Attached files
file | filename |
---|---|
EX-12.01 - STATEMENT RE: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - EASTMAN CHEMICAL CO | exhibit12_01.htm |
EX-10.01 - FORM OF PERFORMANCE SHARE AWARD TO EXECUTIVE OFFICERS - EASTMAN CHEMICAL CO | exhibit10_01.htm |
EX-31.02 - RULE 13A - 14(A) CFO CERTIFICATION - EASTMAN CHEMICAL CO | exhibit31_02.htm |
EX-31.01 - RULE 13A - 14(A) CEO CERTIFICATION - EASTMAN CHEMICAL CO | exhibit31_01.htm |
EX-10.02 - FORM OF PERFORMANCE SHARE AWARD TO MARK J COSTA - EASTMAN CHEMICAL CO | exhibit10_02.htm |
EX-32.02 - SECTION 1350 CFO CERTIFICATION - EASTMAN CHEMICAL CO | exhibit32_02.htm |
EX-32.01 - SECTION 1350 CEO CERTIFICATION - EASTMAN CHEMICAL CO | exhibit32_01.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
|
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
|
|
OR
|
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ______________ to
______________
|
Commission
file number 1-12626
|
EASTMAN
CHEMICAL COMPANY
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
62-1539359
|
|
(State
or other jurisdiction of
|
(I.R.S.
employer
|
|
incorporation
or organization)
|
identification
no.)
|
|
200
South Wilcox Drive
|
||
Kingsport,
Tennessee
|
37662
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
Registrant’s
telephone number, including area code: (423)
229-2000
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES
[X] NO [ ]
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
YES
[X] NO [ ]
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
[X] Accelerated
filer [ ]
Non-accelerated filer
[ ] Smaller
reporting company [ ]
(Do not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES
[ ] NO [X]
|
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
||
Class
|
Number
of Shares Outstanding at September 30, 2009
|
|
Common
Stock, par value $0.01 per share
|
72,707,237
|
|
--------------------------------------------------------------------------------------------------------------------------------
PAGE
1 OF 50 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 49
1
TABLE
OF CONTENTS
ITEM
|
PAGE
|
PART
I. FINANCIAL INFORMATION
1.
|
Financial
Statements
|
|
3
|
||
4
|
||
5
|
||
6
|
||
2.
|
20
|
|
3.
|
45
|
|
4.
|
45
|
PART
II. OTHER INFORMATION
1.
|
46
|
|
1A.
|
46
|
|
2.
|
47
|
|
6.
|
47
|
SIGNATURES
48
|
2
COMPREHENSIVE
INCOME AND RETAINED EARNINGS
Third
Quarter
|
First
Nine Months
|
|||||||
(Dollars
in millions, except per share amounts)
|
2009
|
2008
|
2009
|
2008
|
||||
$
|
1,337
|
$
|
1,819
|
$
|
3,719
|
$
|
5,380
|
|
Cost
of sales
|
1,009
|
1,497
|
2,952
|
4,400
|
||||
Gross
profit
|
328
|
322
|
767
|
980
|
||||
Selling,
general and administrative expenses
|
104
|
107
|
296
|
324
|
||||
Research
and development expenses
|
33
|
39
|
101
|
120
|
||||
Asset
impairments and restructuring charges, net
|
--
|
2
|
23
|
22
|
||||
Operating
earnings
|
191
|
174
|
347
|
514
|
||||
Net
interest expense
|
19
|
19
|
58
|
53
|
||||
Other
charges (income), net
|
2
|
7
|
11
|
7
|
||||
Earnings
from continuing operations before income taxes
|
170
|
148
|
278
|
454
|
||||
Provision
for income taxes from continuing operations
|
69
|
48
|
110
|
124
|
||||
Earnings
from continuing operations
|
101
|
100
|
168
|
330
|
||||
Earnings
from disposal of discontinued operations, net of tax
|
--
|
--
|
--
|
18
|
||||
Net
earnings
|
$
|
101
|
$
|
100
|
$
|
168
|
$
|
348
|
Basic
earnings per share
|
||||||||
Earnings
from continuing operations
|
$
|
1.40
|
$
|
1.35
|
$
|
2.31
|
$
|
4.34
|
Earnings
from discontinued operations
|
--
|
--
|
--
|
0.23
|
||||
Basic
earnings per share
|
$
|
1.40
|
$
|
1.35
|
$
|
2.31
|
$
|
4.57
|
Diluted
earnings per share
|
||||||||
Earnings
from continuing operations
|
$
|
1.38
|
$
|
1.33
|
$
|
2.29
|
$
|
4.27
|
Earnings
from discontinued operations
|
--
|
--
|
--
|
0.23
|
||||
Diluted
earnings per share
|
$
|
1.38
|
$
|
1.33
|
$
|
2.29
|
$
|
4.50
|
Comprehensive
Income
|
||||||||
Net
earnings
|
$
|
101
|
$
|
100
|
$
|
168
|
$
|
348
|
Other
comprehensive income (loss)
|
||||||||
Change
in cumulative translation adjustment, net of tax
|
2
|
(27)
|
17
|
(68)
|
||||
Change
in pension plans, net of tax
|
--
|
(1)
|
(2)
|
7
|
||||
Change
in unrealized gains (losses) on derivative instruments, net of
tax
|
(7)
|
(6)
|
(6)
|
(3)
|
||||
Total
other comprehensive income (loss)
|
(5)
|
(34)
|
9
|
(64)
|
||||
Comprehensive
income
|
$
|
96
|
$
|
66
|
$
|
177
|
$
|
284
|
Retained
Earnings
|
||||||||
Retained
earnings at beginning of period
|
$
|
2,566
|
$
|
2,529
|
$
|
2,563
|
$
|
2,349
|
Net
earnings
|
101
|
100
|
168
|
348
|
||||
Cash
dividends declared
|
(32)
|
(31)
|
(96)
|
(99)
|
||||
Retained
earnings at end of period
|
$
|
2,635
|
$
|
2,598
|
$
|
2,635
|
$
|
2,598
|
The
accompanying notes are an integral part of these consolidated financial
statements.
3
September
30,
|
December
31,
|
|||
(Dollars
in millions, except per share amounts)
|
2009
|
2008
|
||
(Unaudited)
|
||||
Assets
|
|
|||
Current
assets
|
||||
Cash
and cash equivalents
|
$
|
668
|
$
|
387
|
Trade
receivables, net
|
316
|
275
|
||
Miscellaneous
receivables
|
68
|
79
|
||
Inventories
|
495
|
637
|
||
Other
current assets
|
33
|
45
|
||
Total
current assets
|
1,580
|
1,423
|
||
Properties
and equipment
|
||||
Properties
and equipment at cost
|
8,636
|
8,527
|
||
Less: Accumulated
depreciation
|
5,363
|
5,329
|
||
Net
properties and equipment
|
3,273
|
3,198
|
||
Goodwill
|
326
|
325
|
||
Other
noncurrent assets
|
375
|
335
|
||
Total
assets
|
$
|
5,554
|
$
|
5,281
|
Liabilities
and Stockholders' Equity
|
||||
Current
liabilities
|
||||
Payables
and other current liabilities
|
$
|
827
|
$
|
819
|
Borrowings
due within one year
|
1
|
13
|
||
Total
current liabilities
|
828
|
832
|
||
Long-term
borrowings
|
1,440
|
1,442
|
||
Deferred
income tax liabilities
|
274
|
106
|
||
Post-employment
obligations
|
1,250
|
1,246
|
||
Other
long-term liabilities
|
117
|
102
|
||
Total
liabilities
|
3,909
|
3,728
|
||
Stockholders'
equity
|
||||
Common
stock ($0.01 par value – 350,000,000 shares authorized; shares issued –
94,659,859 and 94,495,860 for 2009 and 2008, respectively)
|
1
|
1
|
||
Additional
paid-in capital
|
649
|
638
|
||
Retained
earnings
|
2,635
|
2,563
|
||
Accumulated
other comprehensive loss
|
(326)
|
(335)
|
||
2,959
|
2,867
|
|||
Less:
Treasury stock at cost (22,035,296 shares for 2009 and 22,031,357 shares
for 2008)
|
1,314
|
1,314
|
||
Total
stockholders' equity
|
1,645
|
1,553
|
||
Total
liabilities and stockholders' equity
|
$
|
5,554
|
$
|
5,281
|
The
accompanying notes are an integral part of these consolidated financial
statements.
4
First
Nine Months
|
||||
(Dollars
in millions)
|
2009
|
2008
|
||
Cash
flows from operating activities
|
||||
Net
earnings
|
$
|
168
|
$
|
348
|
|
||||
Adjustments
to reconcile net earnings to net cash provided by (used in) operating
activities:
|
||||
Depreciation
and amortization
|
203
|
199
|
||
Asset
impairments charges
|
--
|
1
|
||
Gains
on sale of assets
|
--
|
(13)
|
||
Provision
(benefit) for deferred income taxes
|
165
|
(56)
|
||
Changes
in operating assets and liabilities, net of effect of acquisitions and
divestitures:
|
||||
(Increase)
decrease in trade receivables
|
(35)
|
(16)
|
||
(Increase)
decrease in inventories
|
141
|
(170)
|
||
Increase
(decrease) in trade payables
|
(8)
|
(49)
|
||
Increase
(decrease) in liabilities for employee benefits and incentive
pay
|
(14)
|
(6)
|
||
Other
items, net
|
48
|
55
|
||
Net
cash provided by operating activities
|
668
|
293
|
||
Cash
flows from investing activities
|
||||
Additions
to properties and equipment
|
(268)
|
(430)
|
||
Proceeds
from sale of assets
|
25
|
333
|
||
Acquisitions
of and investments in joint ventures
|
--
|
(38)
|
||
Additions
to capitalized software
|
(6)
|
(8)
|
||
Other
items, net
|
(64)
|
(2)
|
||
Net
cash used in investing activities
|
(313)
|
(145)
|
||
Cash
flows from financing activities
|
||||
Net
increase in commercial paper, credit facility and other
borrowings
|
23
|
42
|
||
Repayment
of borrowings
|
(16)
|
(175)
|
||
Dividends
paid to stockholders
|
(96)
|
(103)
|
||
Treasury
stock purchases
|
--
|
(501)
|
||
Proceeds
from stock option exercises and other items
|
15
|
38
|
||
Net
cash used in financing activities
|
(74)
|
(699)
|
||
Effect
of exchange rate changes on cash and cash equivalents
|
--
|
--
|
||
Net
change in cash and cash equivalents
|
281
|
(551)
|
||
Cash
and cash equivalents at beginning of period
|
387
|
888
|
||
Cash
and cash equivalents at end of period
|
$
|
668
|
$
|
337
|
The
accompanying notes are an integral part of these consolidated financial
statements.
5
Page
|
|
Note
1. Basis of
Presentation
|
7
|
Note
2. Discontinued
Operations
|
7
|
Note
3. Inventories
|
8
|
8
|
|
Note
5. Provision for Income
Taxes
|
8
|
Note
6. Borrowings
|
9
|
9
|
|
Note
8. Retirement
Plans
|
10
|
Note
9. Environmental
Matters
|
11
|
Note
10. Commitments
|
12
|
Note
11. Fair Value of Financial
Instruments
|
13
|
Note
12. Stockholders' Equity
|
15
|
Note
13. Earnings and Dividends per
Share
|
16
|
Note
14. Share-Based Compensation
Awards
|
16
|
Note
15. Segment Information
|
17
|
Note
16. Legal Matters
|
18
|
Note
17. Recently Issued Accounting
Standards
|
19
|
6
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The
accompanying unaudited consolidated financial statements have been prepared by
Eastman Chemical Company (the "Company" or "Eastman") in accordance and
consistent with the accounting policies stated in the Company's 2008 Annual
Report on Form 10-K and should be read in conjunction with the consolidated
financial statements in Part II, Item 8 of the Company's 2008 Annual Report on
Form 10-K. The unaudited consolidated financial statements are
prepared in conformity with accounting principles generally accepted in the
United States ("GAAP") and, of necessity, include some amounts that are based
upon management estimates and judgments. Future actual results could
differ from such current estimates. The unaudited consolidated
financial statements include assets, liabilities, revenues, and expenses of all
majority-owned subsidiaries and joint ventures. Eastman accounts for
other joint ventures and investments in minority-owned companies where it
exercises significant influence, but does not have control, on the equity
basis. Intercompany transactions and balances are eliminated in
consolidation. Certain prior period data has been reclassified in the
Consolidated Financial Statements and accompanying footnotes to conform to
current period presentation.
The
Company has evaluated the period from September 30, 2009, the date of the
financial statements, through October
23, 2009, the date of the issuance and filing of the financial statements
and has determined that no material subsequent events have occurred that would
affect the information presented in these financial statements or require
additional disclosure.
In first
quarter 2008, the Company sold its polyethylene terephthalate ("PET") polymers
and purified terephthalic acid ("PTA") production facilities in the Netherlands
and its PET production facility in the United Kingdom and related businesses for
approximately $329 million. The Company recognized a gain of $18
million, net of tax, related to the sale of these businesses which included the
recognition of deferred currency translation adjustments of approximately $40
million, net of tax. In addition, the Company indemnified the buyer
against certain liabilities primarily related to taxes, legal matters,
environmental matters, and other representations and warranties.
The sale
of the manufacturing facilities in the Netherlands and United Kingdom, and
related businesses completed the Company's exit from the European PET business
and qualified as a component of an entity under GAAP for the impairment or
disposal of long-lived assets, and accordingly their results are presented as
discontinued operations and are not included in the results from continuing
operations for the effected period presented in the Company's unaudited
consolidated financial statements.
In fourth
quarter 2007, the Company sold its PET polymers production facilities in Mexico
and Argentina and the related businesses. The results related to the
Mexico and Argentina facilities were not presented as discontinued operations
due to continuing involvement of the Company's Performance Polymers segment in
the region including contract polymer intermediates sales under a transition
supply agreement to the divested sites through 2008.
Operating
results of the discontinued operations which were formerly included in the
Performance Polymers segment are summarized below:
First
Nine Months
|
||
(Dollars
in millions)
|
2008
|
|
Sales
|
$
|
169
|
Earnings
before income taxes
|
2
|
|
Gain
on disposal, net of tax
|
18
|
7
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
3.
|
September
30,
|
December
31,
|
|||
(Dollars
in millions)
|
2009
|
2008
|
||
At
FIFO or average cost (approximates current cost)
|
||||
Finished
goods
|
$
|
535
|
$
|
634
|
Work
in process
|
161
|
200
|
||
Raw
materials and supplies
|
259
|
328
|
||
Total
inventories
|
955
|
1,162
|
||
LIFO
Reserve
|
(460)
|
(525)
|
||
Total
inventories
|
$
|
495
|
$
|
637
|
Inventories
valued on the LIFO method were approximately 70 percent as of September 30, 2009
and 75 percent as of December 31, 2008 of total inventories.
September
30,
|
December
31,
|
|||
(Dollars
in millions)
|
2009
|
2008
|
||
Trade
creditors
|
$
|
403
|
$
|
390
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
110
|
129
|
||
Accrued
taxes
|
60
|
41
|
||
Post-employment
obligations
|
62
|
60
|
||
Interest
payable
|
25
|
30
|
||
Bank
overdrafts
|
25
|
4
|
||
Other
|
142
|
165
|
||
Total
payables and other current liabilities
|
$
|
827
|
$
|
819
|
The
current portion of post-employment obligations is an estimate of current year
payments in excess of plan assets.
Third
Quarter
|
First
Nine Months
|
|||||||
(Dollars
in millions)
|
2009
|
2008
|
2009
|
2008
|
||||
Provision
for income taxes
|
$
|
69
|
$
|
48
|
$
|
110
|
$
|
124
|
Effective
tax rate
|
40
%
|
33
%
|
39
%
|
27
%
|
Third
quarter 2009 effective tax rate reflects a $12 million tax charge associated
with the recapture of gasification investment tax credits. Third
quarter 2008 effective tax rate reflected an $8 million benefit from the
reversal of a U.S. capital loss valuation allowance associated with the sale of
businesses, and a $6 million benefit from the settlement of a non-U.S. income
tax audit.
First
nine months 2009 effective tax rate reflects a $12 million tax charge associated
with the recapture of gasification investment tax credits and a $7 million tax
charge associated with a change in accounting method for tax purposes to
accelerate timing of deductions for manufacturing repairs
expense. First nine months 2008 effective tax rate reflected the
estimated benefit resulting from the gasification investment tax credit, an $8
million benefit from the reversal of a U.S. capital loss valuation allowance
associated with the sale of businesses, and a $6 million benefit from the
settlement of a non-U.S. income tax audit. Including the above items,
first nine months 2009 and 2008 effective tax rates reflect the Company's
expected full year tax rate on reported earnings from continuing operations
before income tax, of approximately 38 and 28 percent,
respectively.
8
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The
Company or one of its subsidiaries files tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state and local
income tax examinations by tax authorities for years before 2004, or non-U.S.
income tax examinations by tax authorities for years before 2003.
6.
|
September
30,
|
December
31,
|
|||
(Dollars
in millions)
|
2009
|
2008
|
||
Borrowings
consisted of:
|
||||
7%
notes due 2012
|
$
|
152
|
$
|
154
|
6.30%
notes due 2018
|
206
|
207
|
||
7
1/4% debentures due 2024
|
497
|
497
|
||
7
5/8% debentures due 2024
|
200
|
200
|
||
7.60%
debentures due 2027
|
298
|
298
|
||
Credit
facilities borrowings
|
85
|
84
|
||
Other
|
3
|
15
|
||
Total
borrowings
|
1,441
|
1,455
|
||
Borrowings
due within one year
|
(1)
|
(13)
|
||
Long-term
borrowings
|
$
|
1,440
|
$
|
1,442
|
At
September 30, 2009, the Company had credit facilities with various U.S. and
foreign banks totaling approximately $800 million. These credit
facilities consist of a $700 million revolving credit facility (the "Credit
Facility"), as well as a 58 million euro credit facility ("Euro
Facility"). The Credit Facility has two tranches, with $125 million
expiring in 2012 and $575 million expiring in 2013. The Euro Facility
expires in 2012. Borrowings under these credit facilities are subject
to interest at varying spreads above quoted market rates. The Credit
Facility requires a facility fee on the total commitment. In
addition, these credit facilities contain a number of customary covenants and
events of default, including the maintenance of certain financial
ratios. The Company was in compliance with all such covenants for all
periods presented. At September 30, 2009, the Company's credit
facility borrowings totaled $85 million at an effective interest rate of 0.79
percent. At December 31, 2008, the Company's credit facility
borrowings totaled $84 million at an effective interest rate of 3.74
percent.
The
Credit Facility provides liquidity support for commercial paper borrowings and
general corporate purposes. Accordingly, any outstanding commercial
paper borrowings reduce borrowings available under the Credit
Facility. Given the expiration dates of the Credit Facility, any
commercial paper borrowings supported by the Credit Facility are classified as
long-term borrowings because the Company has the ability and intent to refinance
such borrowings on a long-term basis.
In first
nine months 2009, restructuring charges were $23 million, net. The
charges, primarily for severance, resulted from a reduction in
force.
In third
quarter and first nine months 2008, asset impairments and restructuring charges,
net totaled $2 million and $22 million, respectively, primarily for severance,
pension charges, and site closure costs in the Performance Chemicals and
Intermediates ("PCI") segment resulting from the decision to close a previously
impaired site in the United Kingdom, and in the Performance Polymers segment for
restructuring at the South Carolina facility and the divestiture of the PET
manufacturing facilities in Mexico and Argentina.
9
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Changes
in Reserves for Asset Impairments, Restructuring Charges, and Severance
Charges
The
following table summarizes the beginning reserves, charges to and changes in
estimates to the reserves 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 for full year 2008 and first nine
months 2009:
(Dollars
in millions)
|
Balance
at
January
1, 2008
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
December
31, 2008
|
|||||
Non-cash
charges
|
$
|
--
|
$
|
2
|
$
|
(2)
|
$
|
--
|
$
|
--
|
Severance
costs
|
7
|
10
|
--
|
(12)
|
5
|
|||||
Site
closure and other restructuring costs
|
11
|
34
|
--
|
(20)
|
25
|
|||||
Total
|
$
|
18
|
$
|
46
|
$
|
(2)
|
$
|
(32)
|
$
|
30
|
Balance
at
January
1, 2009
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
September
30, 2009
|
||||||
Non-cash
charges
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
Severance
costs
|
5
|
24
|
--
|
(18)
|
11
|
|||||
Site
closure and other restructuring costs
|
25
|
(1)
|
--
|
--
|
24
|
|||||
Total
|
$
|
30
|
$
|
23
|
$
|
--
|
$
|
(18)
|
$
|
35
|
A
majority of the remaining severance and site closure costs is expected to be
applied to the reserves within one year.
DEFINED
BENEFIT PENSION PLANS
Eastman
maintains defined benefit pension plans that provide eligible
employees with retirement benefits. Costs recognized for these
benefits are recorded using estimated amounts, which may change as actual costs
derived for the year are determined.
Below is
a summary of the components of net periodic benefit cost recognized for
Eastman's significant defined benefit pension plans:
Summary
of Components of Net Periodic Benefit Costs
|
||||||||
Third
Quarter
|
First
Nine Months
|
|||||||
(Dollars
in millions)
|
2009
|
2008
|
2009
|
2008
|
||||
Service
cost
|
$
|
10
|
$
|
11
|
$
|
31
|
$
|
34
|
Interest
cost
|
22
|
22
|
65
|
66
|
||||
Expected
return on assets
|
(25)
|
(26)
|
(74)
|
(79)
|
||||
Curtailment
charge
|
--
|
--
|
--
|
9
|
||||
Amortization
of:
|
||||||||
Prior
service credit
|
(4)
|
(5)
|
(12)
|
(12)
|
||||
Actuarial
loss
|
8
|
7
|
25
|
21
|
||||
Net
periodic benefit cost
|
$
|
11
|
$
|
9
|
$
|
35
|
$
|
39
|
The
Company contributed $30 million to its U.S. defined benefit pension plan in
third quarter 2009.
The
curtailment charge in 2008 was primarily related to the decision to close a
previously impaired site in the United Kingdom.
10
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
POSTRETIREMENT
WELFARE PLANS
Eastman
provides a subsidy toward life insurance, health care, and dental benefits for
eligible retirees hired prior to January 1, 2007, and a subsidy toward health
care benefits for retirees' eligible survivors. In general, Eastman
provides those benefits to retirees eligible under the Company's U.S.
plans. Similar benefits are also made available to retirees of
Holston Defense Corporation, a wholly-owned subsidiary of the Company that,
prior to January 1, 1999, operated a government-owned ammunitions
plant.
Eligible
employees hired on or after January 1, 2007 have access to postretirement health
care benefits, but Eastman does not provide a subsidy toward the premium cost of
postretirement health care benefits for those employees.
A few of
the Company's non-U.S. operations have supplemental health benefit plans for
certain retirees, the cost of which is not significant to the
Company.
Costs
recognized for benefits for eligible retirees hired prior to January 1, 2007 are
recorded using estimated amounts, which may change as actual costs derived for
the year are determined. Below is a summary of the components of net
periodic benefit cost recognized for the Company's U.S. plans:
Summary
of Components of Net Periodic Benefit Costs
|
||||||||
Third
Quarter
|
First
Nine Months
|
|||||||
(Dollars
in millions)
|
2009
|
2008
|
2009
|
2008
|
||||
Service
cost
|
$
|
2
|
$
|
2
|
$
|
6
|
$
|
5
|
Interest
cost
|
12
|
11
|
34
|
33
|
||||
Expected
return on assets
|
(1)
|
(1)
|
(2)
|
(3)
|
||||
Amortization
of:
|
||||||||
Prior
service credit
|
(5)
|
(6)
|
(17)
|
(17)
|
||||
Actuarial
loss
|
4
|
2
|
10
|
7
|
||||
Net
periodic benefit cost
|
$
|
12
|
$
|
8
|
$
|
31
|
$
|
25
|
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of
various hazardous waste sites, the Company, along with many other entities, has
been designated a potentially responsible party ("PRP") by the U.S.
Environmental Protection Agency under the Comprehensive Environmental Response,
Compensation and Liability Act, which potentially subjects PRPs to joint and
several liability for such cleanup costs. In addition, the Company
could be required to incur costs for environmental remediation and closure and
postclosure under the federal Resource Conservation and Recovery
Act. Reserves for environmental contingencies have been established
in accordance with Eastman's policies described in Note 1, "Significant
Accounting Policies", to the consolidated financial statements in Part II, Item
8 of the Company's 2008 Annual Report on Form 10-K. Because of
expected sharing of costs, the availability of legal defenses, and the Company's
preliminary assessment of actions that may be required, management does not
believe that the Company's liability for these environmental matters,
individually or in the aggregate, will be material to the Company's consolidated
financial position, results of operations or cash flows. The
Company's reserve for environmental contingencies was $42 million and $41
million at September 30, 2009 and December 31, 2008, respectively, representing
the minimum or best estimate for remediation costs and the best estimate accrued
to date over the facilities' estimated useful lives for asset retirement
obligation costs. Estimated future environmental expenditures for
remediation costs range from the minimum or best estimate of $10 million to the
maximum of $21 million at September 30, 2009, and $11 million to the maximum of
$21 million at December 31, 2008.
11
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
10.
|
Purchasing
Obligations and Lease Commitments
At
September 30, 2009, the Company had various purchase obligations totaling
approximately $1.3 billion over a period of approximately 15 years for
materials, supplies, and energy incident to the ordinary conduct of
business. The Company also had various lease commitments for property
and equipment under cancelable, noncancelable, and month-to-month operating
leases totaling $103 million over a period of several years. Of the
total lease commitments, approximately 17 percent relate to machinery and
equipment, including computer and communications equipment and production
equipment; approximately 41 percent relate to real property, including office
space, storage facilities and land; and approximately 42 percent relate to
vehicles, primarily railcars.
Accounts
Receivable Securitization Program
In 1999,
the Company entered into an agreement that allows the Company to sell certain
trade receivables on a non-recourse basis to a consolidated special purpose
entity which in turn may sell interests in those receivables to a third party
purchaser which generally funds its purchases via the issuance of commercial
paper backed by the receivables interests. The annually renewable
agreement permits the sale of undivided interests in domestic trade accounts
receivable. The assets of the special purpose entity are not
available to satisfy the Company's general obligations. Receivables
sold to the third party totaled $200 million at September 30, 2009 and December
31, 2008. Undivided interests in designated receivable pools were
sold to the purchaser with recourse limited to the purchased interest in the
receivable pools. Average monthly proceeds from collections
reinvested in the continuous sale program were approximately $245 million and
$370 million in third quarter 2009 and 2008, respectively, and $225 million and
$345 million in first nine months 2009 and 2008, respectively. The
securitization program was fully drawn at September 30, 2009 and renewed in July
2009.
Guarantees
The
Company has operating leases with terms that require the Company to guarantee a
portion of the residual value of the leased assets upon termination of the
lease. These residual value guarantees at September 30, 2009 totaled $159 million and
consisted of leases for railcars and aircraft. Leases with guarantee
amounts totaling $11 million, $138 million, and $10 million will expire in 2011,
2012, and 2014 and beyond, respectively. The Company believes, based
on current facts and circumstances, that the likelihood of a material payment
pursuant to such guarantees is remote.
Variable
Interest Entities
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not Variable Interest
Entities ("VIEs") or, in the case of Primester, a joint venture that
manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the
Company is not the primary beneficiary of the VIE. As such, in
accordance with consolidations rules included in GAAP, the Company is not
required to consolidate these entities. In addition, the Company has
evaluated long-term purchase obligations with an entity that may be a VIE at
September 30, 2009. This potential VIE is a joint venture from which
the Company has purchased raw materials and utilities for several
years. The Company purchased approximately $50 million of raw
materials and utilities during 2008 and expects to purchase approximately $35
million during 2009. The Company has no equity interest in this
entity and has confirmed that one party to this joint venture does consolidate
the potential VIE. However, due to competitive and other reasons, the
Company has not been able to obtain the necessary financial information to
determine whether the entity is a VIE, and whether or not the Company is the
primary beneficiary.
12
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Fair
Value of Borrowings
GAAP
requires public companies to disclose the fair value of financial assets and
liabilities whenever summarizing financial information for interim reporting
periods. The fair value for fixed-rate borrowings is based on current
interest rates for comparable securities. The Company's floating-rate
borrowings approximate fair value.
(Dollars
in millions)
|
September
30, 2009
|
December
31, 2008
|
||||||
Recorded
Amount
|
Fair
Value
|
Recorded
Amount
|
Fair
Value
|
|||||
Long-term
borrowings
|
$
|
1,440
|
$
|
1,484
|
$
|
1,442
|
$
|
1,369
|
Fair
Value Measurements
On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began
recording non-recurring financial as well as all non-financial assets and
liabilities subject to fair value measurement under the same
principles. These fair value principles prioritize valuation inputs
across three broad levels. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or
liabilities. Level 2 inputs are quoted prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument. Level 3
inputs are unobservable inputs based on the Company's assumptions used to
measure assets and liabilities at fair value. An asset or liability's
classification within the various levels is determined based on the lowest level
input that is significant to the fair value measurement.
The
following chart shows the financial assets and liabilities valued on a recurring
basis.
(Dollars
in millions)
|
Fair
Value Measurements at September 30, 2009
|
|||||||
Description
|
September
30, 2009
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
||||
Derivative
Assets
|
$
|
12
|
$
|
--
|
$
|
12
|
$
|
--
|
Derivative
Liabilities
|
(6)
|
--
|
(6)
|
--
|
||||
$
|
6
|
$
|
--
|
$
|
6
|
$
|
--
|
(Dollars
in millions)
|
Fair
Value Measurements at December 31, 2008
|
|||||||
Description
|
December
31, 2008
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
||||
Derivative
Assets
|
$
|
16
|
$
|
--
|
$
|
16
|
$
|
--
|
Derivative
Liabilities
|
(14)
|
--
|
(14)
|
--
|
||||
$
|
2
|
$
|
--
|
$
|
2
|
$
|
--
|
|
Hedging
Programs
The
Company is exposed to market risk, such as changes in currency exchange rates,
raw material and energy costs, and interest rates. The Company uses
various derivative financial instruments pursuant to the Company's hedging
policies to mitigate these market risk factors and their effect on the cash
flows of the underlying transactions. Designation is performed on a
specific exposure basis to support hedge accounting. The changes in
fair value of these hedging instruments are offset in part or in whole by
corresponding changes in the cash flows of the underlying exposures being
hedged. The Company does not hold or issue derivative financial
instruments for trading purposes. For further information, see Note
10, "Fair Value of Financial Instruments", to the consolidated financial
statements in Part II, Item 8 of the Company's 2008 Annual Report on Form
10-K.
13
NOTES TO THE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
Hedges
Fair
value hedges are defined by GAAP as derivative or non-derivative instruments
designated as and used to hedge the exposure to changes in the fair value of an
asset or a liability or an identified portion thereof that is attributable to a
particular risk. For derivative instruments that are designated and
qualify as a fair value hedge, the gain or loss on the derivative as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings.
As of
September 30, 2009, the Company had no active fair value hedges.
Cash Flow
Hedges
Cash flow
hedges are defined by GAAP as derivative instruments designated as and used to
hedge the exposure to variability in expected future cash flows that is
attributable to a particular risk. For derivative instruments that
are designated and qualify as a cash flow hedge, the effective portion of the
gain or loss on the derivative is reported as a component of other comprehensive
income, net of income taxes and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. Gains
and losses on the derivatives representing either hedge ineffectiveness or hedge
components excluded from the assessment of effectiveness are recognized in
current earnings.
As of
September 30, 2009, the total amount of the Company's foreign exchange forward
and option contracts was a $5 million asset. As of September 30,
2009, the total amount of the Company's feedstock/energy forward and option
contracts was a $1 million asset.
Fair Value of Derivatives
Designated as Cash Flow Hedging Instruments
(Dollars
in millions)
|
September
30, 2009
|
|||
Asset
Derivatives
|
Balance
Sheet Location
|
Fair
Value
|
||
Commodity
contract
|
Other
current assets
|
$
|
2
|
|
Foreign
exchange contracts
|
Other
current assets
|
6
|
||
$
|
8
|
(Dollars
in millions)
|
September
30, 2009
|
|||
Liability
Derivatives
|
Balance
Sheet Location
|
Fair
Value
|
||
Commodity contract
|
Payables
and other current liabilities
|
$
|
1
|
|
Foreign
exchange contacts
|
Other
noncurrent liabilities
|
1
|
||
$
|
2
|
14
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Derivatives' Cash Flow
Hedging Relationships
(Dollars
in millions)
|
Third Quarter 2009
|
|||||
Derivatives
Cash Flow Hedging Relationships
|
Amount
after tax of gain/ (loss) recognized in Other Comprehensive Income on
derivatives (effective portion)
|
Location
of gain/(loss) reclassified from Accumulated Other Comprehensive Income
into income (effective portion)
|
Pre-tax
amount of gain/(loss) reclassified from Accumulated Other Comprehensive
Income into income (effective portion)
|
|||
September
30, 2009
|
September
30, 2009
|
|||||
Commodity contract
|
$
|
1
|
Cost
of sales
|
$
|
--
|
|
Foreign
exchange contracts
|
(8)
|
Sales
|
5
|
|||
$
|
(7)
|
$
|
5
|
(Dollars
in millions)
|
First Nine Months 2009
|
|||||
Derivatives
Cash Flow Hedging Relationships
|
Amount
after tax of gain/ (loss) recognized in Other Comprehensive Income on
derivatives (effective portion)
|
Location
of gain/(loss) reclassified from Accumulated Other Comprehensive Income
into income (effective portion)
|
Pre-tax
amount of gain/(loss) reclassified from Accumulated Other Comprehensive
Income into income (effective portion)
|
|||
September
30, 2009
|
September
30, 2009
|
|||||
Commodity contract
|
$
|
6
|
Cost
of sales
|
$
|
(9)
|
|
Foreign
exchange contracts
|
(12)
|
Sales
|
19
|
|||
$
|
(6)
|
$
|
10
|
For third
quarter and nine months ended September 30, 2009, there was no material
ineffectiveness with regard to the Company's cash flow hedges.
Nondesignated /
Nonqualifying Derivative Instruments
The gains
or losses on nonqualifying derivatives or derivatives that are not designated as
hedges are marked to market in the line item "Other charges (income), net" of
the Statements of Earnings. The Company recognized approximately $4
million net loss on nonqualifying derivatives during the quarter ended September
30, 2009. The Company recognized less than $3 million net loss on
nonqualifying derivatives during the nine months ended September 30,
2009.
A
reconciliation of the changes in stockholders' equity in first nine months 2009
is provided below:
(Dollars
in millions)
|
Common
Stock at Par Value
$
|
Paid-in
Capital
$
|
Retained
Earnings
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
Treasury
Stock at Cost
$
|
Total
Stockholders' Equity
$
|
Balance
at December 31, 2008
|
1
|
638
|
2,563
|
(335)
|
(1,314)
|
1,553
|
Net
Earnings
|
--
|
--
|
168
|
--
|
--
|
168
|
Cash
Dividends Declared (1)
|
--
|
--
|
(96)
|
--
|
--
|
(96)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
9
|
--
|
9
|
Stock-Based
Compensation Expense (2)
|
--
|
13
|
--
|
--
|
--
|
13
|
Other
(3)
|
--
|
(2)
|
--
|
--
|
--
|
(2)
|
Balance
at September 30, 2009
|
1
|
649
|
2,635
|
(326)
|
(1,314)
|
1,645
|
(1)
|
Includes
cash dividends declared, but
unpaid.
|
(2)
|
The
fair value of equity share-based awards recognized under GAAP for
share-based payments.
|
(3)
|
The
tax benefits relating to the difference between the amounts deductible for
federal income taxes over the amounts charged to income for book value
purposes have been credited to paid-in
capital.
|
15
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
(Dollars
in millions)
|
Cumulative
Translation Adjustment
$
|
Unrecognized
Loss and Prior Service Cost
$
|
Unrealized
Gains (Losses) on Derivative Instruments
$
|
Unrealized
Losses on Investments
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
Balance
at December 31, 2007
|
157
|
(182)
|
(3)
|
--
|
(28)
|
Period
change
|
(97)
|
(232)
|
23
|
(1)
|
(307)
|
Balance
at December 31, 2008
|
60
|
(414)
|
20
|
(1)
|
(335)
|
Period
change
|
17
|
(2)
|
(6)
|
--
|
9
|
Balance
at September 30, 2009
|
77
|
(416)
|
14
|
(1)
|
(326)
|
Amounts
of other comprehensive income (loss) are presented net of applicable
taxes. The Company records deferred income taxes on the cumulative
translation adjustment related to branch operations and other entities included
in the Company's consolidated U.S. tax return. No deferred income
taxes are provided on the cumulative translation adjustment of subsidiaries
outside the United States, as such cumulative translation adjustment is
considered to be a component of permanently invested, unremitted earnings of
these foreign subsidiaries.
Third
Quarter
|
First
Nine Months
|
||||||
2009
|
2008
|
2009
|
2008
|
||||
Shares
used for earnings per share calculation (in millions):
|
|||||||
Basic
|
72.6
|
74.2
|
72.5
|
76.1
|
|||
Diluted
|
73.5
|
75.1
|
73.3
|
77.2
|
In third
quarter and first nine months 2009, common shares underlying options to purchase
3,037,007 shares of common stock and 3,720,448 shares of common stock,
respectively, were excluded from the computation of diluted earnings per share
because the total market value of option exercises for these awards was less
than the total proceeds that would be received for these
awards. There were no share repurchases in first nine months
2009.
In third
quarter and first nine months 2008, common shares underlying options to purchase
655,884 shares of common stock and 596,784 shares of common stock, respectively,
were excluded from the computation of diluted earnings per share because the
total market value of option exercises for these awards was less than the total
proceeds that would be received for these awards. Third quarter and
first nine months 2008 reflect the impact of share repurchases of 3.9 million
and 8.1 million shares, respectively.
The
Company declared cash dividends of $0.44 per share in third quarter 2009 and
2008 and $1.32 per share in first nine months 2009 and 2008.
The
Company utilizes share-based awards under employee and non-employee director
compensation programs. These share-based awards may include
restricted and unrestricted stock, restricted stock units, stock options, and
performance shares. In third quarter 2009 and 2008, approximately $4
million and $6 million of compensation expense before tax were recognized in
selling, general and administrative expense in the earnings statement for all
share-based awards. The impact on third quarter 2009 and 2008 net
earnings of $3 million and $4 million, respectively, is net of deferred tax
expense related to share-based award compensation.
In first
nine months 2009 and 2008, $13 million and $19 million, respectively, of
compensation expense before tax were recognized in selling, general and
administrative expense in the earnings statement for all share-based
awards. The impact on first nine months 2009 and 2008 net earnings of
$8 million and $12 million, respectively, is net of deferred tax expense related
to share-based award compensation.
16
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Additional
information regarding share-based compensation plans and awards may be found in
Note 16, "Share-Based Compensation Plans and Awards", to the consolidated
financial statements in Part II, Item 8 of the Company's 2008 Annual Report on
Form 10-K.
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the Coatings, Adhesives, Specialty Polymers,
and Inks ("CASPI") segment, the Fibers segment, the PCI segment, the Performance
Polymers segment, and the Specialty Plastics ("SP") segment. For
additional information concerning the Company's segments' businesses and
products, see Note 23, "Segment Information", to the consolidated financial
statements in Part II, Item 8 of the Company's 2008 Annual Report on Form
10-K.
Research
and development and other expenses not identifiable to an operating segment are
not included in segment operating results for either of the periods presented
and are shown in the tables below as "other" operating losses.
Third
Quarter
|
||||
(Dollars
in millions)
|
2009
|
2008
|
||
Sales
by Segment
|
||||
CASPI
|
$
|
338
|
$
|
410
|
Fibers
|
257
|
269
|
||
PCI
|
355
|
594
|
||
Performance
Polymers
|
187
|
293
|
||
SP
|
200
|
253
|
||
Total
Sales
|
$
|
1,337
|
$
|
1,819
|
First
Nine Months
|
||||
(Dollars
in millions)
|
2009
|
2008
|
||
Sales
by Segment
|
||||
CASPI
|
$
|
890
|
$
|
1,213
|
Fibers
|
779
|
783
|
||
PCI
|
943
|
1,768
|
||
Performance
Polymers
|
563
|
886
|
||
SP
|
544
|
730
|
||
Total
Sales
|
$
|
3,719
|
$
|
5,380
|
Third
Quarter
|
||||
(Dollars
in millions)
|
2009
|
2008
|
||
Operating
Earnings (Loss)
|
||||
CASPI
|
$
|
84
|
$
|
55
|
Fibers
|
79
|
65
|
||
PCI
(1)
|
33
|
62
|
||
Performance
Polymers (2)
|
(10)
|
(1)
|
||
SP
|
13
|
6
|
||
Total
Operating Earnings by Segment
|
199
|
187
|
||
Other
|
(8)
|
(13)
|
||
Total
Operating Earnings
|
$
|
191
|
$
|
174
|
(1)
|
Third
quarter 2008 includes $1 million of asset impairments and restructuring
charges, net primarily related to severance and pension costs from the
decision to close a previously impaired site in the United Kingdom and $2
million in accelerated depreciation costs resulting from the previously
reported shutdown of cracking units at the Company's Longview, Texas
facility.
|
(2)
|
Third quarter 2008 includes $1 million of asset impairments and restructuring charges, net related to previously divested manufacturing facilities in Mexico and Argentina and restructuring at the South Carolina facility using IntegRexTM technology, partially offset by a resolution of a contingency from the sale of the Company's polyethylene ("PE") and EpoleneTM polymer businesses divested in fourth quarter 2006, and $1 million of accelerated depreciation costs resulting from restructuring actions associated with certain assets in Columbia, South Carolina. |
17
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
First
Nine Months
|
||||
(Dollars
in millions)
|
2009
|
2008
|
||
Operating
Earnings (Loss)
|
||||
CASPI
(1)(2)
|
$
|
148
|
$
|
167
|
Fibers
(1)
|
222
|
195
|
||
PCI
(1)(3)
|
35
|
160
|
||
Performance
Polymers (1)(4)
|
(32)
|
(5)
|
||
SP
(1)
|
3
|
36
|
||
Total
Operating Earnings by Segment
|
376
|
553
|
||
Other
|
(29)
|
(39)
|
||
Total
Operating Earnings
|
$
|
347
|
$
|
514
|
(1)
|
First
nine months 2009 includes a restructuring charge primarily for a severance
program of $5 million, $4 million, $6 million, $4
million, and $4 million in the CASPI, Fibers, PCI, Performance Polymers,
and SP segments, respectively.
|
(2)
|
First
nine months 2008 includes $2 million in gains for an adjustment to a
reserve for asset impairments and restructuring charges, net for the first
quarter 2008 divestiture of certain product
lines.
|
(3)
|
First
nine months 2008 includes $20 million of asset impairments and
restructuring charges, net primarily related to severance and pension
costs from the decision to close a previously impaired site in the United
Kingdom and $4 million of accelerated depreciation costs resulting from
the previously reported shutdown of cracking units at the Company's
Longview, Texas facility.
|
(4)
|
First nine months 2008 includes
$4 million of asset impairments and restructuring charges, net related to
previously divested manufacturing facilities in Mexico and Argentina and
restructuring at the South Carolina facility using IntegRexTM
technology,
partially offset by a resolution of a contingency from the sale of the
Company's PE and EpoleneTM polymer businesses divested in
fourth quarter 2006 and $4 million of accelerated depreciation costs
resulting from restructuring actions associated with certain assets in
Columbia, South Carolina.
|
September
30,
|
December
31,
|
|||
(Dollars
in millions)
|
2009
|
2008
|
||
Assets
by Segment (1)
|
||||
CASPI
|
$
|
1,132
|
$
|
1,150
|
Fibers
|
724
|
750
|
||
PCI
|
790
|
834
|
||
Performance
Polymers
|
658
|
728
|
||
SP
|
903
|
818
|
||
Total
Assets by Segment
|
4,207
|
4,280
|
||
Corporate
Assets (2)
|
1,347
|
1,001
|
||
Total
Assets
|
$
|
5,554
|
$
|
5,281
|
(1)
|
Assets
managed by segment are accounts receivable, inventory, fixed assets, and
goodwill.
|
(2)
|
Corporate
assets includes approximately $230 million and $200 million at September
30, 2009 and December 31, 2008, respectively, for the Beaumont, Texas
gasification project, which consists of land, capitalized front-end
engineering and design, methanol and ammonia assets, intangible assets,
and goodwill.
|
16.
|
From time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
being handled and defended in the ordinary course of business. While
the Company is unable to predict the outcome of these matters, it does not
believe, based upon currently available facts, that the ultimate resolution of
any such pending matters will have a material adverse effect on its overall
financial condition, results of operations or cash flows. However,
adverse developments could negatively impact earnings or cash flows in a
particular future period.
18
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
In June
2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)" ("SFAS No. 167"). This statement amends certain requirements
of FASB Interpretation No. 46 (revised December 2003), "Consolidation of
Variable Interest Entities", to improve financial reporting by enterprises
involved with variable interest entities and to provide more relevant and
reliable information to users of financial statements. This statement
is effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting periods
thereafter. The Company is currently evaluating the effect SFAS No.
167 will have on its consolidated financial position, liquidity, or results of
operations.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM
|
Page
|
21
|
|
21
|
|
22
|
|
23
|
|
27
|
|
34
|
|
36
|
|
39
|
|
40
|
|
41
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with Eastman Chemical Company's (the
"Company" or "Eastman") audited consolidated financial statements,
including related notes, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's 2008 Annual
Report on Form 10-K, and the Company's unaudited consolidated financial
statements, including related notes, included elsewhere in this
report. All references to earnings per share contained in this report
are diluted earnings per share unless otherwise noted.
As
described below in "Presentation of Non-GAAP Financial Measures", the Company
sold its polyethylene terephthalate ("PET") manufacturing facility in Spain in
the second quarter 2007 and sold its PET polymers and purified terephthalic acid
("PTA") manufacturing facilities in the Netherlands and its PET manufacturing
facility in the United Kingdom and the related businesses in first quarter
2008. Because the Company has exited the PET business in the European
region, results from sales of PET products manufactured at the Spain, the
Netherlands, and the United Kingdom sites, including impairments and
restructuring charges of those operations, and gains and losses from disposal of
those assets and businesses, are presented as discontinued operations for all
periods presented and are therefore not included in results from continuing
operations under accounting principles generally accepted in the United States
("GAAP"). For additional information, see Note 2,
"Discontinued Operations", to the Company's unaudited consolidated financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
20
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
preparing the consolidated financial statements in conformity with GAAP, the
Company's management must make decisions which impact the reported amounts and
the related disclosures. Such decisions include the selection of the
appropriate accounting principles to be applied and assumptions on which to base
estimates and judgments that affect the reported amounts of assets, liabilities,
sales revenue and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to allowances for doubtful accounts,
impairment of long-lived assets, environmental costs, pension and other
post-employment benefits, litigation and contingent liabilities, and income
taxes. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions. The Company's management
believes the critical accounting estimates listed and described in Part II, Item
7 of the Company's 2008 Annual Report on Form 10-K are the most important to the
fair presentation of the Company's financial condition and
results. These estimates require management's most significant
judgments in the preparation of the Company's consolidated financial
statements.
During
2009, the Company recognized $23 million in restructuring charges, primarily for
severance, resulting from a reduction in force.
During
2007 and 2008, the Company took strategic actions in its Performance Polymers
segment to address its underperforming PET manufacturing facilities outside the
United States. In second quarter 2007, the Company completed the sale
of its PET manufacturing facility in Spain and in first quarter 2008, the
Company completed the sale of its PET polymers and PTA manufacturing facilities
in the Netherlands and the PET manufacturing facility in the United Kingdom and
related businesses. Results from, charges related to, and gains and
losses from disposal of the Spain, the Netherlands, and the United Kingdom
assets and businesses are presented as discontinued operations. In
fourth quarter 2007, the Company completed the sale of its Mexico and Argentina
manufacturing facilities. As part of this divestiture, the Company
entered into transition supply agreements for polymer intermediates from which
sales revenue and operating results are included in the Performance Polymers
segment results in 2008.
In fourth
quarter 2006, the Company sold its polyethylene ("PE") and EpoleneTM
polymer businesses and related assets of the Performance Polymers and the
Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI")
segments. As part of the PE divestiture, the Company entered into a
transition supply agreement for contract ethylene sales, from which sales
revenue and operating results are included in the Performance Chemicals and
Intermediates ("PCI") segment results in 2009 and 2008.
Also in
fourth quarter 2006, the Company made strategic decisions relating to the
scheduled shutdown of cracking units in Longview, Texas and a planned shutdown
of higher cost PET assets in Columbia, South Carolina. Accelerated
depreciation costs resulting from these decisions were $3 million and $8 million
in third quarter and first nine months 2008, respectively. For more
information on accelerated depreciation costs, see "Gross Profit" in the
"Results of Operations" section of this Management's Discussion and
Analysis.
This
Management's Discussion and Analysis includes the following non-GAAP financial
measures and accompanying reconciliations to the most directly comparable GAAP
financial measures. The non-GAAP financial measures used by the
Company may not be comparable to similarly titled measures used by other
companies and should not be considered in isolation or as a substitute for
measures of performance or liquidity prepared in accordance with
GAAP.
·
|
Company
and segment sales excluding contract ethylene sales under a transition
agreement related to the divestiture of the PE product
lines;
|
·
|
Company
and segment sales excluding contract polymer intermediates sales under a
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and
Argentina;
|
21
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
Company
and segment gross profit, operating earnings, and earnings from continuing
operations excluding accelerated depreciation costs and asset impairments
and restructuring charges; and
|
·
|
Company
earnings from continuing operations excluding net deferred tax benefits
related to the previous divestiture of
businesses.
|
Eastman's
management believes that contract ethylene sales under the transition agreement
related to the divestiture of the PE product lines and the contract polymer
intermediates sales under the transition supply agreement related to the
divestiture of the PET manufacturing facilities and related businesses in Mexico
and Argentina do not reflect the continuing and expected future business of the
PCI and Performance Polymers segments or of the Company. In addition,
for evaluation and analysis of ongoing business results and of the impact on the
Company and segments of strategic decisions and actions to reduce costs and to
improve the profitability of the Company, management believes that Company and
segment earnings from continuing operations should be considered both with and
without accelerated depreciation costs, asset impairments and restructuring
charges, and deferred tax benefits related to the previous divestiture of
businesses. Management believes that investors can better evaluate
and analyze historical and future business trends if they also consider the
reported Company and segment results, respectively, without the identified
items. Management utilizes Company and segment results including and
excluding the identified items in the measures it uses to evaluate business
performance and in determining certain performance-based
compensation. These measures, excluding the identified items, are not
recognized in accordance with GAAP and should not be viewed as alternatives to
the GAAP measures of performance.
The
Company generated sales revenue of $1.3 billion and $1.8 billion in third
quarter 2009 and 2008, respectively. Excluding the results of
contract ethylene sales and contract polymer intermediates sales from third
quarter 2008, sales revenue decreased by 21 percent. The Company
generated sales revenue of $3.7 billion in first nine months 2009 compared to
$5.4 billion in first nine months 2008. Excluding the results of
contract ethylene sales and contract polymer intermediates sales from both
periods, sales revenue decreased by 26 percent. Sales revenue
decreases for both third quarter and first nine months 2009 compared to the same
periods in 2008 were due to lower selling prices in response to lower raw
material and energy costs and lower sales volume primarily attributed to the
global recession.
Operating
earnings were $191 million in third quarter 2009 compared with $174 million in
third quarter 2008. Excluding accelerated depreciation costs and
asset impairments and restructuring charges, operating earnings were $179
million in third quarter 2008. The increase in third quarter 2009 was
due to lower raw material and energy costs and cost reduction actions more than
offsetting lower selling prices and lower sales volume. The increased
operating margin was attributed to a favorable shift in company product mix due
to a higher percentage of overall sales revenue from the Fibers, CASPI, and
Specialty Plastics ("SP") segments compared to the PCI and Performance Polymers
segments.
Operating
earnings were $347 million in first nine months 2009 compared with $514 million
in first nine months 2008. Excluding asset impairments and
restructuring charges in first nine months 2009 and 2008 and accelerated
depreciation costs in first nine months 2008, operating earnings were $370
million in first nine months 2009 compared with $544 million in first nine
months 2008. Eastman's reduced earnings reflect continued weakness in
demand for the Company's products that caused lower sales volume and continued
low capacity utilization which resulted in higher unit costs. This
weakness in demand, which is attributed to the global recession, has been
moderating throughout 2009 resulting in sequential sales volume and operating
earnings increases each quarter. First nine months 2009 operating
earnings also included approximately $20 million in costs related to the
reconfiguration of the Longview, Texas facility. Operating earnings
benefited from cost reduction actions which will positively impact results
throughout the year.
Earnings
from continuing operations were $101 million in third quarter 2009 compared to
$100 million in third quarter 2008. Excluding accelerated
depreciation costs, asset impairments and restructuring charges, and net
deferred tax benefits, earnings from continuing operations were $102 million in
third quarter 2008. Earnings from continuing operations were $168
million in first nine months 2009 compared to $330 million in first nine months
2008. Excluding accelerated depreciation costs, asset impairments and
restructuring charges, and net deferred tax benefits, earnings from continuing
operations were $182 million and $338 million in first nine months 2009 and
2008, respectively.
22
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company generated $668 million in cash from operating activities during first
nine months 2009 compared to $293 million in first nine months
2008. The improvement was primarily due to a decrease in working
capital in 2009 compared to an increase in working capital in 2008, as well as a
change in tax accounting method reflected as a provision for deferred income
taxes. The Company expects to generate positive free cash flow (operating
cash flow less capital expenditures and dividends) in excess of $300 million in
2009, assuming continued difficult economic conditions and raw material and
energy costs similar to current levels.
During
third quarter 2009, the Company completed front-end engineering and design for
its industrial gasification project in Beaumont, Texas, which resulted in a
higher than anticipated capital cost estimate and a later estimated project
completion date. The Company continues to believe that the long-term
business fundamentals of the project are favorable, and is evaluating
alternatives to lower the overall project cost. The Company is also
pursuing government financing and incentives, and evaluating the possible impact
of pending and proposed environmental legislation. Given the
uncertainty of the timing of the project, obtaining government financing and
incentives, and possible environmental legislation, the Company has reduced
spending for this project.
RESULTS OF OPERATIONS
Third
Quarter
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
||||||||||
(Dollars
in millions)
|
2009
|
2008
|
Change
|
|||||||||||
Sales
|
$
|
1,337
|
$
|
1,819
|
(27)
%
|
(10)
%
|
(17)
%
|
--
%
|
--
%
|
|||||
Sales
- contract polymer intermediates sales (1)
|
--
|
35
|
||||||||||||
Sales
- contract ethylene sales (2)
|
--
|
89
|
||||||||||||
Sales
– excluding listed items
|
1,337
|
1,695
|
(21)
%
|
(4)
%
|
(18)
%
|
1
%
|
--
%
|
|||||||
First
Nine Months
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
||||||||||
(Dollars
in millions)
|
2009
|
2008
|
Change
|
|||||||||||
Sales
|
$
|
3,719
|
$
|
5,380
|
(31)
%
|
(18)
%
|
(13)
%
|
--
%
|
--
%
|
|||||
Sales
- contract polymer intermediates sales (1)
|
--
|
117
|
||||||||||||
Sales
- contract ethylene sales (2)
|
18
|
283
|
||||||||||||
Sales
– excluding listed items
|
3,701
|
4,980
|
(26)
%
|
(12)
%
|
(13)
%
|
(1)
%
|
--
%
|
|||||||
(1)
|
Included
in 2008 sales revenue are contract polymer intermediates sales under the
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and Argentina in
fourth quarter 2007.
|
(2)
|
Included
in 2009 and 2008 sales revenue are contract ethylene sales under the
transition supply agreement related to the divestiture of the PE
businesses.
|
Sales
revenue in third quarter 2009 compared to third quarter 2008 decreased $482
million. Excluding revenue from the contract ethylene and polymer
intermediates sales, sales revenue decreased $358 million in third quarter 2009
compared to third quarter 2008. The decrease was primarily due to
lower selling prices in response to lower raw material and energy costs,
particularly in the PCI and Performance Polymers segments, and lower sales
volume primarily attributed to weakened demand due to the global
recession.
23
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue in first nine months 2009 compared to first nine months 2008 decreased
$1.7 billion. Excluding revenue from the contract ethylene and
polymer intermediates sales, sales revenue decreased $1.3 billion in first nine
months 2009 compared to first nine months 2008. The decrease was due
to lower selling prices in response to lower raw material and energy costs,
particularly in the PCI and Performance Polymers segments, and lower sales
volume primarily attributed to weakened demand due to the global
recession.
Third
Quarter
|
First
Nine Months
|
|||||||||||
(Dollars
in millions)
|
2009
|
2008
|
Change
|
2009
|
2008
|
Change
|
||||||
Gross
Profit
|
$
|
328
|
$
|
322
|
2
%
|
$
|
767
|
$
|
980
|
(22)
%
|
||
As
a percentage of sales
|
25
%
|
18
%
|
21
%
|
18
%
|
||||||||
Accelerated
depreciation costs included in cost of goods sold
|
--
|
3
|
--
|
8
|
||||||||
Gross
profit excluding accelerated depreciation costs
|
328
|
325
|
1
%
|
767
|
988
|
(22)
%
|
||||||
As
a percentage of sales
|
25
%
|
18
%
|
21
%
|
18
%
|
Gross
profit in third quarter 2009 increased slightly compared to third quarter 2008
with increases in the CASPI, Fibers, and SP segments offset by decreases in the
PCI and Performance Polymers segments. Gross profit as a percentage
of sales in third quarter 2009 increased compared to third quarter 2008 due to
lower raw material and energy costs and cost reduction actions more than
offsetting lower selling prices and lower sales volume. The increase
was attributed to a favorable shift in company product mix due to a higher
percentage of overall sales revenue from the Fibers, CASPI, and SP segments
compared to the PCI and Performance Polymers segments. Third quarter
2008 included accelerated depreciation costs of $3 million resulting from the
previously reported shutdown of the cracking units in Longview, Texas and of
higher cost PET polymer assets in Columbia, South Carolina. The
Company's third quarter raw material and energy costs decreased by approximately
$350 million compared with third quarter 2008.
Gross
profit in first nine months 2009 decreased compared to first nine months 2008 in
all segments except the Fibers segment due to continued weakness in demand for
the Company's products attributed to the global recession. This weak
demand caused lower sales volume and lower capacity utilization which resulted
in higher unit costs. In addition, first nine months 2009 included
approximately $20 million in costs related to the reconfiguration of the
Longview, Texas facility. The reconfiguration costs impacted the PCI
and CASPI segments. First nine months 2009 also benefited from cost
reduction actions. First nine months 2008 included accelerated
depreciation costs of $8 million resulting from the previously reported shutdown
of the cracking units in Longview, Texas and of higher cost PET polymer assets
in Columbia, South Carolina. The Company's first nine months 2009 raw
material and energy costs decreased by approximately $725 million compared with
first nine months 2008.
Third
Quarter
|
First
Nine Months
|
|||||||||||
(Dollars
in millions)
|
2009
|
2008
|
Change
|
2009
|
2008
|
Change
|
||||||
Selling,
General and Administrative Expenses
|
$
|
104
|
$
|
107
|
(3)
%
|
$
|
296
|
$
|
324
|
(9)
%
|
||
Research
and Development Expenses
|
33
|
39
|
(15)
%
|
101
|
120
|
(16)
%
|
||||||
$
|
137
|
$
|
146
|
(6)
%
|
$
|
397
|
$
|
444
|
(11)
%
|
|||
As
a percentage of sales
|
10
%
|
8
%
|
11
%
|
8
%
|
Selling,
general and administrative expenses decreased in third quarter and first nine
months 2009 compared to third quarter and first nine months 2008 primarily due
to lower discretionary spending and compensation expense resulting from cost
reduction actions partially offset by increased compensation expense linked to
the Company's stock price.
24
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Research
and development ("R&D") expenses decreased $6 million and $19 million in
third quarter 2009 compared to third quarter 2008 and first nine months 2009
compared to first nine months 2008, respectively. The decrease is
primarily due to lower R&D expenses for corporate growth initiatives and
lower discretionary spending resulting from cost reduction actions.
Asset
Impairments and Restructuring Charges, Net
In first
nine months 2009, restructuring charges were $23 million, net. The
charges, primarily for severance, resulted from a reduction in
force.
In third
quarter and first nine months 2008, asset impairments and restructuring charges,
net totaled $2 million and $22 million, respectively, primarily for severance,
pension charges, and site closure costs in the PCI segment resulting from the
decision to close a previously impaired site in the United Kingdom.
For more
information regarding asset impairments and restructuring charges, net see the
segment discussions and Note 7, "Asset Impairments and
Restructuring Charges, Net", to the Company's unaudited consolidated
financial statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
Operating
Earnings
|
||||||||||||
Third
Quarter
|
First
Nine Months
|
|||||||||||
(Dollars
in millions)
|
2009
|
2008
|
Change
|
2009
|
2008
|
Change
|
||||||
Operating
earnings
|
$
|
191
|
$
|
174
|
10
%
|
$
|
347
|
$
|
514
|
(32)
%
|
||
Accelerated
depreciation costs included in cost of goods sold
|
--
|
3
|
--
|
8
|
||||||||
Asset
impairments and restructuring charges, net
|
--
|
2
|
23
|
22
|
||||||||
Operating
earnings excluding accelerated depreciation costs and asset impairments
and restructuring charges, net
|
$
|
191
|
$
|
179
|
7
%
|
$
|
370
|
$
|
544
|
(32)
%
|
Operating
earnings increased in third quarter 2009 compared to third quarter 2008 despite
lower sales revenue as a result of a favorable shift in company product mix and
cost reduction actions. Operating earnings decreased in first nine
months 2009 compared to first nine months 2008 reflecting continued weakness in
demand for the Company's products. This weakness in demand, which is
attributed to the global recession, has been moderating throughout 2009
resulting in sequential sales volume and operating earnings increases each
quarter.
Net
Interest Expense
Third
Quarter
|
First
Nine Months
|
|||||||||||
(Dollars
in millions)
|
2009
|
2008
|
Change
|
2009
|
2008
|
Change
|
||||||
Gross
interest costs
|
$
|
23
|
$
|
26
|
$
|
73
|
$
|
80
|
||||
Less: Capitalized
interest
|
3
|
3
|
10
|
7
|
||||||||
Interest
expense
|
20
|
23
|
(13)
%
|
63
|
73
|
(14)
%
|
||||||
Interest
income
|
1
|
4
|
5
|
20
|
||||||||
Net
interest expense
|
$
|
19
|
$
|
19
|
--
%
|
$
|
58
|
$
|
53
|
9
%
|
||
Net
interest expense was unchanged in third quarter 2009 compared to third quarter
2008 as lower gross interest costs were offset by lower interest income due to
lower average interest rates.
25
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Net
interest expense increased $5 million in first nine months 2009 compared to
first nine months 2008. Gross interest costs in first nine months
2009 were lower compared to first nine months 2008 due to lower average
borrowings and lower average interest rates. Interest income in first
nine months 2009 was lower compared to first nine months 2008 due to lower
average interest rates and lower average cash balances.
For 2009,
the Company expects net interest expense to increase compared with 2008
primarily due to lower interest income, driven by lower average interest rates
and lower average cash balances.
Other
Charges (Income), Net
Third
Quarter
|
First
Nine Months
|
|||||||
(Dollars in
millions)
|
2009
|
2008
|
2009
|
2008
|
||||
Foreign
exchange transaction losses
|
$
|
--
|
$
|
6
|
$
|
2
|
$
|
8
|
Investment
losses (gains)
|
(1)
|
1
|
4
|
2
|
||||
Other,
net
|
3
|
--
|
5
|
(3)
|
||||
Other
charges (income), net
|
$
|
2
|
$
|
7
|
$
|
11
|
$
|
7
|
Included
in net other charges (income) are gains or losses on foreign exchange
transactions, results from equity investments, gains or losses on business
venture investments, other non-operating income or charges related to Holston
Defense Corporation, gains from the sale of non-operating assets, royalty
income, certain litigation costs, fees on securitized receivables, other
non-operating income, and other miscellaneous items.
Provision
for Income Taxes
Third
Quarter
|
First
Nine Months
|
|||||||
(Dollars
in millions)
|
2009
|
2008
|
2009
|
2008
|
||||
Provision
for income taxes
|
$
|
69
|
$
|
48
|
$
|
110
|
$
|
124
|
Effective
tax rate
|
40
%
|
33
%
|
39
%
|
27
%
|
Third
quarter 2009 effective tax rate reflects a $12 million tax charge associated
with the recapture of gasification investment tax credits as the Company no
longer anticipates meeting the timeline agreed to with the Internal Revenue
Service. Third quarter 2008 effective tax rate reflected an $8
million benefit from the reversal of a U.S. capital loss valuation allowance
associated with the sale of businesses, and a $6 million benefit from the
settlement of a non-U.S. income tax audit.
First
nine months 2009 effective tax rate reflects a $12 million tax charge associated
with the recapture of gasification investment tax credits and a $7 million tax
charge associated with a change in accounting method for tax purposes to
accelerate timing of deductions for manufacturing repairs
expense. First nine months 2008 effective tax rate reflected the
estimated benefit resulting from the gasification investment tax credit, an $8
million benefit from the reversal of a U.S. capital loss valuation allowance
associated with the sale of businesses, and a $6 million benefit from the
settlement of a non-U.S. income tax audit. Including the above items,
first nine months 2009 and 2008 effective tax rates reflect the Company's
expected full year tax rate on reported earnings from continuing operations
before income tax, of approximately 38 and 28 percent,
respectively.
26
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Earnings
from Continuing Operations
|
||||||||
Third
Quarter
|
First
Nine Months
|
|||||||
(Dollars
in millions)
|
2009
|
2008
|
2009
|
2008
|
||||
Earnings
from continuing operations
|
$
|
101
|
$
|
100
|
$
|
168
|
$
|
330
|
Accelerated
depreciation costs included in cost of goods sold, net of
tax
|
--
|
2
|
--
|
5
|
||||
Asset
impairments and restructuring charges, net of tax
|
--
|
3
|
14
|
17
|
||||
Net
deferred tax benefits related to the previous divestiture
of businesses
|
--
|
(3)
|
--
|
(14)
|
||||
Earnings
from continuing operations excluding accelerated depreciation costs, net
of tax, asset impairments and restructuring charges, net of tax, and net
deferred tax benefits related to the previous divestiture of
businesses
|
$
|
101
|
$
|
102
|
$
|
182
|
$
|
338
|
Net
Earnings
|
||||||||
Third
Quarter
|
First
Nine Months
|
|||||||
(Dollars
in millions)
|
2009
|
2008
|
2009
|
2008
|
||||
Earnings
from continuing operations
|
$
|
101
|
$
|
100
|
$
|
168
|
$
|
330
|
Earnings
from disposal of discontinued operations, net of tax
|
--
|
--
|
--
|
18
|
||||
Net
earnings
|
$
|
101
|
$
|
100
|
$
|
168
|
$
|
348
|
The
earnings on disposal of discontinued operations, net of tax of $18 million in
first nine months 2008 was from the sale of the Company's PET polymers and PTA
production facilities in the Netherlands and its PET production facility in the
United Kingdom and related businesses for approximately $329 million in first
quarter 2008. For additional information, see Note
2, "Discontinued Operations", to the Company's unaudited consolidated
financial statements in Part I, Item 1 of this Quarterly Report on Form
10-Q.
R&D
and other expenses not identifiable to an operating segment, including
industrial gasification project expenses, are not included in segment operating
results for either of the periods presented and are shown in Note 15, "Segment Information", to the Company's unaudited
consolidated financial statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q, as "other" operating losses. As discussed in Note 15,
these "other" operating losses are $8 million and $29 million in third quarter
and first nine months 2009, respectively, and $13 million and $39 million in
third quarter and first nine months 2008, respectively. The total
corporate assets of $1.3 billion include approximately $230 million and $200
million at September 30, 2009 and December 31, 2008, respectively, related to
the Beaumont, Texas gasification project.
27
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
CASPI
Segment
|
|||||||||||||||||
Third
Quarter
|
First
Nine Months
|
||||||||||||||||
Change
|
Change
|
||||||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
|||||||||
Sales
|
$
|
338
|
$
|
410
|
$
|
(72)
|
(18)
%
|
$
|
890
|
$
|
1,213
|
$
|
(323)
|
(27)
%
|
|||
Volume
effect
|
(27)
|
(7)
%
|
(227)
|
(19)
%
|
|||||||||||||
Price
effect
|
(44)
|
(11)
%
|
(64)
|
(5)
%
|
|||||||||||||
Product
mix effect
|
(1)
|
--
%
|
(29)
|
(3)
%
|
|||||||||||||
Exchange
rate effect
|
--
|
--
%
|
(3)
|
--
%
|
|||||||||||||
Operating
earnings
|
84
|
55
|
29
|
53
%
|
148
|
167
|
(19)
|
(11)
%
|
|||||||||
Asset
impairments and restructuring charges, net
|
--
|
--
|
--
|
5
|
(2)
|
7
|
|||||||||||
Operating
earnings excluding asset impairments and restructuring charges,
net
|
84
|
55
|
29
|
53
%
|
153
|
165
|
(12)
|
(7)
%
|
Sales
revenue decreased $72 million in third quarter 2009 compared to third quarter
2008 primarily due to lower selling prices and lower sales
volume. The lower selling prices were due to lower raw material and
energy costs. The lower sales volume was due to weak customer demand,
attributed to the global recession, particularly for products sold into the
automotive, building and construction, and packaging markets.
Sales
revenue decreased $323 million in first nine months 2009 compared to first nine
months 2008 primarily due to lower sales volume and lower selling
prices. The lower sales volume was due to weak customer demand, in
all regions except Asia Pacific, attributed to the global recession,
particularly for products sold into the automotive, building and construction,
and packaging markets. The lower selling prices were due to lower raw
material and energy costs.
Excluding
asset impairments and restructuring charges, net, operating earnings increased
$29 million in third quarter 2009 compared to third quarter 2008 due primarily
to lower raw material and energy costs and cost reduction actions, which more
than offset lower selling prices and lower sales volume.
Excluding
asset impairments and restructuring charges, net, operating earnings decreased
$12 million in first nine months 2009 compared to first nine months 2008 due
primarily to lower sales volume, partially offset by lower raw material and
energy costs and cost reduction actions. The asset impairments and
restructuring charges, net for 2009 reflect the segment's portion of the
severance charge for a reduction in force in first quarter 2009 and 2008
reflects an adjustment to a reserve for first quarter 2008 divestiture of
certain product lines.
28
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Fibers
Segment
|
|||||||||||||||||
Third
Quarter
|
First
Nine Months
|
||||||||||||||||
Change
|
Change
|
||||||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
|||||||||
Sales
|
$
|
257
|
$
|
269
|
$
|
(12)
|
(5)
%
|
$
|
779
|
$
|
783
|
$
|
(4)
|
--
%
|
|||
Volume
effect
|
(33)
|
(12)
%
|
(79)
|
(10)
%
|
|||||||||||||
Price
effect
|
20
|
7
%
|
69
|
9
%
|
|||||||||||||
Product
mix effect
|
--
|
--
%
|
5
|
1
%
|
|||||||||||||
Exchange
rate effect
|
1
|
--
%
|
1
|
--
%
|
|||||||||||||
Operating
earnings
|
79
|
65
|
14
|
22
%
|
222
|
195
|
27
|
14
%
|
|||||||||
Asset
impairments and restructuring charges, net
|
--
|
--
|
--
|
4
|
--
|
4
|
|||||||||||
Operating
earnings excluding asset impairments and restructuring charges,
net
|
79
|
65
|
14
|
22
%
|
226
|
195
|
31
|
16
%
|
Sales
revenue decreased $12 million in third quarter 2009 compared to third quarter
2008 and $4 million in first nine months 2009 compared to first nine months 2008
primarily due to lower sales volume partially offset by higher selling
prices. The lower sales volume was primarily for the acetyl chemical
products. The higher selling prices were in response to higher raw
material costs, particularly for wood pulp.
Operating
earnings increased $14 million in third quarter 2009 compared to third quarter
2008 primarily due to higher selling prices and cost reduction actions partially
offset by lower sales volume.
Excluding
the segment's portion of the severance charge for a reduction in force in first
quarter 2009, operating earnings increased $31 million in first nine months 2009
compared to first nine months 2008 primarily due to higher selling prices, cost
reduction actions, and a favorable shift in product mix, partially offset by
lower sales volume and higher raw material and energy costs.
In
December 2008, the Company announced an alliance with SK Chemicals Company Ltd.
("SK") to form a company to acquire and operate a cellulose acetate tow
manufacturing facility and related business, with the facility to be constructed
by SK in Korea. Eastman will have majority ownership in the
company. Construction began in first quarter 2009 and the facility is
expected to be operational in second quarter 2010.
29
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
PCI
Segment
|
||||||||||||||||
Third
Quarter
|
First
Nine Months
|
|||||||||||||||
Change
|
Change
|
|||||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||
Sales
|
$
|
355
|
$
|
594
|
$
|
(239)
|
(40)
%
|
$
|
943
|
$
|
1,768
|
$
|
(825)
|
(47)
%
|
||
Volume
effect
|
(61)
|
(10)
%
|
(432)
|
(25)
%
|
||||||||||||
Price
effect
|
(188)
|
(32)
%
|
(409)
|
(23)
%
|
||||||||||||
Product
mix effect
|
9
|
2
%
|
16
|
1
%
|
||||||||||||
Exchange
rate effect
|
1
|
--
%
|
--
|
--
%
|
||||||||||||
Sales
– contract ethylene sales
|
--
|
89
|
(89)
|
18
|
283
|
(265)
|
||||||||||
Sales
– excluding contract ethylene sales
|
355
|
505
|
(150)
|
(30)
%
|
925
|
1,485
|
(560)
|
(38)
%
|
||||||||
Volume
effect
|
28
|
5
%
|
(144)
|
(10)
%
|
||||||||||||
Price
effect
|
(188)
|
(37)
%
|
(415)
|
(28)
%
|
||||||||||||
Product
mix effect
|
9
|
2
%
|
(1)
|
--
%
|
||||||||||||
Exchange
rate effect
|
1
|
--
%
|
--
|
--
%
|
||||||||||||
Operating
earnings
|
33
|
62
|
(29)
|
(47)
%
|
35
|
160
|
(125)
|
(78)
%
|
||||||||
Accelerated
depreciation costs included in cost of goods sold
|
--
|
2
|
(2)
|
--
|
4
|
(4)
|
||||||||||
Asset
impairments and restructuring charges, net
|
--
|
1
|
(1)
|
6
|
20
|
(14)
|
||||||||||
Operating
earnings excluding accelerated depreciation costs and asset impairments
and restructuring charges, net
|
33
|
65
|
(32)
|
(49)
%
|
41
|
184
|
(143)
|
(78)
%
|
||||||||
30
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue decreased $239 million in third quarter 2009 compared to third quarter
2008. Excluding contract ethylene sales under the transition
agreement resulting from the divestiture of the Performance Polymers segment's
PE business in the fourth quarter 2006, sales revenue decreased $150 million in
third quarter 2009 compared to third quarter 2008 due to lower selling prices
more than offsetting higher sales volume. The lower selling prices
were primarily due to lower raw material and energy costs.
Sales
revenue decreased $825 million in first nine months 2009 compared to first nine
months 2008. Excluding contract ethylene sales, sales revenue
decreased $560 million in first nine months 2009 compared to first nine months
2008 due to lower selling prices and lower sales volume. The lower
selling prices were primarily due to lower raw material and energy
costs. The lower sales volume was primarily in olefin-based
derivatives and was attributed to the global recession.
Excluding
accelerated depreciation costs and asset impairments and restructuring charges,
net in third quarter 2008, operating earnings decreased $32 million in third
quarter 2009 compared to third quarter 2008 primarily due to lower selling
prices partially offset by lower raw material and energy costs and cost
reduction actions.
Excluding
asset impairments and restructuring charges, net in first nine months 2009 and
2008 and accelerated depreciation costs in first nine months 2008, operating
earnings decreased $143 million in first nine months 2009 compared to first nine
months 2008 primarily due to lower selling prices, lower sales volume, lower
capacity utilization resulting in higher unit costs including approximately $15
million in costs related to the reconfiguration of the Longview, Texas facility,
partially offset by lower raw material and energy costs and cost reduction
actions. A restructuring charge in first quarter 2009 consisted of the
segment's portion of the severance charge for a reduction in
force. Asset impairments and restructuring charges in first nine
months 2008 consisted primarily of severance and pension costs from the decision
to close a previously impaired site in the United Kingdom. The
accelerated depreciation costs for 2008 are related to the continuation of the
previously reported planned staged phase-out of older cracking units in 2007 at
the Company's Longview, Texas facility.
31
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
As a
result of the Company's strategic actions in the Performance Polymers segment,
the discussion below is of results from continuing operations in all periods
presented. For additional information, see Note 2,
"Discontinued Operations", to the Company's unaudited consolidated financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Third
Quarter
|
First
Nine Months
|
||||||||||||||||
Change
|
Change
|
||||||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
|||||||||
Sales
|
$
|
187
|
$
|
293
|
$
|
(106)
|
(36)
%
|
$
|
563
|
$
|
886
|
$
|
(323)
|
(36)
%
|
|||
Volume
effect
|
(34)
|
(11)
%
|
(117)
|
(13)
%
|
|||||||||||||
Price
effect
|
(81)
|
(28)
%
|
(221)
|
(25)
%
|
|||||||||||||
Product
mix effect
|
9
|
3
%
|
15
|
2
%
|
|||||||||||||
Exchange
rate effect
|
--
|
--
%
|
--
|
--
%
|
|||||||||||||
Sales
– contract polymer intermediates sales (1)
|
--
|
35
|
(35)
|
--
|
117
|
(117)
|
|||||||||||
Sales
– excluding contract polymer intermediates sales
|
187
|
258
|
(71)
|
(27)
%
|
563
|
769
|
(206)
|
(27)
%
|
|||||||||
Volume
effect
|
1
|
--
%
|
--
|
--
%
|
|||||||||||||
Price
effect
|
(81)
|
(31)
%
|
(221)
|
(29)
%
|
|||||||||||||
Product
mix effect
|
9
|
4
%
|
15
|
2
%
|
|||||||||||||
Exchange
rate effect
|
--
|
--
%
|
--
|
--
%
|
|||||||||||||
Operating
loss (2)
|
|
(10)
|
|
(1)
|
|
(9)
|
>(100)
%
|
|
(32)
|
|
(5)
|
|
(27)
|
>(100)
%
|
||
Accelerated
depreciation costs included in cost of goods sold
|
--
|
1
|
(1)
|
--
|
4
|
(4)
|
||||||||||
Asset
impairments and restructuring charges, net
|
--
|
1
|
(1)
|
4
|
4
|
--
|
||||||||||
Operating
earnings (loss) excluding accelerated depreciation costs and asset
impairments and restructuring charges, net
|
(10)
|
1
|
(11)
|
>(100)
%
|
(28)
|
3
|
(31)
|
>(100)
%
|
(1)
|
Sales
revenue for 2008 includes contract polymer intermediates sales under the
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and Argentina in
fourth quarter 2007.
|
(2)
|
Includes
allocated costs in 2008 not included in discontinued operations, some of
which may remain and could be reallocated to the remainder of the segment
and other segments.
|
Excluding
contract polymer intermediates sales to the buyer of the divested Mexico and
Argentina facilities, sales revenue decreased $71 million and $206 million in
third quarter and first nine months 2009 compared to third quarter and first
nine months 2008 due to lower selling prices. The lower selling
prices were attributed to a decline in raw material and energy costs, primarily
for paraxylene. Sales volume excluding contract polymer intermediates
sales was unchanged as higher volume from the Company's IntegRex™ technology
based PET facility was offset by lower volume from the Company's conventional
PET manufacturing assets which were significantly rationalized in first quarter
2008.
32
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Excluding
asset impairments and restructuring charges and accelerated depreciation costs,
net in third quarter 2008, operating results in third quarter 2009 declined $11
million compared to third quarter 2008. Operating results declined
due to lower selling prices and the impact on sales revenue and manufacturing
costs of previously disclosed continuing operational challenges with the
IntegRexTM-based
PET manufacturing facility, partially offset by lower raw material and energy
costs and cost reduction actions.
Excluding
asset impairments and restructuring charges, net in first nine months 2009 and
2008, and accelerated depreciation costs in first nine months 2008, operating
results in first nine months 2009 declined $31 million compared to first nine
months 2008. Operating results declined due to lower selling prices
and higher unit costs resulting from lower polyester stream utilization,
partially offset by lower raw material and energy costs and cost reduction
actions. In addition, results were negatively impacted by the slower
than expected start-up of the debottleneck of the IntegRexTM-based
PET manufacturing facility and previously disclosed continuing operational
challenges with the facility. A restructuring charge in first quarter
2009 consisted of the segment's portion of the severance charge for a reduction
in force. Accelerated depreciation costs of $4 million in first nine
months 2008 resulted from restructuring actions associated with higher cost PET
polymer assets in Columbia, South Carolina. Asset impairments and
restructuring charges of $4 million in first nine months 2008 related to
restructuring at the South Carolina facility using IntegRexTM
technology.
Because
of seasonality of demand, additional market capacity, volatility of paraxylene,
and additional costs to address continuing operational challenges with the
IntegRexTM-based
PET manufacturing facility, the Company expects the Performance Polymers segment
to have greater operating losses in fourth quarter 2009 compared to third
quarter 2009. In response to the continuing operational challenges,
the Company will have a planned shutdown in the fourth quarter to make
additional improvements to the facility.
SP
Segment
|
|||||||||||||||||
Third
Quarter
|
First
Nine Months
|
||||||||||||||||
Change
|
Change
|
||||||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
|||||||||
Sales
|
$
|
200
|
$
|
253
|
$
|
(53)
|
(21)
%
|
$
|
544
|
$
|
730
|
$
|
(186)
|
(25)
%
|
|||
Volume
effect
|
(32)
|
(13)
%
|
(127)
|
(17)
%
|
|||||||||||||
Price
effect
|
(18)
|
(7)
%
|
(41)
|
(5)
%
|
|||||||||||||
Product
mix effect
|
(5)
|
(2)
%
|
(20)
|
(3)
%
|
|||||||||||||
Exchange
rate effect
|
2
|
1
%
|
2
|
--
%
|
|||||||||||||
Operating
earnings
|
13
|
6
|
7
|
>100
%
|
3
|
36
|
(33)
|
(92)
%
|
|||||||||
Asset
impairments and restructuring charges, net
|
--
|
--
|
--
|
4
|
--
|
4
|
|||||||||||
Operating
earnings excluding asset impairments and restructuring charges,
net
|
13
|
6
|
7
|
>100
%
|
7
|
36
|
(29)
|
(81)
%
|
Sales
revenue decreased $53 million in third quarter 2009 compared to third quarter
2008 due to lower sales volume and lower selling prices. The decline
in sales volume was attributed to the global recession which has weakened demand
for plastic resins, including copolyester products sold into the consumer and
durable goods markets and for cellulosic plastics sold into various
markets. The lower selling prices were a result of lower raw material
and energy costs.
33
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue decreased $186 million in first nine months 2009 compared to first nine
months 2008 due to lower sales volume and lower selling prices. The
decline in sales volume was attributed to the global recession which has
weakened demand for plastic resins, including copolyester products sold into the
packaging, consumer and durable goods markets, and for cellulosic plastics sold
into various markets. The lower selling prices were a result of lower
raw material and energy costs.
Operating
results increased $7 million in third quarter 2009 compared to third quarter
2008 due to lower raw material and energy costs and cost reduction actions,
partially offset by lower sales volume, lower capacity utilization
resulting in higher unit costs, and an unfavorable shift in product mix with
less cellulosic plastics sold into various markets.
Excluding
the segment's portion of a severance charge for a reduction in force in first
quarter 2009, operating results decreased $29 million in first nine months 2009
compared to first nine months 2008 due to lower sales volume, lower capacity
utilization causing higher unit costs, and an unfavorable shift in product mix
with less cellulosic plastics sold into various markets, partially offset by
lower raw material and energy costs and cost reduction actions.
The SP
segment is progressing with the introduction of its new copolyester, Eastman
TritanTM
copolyester, including a new 30,000 metric ton TritanTM
manufacturing facility expected to be online by early 2010.
Sales Revenue
Third
Quarter
|
||||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||
United
States and Canada
|
$
|
737
|
$
|
1,124
|
(34)
%
|
(13)
%
|
(22)
%
|
1
%
|
--
%
|
|||||
Asia
Pacific
|
282
|
309
|
(9)
%
|
1
%
|
(9)
%
|
(1)
%
|
--
%
|
|||||||
Europe,
Middle East, and Africa
|
222
|
248
|
(10)
%
|
(8)
%
|
(2)
%
|
(2)
%
|
2
%
|
|||||||
Latin
America
|
96
|
138
|
(31)
%
|
(14)
%
|
(22)
%
|
6
%
|
(1)
%
|
|||||||
$
|
1,337
|
$
|
1,819
|
(27)
%
|
(10)
%
|
(17)
%
|
--
%
|
--
%
|
Sales
revenue in the United States and Canada decreased in third quarter 2009 compared
to third quarter 2008 primarily due to lower selling prices and lower sales
volume particularly in the PCI segment partially due to contract ethylene
sales. Excluding contract ethylene sales, sales revenue decreased 29
percent primarily due to lower selling prices particularly in the PCI and
Performance Polymers segments and lower sales volume particularly in the CASPI
segment.
Sales
revenue in Asia Pacific decreased in third quarter 2009 compared to third
quarter 2008 primarily due to lower selling prices in the PCI, CASPI, and SP
segments partially offset by higher selling prices in the Fibers
segment. Sales volume in the region increased in third quarter
2009 compared to third quarter 2008 as higher sales volume in the PCI and CASPI
segments were partially offset by lower sales volume in the SP and Fibers
segments. The higher sales volume was partially due to a plant
shutdown in third quarter 2008 in the PCI segment.
Sales
revenue in Europe, Middle East and Africa decreased in third quarter 2009
compared to third quarter 2008, primarily due to lower sales volume in all
segments. The region had minimal price effect change compared to
significant declines in other regions due to the higher selling prices in the
Fibers segment offsetting declines in each of the other segments in third
quarter 2009 compared to third quarter 2008.
34
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue in Latin America decreased in third quarter 2009 compared to third
quarter 2008 primarily due to lower selling prices and sales
volume. Excluding contract polymer intermediates sales, sales revenue
decreased 8 percent due to lower selling prices in all segments except the
Fibers segment partially offset by increased sales volume in the PCI and CASPI
segments. The increased sales volume were a result of a plant
shutdown in third quarter 2008 in the PCI segment. Sales revenue also
benefited from a favorable shift in product mix, particularly for the
Performance Polymers segment resulting from the completion of contract polymer
intermediates sales under the transition supply agreement related to the
divestiture of the PET manufacturing facilities and related businesses in Mexico
and Argentina in fourth quarter 2007.
Sales Revenue
First
Nine Months
|
||||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||
United
States and Canada
|
$
|
2,096
|
$
|
3,287
|
(36)
%
|
(21)
%
|
(16)
%
|
1
%
|
--
%
|
|||||
Asia
Pacific
|
769
|
921
|
(17)
%
|
(8)
%
|
(6)
%
|
(3)
%
|
--
%
|
|||||||
Europe,
Middle East, and Africa
|
607
|
774
|
(20)
%
|
(12)
%
|
--
%
|
(8)
%
|
--
%
|
|||||||
Latin
America
|
247
|
398
|
(40)
%
|
(31)
%
|
(17)
%
|
8
%
|
--
%
|
|||||||
$
|
3,719
|
$
|
5,380
|
(31)
%
|
(18)
%
|
(13)
%
|
--
%
|
--
%
|
Sales
revenue in the United States and Canada decreased in first nine months 2009
compared to first nine months 2008 primarily due to lower sales volume and lower
selling prices particularly in the PCI segment partially due to contract
ethylene sales in the PCI segment. Excluding contract ethylene sales,
sales revenue decreased 31 percent primarily due to lower selling prices
particularly in the PCI and Performance Polymers segments and lower sales volume
particularly in the CASPI and PCI segments.
Sales
revenue in Asia Pacific decreased in first nine months 2009 compared to first
nine months 2008 primarily due to lower sales volume particularly in the SP and
Fibers segments and lower selling prices in the PCI, SP, and CASPI segments
partially offset by higher selling prices in the Fibers segment.
Sales
revenue in Europe, Middle East and Africa decreased in first nine months 2009
compared to first nine months 2008 primarily due to lower sales volume and an
unfavorable shift in product mix in all segments. The region had
minimal price effect change compared to significant declines in other regions
due to the higher selling prices in the Fibers segment offsetting declines in
each of the other segments in first nine months 2009 compared to first nine
months 2008.
Sales
revenue in Latin America decreased in first nine months 2009 compared to first
nine months 2008 primarily due to lower sales volume and lower selling prices
partially offset by a favorable shift in product mix. Excluding
contract polymer intermediates sales, sales revenue decreased 12 percent due to
lower selling prices primarily in the Performance Polymers and PCI segments
partially offset by a favorable shift in product mix primarily in the
Performance Polymers segment.
With a
substantial portion of sales to customers outside the United States, Eastman is
subject to the risks associated with operating in international
markets. To mitigate its exchange rate risks, the Company frequently
seeks to negotiate payment terms in U.S. dollars. In addition, where
it deems such actions advisable, the Company engages in foreign currency hedging
transactions and requires letters of credit and prepayment for shipments where
its assessment of individual customer and country risks indicates their use is
appropriate. For additional information, see Note 10 to the
consolidated financial statements in Part II, Item 8 and Part II, Item 7A of the
Company's 2008 Annual Report on Form 10-K and Forward-Looking Statements and Risk
Factors of this Quarterly Report on Form 10-Q.
35
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Cash
Flows
First Nine
Months
|
||||
(Dollars
in millions)
|
2009
|
2008
|
||
Net
cash provided by (used in)
|
||||
Operating
activities
|
$
|
668
|
$
|
293
|
Investing
activities
|
(313)
|
(145)
|
||
Financing
activities
|
(74)
|
(699)
|
||
Net
change in cash and cash equivalents
|
281
|
(551)
|
||
|
||||
Cash
and cash equivalents at beginning of period
|
387
|
888
|
||
Cash
and cash equivalents at end of period
|
$
|
668
|
$
|
337
|
Cash
provided by operating activities was $668 million in first nine months 2009
compared to $293 million in first nine months 2008. The improvement
was primarily due to a decrease in working capital in 2009, particularly
inventories, compared to an increase in working capital in 2008, as well as a
change in tax accounting method reflected as a provision for deferred income
taxes. The Company generated a more than $100 million positive
operating cash flow impact from a change in tax accounting method in the first
nine months of 2009, which for tax purposes, accelerated the timing of
deductions for manufacturing repairs expense resulting in lower estimated tax
payments and a refund of previously paid taxes.
Cash used
in investing activities was $313 million in first nine months 2009 compared to
$145 million used in investing activities in first nine months
2008. The first nine months 2009 included the first three scheduled
payments for an investment in the Company's alliance with SK which are reflected
in the line item "Cash flows from investing activities -- Other items, net" of
the Statements of Cash Flows. Proceeds of $333 million were received
in the first nine months 2008 primarily related to the sale of the Company's PET
polymers and PTA manufacturing facilities in the Netherlands and the PET
manufacturing facility in the United Kingdom. Capital spending of
$268 million in first nine months 2009 decreased compared to $430 million in
first nine months 2008 due primarily to actions taken to respond to the current
global recession.
Cash used
in financing activities totaled $74 million in first nine months 2009 compared
to $699 million used in financing activities in first nine months
2008. Share repurchases in first nine months 2008 were $501
million.
The
payment of dividends is also reflected in financing activities in all
periods.
The
Company expects to generate positive free cash flow (operating cash flow less
capital expenditures and dividends) in excess of $300 million in 2009, including
approximately $100 million in cash from working capital and approximately $100
million from a combination of a refund of previously paid taxes and lower
estimated tax payments, assuming continued difficult economic conditions and raw
material and energy costs similar to current levels. The priorities
for uses of available cash are expected to be payment of the quarterly cash
dividend, investing in growth initiatives, funding defined benefit pension
plans, and repurchasing shares.
36
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Liquidity
At
September 30, 2009, the Company had credit facilities with various U.S. and
foreign banks totaling approximately $800 million. These credit
facilities consist of a $700 million revolving credit facility (the "Credit
Facility") and a 58 million euro credit facility ("Euro
Facility"). The Credit Facility has two tranches, with $125 million
expiring in 2012 and $575 million expiring in 2013. The Euro Facility
expires in 2012. Borrowings under these credit facilities are subject
to interest at varying spreads above quoted market rates. The Credit
Facility requires a facility fee on the total commitment that is based on
Eastman's credit rating. In addition, these credit facilities contain
a number of customary covenants and events of default, including the maintenance
of certain financial ratios. The Company was in compliance with all
such covenants for all periods presented. At September 30, 2009, the
Company's credit facility borrowings totaled $85 million, primarily from the
Euro Facility, at an effective interest rate of 0.79 percent. At
December 31, 2008, borrowings on these credit facilities were $84 million,
primarily from the Euro Facility, at an effective interest rate of 3.74
percent.
The
Credit Facility provides liquidity support for commercial paper borrowings and
general corporate purposes. Accordingly, any outstanding commercial
paper borrowings reduce borrowings available under the Credit
Facility. Given the expiration dates of the Credit Facility, any
commercial paper borrowings supported by the Credit Facility are classified as
long-term borrowings because the Company has the ability to refinance such
borrowings on a long-term basis.
Additionally,
the Company maintains a $200 million annually renewable accounts receivable
securitization program that is available to provide liquidity through the
sale of receivables. The securitization program was fully drawn at
September 30, 2009 and renewed in July 2009. For more information,
see "Off-Balance Sheet and Other
Financing Arrangements" below and Note 10,
"Commitments", to the Company's unaudited consolidated financial statements
in Part I, Item 1 of this Quarterly Report on Form 10-Q.
For more
information regarding interest rates, refer to Note 6,
"Borrowings", to the Company's unaudited consolidated financial statements
in Part I, Item 1 of this Quarterly Report on Form 10-Q.
In third
quarter 2009, the Company completed a planned $30 million contribution to its
U.S. defined benefit pension plan. In 2008, the Company made no
contribution to its U.S. defined benefit pension plan.
Cash
flows from operations and the other sources of liquidity described above are
expected to be available and sufficient to meet foreseeable cash flow
requirements. However, the Company's cash flows from operations can
be affected by numerous factors including risks associated with global
operations, raw material availability and cost, demand for and pricing of
Eastman's products, capacity utilization, and other factors described under
"Forward-Looking Statements and Risk Factors" below. The Company
believes maintaining a financial profile consistent with an investment grade
company is important to its long term strategic and financial
flexibility.
Capital
Expenditures
Capital
expenditures were $268 million and $430 million in first nine months 2009 and
2008, respectively. The decrease of $162 million in 2009 compared
with 2008 was primarily due to the Company's reduced capital spending in
response to the current global recession. The Company expects that
2009 capital spending will be between $300 million and $325 million, which is
sufficient to fund required maintenance and certain strategic growth initiatives
including the increased capacity for Eastman TritanTM
copolyester and the front-end engineering and design for the industrial
gasification project.
Other
Commitments
At
September 30, 2009, the Company's obligations related to notes and debentures
totaled approximately $1.4 billion to be paid over a period of up to 20
years. Other borrowings, related primarily to credit facility
borrowings, totaled approximately $90 million.
37
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company had various purchase obligations at September 30, 2009 totaling
approximately $1.3 billion over a period of approximately 15 years for
materials, supplies, and energy incident to the ordinary conduct of
business. For information regarding the Company's lease commitments,
refer to Note 10, "Commitments", to the Company’s
unaudited consolidated financial statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
In
addition, the Company had other liabilities at September 30, 2009 totaling
approximately $1.4 billion primarily related to pension, retiree medical, and
other post-employment obligations.
The
Company expects to make scheduled payments of approximately $55 million towards
the investment in the Company’s alliance with SK in 2009.
The items
described above are summarized in the following table:
(Dollars
in millions)
|
Payments
Due for
|
|||||||||||||
Period
|
Notes
and Debentures
|
Credit
Facility Borrowings and Other
|
Interest
Payable
|
Purchase
Obligations
|
Operating
Leases
|
Other
Liabilities (a)
|
Total
|
|||||||
2009
|
$
|
--
|
$
|
1
|
$
|
13
|
$
|
79
|
$
|
7
|
$
|
122
|
$
|
222
|
2010
|
--
|
--
|
97
|
355
|
26
|
80
|
558
|
|||||||
2011
|
2
|
--
|
97
|
245
|
25
|
61
|
430
|
|||||||
2012
|
152
|
85
|
93
|
241
|
16
|
53
|
640
|
|||||||
2013
|
--
|
--
|
86
|
227
|
11
|
54
|
378
|
|||||||
2014
and beyond
|
1,201
|
--
|
906
|
113
|
18
|
1,060
|
3,298
|
|||||||
Total
|
$
|
1,355
|
$
|
86
|
$
|
1,292
|
$
|
1,260
|
$
|
103
|
$
|
1,430
|
$
|
5,526
|
(a)
Amounts represent the current estimated cash payments to be made by the Company
primarily for pension and other post-employment benefits and taxes payable in
the periods indicated. The amount and timing of such payments is
dependent upon interest rates, health care trends, actual returns on plan
assets, retirement and attrition rates of employees, continuation or
modification of the benefit plans, and other factors. Such factors
can significantly impact the amount and timing of any future contributions by
the Company.
If
certain operating leases are terminated by the Company, it guarantees a portion
of the residual value loss, if any, incurred by the lessors in disposing of the
related assets. For information on the Company's residual value
guarantees, refer to Note 10, "Commitments", to the
Company's unaudited consolidated financial statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
Eastman
entered into an agreement in 1999 that allows it to generate cash by reducing
its working capital through the sale of undivided interests in certain domestic
trade accounts receivable under a planned continuous sale program to a third
party. For information on the Company's annually renewable accounts
receivable securitization program, refer to Note 10,
"Commitments", to the Company’s unaudited consolidated financial statements
in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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.
38
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not Variable Interest
Entities ("VIEs") or, in the case of Primester, a joint venture that
manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the
Company is not the primary beneficiary of the VIE. As such, in
accordance with GAAP for consolidations, the Company is not required to
consolidate these entities. In addition, the Company has evaluated
long-term purchase obligations with an entity that may be a VIE at September 30,
2009. This potential VIE is a joint venture from which the Company
has purchased raw materials and utilities for several
years. The Company purchased approximately $50 million of raw
materials and utilities during 2008 and expects to purchase approximately $35
million during 2009. The Company has no equity interest in this
entity and has confirmed that one party to this joint venture does consolidate
the potential VIE. However, due to competitive and other reasons, the
Company has not been able to obtain the necessary financial information to
determine whether the entity is a VIE, and whether or not the Company is the
primary beneficiary.
Guarantees
and claims also arise during the ordinary course of business from relationships
with suppliers, customers, and non-consolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others if specified
triggering events occur. Non-performance under a contract could
trigger an obligation of the Company. These potential claims include actions
based upon alleged exposures to products, intellectual property and
environmental matters, and other indemnifications. The ultimate
effect on future financial results is not subject to reasonable estimation
because considerable uncertainty exists as to the final outcome of these
claims. However, while the ultimate liabilities resulting from such
claims may be significant to results of operations in the period recognized,
management does not anticipate they will have a material adverse effect on the
Company's consolidated financial position or liquidity.
Treasury
Stock
In
October 2007, the Company's Board of Directors authorized the repurchase of up
to $700 million of the Company's outstanding common stock at such times, in such
amounts, and on such terms, as determined to be in the best interests of the
Company. As of September 30, 2009, a total of 9.4 million shares had
been repurchased under this authorization for a total amount of $583
million. No share repurchases were made in first nine months
2009.
Dividends
The
Company declared cash dividends of $0.44 per share in third quarter 2009 and
2008 and $1.32 per share in first nine months 2009 and 2008.
In June
2009, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 166, "Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140" ("SFAS No.
166"). This statement addresses the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement in transferred financial
assets. This statement is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. The Company is
currently evaluating the effect SFAS No. 166 will have on its consolidated
financial position, liquidity, or results of operations.
In June
2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)" ("SFAS No. 167"). This statement amends certain requirements
of FASB Interpretation No. 46 (revised December 2003), "Consolidation of
Variable Interest Entities", to improve financial reporting by enterprises
involved with variable interest entities and to provide more relevant and
reliable information to users of financial statements. This statement
is effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting periods
thereafter. The Company is currently evaluating the effect SFAS No.
167 will have on its consolidated financial position, liquidity, or results of
operations.
39
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
For 2009,
the Company expects:
·
|
declines
in volume attributed to the global
recession;
|
·
|
the
volatility of market prices for raw material and energy to continue and
that the Company will continue to use pricing strategies and ongoing cost
control initiatives in an attempt to offset the effects on gross
profit;
|
·
|
some
segments to be challenged to meet their typical operating margins with the
current uncertainty of the global
recession;
|
·
|
sales
volume for acetate tow in the Fibers segment to be down slightly compared
to 2008, and to make scheduled payments of approximately $55 million in
the alliance with SK to form a company to acquire and operate a cellulose
acetate tow manufacturing facility and related business in
Korea;
|
·
|
to
complete an additional 30 percent expansion of its CASPI segment's
hydrogenated hydrocarbon resins manufacturing capacity in Middelburg, the
Netherlands during fourth quarter;
|
·
|
ethylene
volume to decline in the PCI segment due to the staged phase-out of older
cracking units at the Company's Longview, Texas
facility;
|
·
|
to
complete maintenance and capital projects for its largest cracking unit as
the last step in the reconfiguration of its Longview, Texas facility
during second quarter (which was completed in second quarter 2009), with
costs related to these actions impacting the PCI and CASPI
segments;
|
·
|
the
SP segment will continue to progress with the introduction of its new
copolyester, Eastman TritanTM
copolyester, including a new 30,000 metric ton TritanTM
manufacturing facility expected to be online in
2010;
|
·
|
the
Performance Polymers segment to have a greater operating loss in fourth
quarter 2009 compared to third quarter 2009 because of seasonality of
demand, additional market capacity, volatility of paraxylene, and
additional costs to address operational challenges with the IntegRexTM-based
PET manufacturing facility;
|
·
|
to
continue to pursue options to create additional value from its
IntegRexTM technology,
primarily by actively pursuing licensing
opportunities;
|
·
|
following
completion of front-end engineering and design for the industrial
gasification project, to evaluate alternatives to lower the overall
project cost, pursue government financing and incentives, and evaluate the
possible impact of pending and proposed environmental
legislation;
|
·
|
depreciation
and amortization to be slightly higher than
2008;
|
·
|
pension
expense to be similar to 2008, and to fund defined benefit pension plans
in an amount between $25 million and $50 million (approximately $35
million of which has been funded through third quarter) and is evaluating
additional funding in the fourth quarter such that funding in 2009 would
exceed $50 million;
|
·
|
net
interest expense to increase compared with 2008 primarily due to lower
interest income, driven by lower average interest rates and lower average
cash balances;
|
·
|
the
effective tax rate, including the recapture of gasification investment tax
credits taken and a charge associated with a change in accounting method
for tax purposes, to be approximately
38%;
|
40
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
capital
spending to be between $300 million and $325 million as it selectively
funds targeted growth efforts, while prioritizing capital spending,
including the increased capacity for Eastman TritanTM
copolyester and the front-end engineering and design for the industrial
gasification project;
|
·
|
to
generate positive free cash flow in excess of $300 million, including
approximately $100 million in cash from working capital, assuming
continued difficult economic conditions and raw material and energy costs
similar to current levels, and $100 million positive operating cash flow
impact of a change in tax accounting method;
and
|
·
|
priorities
for uses of available cash to be payment of the quarterly cash dividend,
fund targeted growth initiatives and defined benefit pension plans, and
repurchase shares.
|
Based
upon the foregoing, the Company expects fourth quarter 2009 earnings per share
to decline compared to third quarter 2009, but to be slightly above $0.85 per
share.
In addition to the above, the Company expects to significantly improve earnings over the long-term through strategic efforts and growth initiatives in existing businesses, and expects:
·
|
the
SP segment to improve earnings by continued focus on copolyesters growth,
increasing sales revenue from cellulose esters used in liquid crystal
displays screens and other various markets, and continued progress with
the introduction of its high performance
copolyesters;
|
·
|
to
pursue licensing opportunities for the PCI segment's acetyl and oxo
technologies and for the Performance Polymers segment's IntegRexTM technology;
|
·
|
to
pursue additional growth opportunities in Asia for acetate tow in the
Fibers segment; and
|
·
|
to
continue exploring options with industrial
gasification.
|
See
"Forward-Looking Statements and Risk Factors" below.
The
expectations under "Outlook" and certain other statements
in this Quarterly Report on Form 10-Q may be forward-looking in nature as
defined in the Private Securities Litigation Reform Act of
1995. These statements and other written and oral forward-looking
statements made by the Company from time to time may relate to, among other
things, such matters as planned and expected capacity increases and utilization;
anticipated capital spending; expected depreciation and amortization;
environmental matters; legal proceedings; exposure to, and effects of hedging
of, raw material and energy costs, foreign currencies and interest rates; global
and regional economic, political, and business conditions; competition; growth
opportunities; supply and demand, volume, price, cost, margin, and sales;
earnings, cash flow, dividends and other expected financial results and
conditions; expectations, strategies, and plans for individual assets and
products, businesses and segments as well as for the whole of Eastman Chemical
Company; cash requirements and uses of available cash; financing plans; pension
expenses and funding; credit ratings; anticipated restructuring, divestiture,
and consolidation activities; cost reduction and control efforts and targets;
integration of acquired businesses; strategic initiatives and development,
production, commercialization, and acceptance of new products, services and
technologies and related costs; asset, business and product portfolio changes;
and expected tax rates and net interest costs.
These
plans and expectations are based upon certain underlying assumptions, including
those mentioned with the specific statements. Such assumptions are in
turn based upon internal estimates and analyses of current market conditions and
trends, management plans and strategies, economic conditions and other
factors. These plans and expectations and the assumptions underlying
them are necessarily subject to risks and uncertainties inherent in projecting
future conditions and results. Actual results could differ materially
from expectations expressed in the forward-looking statements if one or more of
the underlying assumptions and expectations proves to be inaccurate or is
unrealized. In addition to the factors described elsewhere in this
report, the following are some of the important risk factors that could cause
the Company's actual results to differ materially from those in any such
forward-looking statements:
41
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
Conditions
in the global economy and global capital markets may adversely affect the
Company's results of operations, financial condition, and cash
flows. The Company's business and operating results have been
and will continue to be affected by the global recession, including the
credit market crisis, declining consumer and business confidence,
fluctuating commodity prices, volatile exchange rates, and other
challenges currently affecting the global economy. The
Company's customers have experienced and may continue to experience
deterioration of their businesses, cash flow shortages, and difficulty
obtaining financing. As a result, existing or potential
customers may continue to delay or cancel plans to purchase products and
may not be able to fulfill their obligations in a timely
fashion. Further, suppliers may be experiencing similar
conditions, which could impact their ability to fulfill their obligations
to the Company. If the global recession continues for
significant future periods or deteriorates significantly, the Company's
results of operations, financial condition and cash flows could continue
to be materially adversely
affected.
|
·
|
The
Company is reliant on certain strategic raw material and energy
commodities for its operations and utilizes risk management tools,
including hedging, as appropriate, to mitigate short-term market
fluctuations in raw material and energy costs. There can be no
assurance, however, that such measures will result in cost savings or that
all market fluctuation exposure will be eliminated. In
addition, natural disasters, changes in laws or regulations, war or other
outbreak of hostilities or terrorism or other political factors in any of
the countries or regions in which the Company operates or does business or
in countries or regions that are key suppliers of strategic raw material
and energy commodities, or breakdown or degradation of transportation
infrastructure used for delivery of strategic raw material and energy
commodities, could affect availability and costs of raw material and
energy commodities.
|
·
|
While
temporary shortages of raw material and energy may occasionally occur,
these items have historically been sufficiently available to cover current
and projected requirements. However, their continuous
availability and price are impacted by natural disasters, plant
interruptions occurring during periods of high demand, domestic and world
market and political conditions, changes in government regulation, war or
other outbreak of hostilities or terrorism, and breakdown or degradation
of transportation infrastructure. Eastman's operations or
products may, at times, be adversely affected by these
factors.
|
·
|
The
Company's competitive position in the markets in which it participates is,
in part, subject to external factors in addition to those that the Company
can impact. Natural disasters, pandemic illnesses, changes in
laws or regulations (including environmental laws and regulations), war or
other outbreak of hostilities or terrorism, or other political factors in
any of the countries or regions in which the Company operates or does
business or in countries or regions that are key suppliers of strategic
raw materials, and breakdown or degradation of transportation
infrastructure used for delivery of raw material and energy
supplies to the Company and for delivery of the Company's products to
customers, could negatively impact the Company's competitive position and
its ability to maintain market share. For example, supply and
demand for certain of the Company's products is driven by end-use markets
and worldwide capacities which, in turn, impact demand for and pricing of
the Company's products.
|
·
|
Limitation
of the Company's available manufacturing capacity due to significant
disruption in its manufacturing operations, including natural disasters,
pandemic illnesses, changes in laws or regulations, war or other outbreak
of hostilities or terrorism, or other political factors in any of the
countries or regions in which the Company operates or does business, or
breakdown or degradation of transportation infrastructure used for
delivery of raw material and energy supplies to the Company and
for delivery of the Company's products to customers, could have a material
adverse affect on sales revenue, costs and results of operations and
financial condition.
|
·
|
The
Company has an extensive customer base; however, loss of, or material
financial weakness of, certain of the largest customers could adversely
affect the Company's financial condition and results of operations until
such business is replaced and no assurances can be made that the Company
would be able to regain or replace any lost
customers.
|
42
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
The
Company has efforts underway to exploit growth opportunities in certain
core businesses by developing new products and technologies, licensing
technologies, expanding into new markets, and tailoring product offerings
to customer needs. Current examples include IntegRexTM
technology and new PET polymers products and TritanTM
and other copolyester product innovations. There can be no
assurance that such efforts will result in financially successful
commercialization of such products or acceptance by existing or new
customers or new markets or that large capital projects for such growth
efforts can be completed within the time or at the costs projected due,
among other things, to demand for and availability of construction
materials and labor.
|
·
|
The
Company has made, and intends to continue making, strategic investments,
including in industrial gasification, and has entered, and expects to
continue to enter, into strategic alliances in technology, services
businesses, and other ventures in order to build, diversify, and
strengthen certain Eastman capabilities, improve Eastman's raw material
and energy cost and supply position, and maintain high utilization of
manufacturing assets. There can be no assurance that such
investments and alliances will achieve their underlying strategic business
objectives or that they will be beneficial to the Company's results of
operations or that large capital projects for such growth efforts can be
completed within the time or at the costs projected due, among other
things, to demand for and availability of construction materials and labor
and obtaining regulatory approvals and operating permits and reaching
agreement on terms of key agreements and arrangements with potential
suppliers and customers. Such delays or cost overruns or the
inability to obtain such approvals or to reach such agreements on
acceptable terms could negatively affect the returns from these strategic
investments and projects.
|
·
|
The
Company is trying to obtain non-recourse project financing for its
industrial gasification project. There is risk that such
financing cannot be obtained or, if obtained, may be on terms different
than those assumed in the Company's projections for financial performance
of the project, due to any circumstance, change, or condition in the loan
syndication, financial, capital markets, or government loan guarantee
programs, that could reasonably be expected to materially affect
availability, terms, and syndication of such financing. The
ability to enter into financially acceptable project commercial agreements
for such elements as engineering, procurement, and construction, off-take
agreements, commodity and/or interest hedges, utilities, administrative
services, and others, as well as obtaining all necessary regulatory
approvals and operating permits, may impact the available financing for
the project or the terms of such financing, if available, including the
nature and terms of any recourse back to the
Company.
|
·
|
In
addition to productivity and cost reduction initiatives, the Company is
striving to improve margins on its products through price increases where
warranted and accepted by the market; however, the Company's earnings
could be negatively impacted should such increases be unrealized, not be
sufficient to cover increased raw material and energy costs, or have a
negative impact on demand and volume. There can be no
assurances that price increases will be realized or will be realized
within the Company's anticipated
timeframe.
|
·
|
The
Company has undertaken and expects to continue to undertake productivity
and cost reduction initiatives and organizational restructurings to
improve performance and generate cost savings. There can be no
assurance that these will be completed as planned or beneficial or that
estimated cost savings from such activities will be
realized.
|
·
|
The
Company's facilities and businesses are subject to complex health, safety
and environmental laws and regulations, which require and will continue to
require significant expenditures to remain in compliance with such laws
and regulations currently and in the future. The Company's
accruals for such costs and associated liabilities are subject to changes
in estimates on which the accruals are based. The amount
accrued reflects the Company's assumptions about remediation requirements
at the contaminated site, the nature of the remedy, the outcome of
discussions with regulatory agencies and other potentially responsible
parties at multi-party sites, and the number and financial viability of
other potentially responsible parties. Changes in the estimates
on which the accruals are based, unanticipated government enforcement
action, or changes in health, safety, environmental, chemical control
regulations, and testing requirements could result in higher or lower
costs. Pending and proposed U.S. Federal legislation and
regulation increase the likelihood that the Company’s manufacturing sites
will in the future be impacted by regulation or taxation of greenhouse gas
emissions, which legislation and regulation, if enacted, may result in
capital expenditures, increases in costs for raw materials and energy,
limitations on raw material and energy source and supply choices, and
other direct compliance costs.
|
43
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
·
|
The
Company and its operations from time to time are parties to, or targets
of, lawsuits, claims, investigations, and proceedings, including product
liability, personal injury, asbestos, patent and intellectual property,
commercial, contract, environmental, antitrust, health and safety, and
employment matters, which are handled and defended in the ordinary course
of business. The Company believes amounts reserved are adequate
for such pending matters; however, results of operations could be affected
by significant litigation adverse to the
Company.
|
·
|
The
Company has deferred tax assets related to capital and operating
losses. The Company establishes valuation allowances to reduce
these deferred tax assets to an amount that is more likely than not to be
realized. The Company's ability to utilize these deferred tax
assets depends on projected future operating results, the reversal of
existing temporary differences, and the availability of tax planning
strategies. Realization of these assets is expected to occur
over an extended period of time. As a result, changes in tax
laws, assumptions with respect to future taxable income, and tax planning
strategies could result in adjustments to these
assets.
|
·
|
Due
to the Company's global sales, earnings, and asset profile, it is exposed
to volatility in foreign currency exchange rates and interest
rates. The Company may use derivative financial instruments,
including swaps, options and forwards, to mitigate the impact of changes
in exchange rates and interest rates on its financial
results. However, there can be no assurance that these efforts
will be successful and operating results could be affected by significant
adverse changes in currency exchange rates or interest
rates.
|
·
|
The
Company's sources of liquidity have been and are expected to be cash from
operating activities, available cash balances, the revolving $700 million
credit facility, sales of domestic receivables under the $200 million
annually renewable accounts receivable securitization program, the
commercial paper market, and the capital markets. Additionally,
the Company relies upon third parties to provide it with trade credit for
purchases of various products and services. While the Company
maintains business relationships with a diverse group of financial
institutions, their continued viability is not certain and could lead them
not to honor their contractual credit commitments or to renew their
extensions of credit or provide new sources of
credit. Furthermore, trade creditors may be unable to obtain
credit and reduce their trade credit extension. Recently, the
capital and credit markets have become increasingly volatile as a result
of adverse conditions that have caused the failure or near failure of a
number of large financial services companies. If the capital
and credit markets continue to experience volatility and the availability
of funds remains limited, the Company may incur increased costs associated
with borrowings. In addition, it is possible that the Company's
ability to access the capital and credit markets may be limited by these
or other factors at a time when it would like, or need, to do so, which
could have an impact on the Company's ability to finance its business or
react to changing economic and business conditions. While the
Company believes that recent governmental and regulatory actions reduce
the risk of a further deterioration or systemic contraction of capital and
credit markets, there can be no certainty that the Company's liquidity
will not be negatively impacted. Company borrowings are subject
to a number of customary covenants and events of default, including the
maintenance of certain financial ratios. While the Company
expects to remain in compliance with such covenants, there is no certainty
that events and circumstances will not result in covenant violations which
could limit access to credit facilities or cause events of default with
outstanding borrowings. In addition, the
Company's cash flows from operations may be adversely affected by
unfavorable consequences to the Company's customers and the markets in
which the Company competes as a result of the current financial, economic,
and capital and credit market conditions and
uncertainty.
|
The
foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure,
including that under "Outlook" and "Forward-Looking Statements and Risk
Factors," and other forward-looking statements and related disclosures made by
the Company in this Quarterly Report on Form 10-Q and elsewhere from time to
time, represents management's best judgment as of the date the information is
given. The Company does not undertake responsibility for updating any
of such information, whether as a result of new information, future events, or
otherwise, except as required by law. Investors are advised, however,
to consult any further public Company disclosures (such as in filings with the
Securities and Exchange Commission or in Company press releases) on related
subjects.
44
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
There are
no material changes to the Company's market risks from those disclosed in Part
II, Item 7A of the Company's 2008 Annual Report on Form 10-K.
Disclosure Controls and
Procedures
The
Company maintains a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is accumulated and communicated to the Company's management, including its
principal executive and principal financial officers as appropriate to allow
timely decisions regarding required disclosure. An evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded
that as of September 30, 2009, the Company's disclosure controls and procedures
were effective to ensure that information required to be disclosed was
accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control
Over Financial Reporting
There has
been no change in the Company's internal control over financial reporting that
occurred during first nine months of 2009 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
45
PART
II. OTHER INFORMATION
General
From time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
being handled and defended in the ordinary course of business. While
the Company is unable to predict the outcome of these matters, it does not
believe, based upon currently available facts, that the ultimate resolution of
any such pending matters will have a material adverse effect on its overall
financial condition, results of operations, or cash flows. However,
adverse developments could negatively impact earnings or cash flows in a
particular future period.
Jefferson
(Pennsylvania) Environmental Proceeding
In
December 2005, Eastman Chemical Resins, Inc., a wholly-owned subsidiary of the
Company (the "ECR Subsidiary"), received a Notice of Violation ("NOV") from the
United States Environmental Protection Agency's Region III Office ("EPA")
alleging that the ECR Subsidiary's West Elizabeth, Jefferson Borough, Allegheny
County, Pennsylvania manufacturing operation violated certain federally
enforceable local air quality regulations and certain provisions in a number of
air quality-related permits. In October 2006, EPA referred the matter
to the United States Department of Justice's Environmental Enforcement Section
("DOJ"). Company representatives have met with EPA and DOJ on a
number of occasions since the NOV’s issuance and have determined that it is not
reasonably likely that any civil penalty assessed by the EPA and DOJ will be
less than $100,000. While the Company intends to vigorously defend
against these allegations, this disclosure is made pursuant to SEC Regulation
S-K, Item 103, Instruction 5.C., which requires disclosure of administrative
proceedings commenced under environmental laws that involve governmental
authorities as parties and potential monetary sanctions in excess of
$100,000. The Company believes that the ultimate resolution of this
proceeding will not have a material impact on the Company's financial condition,
results of operations, or cash flows.
ITEM
1A. RISK FACTORS
For
identification and discussion of the most significant risks applicable to the
Company and its business, see "Part I – Item
2 – Management's Discussion and Analysis of Financial Condition and Results of
Operations – Forward-Looking Statements and Risk Factors" of this Quarterly Report on
Form 10-Q.
46
(c) Purchases
of Equity Securities by the Issuer
Period
|
Total
Number
of
Shares
Purchased
(1)
|
Average
Price Paid Per Share
(2)
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
or
Programs
(3)
|
Approximate
Dollar
Value
(in millions) that May Yet Be Purchased Under the Plans or
Programs
(3)
|
|||
July
1-31, 2009
|
0
|
$
|
--
|
0
|
$
|
117
|
|
August
1-31, 2009
|
212
|
$
|
55.02
|
0
|
$
|
117
|
|
September
1-30, 2009
|
93
|
$
|
51.50
|
0
|
$
|
117
|
|
Total
|
305
|
$
|
53.95
|
0
|
(1)
|
Shares
surrendered to the Company by employees to satisfy individual tax
withholding obligations upon vesting of previously issued shares of
restricted common stock. These share surrenders were not part
of any Company repurchase plan.
|
(2)
|
Average
price paid per share reflects the closing price of Eastman common stock on
the business day the shares were surrendered by the employee stockholder
to satisfy individual tax withholding
obligations.
|
(3)
|
In
October 2007, the Board of Directors authorized $700 million for
repurchase of the Company's outstanding common shares at such times, in
such amounts, and on such terms, as determined to be in the best interests
of the Company. As of September 30, 2009, a total of 9.4
million shares have been repurchased under this authorization for a total
amount of $583 million. For
additional information, see Note 12, "Stockholders'
Equity", to the Company's unaudited consolidated financial statements
in Part I, Item 1 of this Quarterly Report on Form
10-Q.
|
ITEM
6. EXHIBITS
Exhibits
filed as part of this report are listed in the Exhibit Index appearing on page
49.
47
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Eastman
Chemical Company
|
|||
Date: October
23, 2009
|
By:
|
/s/Curtis E. Espeland | |
Curtis
E. Espeland
|
|||
Senior
Vice President and Chief Financial
Officer
|
48
Sequential
|
||||
Exhibit
|
Page
|
|||
Number
|
Description
|
Number
|
||
3.01
|
Amended
and Restated Certificate of Incorporation of Eastman Chemical Company, as
amended (incorporated herein by reference to Exhibit 3.01 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001)
|
|||
3.02
|
Amended
and Restated Bylaws of Eastman Chemical Company, as
amended November 9, 2007 (incorporated herein by referenced to
Exhibit 3.02 to Eastman Chemical Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2007 (the "September 30,
2007 10-Q")
|
|||
4.01
|
Form
of Eastman Chemical Company common stock certificate as amended February
1, 2001 (incorporated herein by reference to Exhibit 4.01 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001)
|
|||
4.02
|
Indenture,
dated as of January 10, 1994, between Eastman Chemical Company and The
Bank of New York, as Trustee (the "Indenture") (incorporated herein by
reference to Exhibit 4(a) to Eastman Chemical Company's Current Report on
Form 8-K dated January 10, 1994 (the "8-K"))
|
|||
4.03
|
Form
of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K)
|
|||
4.04
|
Officers'
Certificate pursuant to Sections 201 and 301 of the Indenture
(incorporated herein by reference to Exhibit 4(a) to Eastman Chemical
Company's Current Report on Form 8-K dated June 8, 1994 (the "June
8-K"))
|
|||
4.05
|
Form
of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference
to Exhibit 4(b) to the June 8-K)
|
|||
4.06
|
Form
of 7.60% Debentures due February 1, 2027 (incorporated herein by reference
to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (the "1996 10-K"))
|
|||
4.07
|
Form
of 7% Notes due April 15, 2012 (incorporated herein by reference to
Exhibit 4.09 to Eastman Chemical Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002)
|
|||
4.08
|
Officer's
Certificate pursuant to Sections 201 and 301 of the Indenture related to
7.60% Debentures due February 1, 2027 (incorporated herein by reference to
Exhibit 4.09 to the 1996 10-K)
|
|||
4.09
|
$200,000,000
Accounts Receivable Securitization agreement dated July 9, 2008 (amended
February 18, 2009, and July 8, 2009), between the Company and The Bank of
Tokyo-Mitsubishi UFJ, Ltd. and SunTrust Robinson Humphrey, Inc., as agents
(incorporated herein by reference to Exhibit 4.09 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2009)
|
|||
4.10
|
Amended
and Restated Credit Agreement, dated as of April 3, 2006 (the "Credit
Agreement") among Eastman Chemical Company, the Lenders named therein, and
Citigroup Global Markets , Inc. and J. P. Morgan Securities Inc.,
as joint lead arrangers (incorporated herein by reference to
Exhibit 4.11 to Eastman Chemical Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006)
|
49
EXHIBIT
INDEX
|
Sequential
|
|||
Exhibit
|
Page
|
|||
Number
|
Description
|
Number
|
||
4.11
|
Letter
Amendments dated November 16, 2007 and March 10, 2008, to the Credit
Agreement (incorporated herein by reference to Exhibit 4.10 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008)
|
|||
4.12
|
Form
of 6.30% Notes due November 15, 2018 (incorporated herein by
reference to Exhibit 4.14 to Eastman Chemical Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003)
|
|||
10.01
|
51-63
|
|||
10.02
|
64-76
|
|||
12.01
|
77
|
|||
31.01
|
78
|
|||
31.02
|
79
|
|||
32.01
|
80
|
|||
32.02
|
81
|
|||
101.INS
|
XBRL
Instance Document (furnished, not filed)
|
|||
101.SCH
|
XBRL
Taxonomy Extension Schema (furnished, not filed)
|
|||
101.CAL
|
XBRL
Taxonomy Calculation Linkbase (furnished, not filed)
|
|||
101.LAB
|
XBRL
Taxonomy Label Linkbase (furnished, not filed)
|
|||
101.PRE
|
XBRL
Definition Linkbase Document (furnished, not filed)
|
|||
50