quarter 2003 primarily due to increased sales volume and higher selling prices that were partially offset by an unfavorable shift in product mix. The increases in sales volume primarily relate to Voridian division products, in particular PET polymers and acetyl chemicals, and had a positive impact on sales revenue of $33 million. Higher selling prices, particularly for polyethylene, also had a positive impact on sales revenue of $33 million. These increases were offset by an unfavorable shift in product mix, particularly for the Fibers segment, that negatively impacted sales revenues in the amount of $24 million.
Sales revenue in Europe, Middle East and Africa increased for the first quarter 2004 compared to the first quarter 2003 primarily due to favorable shifts in foreign currency exchange rates that had a positive impact on sales revenue of $53 million. Increased sales volume, particularly for PET polymers, had a positive impact on sales revenue of $19 million. Additionally, a favorable shift in product mix positively impacted sales revenue by $5 million. These increases were partially offset by lower selling prices that had a negative impact on sales revenue of $9 million.
Sales revenue in Asia Pacific increased for the first quarter 2004 compared to first quarter 2003 primarily due to increased sales volume and a favorable shift in product mix, particularly for acetate tow, which had a positive impact on sales revenue of $15 million and $6 million, respectively. Higher selling prices and favorable shifts in foreign currency exchange rates also had a positive impact on sales revenue of $3 million and $2 million, respectively.
Sales revenue in Latin America increased for the first quarter 2004 compared to first quarter 2003 primarily due to increased sales volume, particularly for the Polymers segment. This increase in sales volume had a positive impact on sales revenue of $15 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. For additional information, refer to Note 10 to the Company’s unaudited consolidated financial statements.
|
39 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION
|
|
First Quarter |
|
|
|
(Dollars in millions) |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) |
|
|
|
|
|
Operating activities |
$ |
(34) |
$ |
(168) |
|
Investing activities |
|
(63) |
|
(3) |
|
Financing activities |
|
(419) |
|
170 |
|
|
|
|
|
|
Net change in cash and cash equivalents |
$ |
(516) |
$ |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
$ |
42 |
$ |
76 |
|
|
|
|
|
Cash Flows
Cash used in operating activities of $34 million in the first quarter 2004 improved $134 million compared to the first quarter 2003 primarily because the Company made no contribution to its U.S. defined benefit pension plans in the first quarter 2004, while making a $90 million contribution in the first quarter 2003. The remaining improvement was due to operating results and other items. First quarter 2004 cash used in operating activities was negatively impacted by the seasonal increase in working capital requirements, particularly for receivables.
The net increase of $60 million in cash used in investing activities in the first quarter 2004 compared to first quarter 2003 primarily reflects a $14 million increase in additions to properties and equipment in the first quarter 2004 as well as $28 million in proceeds from the sale of assets in the first quarter 2003. The proceeds from the sale of assets were due to the sale of the Company’s high-performance crystalline plastics assets.
Cash used in financing activities in the first quarter 2004 reflects the January 2004 repayment of $500 million of 6 3/8% notes and an increase in commercial paper and credit facility borrowings of $105 million. In the first quarter 2003, cash provided by financing activities is primarily due to the increase in commercial paper borrowings of $204 million. The payment of dividends is reflected in all periods.
In 2004, priorities for use of available cash from operations are to pay the dividend, reduce outstanding borrowings and fund targeted growth initiatives such as small acquisitions and other ventures.
Liquidity
In April 2004, Eastman amended its $600 million revolving credit facility (the "Credit Facility") expiring in July 2005 to provide for a $700 million revolving credit facility expiring in April 2009. These and any other amounts that could be borrowed under the 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 March 31, 2004 and December 31, 2003. The Credit Facility contains a number of covenants and events of default, including the maintenance of certain financial ratios. At March 31, 2004, the Company was in compliance with these covenants.
Eastman typically utilizes commercial paper 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 April 2009, 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 March 31, 2004, the Company’s commercial paper and revolving credit facility borrowings were $301 million at an effective interest rate of 1.69%. At December 31, 2003, the Company's commercial paper borrowings were $196 million at an effective interest rate of 1.
85%.
|
40 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has an effective shelf registration statement, filed in 1998 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. On November 12, 2003, the Company iss
ued notes in the principal amount of $250 million due 2018 and bearing interest at 6.30% per annum. Proceeds from the sale of the notes, net of approximately $2 million in transaction fees, were $246 million and were used, along with cash generated from business activities and other borrowings, for the repayment of the Company’s $500 million 6 3/8% notes due on January 15, 2004.
On January 15, 2004, the Company repaid at maturity $500 million of notes bearing interest at 6 3/8% per annum. These notes were reflected in borrowings due within one year in the Consolidated Statements of Financial Position at December 31, 2003. This notes were repaid with cash generated from business activities, new long-term borrowings and available short-term borrowing capacity.
Cash flows from operations and the sources of capital described above are expected to be available and sufficient to meet foreseeable cash flow requirements including those requirements related to the normal seasonal increase in working capital expected in the first half of the year. 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 $59 million and $45 million for the first quarters 2004 and 2003, respectively. The Company continues its emphasis on cash flow management and, for 2004, expects that capital spending and other directed investments for small acquisitions and other ventures will increase compared to 2003, but be no more than depreciation and amortization.
Other Commitments
At March 31, 2004, the Company’s obligations related to notes and debentures totaled approximately $1.9 billion to be paid over a period of 25 years. Other borrowings, related primarily to commercial paper and credit facility borrowings, totaled approximately $301 million.
The Company had various purchase obligations at March 31, 2004 totaling approximately $1.8 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 $217 million over a period of several years. Of the total lease commitments, approximately 21% relate to machinery and equipment, including computer and communications equipment and production equipment; approximately 47% relate to real property, including office space, storage facilities and land; and approximately 32% relate to railcars.
In addition, the Company had other liabilities at March 31, 2004 totaling approximately $1.2 billion related to pension, retiree medical, and other post-employment obligations.
|
41 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The obligations described above are summarized in the following table:
|
(Dollars in millions) |
|
Payments Due For |
|
Period |
|
Notes and Debentures |
|
Commercial Paper and Credit Facility Borrowings |
|
Purchase Obligations
(a) |
|
Operating Leases |
|
Other Liabilities (b) |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining in 2004 |
$ |
1 |
$ |
-- |
$ |
177 |
$ |
35 |
$ |
50 |
$ |
263 |
|
2005 |
|
-- |
|
301 |
|
236 |
|
41 |
|
128 |
|
706 |
|
2006 |
|
8 |
|
-- |
|
232 |
|
37 |
|
180 |
|
457 |
|
2007 |
|
-- |
|
-- |
|
230 |
|
25 |
|
151 |
|
406 |
|
2008 |
|
250 |
|
-- |
|
130 |
|
14 |
|
107 |
|
501 |
|
2009 and beyond |
|
1,663 |
|
-- |
|
840 |
|
65 |
|
596 |
|
3,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
1,922 |
$ |
301 |
$ |
1,845 |
$ |
217 |
$ |
1,212 |
$ |
5,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Amounts represent the current estimated cash payments to be made by the Company in the periods indicated based on market prices and the assumption that the plants utilizing these contracts will remain in operation. Many of the purchase obligations are tied to market prices for various raw materials that fluctuate from time to time. Therefore, the Company’s actual obligation could be significantly higher or lower than presented above. Also, many of the Company’s contracts are cancelable for a certain fee, which, in the case of a plant closure could result in a lower total cost related to the obligation.
(b) Amounts represent the current estimated cash payments to be made by the Company in the periods indicated. The amount and timing of such payments is dependent upon interest rates, health care trends, actual returns on plan assets, retirement and attrition rates of employees, continuation or modification of the benefit plans, and other factors. Such factors can significantly impact the amount and timing of any future contributions by the Company. In addition, amounts related to retiree medical do not include the potential effect of the recently enacted Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"). For further details regarding the implementation of the Act, see Note 8 to the Company’s unaudited consolidated financial statements.
The Company also had outstanding guarantees at March 31, 2004. Additional information related to these guarantees is provided in Note 16 to the Company’s unaudited consolidated financial statements.
Off Balance Sheet and Other Financing Arrangements
If certain operating leases are terminated by the Company, it guarantees a portion of the residual value loss, if any, incurred by the lessors in disposing of the related assets. The Company believes, based on current facts and circumstances, that the likelihood of 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 March 31, 2004 totaled $84 million and consisted primarily of leases for railcars and other equipment.
|
42 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has long-term commitments relating to joint ventures as described in Note 16 to the Company’s unaudited consolidated financial statements. These joint ventures allow the Company to gain access to markets the Company otherwise would not be able to gain access to. The guarantees related to the joint ventures provide borrowing capability in excess of what the joint venture would have access to based on its own resources. The Company guarantees up to $131 million of the principal amount of the joint ventures’ third-party borrowings, but 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. For more information concerning the joint ventures described above, see Note 5 in the
notes to the audited financial statements contained in the Company’s 2003 Annual Report on Form 10-K.
As described in Note 16 to the Company’s unaudited consolidated financial statements, Eastman entered into an agreement in 1999 that allows it to generate cash by reducing its working capital through the sale of undivided interests in certain domestic trade accounts receivable under a planned continuous sale program to a third party. Under this agreement, receivables sold to the third party totaled $200 million at March 31, 2004 and December 31, 2003. Undivided interests in designated receivable pools were sold to the purchaser with recourse limited to the purchased interest in the receivable pools.
The Company has evaluated material relationships including the guarantees related to the third-party borrowings of joint ventures described above and has concluded that the entities are not variable interest entities ("VIEs") or, in the case of Primester, the Company is not the primary beneficiary of the VIE. As such, in accordance with FIN 46R, the Company is not required to consolidate these entities. The Company has evaluated long-term purchase obligations with two entities that may be VIEs. These potential VIEs are entities from which the Company purchases approximately $40 million of raw materials and utilities on an annual basis. The Company has no equity interest in these entities and has confirmed
that each entity is consolidated by an owner. However, due to competitive and other reasons, the Company has not been able to obtain the necessary financial information to determine whether the entities are VIEs, and if one or both are VIEs, whether or not the Company is the primary beneficiary.
The Company did not have any other material relationships with unconsolidated entities or financial partnerships, including special purpose entities, for the purpose of facilitating off-balance sheet arrangements with contractually narrow or limited purposes. Thus, Eastman is not materially exposed to any financing, liquidity, market, or credit risk related to the above or any other such relationships.
For more information on the above off balance sheet and other financing arrangements, see Note 16 to the unaudited consolidated financial statements.
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 quarters of 2004 and 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 this authorization. Repurchased shares may be used to meet common stock requirements for compensation and benefit plans and other corporate purposes.
Dividends
The Company declared cash dividends of $0.44 per share in the first quarters 2004 and 2003.
|
43 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
For 2004, the Company expects:
-
cash flow to increase in 2004 compared to 2003 and that priorities for use of available cash from operations will be to pay the quarterly cash dividend, reduce outstanding borrowings, and fund targeted growth initiatives such as small acquisitions and other ventures;
Due to the above factors, improving economic conditions, and normal seasonality, the Company anticipates strong sales volume in the second quarter, and expects second quarter 2004 net earnings to increase by between 40 percent and 60 percent compared with first-quarter net earnings, excluding asset impairments and restructuring charges.
Longer term, the Company expects:
|
44 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See "Forward-Looking Statements and Risk Factors."
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; asset and product portfolio changes; and expected tax rate.
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:
-
The Company has manufacturing and marketing operations throughout the world, with approximately 45% of the Company's sales revenue attributable to sales outside the United States. Economic factors, including foreign currency exchange rates, could affect the Company's sales revenue, expenses and results. Although the Company utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in foreign currencies, any changes in strategy in regard to risk management tools can also affect sales revenue, expenses and results and there can be no assurance that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws, regulations, or other political factors in any of the countries in which the Company operates could affect business in that country or region, as
well as the Company's results of operations and financial condition.
-
The Company has made and may continue to make acquisitions, divestitures and investments, and enter into alliances, as part of its strategies for growth and improved profitability. The completion of such transactions is subject to the timely receipt of necessary regulatory and other consents and approvals needed to complete the transactions which could be delayed for a variety of reasons, including the satisfactory negotiation of the transaction documents and the fulfillment of all closing conditions to the transactions. Additionally, there can be no assurance that such transactions will be successfully completed on a timely and cost-efficient basis or that they will achieve projected operating earnings or cost reduction targets.
-
The Company has made strategic investments in technology, services businesses, and other ventures in order to build certain Eastman capabilities. There can be no assurance that such investments will achieve their objectives or that they will be beneficial to the Company's results of operations.
-
The Company owns assets in the form of equity in other companies, including joint ventures, technology investments and Genencor. Such investments are minority investments in companies which are not managed or controlled by the Company and are subject to all of the risks associated with changes in value of such investments including the market valuation of those companies whose shares are publicly traded.
|
45 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-
The Company has undertaken and will continue to undertake productivity and cost reduction initiatives and organizational restructurings to improve performance and generate cost savings. There can be no assurance that these will be completed as planned or beneficial or that estimated cost savings from such activities will be realized.
-
In addition to cost reduction initiatives, the Company is striving to improve margins on its products through price increases, where warranted and accepted by the market; however, the Company's earnings could be negatively impacted should such increases be unrealized, not be sufficient to cover increased raw material and energy costs, or have a negative impact on demand and volume. There can be no assurances that any price increases will be realized or will be realized within the Company's anticipated timeframe.
-
The Company is reliant on certain strategic raw materials for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate short-term market fluctuations in raw material costs. There can be no assurance, however, that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which the Company operates or does business, or in countries or regions that are key suppliers of strategic raw materials, could affect availability and costs of raw materials.
-
While temporary shortages of raw materials and energy may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuous availability and price are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic or world market and political conditions, changes in government regulation, war or other outbreak of hostilities. Eastman’s operations or products may, at times, be adversely affected by these factors.
-
The Company's competitive position in the markets in which it participates is, in part, subject to external factors. For example, supply and demand for certain of the Company's products is driven by end-use markets and worldwide capacities which, in turn, impact demand for and pricing of the Company's products.
-
The Company has an extensive customer base; however, loss of certain top customers could adversely affect the Company's financial condition and results of operations until such business is replaced and no assurances can be made that the Company would be able to regain or replace any lost customers.
-
Limitation of the Company's available manufacturing capacity due to significant disruption in its manufacturing operations could have a material adverse affect on sales revenue, expenses and results of operations and financial condition.
-
The Company's facilities and businesses are subject to complex health, safety and environmental laws and regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. The amount accrued reflects the Company’s assumptions about remedial requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety,
environmental, chemical control regulations and testing requirements could result in higher or lower costs.
-
The Company accesses the capital and credit markets on a regular basis. Access to these markets and the cost of capital is dependent in part upon the Company's credit rating received from independent credit rating agencies. An adverse change in the Company's credit rating could affect the renewal of existing credit facilities or the Company's ability to obtain access to new credit facilities or other debt financing in the future, could adversely affect the terms under which the Company can borrow, and could increase the cost of new borrowings, other debt, or capital.
|
46 |
| |
|
|
|
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-
The Company’s operations from time to time are parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company believes amounts reserved are adequate for such pending matters; however, results of operations could be affected by significant litigation adverse to the Company.
The 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.
|
47 |
| |
|
|
|
|
|
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 the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of March 31, 2004.
There has been no change in the Company's internal control over financial reporting that occurred during the first quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
48 |
| |
|
|
|
|
|
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, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters, including the sorbates litigation and the asbestos litigation described in the following paragraphs, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developm
ents 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. Only two of these lawsuits have not been resolved via settlement. One of the cases has been inactive for more than a year. In the other case, the trial court decided in October 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 settled; defense motions to dismiss were granted in four state cases; one of those dismissals has been appealed and none of the other three are yet final. Seven other states have advised the Company that they intend to bring similar actions against the Company and others. A settlement with those seven states has tentatively been reached.
The Company has recognized charges to earnings 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.
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49 |
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Asbestos Litigation
Over the years, Eastman has been named as a defendant, along with numerous other defendants, in lawsuits in various state courts in which plaintiffs 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.
In recently filed cases, plaintiffs allege exposure 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 plaintiffs worked with or around any such product alleged to have been manufactured by the Company.
The Company recently reached an agreement with plaintiffs' counsel to resolve many of these claims. The Company intends to defend vigorously the approximately 3,000 remaining claims 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.
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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 53.
(b) On January 29, 2004, the Company furnished under Item 12 of Form 8-K the text of its publicly released financial results for the fourth quarter and full year of 2003.
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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: May 6, 2004 |
By: /s/ Richard A. Lorraine |
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_______________________________ |
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Richard A. Lorraine |
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Senior Vice President and |
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Chief Financial Officer |
EXHIBIT INDEX
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Exhibit |
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Sequential |
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Number |
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Description |
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Page Number |
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3.01 |
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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) |
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3.02 |
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Amended and Restated Bylaws of Eastman Chemical Company, as amended December 4, 2003 (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, 2003) |
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4.01 |
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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")) |
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4.02 |
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Stockholder Protection Rights Agreement dated as of December 13, 1993, between Eastman Chemical Company and First Chicago Trust Company of New York, as Rights Agent as amended December 4, 2003 (incorporated herein by reference to Exhibit 4.2 to Eastman Chemical Company's current report on Form 8-K dated December 5, 2003) |
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4.03 |
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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")) |
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4.04 |
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Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by reference to Exhibit 4(c) to the 8-K) |
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4.05 |
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Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the 8-K) |
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4.06 |
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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")) |
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4.07 |
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Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the June 8-K) |
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4.08 |
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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")) |
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Exhibit |
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Sequential |
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Number |
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Description |
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Page Number |
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4.09 |
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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) |
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4.10 |
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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) |
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4.11 |
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$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 |
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4.12 |
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Amended and Restated Credit Agreement, dated as of April 7, 2004 (the "Credit Agreement") among Eastman Chemical Company, the Lenders named therein, and Citicorp USA, Inc., as Agent |
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55-143 |
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4.13 |
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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) |
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4.14 |
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Form of 6.30% Notes due 2018 (incorporated herein by reference to Exhibit 4.14 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003) |
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12.01 |
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Statement re: Computation of Ratios of Earnings to Fixed Charges |
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144 |
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31.01 |
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Rule 13a – 14(a) Certification |
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145 |
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by J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, for the quarter ended March 31, 2004 |
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31.02 |
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Rule 13a – 14(a) Certification
by Richard A. Lorraine, Senior Vice President and Chief Financial Officer, for the quarter ended March 31, 2004 |
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146 |
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32.01 |
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Section 1350 Certification by J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, for the quarter ended March 31, 2004 |
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147 |
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32.02 |
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Section 1350 Certification by Richard A. Lorraine, Senior Vice President and Chief Financial Officer, for the quarter ended March 31, 2004 |
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148 |
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99.01 |
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Reclassified Segment Information. |
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149-151 |