Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
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(Mark
One)
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2009
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to
______________
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Commission
file number 1-12626
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EASTMAN
CHEMICAL COMPANY
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(Exact
name of registrant as specified in its
charter)
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Delaware
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62-1539359
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
no.)
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200
South Wilcox Drive
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Kingsport,
Tennessee
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37662
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (423)
229-2000
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $0.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
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____________________________________________________________________________________________
PAGE 1 OF
132 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 128
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Yes
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No
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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[X]
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Yes
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No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act.
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[X]
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Yes
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No
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Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
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[X]
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Yes
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No
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Indicate
by check mark 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).
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[X]
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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[X]
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
[X] Accelerated
filer [ ]
Non-accelerated
filer [ ] Smaller
reporting company [ ]
(Do
not check if a smaller reporting company)
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Yes
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No
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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[X]
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The
aggregate market value (based upon the $37.90 closing price on the New York
Stock Exchange on June 30, 2009) of the 71,980,441 shares of common equity held
by non-affiliates as of December 31, 2009 was approximately $2,728,058,714,
using beneficial ownership rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended, to exclude common stock that may be
deemed beneficially owned as of December 31, 2009 by Eastman Chemical Company's
("Eastman" or the "Company") directors and executive officers and charitable
foundation, some of whom might not be held to be affiliates upon judicial
determination. A total of 72,468,042 shares of common stock of the
registrant were outstanding at December 31, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement relating to the 2010 Annual
Meeting of Stockholders (the "2010 Proxy Statement"), to be filed with the
Securities and Exchange Commission, are incorporated by reference in Part III,
Items 10 to 14 of this Annual Report on Form 10-K (the "Annual Report") as
indicated herein.
2
FORWARD-LOOKING
STATEMENTS
Certain
statements in this Annual Report which are not statements of historical fact may
be "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 and other federal securities laws. 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; cash requirements and uses of
available cash; financing plans and activities; pension expenses and funding;
credit ratings; anticipated restructuring, divestiture, and consolidation
activities; cost reduction and control efforts and targets; integration of any
acquired businesses; strategic initiatives and development, production,
commercialization, and acceptance of new products, services and technologies and
related costs; asset, business and product portfolio changes; and expected tax
rates and net interest costs.
These
plans and expectations are based upon certain underlying assumptions, including
those mentioned with the specific statements. Such assumptions are
based upon internal estimates and other analyses of current market conditions
and trends, management plans and strategies, economic conditions, and other
factors. These plans and expectations and the underlying assumptions
are necessarily subject to risks and uncertainties inherent in projecting future
conditions and results. Actual results could differ materially from
expectations expressed in any forward-looking statements if one or more of the
underlying assumptions or expectations proves to be inaccurate or is
unrealized. The most significant known factors that could cause
actual results to differ materially from those in the forward-looking statements
are identified and discussed in Part II—Item 7—"Management's Discussion and
Analysis of Financial Condition and Results of Operations—Forward-Looking
Statements and Risk Factors" of this Annual Report.
3
TABLE OF
CONTENTS
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ITEM
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PAGE
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PART
I
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1.
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5
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1A.
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23
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1B.
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Unresolved
Staff Comments
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23
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24
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2.
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26
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3.
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27
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4.
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27
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PART II
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5.
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28
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6.
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30
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7.
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32
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7A.
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70
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8.
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71
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9.
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121
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9A.
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121
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9B.
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122
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PART
III
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10.
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123
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11.
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123
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12.
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123
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13.
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124
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14.
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124
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PART
IV
SIGNATURES
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126
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4
PART
I
CORPORATE
OVERVIEW
Eastman
Chemical Company ("Eastman" or the "Company") is a global chemical company which
manufactures and sells a broad portfolio of chemicals, plastics, and
fibers. Eastman began business in 1920 for the purpose of producing
chemicals for Eastman Kodak Company's photographic business and became a public
company, incorporated in Delaware, as of December 31, 1993. Eastman
has eleven manufacturing sites in seven countries that supply chemicals,
plastics, and fibers products to customers throughout the world. The
Company's headquarters and largest manufacturing site are located in Kingsport,
Tennessee.
In 2009,
the Company had sales revenue of $5.0 billion and operating earnings of $317
million. Earnings per diluted share were $1.85 in
2009. Included in 2009 operating earnings were asset impairments and
restructuring charges of $200 million.
The
Company's products and operations are managed and reported in five operating
segments: the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI")
segment, the Fibers segment, the Performance Chemicals and Intermediates ("PCI")
segment, the Performance Polymers segment and the Specialty Plastics
segment. The Company manages certain costs and initiatives at the
corporate level, including certain research and development costs not allocated
to the operating segments. For additional information concerning the
Company's operating segments, see Note 22 "Segment Information" to the Company's
consolidated financial statements in Part II, Item 8 of this 2009 Annual Report
on Form 10-K (this "Annual Report").
Corporate
Strategy
Eastman's
objective is to be an outperforming chemical company by delivering solid
financial results from its core businesses and its plans for profitable
growth. The Company's core businesses currently sell differentiated
products into diverse markets and geographic regions. Management
believes that the Company can increase the revenues from its core businesses
with increasing profitability through a balance of new applications for existing
products, development of new products, and sales growth in adjacent markets and
emerging geographic regions. These revenue and earnings increases are
expected to result from organic initiatives and through acquisitions and joint
ventures. Current Company growth initiatives include:
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In
the Fibers segment, construction of the Korean cellulose acetate tow
manufacturing facility began in first quarter 2009 and the facility is
expected to be operational in first quarter 2010. The facility
and related business will be owned by a company formed through an alliance
with SK Chemicals Company Ltd.
("SK").
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In
the Specialty Plastics segment, continued introduction of new
high-temperature copolyester products based on Eastman TritanTM
copolyester and production in early 2010 from the monomer manufacturing
facility and its first TritanTM
copolyester polymer manufacturing facility in Kingsport, Tennessee which
were both completed in 2009.
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·
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In
the CASPI segment, increased production in 2010 as a result of the 30
percent expansion of the Company's hydrogenated hydrocarbon resins
manufacturing capacity in Middelburg, the Netherlands which was completed
in 2009 to meet growing demand for specialty hydrocarbon
resins.
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In
the PCI segment, increased revenue from acetyl licenses and growth in
plasticizers, including Eastman 168TM
plasticizer, in 2010.
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The
Company benefits from advantaged feedstocks and proprietary technologies, and is
focusing on sustainability as a competitive strength for
growth. Eastman has developed new products and technologies that
enable customers' development and sales of sustainable products, and has reduced
its greenhouse gas emissions and energy consumption.
The
combination of sustainable profits from the solid core businesses and profitable
revenue growth is expected to result in continued solid financial
results.
5
Manufacturing
Streams
Integral
to Eastman's corporate strategy for growth is leveraging its heritage of
expertise and innovation in acetyl, polyester, and olefins chemistries in key
markets, including packaging, tobacco, building and construction, and
consumables. For each of these chemistries, Eastman has developed a
combination of assets and technologies that are operated within three
manufacturing "streams".
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In
the acetyl stream, the Company begins with high sulfur coal which is then
gasified in its coal gasification facility. The resulting
synthesis gas is converted into a number of chemicals including methanol,
methyl acetate, acetic acid, and acetic anhydride. These
chemicals are used in products throughout the Company including acetate
tow, acetate yarn, and cellulose esters. The Company's ability
to use coal is a competitive advantage in both raw materials and
energy. The Company continues to evaluate opportunities to
further leverage its gasification expertise to produce additional cost
advantaged chemicals from petroleum coke or coal instead of natural gas or
petroleum.
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·
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In
the polyester stream, the Company begins with purchased paraxylene and
produces purified terephthalic acid ("PTA") for polyethylene terephthalate
("PET") and copolyesters and dimethyl terephthalate ("DMT") for
copolyesters. PTA or DMT is then reacted with ethylene glycol,
which the Company both makes and purchases, along with other raw materials
(some of which the Company makes and are proprietary) to produce PET and
copolyesters. The Company believes that this backward
integration of polyester manufacturing is a competitive advantage, giving
Eastman a low cost position, as well as surety of intermediate
supply. In addition, Eastman can add specialty monomers to
copolyesters to provide clear, tough, chemically resistant product
characteristics. As a result, the Company's copolyesters can
effectively compete with materials such as polycarbonate and
acrylic.
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·
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In
the olefins stream, the Company begins primarily with propane and ethane,
which are then cracked at its facility in Longview, Texas into propylene,
as well as ethylene. "Cracking" is a chemical process in which
gases are broken down into smaller, lighter molecules for use in the
manufacturing process. The Company also purchases propylene for
use at its Longview facility and its facilities outside the
U.S. The propylene is used in oxo derivative
products. The ethylene is used in oxo derivative products,
acetaldehyde and ethylene glycol production and is also sold
commercially. Petrochemical business cycles are influenced by
periods of over- and under-capacity. Capacity additions to
steam cracker units around the world, combined with demand for light
olefins, determine the operating rate and thus profitability of producing
olefins. Historically, periodic additions of large blocks of
capacity have caused profit margins of light olefins to be very volatile,
resulting in "ethylene" or "olefins"
cycles.
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The
following chart shows the Company's sites at which its manufacturing streams are
primarily employed.
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SITE
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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Kingsport,
Tennessee
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X
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X
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X
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Longview,
Texas
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X
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X
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Columbia,
South Carolina
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X
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Kuantan,
Malaysia
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X
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Singapore
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X
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Workington,
United Kingdom
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X
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6
The
following chart shows significant Eastman products, markets, and end uses by
segment and manufacturing stream.
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SEGMENT
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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KEY
PRODUCTS, MARKETS, AND
END
USES
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CASPI
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X
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X
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Adhesives
ingredients (tape, labels, and nonwovens) and paints and coatings
(architectural, transportation, industrial, and original equipment
manufacturing ("OEM"))
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Fibers
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X
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Acetate
fibers for filter products and textiles
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PCI
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X
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X
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X
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Intermediate
chemicals for agrochemicals, transportation, beverages, nutrition,
pharmaceuticals, coatings, medical devices, toys, photographic and
imaging, household products, polymers, textiles, and consumer and
industrial products and uses
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Performance
Polymers
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X
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X
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PET
for beverage and food packaging, custom-care and cosmetic packaging,
health care and pharmaceutical uses, household products, and industrial
packaging applications
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Specialty
Plastics
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X
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X
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X
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Copolyesters
and cellulosics for appliances, store fixtures and displays, building and
construction, electronic packaging, medical devices and packaging, graphic
arts, general purpose packaging, personal care and cosmetics, food and
beverage packaging, performance films, tape and labels, fibers/nonwovens,
photographic and optical films, and liquid crystal displays
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In
addition to stream integration, the Company also derives value from Eastman
cellulosics. These are natural polymers, sourced from managed
forests, which when combined with the acetyl and olefin streams, provide an
advantaged raw material position for Eastman.
The
Company continues to leverage its heritage of expertise and innovation in
acetyl, polyester, and olefins chemistries and technologies, as well as its use
of cellulosics, to meet demand and create new uses and opportunities for the
Company's products in key markets. By choosing to
combine certain streams, the Company is able to create unique and
differentiated products that have a performance advantage over competitive
materials.
Cyclicality
and Seasonality
The PCI
and Performance Polymers segments are impacted by the cyclicality of key
products and markets, while the other segments are more sensitive to global
economic conditions. Supply and demand dynamics determine profitability at
different stages of cycles and global economic conditions affect the length of
each cycle. Despite sensitivity to global economic conditions, many of the
products in the Fibers and CASPI segments provide a stable foundation of
earnings.
7
The
Company's earnings are typically greater in the second and third quarters and
cash flows from operations are greatest in fourth quarter due to
seasonality. Demand for CASPI segment products is typically stronger
in the second and third quarters due to the increased use of coatings products
in the building and construction industries, while demand is typically weaker
during the winter months because of seasonal construction
downturns. The PCI segment typically has weaker fourth quarter
financial results, due in part to a seasonal downturn in demand for products
used in certain building and construction and agricultural
markets. The Performance Polymers segment typically has stronger
demand for its PET polymers for beverage container plastics during the second
and early third quarters due to higher consumption of beverages in the U.S. and
Canada, while demand typically weakens during the late third and fourth
quarters.
In 2009,
the impact of the global recession on demand for the Company's products affected
the typical yearly trend, resulting in lower earnings in first and second
quarters, with increased earnings in the second half of the year. Due
to strategic cash management during the first half of the year to counter the
effects of the recession and a pension contribution in fourth quarter, cash
flows from operations were greatest in third quarter.
CASPI
SEGMENT
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·
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Overview
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In the
CASPI segment, the Company manufactures resins, specialty polymers, and solvents
which are integral to the production of paints and coatings, inks, adhesives,
and other formulated products. Growth in these markets in the U.S.,
Canada, and Europe typically approximates general economic growth due to the
wide variety of end uses for these applications. Typically, growth in
Asia, Eastern Europe, and Latin America continues to be higher than general
economic growth, driven by regional growth in these emerging
economies. In 2009, the impact of the global recession on demand for
the Company's products affected the typical yearly trend. The CASPI
segment focuses on producing raw materials rather than finished products and
developing long-term, strategic relationships to achieve preferred supplier
status with its customers. In 2009, the CASPI segment had sales
revenue of $1.2 billion, representing 24 percent of Eastman's total
sales.
The
profitability of the CASPI segment is sensitive to the global economy, market
trends, broader chemical cycles, particularly the olefins cycle, and foreign
currency exchange rates. The CASPI segment's specialty products,
which include cellulose-based specialty polymers, coalescents, and selected
hydrocarbon resins, are less sensitive to the olefins cycle due to their
functional performance attributes. The commodity products, which
include commodity solvents and base resins, are more impacted by the olefins
cycle as discussed under "Manufacturing Streams". The Company seeks
to leverage its proprietary technologies, competitive cost structure, and
integrated manufacturing facilities to maintain a strong competitive position
throughout such cycles.
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·
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Products
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Ø
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Polymers
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The
polymers product line consists of cellulose-based specialty polymers and
olefin-based performance products. Eastman's cellulose-based
specialty polymers enhance the aesthetic appeal and improve the performance of
industrial and transportation coatings and inks. Olefin-based
products are used as base polymers in hot-melt adhesives, paper laminating,
sealants and pressure sensitive adhesives. They are also used as
elastomer extenders in sealants and waterproofing compounds for wire and cable
flooding applications. The polymers product line also includes
chlorinated polyolefins which promote the adherence of paints and coatings to
plastic substrates. Polymers accounted for approximately 15 percent
of the CASPI segment's total sales for 2009.
8
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Ø
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Resins
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The
resins product line consists of hydrocarbon resins, rosin resins, and resin
dispersions. These products are sold primarily to adhesive
formulators and consumer product companies for use as raw materials essential in
hot-melt and pressure sensitive adhesives and as binders in nonwoven products
such as disposable diapers, feminine products, and pre-saturated
wipes. Eastman offers a broad product portfolio of essential
ingredients for the adhesives industry, and ranks as the second largest global
tackifier supplier. In addition, Eastman is one of the largest
manufacturers of hydrogenated gum rosins used in chewing gum
applications. Eastman resins are also used in a wide range of
applications including plastics and rubber modification and
inks. Resins accounted for approximately 35 percent of the CASPI
segment's total sales for 2009.
|
Ø
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Solvents
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The
solvents product line includes both specialty coalescents and ketones and
commodity esters, glycol ethers and alcohol solvents. Coalescents
include products such as TexanolTM
ester alcohol which improves film formation and durability in architectural
latex paints. Ketones consist of low volatile organic compound
("VOC") solvents used in high solids coatings applications. Commodity
solvents, which consist of esters, glycol ether, and alcohol solvents, are used
in both paints and inks to maintain the formulation in liquid form for ease of
application. Solvents accounted for approximately 50 percent of the
CASPI segment's total sales for 2009.
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·
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Strategy
and Innovation
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A key
element of the CASPI segment's growth strategy is the continued development of
innovative product offerings, building on proprietary technologies in
high-growth markets and regions to meet customers' evolving needs and improve
the quality and performance of customers' end products. Management
believes that its ability to leverage the CASPI segment's broad product line and
Eastman's research and development capabilities make the segment uniquely
capable of offering a broad array of solutions for new and emerging
markets. For example, in 2009 Eastman received the Environmental
Protection Agency's ("EPA") 2009 Presidential Green Chemistry Challenge Award
for its green biocatalytic process. This process is utilized in the
CASPI segment products sold in higher-growth markets such as personal and
household care.
The
Company intends to continue to leverage its resources to strengthen the CASPI
segment's product innovation and product enhancement pipeline by meeting market
needs and the expanded use of proprietary products and
technologies. Although the CASPI segment sales and application
development are often specialized by end-use markets, developments in technology
can often be successfully shared across multiple end-uses and
markets.
The
Company's global manufacturing presence is a key element of the CASPI segment's
growth strategy. For example, the segment is well positioned to
capitalize on expected high industrial growth in China and other parts of Asia
from its facility in Singapore and joint venture operations in
China. This regional position will be further strengthened by the
purchase of a small polymer producer in China which was completed in first
quarter 2010. The Company is committed to maintaining reliability of
supply of the CASPI segment products to our strategic customers to ensure that
Eastman is the supplier of choice. The segment is meeting growing
demand for specialty hydrocarbon resins through the 30 percent expansion of the
Company's hydrogenated hydrocarbon resins manufacturing capacity in Middelburg,
the Netherlands which was completed in 2009.
|
·
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Customers
and Markets
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As a
result of the variety of end uses for its products, the customer base for the
CASPI segment is broad and diverse. This segment has approximately 825 customers
around the world, while 80 percent of its sales revenue in 2009 was attributable
to approximately 80 customers. The CASPI segment focuses on
establishing long-term, customer service-oriented relationships with its
strategic customers in order to become their preferred supplier and to leverage
these relationships to pursue sales opportunities in previously underserved
markets and to expand the scope of its value-added services. Growth
in the U.S., Canadian, and European markets typically coincides with economic
growth in general, due to the wide variety of end uses for these applications
and their dependence on the economic conditions of the markets for packaged
goods, transportation, durable goods, and housing.
9
The
current regulatory environment, particularly in the U.S., Canada, and Europe,
provides both market challenges and opportunities for the CASPI
segment. Environmental regulations that impose limits on the emission
of VOCs and hazardous air pollutants ("HAPs") continue to impact coatings
formulations requiring compliant coatings raw materials. The coatings
industry is responding by promoting products and technologies designed to enable
customers and end users to reduce air emissions of VOCs and HAPs in compliance
with state and federal regulations. A variety of Eastman's CASPI
segment products are used in compliance coatings. Additional products
are currently being developed to meet the growing demand for low VOC coatings,
including the recently introduced SolusTM 2300
product.
|
·
|
Competition
|
Competition
within the CASPI segment's markets varies widely depending on the specific
product or product group. The Company's major competitors in the
CASPI segment's markets include larger companies such as BASF SE ("BASF"), Dow
Chemical Company ("Dow"), and Exxon Mobil Corporation, which may have greater
financial and other resources than Eastman. Additionally, within each
CASPI segment product market, the Company competes with other smaller,
regionally focused companies that may have advantages based upon location, local
market knowledge, manufacturing strength in a specific product, or other similar
factors. However, Eastman does not believe that any of its
competitors has a dominant position within the CASPI segment's markets, nor the
breadth of product offerings that Eastman is able to offer its CASPI segment
customers. The Company believes its competitive advantages include
its level of vertical integration; breadth of product offerings, service, and
technology offerings; low-cost manufacturing position; consistent product
quality; security of supply; and process and market knowledge. The
CASPI segment principally competes on breadth of products and through leveraging
its strong customer base and long-standing customer relationships to promote
substantial recurring business and product development.
FIBERS
SEGMENT
|
·
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Overview
|
In the
Fibers segment, Eastman manufactures and sells EstronTM acetate tow and
EstrobondTM
triacetin plasticizers for use primarily in the manufacture of cigarette
filters; EstronTM
natural and ChromspunTM
solution-dyed acetate yarns for use in apparel, home furnishings and industrial
fabrics; and cellulose acetate flake and acetyl raw materials for other acetate
fiber producers. Eastman is one of the world's two largest suppliers
of acetate tow and has been a market leader in the manufacture and sale of
acetate tow since it began production in the early 1950s. The Company
is the world's largest producer of acetate yarn and has been in this business
for over 75 years. The Fibers segment's manufacturing operations are
primarily located at the Kingsport, Tennessee site, and also include a smaller
acetate tow production plant in Workington, England, which was expanded in
2008. In 2009, the Fibers segment had sales revenue of $1.0 billion,
representing 21 percent of Eastman's total sales. The Fibers segment
remains a strong and stable cash generator for the Company.
The
Company's long history and experience in the fibers markets are reflected in the
Fibers segment's operating expertise, both within the Company and in support of
its customers' processes. The Fibers segment's knowledge of the
industry and of customers' processes allows it to assist its customers in
maximizing their processing efficiencies, promoting repeat sales and mutually
beneficial, long-term customer relationships.
The
Company's fully integrated fiber manufacturing processes from coal-based acetyl
raw materials through acetate tow and yarn provide a competitive advantage over
companies whose processes are dependent on petrochemicals. In
addition, the Fibers segment employs unique technology that allows it to use a
broad range of high-purity wood pulps for which the Company has dependable
sources of supply. Management believes that these factors combine to
make Eastman an industry leader in reliability of supply and cost
position. In addition to the cost advantage of being coal-based, the
Fibers segment's competitive strengths include a reputation for high-quality
products, technical expertise, large scale vertically-integrated processes,
reliability of supply, acetate flake supply in excess of internal needs, a
reputation for customer service excellence, and a customer base characterized by
long-term customer relationships. The Company intends to continue to
capitalize and build on these strengths to improve the strategic position of its
Fibers segment.
Contributing
to the profitability in the Fibers segment is the limited number of competitors,
the high industry capacity utilization, and significant barriers to
entry. These barriers include, but are not limited to, high capital
costs for integrated manufacturing facilities.
10
In the
Fibers segment, construction of the Korean cellulose acetate tow manufacturing
facility began in first quarter 2009, and the facility is expected to be
operational in first quarter 2010. The facility and related business
will be owned by a company formed through an alliance with SK.
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·
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Products
|
|
|
Ø
|
Acetate
Tow
|
Eastman
manufactures acetate tow under the EstronTM
trademark according to a wide variety of customer specifications, primarily for
use in the manufacture of cigarette filters. Acetate tow is the
largest sales product of the Fibers segment. Worldwide demand for
acetate tow is expected to increase by one to two percent per year through 2012,
with higher growth rates in Asia.
|
|
Ø
|
Acetate
Yarn
|
The
Company manufactures acetate filament yarn under the EstronTM and
ChromspunTM
trademarks in a wide variety of specifications. EstronTM
acetate yarn is available in bright and dull luster and is suitable for
subsequent dyeing in the fabric form. ChromspunTM
acetate yarn is solution-dyed in the manufacturing process and is available in
more than 100 colors.
|
|
Ø
|
Acetyl Chemical
Products
|
The
Fibers segment's acetyl chemical products are sold primarily to other acetate
fiber market producers and include cellulose diacetate flake, acetic acid, and
acetic anhydride. Each is used as a raw material for the production
of cellulose acetate fibers. The Fibers segment also markets
acetyl-based triacetin plasticizers under the EstrobondTM trademark, generally
for use by cigarette manufacturers as a bonding agent in cigarette
filters.
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·
|
Strategy and
Innovation
|
|
|
Ø
|
Growth
|
In the
Fibers segment, Eastman is leveraging its strong customer relationships and
knowledge of the industry to identify growth options. These growth
options are enabled by its excess acetate flake capacity at the Kingsport,
Tennessee site. In December 2008, the Company announced an alliance
with SK to form a company to acquire and operate a cellulose acetate tow
manufacturing facility and related business, with the facility to be constructed
by SK in Korea. Eastman will have controlling ownership in the
business. Construction of the Korean facility began in first quarter
2009, and the facility is expected to be operational in first quarter 2010 and
fully integrated into the Fibers segment's production and sales processes in
2011. Annual capacity at the Korean facility is expected to be
approximately 27,000 metric tons, and Eastman's total worldwide capacity for
acetate tow will exceed 200,000 metric tons, an increase of approximately 15
percent. The net impact of the added Korean facility on global
capacity is estimated to be an increase of approximately two percent versus 2008
industry capacity levels.
|
|
Ø
|
Continue to Capitalize on
Fibers Technology Expertise
|
The
Fibers segment intends to continue to make use of its capabilities in fibers
technology to maintain a strong focus on incremental product and process
improvements, with the goals of meeting customers' evolving needs and improving
the segment's manufacturing process efficiencies.
|
Ø
|
Maintain
Cost-Effective Operations and Consistent Cash Flows and
Earnings
|
The
Fibers segment intends to continue to operate in a cost effective manner,
capitalizing on its technology, scale and vertical integration, and to make
further productivity and efficiency improvements through continued investments
in research and development.
|
Ø
|
Research
and Development
|
The
Company's Fibers segment research and development efforts focus on process and
product improvements, as well as cost reduction, with the objectives of
increasing sales and reducing costs. The Fibers segment also conducts
research to assist acetate tow customers in the effective use of the segment's
products and in the customers' product development efforts.
11
|
·
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Customers and
Markets
|
The
customer base in the Fibers segment is relatively concentrated, consisting of
approximately 150 companies in the tobacco, textile, and acetate fibers
industries. Eastman's Fibers segment customers are located in all
regions of the world. The largest 12 customers within the Fibers
segment include multinational as well as regional cigarette producers, fabric
manufacturers, and other acetate fiber producers. These largest 12
customers accounted for about 80 percent of the segment's total sales revenue in
2009. Sales prices for a significant portion of the Fibers segment's
products are typically negotiated on an annual basis. The segment
maintains a strong position in acetate tow exports to China, one of the largest
and fastest growing markets in the world.
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·
|
Competition
|
Eastman
is the second largest acetate tow manufacturer in the
world. Competitors in the fibers market for acetate tow include
Celanese Corporation ("Celanese"), Daicel Chemical Industries Ltd ("Daicel"),
Mitsubishi Rayon Co., Ltd. ("Mitsubishi Rayon"), and Rhodia S.A.. In
the acetate tow market, two major competitors, Celanese and Daicel, have joint
venture capacity in China.
In the segment's acetate yarn business, major competitors include Industrias del Acetato de Celulosa S.A. ("INACSA"), Mitsubishi Rayon, and UAB Korelita. Eastman is the world leader in acetate yarn production and the only acetate yarn producer in the U.S. and Canada. The physical properties of acetate yarn make it desirable for use in textile products such as suit linings, women's apparel, medical tape, drapery, ribbons and other specialty fabrics. However, over the past 20 years, demand for acetate yarn has been adversely affected by the substitution of lower cost polyester and rayon yarns. Accordingly, worldwide demand for acetate yarn is expected to continue to decrease as mills substitute these cheaper yarns for acetate yarn. Eastman, however, remains uniquely positioned because it is the only integrated producer of acetate yarn.
As described above under "Fibers Segment – Overview", the principal methods of competition include maintaining the Company's large-scale vertically integrated manufacturing process from coal-based acetyl raw materials, reliability of supply, product quality, and sustaining long-term customer relationships.
PCI
SEGMENT
|
·
|
Overview
|
The
Company's PCI segment manufactures diversified products that are sold
externally, as well as used internally by other segments. The PCI
segment's earnings are highly dependent on how the Company chooses to optimize
the acetyl and olefins streams. In 2009, the PCI segment had sales
revenue of $1.3 billion, representing 26 percent of Eastman's total
sales.
Many of
the segment's products are affected by the olefins cycle. See
"Corporate Overview – Manufacturing Streams" earlier in this "Part 1 – Item 1.
Business." This cyclicality is caused by periods of supply and demand
imbalance, either when incremental capacity additions are not offset by
corresponding increases in demand, or when demand exceeds existing
supply. Demand, in turn, is based on general economic conditions, raw
material and energy costs, and other factors beyond the Company's
control. Future PCI segment results will continue to fluctuate from
period to period due to these changing economic conditions.
There are
four cracking units located at the Company's Longview, Texas
facility. In 2007, the three oldest cracking units were identified
for a staged phase-out. Eastman shut down the first of the three
units in fourth quarter 2007 and idled the second cracking unit in December
2008. The timing of the permanent shut down of the second and third
cracking units including the idled cracker is dependent on feedstock and olefin
market conditions. With the divestiture of the Company's polyethylene
business in 2006, the Company has experienced excess ethylene capacity and has
reconfigured its cracker position to enhance its long-term olefin production to
better match the Company's feedstock requirements.
Approximately
75 percent of the Company's olefin derivatives are made from propylene and sold
in the U.S. and Canadian market. The PCI segment believes it is
well-positioned in the U.S. and Canadian market for most of its major products,
including both acetyl products and olefin derivatives, due to its competitive
delivered cost position and supply reliability versus
competitors.
12
|
·
|
Products
|
The PCI
segment offers over 135 products that include intermediates based on oxo and
acetyl chemistries and performance chemicals. The PCI segment's 2009
sales revenue was approximately 50 percent from olefin-based and 35 percent from
acetyl-based chemistries, and 15 percent from other. Approximately 65
percent of the PCI segment's sales revenue is generated in the U.S. and Canada,
a region in which the Company has a leading market share position for most of
its key oxo and acetyl products. Sales in all regions are generated
through a mix of the Company's direct sales force and a network of
distributors. The Company's PCI segment is the largest marketer of
acetic anhydride in the United States, an intermediate that is a critical
component of analgesics, laundry care products, and nutritional supplements, and
is the only U.S. producer of acetaldehyde, a key intermediate in the production
of agricultural and other specialty products. Eastman believes that
it manufactures one of the world's broadest ranges of products derived from oxo
aldehydes. The PCI segment's other intermediate products include
plasticizers and glycols. Many of the intermediates products in the
PCI segment are priced based on supply and demand of substitute and competing
products. In order to maintain a competitive position, the Company
strives to operate with a low cost manufacturing base.
The PCI
segment also manufactures performance chemicals, complex organic molecules such
as diketene derivatives, specialty ketones, and specialty anhydrides for
pharmaceutical, fiber, and food and beverage ingredients, which are typically
used in specialty market applications. These specialty products are
typically priced based on value added rather than supply and demand
factors.
|
·
|
Strategy
and Innovation
|
To build
on and maintain its status as a low cost producer, the PCI segment continuously
focuses on cost control, operational efficiency, and capacity utilization to
maximize earnings. The shutdown of the first of the three cracking
units in Longview, Texas, as part of the staged phase-out of our oldest
crackers, with the continued shutdown dependent on feedstock and olefins market
conditions, has been part of the initiative to increase operational
efficiency. Through the PCI segment, the Company maximizes the
advantage of its highly integrated and world-scale manufacturing
facilities. For example, the Kingsport, Tennessee manufacturing
facility allows the PCI segment to produce acetic anhydride and other acetyl
derivatives from coal rather than natural gas or other petroleum
feedstocks. At the Longview, Texas manufacturing facility, Eastman's
PCI segment uses its proprietary oxo-technology in the world's largest
single-site, oxo aldehyde manufacturing facility to produce a wide range of
alcohols, esters, and other derivative products utilizing local propane and
ethane supplies, as well as purchased propylene. These integrated
facilities, combined with large scale production processes and a continuous
focus on additional process improvements, allow the PCI segment to remain cost
competitive with, and for some products cost-advantaged over, its
competitors.
The PCI
segment selectively focuses on continuing to develop and access markets with
high-growth potential for the Company's chemicals. One such market is
for flexible plastic products used in sensitive applications such as toys, child
care articles, medical packaging and devices, and food
contact. Eastman 168TM plasticizer
provides an effective alternative to ortho-phthalate plasticizers traditionally
used in these applications. Eastman 168TM plasticizer
allows manufacturers to meet the challenging requirements of changing government
regulations and consumer preferences without sacrificing production efficiency
or product performance.
The
Company engages in customer-focused research and development initiatives in
order to develop new PCI products and find additional applications for existing
products. The Company also evaluates licensing opportunities for
acetic acid and oxo derivatives on a selective basis, and has licensed
technology to produce acetyl products to Saudi International Petrochemical
Company ("SIPCHEM") in Saudi Arabia and to Chang Chun Petrochemical Company
("Chang Chun") in Taiwan in 2005 and 2007, respectively. SIPCHEM
started operations in 2009 at its plant based on this technology and Chang Chun
is in the process of building its plant. In first half of 2010, the
Company expects to achieve the final milestones associated with the SIPCHEM
agreement and to recognize the remaining revenue related to the
license. The Company will also purchase acetic anhydride from the
SIPCHEM facility.
13
|
·
|
Customers
and Markets
|
The PCI
segment's products are used in a variety of markets and end uses, including
agrochemical, transportation, beverages, nutrition, pharmaceuticals, coatings,
flooring, medical devices, toys, photographic and imaging, household products,
polymers, textiles, and industrials. Because of its cost position,
reliability, and service, the Company has been able to establish and maintain
long-term arrangements and relationships with
customers. Product-specific olefin derivative market conditions vary
based upon prevailing supply and demand conditions. An important
trend for the PCI segment's business is a tendency toward regionalization of key
markets due to increased transportation costs and local supply in developing
geographies from new capacities. The PCI segment benefits from this
trend primarily in the U.S. and Canada, but may lose export volume to other
markets as this trend continues. The anhydride purchased from the new
SIPCHEM facility will give increased access to the Asian market for PCI
products. Additionally, the PCI segment is engaged in continuous
efforts to optimize product and customer mix. Approximately 80
percent of the PCI segment's sales revenue in 2009 was from 112 out of
approximately 900 customers worldwide.
|
·
|
Competition
|
Historically,
there have been significant barriers to entry for potential competitors in the
PCI segment's major product lines, including acetic acid and acetic anhydride,
primarily due to the fact that the relevant technology has been held by a small
number of companies. As this technology has become more readily
available, competition from multinational chemical manufacturers has
intensified. Eastman competes with these and other producers
primarily based on price, as products are generally interchangeable, but also on
technology, marketing, and services. Eastman's major competitors in
this segment include large multinational companies such as BASF, Celanese, Dow,
and Exxon Mobil Corporation. While some competitors in PCI's product
markets may have greater financial resources than Eastman, the Company believes
it maintains a strong competitive position due to the combination of its scale
of operations, breadth of product line, level of integration, and technology
leadership.
PERFORMANCE
POLYMERS SEGMENT
|
·
|
Overview
|
In 2009,
the Performance Polymers segment had sales revenue of $719 million, representing
14 percent of the Company's total sales. The segment is comprised
primarily of the Company's PET product lines, and also includes various polymer
intermediates.
In 2008,
the Company completed strategic actions intended to improve the operating
results of the Performance Polymers segment. The Company shut down
300,000 metric tons of higher cost assets in 2008 after having shut down 100,000
metric tons of higher cost PET assets during 2007, some of which were converted
to Specialty Plastics production. In fourth quarter 2008, the Company
also completed a debottleneck of its IntegRexTM
technology facility in South Carolina, bringing its IntegRexTM
capacity to 525,000 metric tons. Operational difficulties following
this debottleneck persisted throughout 2009. These operational
difficulties resulted in additional costs as well as negative impact on sales
revenue through an unfavorable shift in customer and market mix contributing to
an operating loss for the year. The Company completed a shutdown of the
facility in fourth quarter 2009 to correct these problems. In first
quarter 2010, the IntegRexTM-based
facility located in Columbia, South Carolina is demonstrating the capability to
produce improved quality ParaStar TM PET
products at the facility's nameplate capacity of 525,000 metric tons. The
Company expects smaller Performance Polymers segment losses in 2010 based on
this improved operational performance and the resulting capability for a more
profitable mix of product sales.
The
Company's PET product pricing and profitability have historically been most
affected by raw material costs and industry capacity utilization. PET
global supply has exceeded demand since 1997 as a result of capacity being
introduced into the market at a rate exceeding that of demand
growth. While the global demand for PET continues to increase
steadily, the Company sells PET primarily in the North American Free Trade
Agreement ("NAFTA") region, which is projected to have lower Gross Domestic
Product ("GDP") and PET demand growth than the overall global PET
market. Excess Asian PET capacity and related exports are expected to
continue to have an adverse impact on PET pricing and profitability worldwide,
particularly in the NAFTA region. In addition, a significant capacity
expansion by a competitor in late 2009 is expected to contribute to a continued
challenging business environment and negatively impact PET profitability in the
NAFTA region.
14
|
·
|
Products
|
PET is
used in beverage and food packaging and other applications such as personal care
and cosmetics packaging, health care and pharmaceutical uses, household
products, carpet fibers, and industrial packaging applications. PET
offers fast and easy processing, superb clarity and color consistency,
durability and strength, impact and chemical resistance, and high heat
stability. Packages made from PET are characterized by their light
weight, gloss, high strength, durability, clarity, low cost, safety, and
recyclability.
|
·
|
Strategy
and Innovation
|
|
Ø
|
Operational
Efficiency
|
The
Performance Polymers segment focuses on improving its performance by directing
its research and development efforts to lowering its manufacturing costs through
technology innovations and process improvement. These efforts
resulted in the development of IntegRexTM
technology, a lower cost PTA and PET manufacturing process that provides
manufacturing and capital cost savings compared to conventional
technologies.
|
Ø
|
Licensing
|
As a
strategic initiative to create and capture additional value from the IntegRex™
technology, the Company is actively pursuing a licensing
program. IntegRex™ technology provides significant capital and
operating cost benefits relative to conventional PTA and PET technologies.
The Company is offering licensees use of its Eastman-owned patents and expertise
in the design, construction, and operation of a full range of production
facilities, including IntegRex™ PTA, IntegRex™ PET, or integrated configurations
of the two processes. Also, as the Company improves the IntegRex™
technology for its own use, it expects it may offer these enhancements to its
licensees.
|
·
|
Customers
and Markets
|
Approximately
20 customers within the Performance Polymers segment accounted for more than 80
percent of the segment's total sales revenue from continuing operations in
2009. The segment serves PET customers in the NAFTA region who are
primarily PET container producers for large volume beverage markets such as
carbonated soft drinks, water, and juice, with strong participation in custom
areas such as food, liquor, sport and fruit beverages, health and beauty aids,
and household products. PET is a preferred material for recyclable,
single-serve containers and as a substitute for glass and aluminum
packaging. PET market volume growth rates in the NAFTA region are
projected to be below GDP in the region for the next several years due to
reduced consumption of carbonated soft drinks and continued light weighting of
bottles, while new capacity has been added by a competitor in the
U.S. Although near-term growth in demand is uncertain, the Company
projects the demand in the NAFTA region for PET to grow by approximately two to
three percent annually on a long-term basis.
|
·
|
Competition
|
The
Company's PET product lines compete to a large degree on price in a capital
intensive industry. Profitability is dependent on attaining low cost
positions through technology innovation, manufacturing scale, capacity
utilization, access to reliable and competitive utilities, energy and raw
materials, and efficient manufacturing and distribution processes.
The
Company's PET production is vertically integrated back to the raw material
paraxylene. This gives Eastman a cost advantage and reliable
intermediate supply.
As a
result of recent strategic actions, the Performance Polymers segment competes
primarily in the NAFTA region. Major competitors in the NAFTA region
for the Performance Polymers segment include DAK Americas LLC, Indorama Group,
Invista, Mossi & Ghisolfi Group, Nan Ya Plastics Corporation, and Wellman
Inc., as well as Asian PET exporters. Comprised of many
competitors, imports hold approximately 15 percent market share in the NAFTA
region and are expected to continue to have an adverse impact on PET pricing and
profitability due to the large excess capacity in Asia. In 2010, a
major competitor is bringing additional capacity to the market from an expansion
in late 2009, resulting in further stress on pricing and
profitability.
15
SPECIALTY
PLASTICS SEGMENT
|
·
|
Overview
|
In the
Specialty Plastics segment, the Company produces and markets specialized
copolyesters and cellulosic plastics that possess differentiated performance
properties for value-added end uses. In 2009, the Specialty Plastics
segment had sales revenue of $749 million, approximately 15 percent of Eastman's
total sales.
Eastman
has the ability within its Specialty Plastics segment to modify its polymers and
plastics to control and customize their final properties, creating numerous
opportunities for new application development, including the expertise to
develop new materials and new applications starting from the molecular level in
the research laboratory to the final designed application. Recent
industry trends in various markets have renewed customers' interest in some of
the unique attributes offered by Eastman materials. Such trends
include, but are not limited to, interest in halogen-free and bisphenol A
("BPA")-free plastics, as well as plastics that have superior chemical and
mechanical properties to withstand increasing demands in specific
applications. The addition of the Eastman Tritan™ family of products
significantly enhances the segment's ability to customize copolyesters and
cellulosic plastics for new markets and applications. In addition,
the Specialty Plastics segment has a long history of manufacturing excellence
with strong process improvement programs providing continuing cost
reduction.
|
·
|
Products
|
The
Specialty Plastics segment consists of two primary product lines, specialty
copolyesters and cellulosics. Eastman estimates that the market
growth for copolyesters will continue to be higher than general domestic
economic growth due to ongoing specialty copolyester material innovations and
displacement opportunities. Eastman believes that cellulosic
materials will grow at the rate of the domestic economy in general, with the
strong demand for cellulose esters in liquid crystal displays more than
offsetting the decline in legacy photographic markets. For both
specialty copolyesters and cellulosic plastics, the Specialty Plastics segment
benefits from integration into the Company's polyester and acetyls
streams. The Specialty Plastics segment's specialty copolyesters are
currently produced in Kingsport, Tennessee; Columbia, South Carolina; and
Kuantan, Malaysia. The cellulosic products are produced in Kingsport,
Tennessee.
|
Ø
|
Specialty
Copolyesters
|
Eastman's
specialty copolyesters accounted for approximately 80 percent of the Specialty
Plastics segment's 2009 sales revenue. Eastman's specialty
copolyesters, which generally are based on Eastman's production of cyclohexane
dimethanol ("CHDM") modified polymers, typically fill a market position between
polycarbonates and acrylics. Polycarbonates traditionally have
offered some superior performance characteristics, while acrylics have been less
expensive. Specialty copolyesters combine superior performance with
competitive pricing and are being substituted for both polycarbonates and
acrylics in some applications.
The
Specialty Plastics segment continues to develop new applications for its core
copolyesters to meet growing demand for more environmentally-friendly
copolyester products. During 2009, Eastman commercialized a new
copolyester for the personal care packaging segment, which now represents the
clearest copolyester with the highest chemical resistance used in this
application. The segment also experienced significant growth in
copolyesters for clear handleware applications, where Eastman's materials offer
a unique merchandising solution. Through broadening its Embrace™
family of products, Eastman has continued to see growth in shrink packaging in
Embace LV™ as well as Embrace HY™. The family of offerings in the
shrink segment has made Eastman the leading provider of resins for full body
shrink labels. Eastman's newest copolyester, Tritan™, enables the
Company to move to higher value applications by adding high temperature
resistance to the other properties of copolyesters, including toughness,
chemical resistance, and excellent processability.
16
|
Ø
|
Cellulosic
Plastics
|
Cellulosics
and cellulosic plastics accounted for approximately 20 percent of the Specialty
Plastics segment's 2009 sales revenue. Sold under the TeniteTM
brand, these products are known for their excellent balance of properties,
including toughness, hardness, strength, surface gloss, clarity, chemical
resistance, and warmth to the touch. This product line includes
TeniteTM
acetate, TeniteTM
butyrate, and TeniteTM
propionate flake and polymers, as well as a family of colored products for each
line.
In 2006,
Eastman first commercialized a new family of cellulosic polymers, VisualizeTM
cellulosics, for the liquid crystal display ("LCD") market. Through
the development of new formulations and applications, Eastman's LCD product line
has continued to benefit from demand growth in the LCD market.
|
·
|
Strategy
and Innovation
|
The
Specialty Plastics segment is focused on providing consistent profit margins and
generating cash which the Company can reinvest in the Specialty Plastics
segment's business for continued growth. The Company continues to
leverage the advantages of being an integrated polyester manufacturer and
expects to continue to pursue opportunities within the integrated polyester
stream. The Company is utilizing rationalized PET assets to reduce
Specialty Plastics copolyester conversion costs and expand production with
larger scale assets.
Through
Eastman's advantaged asset position and innovation efforts around applications
development, the segment has increased specialty copolyesters sales volume to
twice U.S. GDP growth over the past 5 years. During 2009, Eastman
significantly increased its share in the shrink film market by developing new
applications for its family of products that now include Embrace™, Embrace LV™
and Embrace HY™. The trend of influencing the purchasing decision
with product design has also benefited Eastman's clear handleware solutions for
large containers. Additionally, increased health concerns related to
BPA have created new opportunities for various applications for legacy
copolyesters. Also during 2009, Eastman developed a proprietary
copolyester resin for the coating of hard surfaces. This surface
offers a low VOC, paintable and highly durable alternative to current coating
technologies.
The LCD
market is a developing growth market for the Specialty Plastics
segment. The Company continues to invest in the development of
copolyester and cellulosic-based product solutions for this high-growth market,
with the objective of being a strategic raw material supplier in the LCD
market. The downturn which began during the fourth quarter 2008 in
the LCD industry created renewed interest in solutions that provide an optimum
balance between cost and performance, and Eastman's developmental product
pipeline in LCDs we believe is now well positioned for anticipated growth in
this market.
The
addition of Tritan™ copolyester to Eastman's Specialty Plastics product offering
has created new opportunities for applications previously occupied by materials
such as polycarbonate or polysulfone. During 2009, Eastman has gained
substantial market share in certain food contact applications such as water
bottles and other consumer houseware applications through OEMs and brand owners
requirement for Tritan™ copolyester properties. The construction of a
new monomer facility as well as a new polymer facility was completed in
2009. Both facilities will be operational in early
2010. The monomer facility will produce a proprietary monomer
required in the production of Tritan™ copolyester while the polymer facility
will be capable of producing 30,000 metric tons of Tritan™
polymer. Given the successful market introduction of Tritan™
copolyester and rapid demand growth, the monomer facility was designed to be
capable of supplying a second Tritan™ copolyester manufacturing facility of
30,000 metric tons per year. The timing for the construction of the
second Tritan™ polyester facility is dependent on the market adoption rate for
these products.
|
·
|
Customers
and Markets
|
The
customer base in the Specialty Plastics segment is broad and diverse, consisting
of approximately 620 companies worldwide in a variety of
industries. Approximately 80 percent of the Specialty Plastics
segment's 2009 sales revenue was attributable to approximately 65
customers. The Specialty Plastics segment seeks to develop mutually
beneficial relationships with its customers throughout various stages of product
life cycles. By doing so, it is better able to understand its
customers' needs as those customers develop new products and more effectively
bring new solutions to market.
17
Specialty
copolyesters are sold into a wide range of markets and applications including
specialty packaging (medical and electronic component trays, shrink label films,
general purpose packaging, and multilayer films); in-store fixtures and displays
(point of purchase displays including indoor sign and store fixtures); consumer
and durable goods (appliances, housewares, toys, and sporting goods); medical
goods (disposable medical devices, health care equipment and instruments, and
pharmaceutical packaging); personal care and consumer packaging (food and
beverage packaging and consumer packaging); photographic film, optical film,
fibers/nonwovens, tapes/labels, and LCD. The new Tritan™ family of
products is being sold into a range of markets including, but not limited to,
consumer housewares, infant care, small appliances and other consumer durables
segments. Additional applications and markets are currently under
development.
|
·
|
Competition
|
The
segment principally competes by leveraging price and product performance in
specific applications. The customers' product selection is typically
determined on an application-by-application basis and often by OEMs rather than
by resin converters. New market opportunities are coming from
substitution of plastic for other materials, and displacement of other plastic
resins in existing applications. While historically the Specialty
Plastics segment's ability to compete was very closely tied to supply-demand
balances of competing plastics, the addition of Tritan™, a material based on
Eastman proprietary technology, opens new market opportunities in which Eastman
expects to leverage the unique combination of properties of the new family of
products. In certain cases, the Company believes that Tritan™ offers
a unique solution by bringing properties similar to polycarbonate without
containing any BPA. In food applications, the fact that copolyesters
are both BPA and halogen-free makes them an attractive alternative to materials
such as polycarbonate and other plastics, respectively. In addition,
the combination of excellent clarity and superior processability allows for the
production of unique and attractive packaging that allows brand owners to
differentiate themselves on the retail shelf. Examples of such
applications include, but are not limited to, shrink film made from Eastman's
Embrace™ copolyester family of products, as well as clear handleware containers
produced from Eastman copolyesters.
The
Specialty Plastics segment believes that it maintains competitive advantages
throughout the product life cycle. At product introduction, the
segment's breadth of offerings combined with its research and development
capabilities and customer service orientation enable it to quickly bring a wide
variety of products to market. As products enter the growth phase of
the life cycle, the Specialty Plastics segment is able to continue to leverage
its product breadth by generating sales revenue from multiple sources, as well
as retaining customers from long-term relationships. As products
become more price sensitive, the Specialty Plastics segment can take advantage
of Eastman's scale of operations, including conversion of rationalized PET
assets and vertical integration to maintain a superior product conversion cost
position.
In recent
years, the industry has been confronted by unprecedented raw material cost
volatility. While raw material cost volatility is expected to
continue into the future, Eastman maintains a competitive advantage from
diversification of its raw materials base by using both coal for cellulosics, as
well as petrochemical-based feedstocks for copolyesters.
Eastman's
primary competitors for copolyester products include Bayer AG, Dow, Evonvik
Industries, Saudi Basic Industries Corporation ("SABIC"), and SK Chemical
Industries. Competition for cellulosic plastics is primarily from
other producers of cellulose ester polymers such as Acetati SpA and
Daicel.
18
REGIONAL
BUSINESS OVERVIEW
Eastman
operates as a global business with approximately 45 percent of its sales and 50
percent of its operating earnings, excluding asset impairments and restructuring
charges, generated from outside of the U.S. and Canadian region in
2009. As the Company focuses on growth in emerging markets, these
percentages are expected to increase. While manufacturing is centered
in the U.S., the Company has the ability to transport products globally to meet
demand. In 2009, all regions were affected by the global recession,
but the degree of the impact on the various regions was dependent on the mix of
the Company's segments in the region. Regions are classified as
United States and Canada; Asia Pacific; Europe, Middle East, and Africa; and
Latin America. In 2009, the mix of regional revenue from the segments was
as follows:
|
United
States and Canada
|
Asia
Pacific
|
Europe,
Middle East, and Africa
|
Latin
America
|
|
|
CASPI
|
25
%
|
20
%
|
35
%
|
25
%
|
|
Fibers
|
10
%
|
45
%
|
30
%
|
15
%
|
|
PCI
|
30
%
|
20
%
|
15
%
|
20
%
|
|
Performance
Polymers
|
20
%
|
--
%
|
--
%
|
35
%
|
|
Specialty
Plastics
|
15
%
|
15
%
|
20
%
|
5
%
|
|
Total
|
100
%
|
100
%
|
100
%
|
100
%
|
The
United States and Canada region contains the highest concentration of the
Company's long-lived assets with approximately 90 percent located in the United
States. We believe that the location of these manufacturing
facilities provides the Company with an advantaged delivered cost position
for our domestic customers, particularly for commodity and bulk
products. The PCI segment accounts for approximately one-third of the
region's revenue, as the segment is well-positioned in this region's market for
most of its major products, including acetic acid and acetic
anhydride. As the PCI and Performance Polymers segments account for
one-half of the region's revenue, the region is subject to increased variability
in revenues due to the effect of raw material and energy prices on these
segments' selling prices.
A large
percentage of revenue in the Asia Pacific region is from acetate tow products in
the Fibers segment while minimal PET products in the Performance Polymers
segment are sold in the region. Both factors contribute to less
volatile price effect on revenue. The region consists of many
emerging growth markets served by Eastman products, including specialty products
in the CASPI segment and acetate tow for filters, particularly in
China. The Company is responding to the growth by strengthening its
position through joint ventures and acquisitions such as the alliance with
SK.
The
Europe, Middle East, and Africa region benefits from fewer sales from commodity
product lines than any other region and therefore is less affected by economic
downturns and price is less dependent on raw material costs compared to other
regions. The favorable product mix is a result of a higher percentage
of the region's revenue being derived from the Fibers and Specialty Plastics
segments and less from the PCI and Performance Polymers segments.
The Latin
America region has the largest impact from the Performance Polymers segment of
all the regions. Combined with sales revenue from the PCI segment of
approximately 20 percent, the region is subject to increased volatility in sales
volume and selling prices.
CORPORATE
INITIATIVES
In
addition to its business segments, the Company manages certain costs and
initiatives at the corporate level, including certain research and development
("R&D") costs not allocated to any one operating segment. The
Company uses a disciplined decision making framework for evaluating targeted
opportunities.
19
One such
corporate initiative was the Company's Beaumont, Texas industrial gasification
project. In fourth quarter 2009, the Company announced the
discontinuation of this project. However, the Company continues to
explore global industrial gasification opportunities as a long-term growth
option. The Company also continues to explore and invest in R&D
initiatives that are aligned with macro trends in sustainability, consumerism,
and energy efficiency through high performance materials, advanced cellulosics,
environmentally-friendly chemistry, and process improvements.
In 2009,
operating losses for corporate initiatives were $217 million, including $179
million in asset impairments related to the discontinuance of its Beaumont,
Texas industrial gasification project, compared with $52 million in
2008.
EASTMAN
CHEMICAL COMPANY GENERAL INFORMATION
Sales, Marketing, and
Distribution
The
Company markets and sells products primarily through a global marketing and
sales organization which has a presence in the United States and in over 35
other countries selling into approximately 100 countries around the
world. Eastman has a marketing and sales strategy targeting
industries and applications where Eastman products and services provide
differentiated value. Market, customer, and technical expertise are
critical capabilities. Through a highly skilled and specialized sales
force that is capable of providing customized business solutions for each of its
five operating segments, Eastman is able to establish long-term customer
relationships and strives to become the preferred supplier of specialty
chemicals and plastics worldwide.
The
Company's products are also marketed through indirect channels, which include
distributors and contract representatives. Non-U.S. sales tend to be
made more frequently through distributors and contract representatives than U.S.
sales. The combination of direct and indirect sales channels,
including sales online through its website, allows Eastman to reliably serve
customers throughout the world.
The
Company's products are shipped to customers directly from Eastman's
manufacturing plants, as well as from distribution centers
worldwide.
Sources
and Availability of Raw Material and Energy
Eastman
purchases a substantial portion, estimated to be approximately 75 percent, of
its key raw materials and energy through long-term contracts, generally of three
to five years in initial duration with renewal or cancellation options for each
party. Most of these agreements do not require the Company to
purchase materials or energy if its operations are reduced or
idle. The cost of raw materials and energy is generally based on
market price at the time of purchase, and Eastman uses derivative financial
instruments, valued at quoted market prices, to mitigate the impact of
short-term market price fluctuations. Key raw materials include
propane, ethane, paraxylene, ethylene glycol, PTA, coal, cellulose, methanol,
and a wide variety of precursors for specialty organic
chemicals. Key purchased energy sources include natural gas,
steam, coal, and electricity. The Company has multiple suppliers for
most key raw materials and energy and uses quality management principles, such
as the establishment of long-term relationships with suppliers and on-going
performance assessment and benchmarking, as part of its supplier selection
process. When appropriate, the Company purchases raw materials from a
single source supplier to maximize quality and cost improvements, and has
developed contingency plans designed to minimize the impact of any supply
disruptions from single source suppliers.
While
temporary shortages of raw materials and energy may occasionally occur, these
items are generally sufficiently available to cover current and projected
requirements. However, their continuous availability and cost are
subject to unscheduled plant interruptions occurring during periods of high
demand, or due to domestic or world market and political conditions, changes in
government regulation, natural disasters, war or other outbreak of hostilities
or terrorism or other political factors, or breakdown or degradation of
transportation infrastructure. Eastman's operations or products have
been in the past and may be in the future, at times, adversely affected by these
factors. The Company's raw material and energy costs as a percent of
total cost of operations were approximately 60 percent in 2009 compared to 70
percent in 2008 and 2007.
20
Capital
Expenditures
Capital
expenditures were $310 million, $634 million, and $518 million for 2009, 2008,
and 2007, respectively. The decreased capital spending in 2009 was
primarily due to the Company's response to the current global recession and
consisted of required maintenance and certain strategic growth initiatives
including the creation of increased capacity for Eastman TritanTM
copolyester, the front-end engineering and design for the industrial
gasification project, reconfiguration of the Longview, Texas facility, and
expansion of the Company's hydrogenated hydrocarbon resins manufacturing
capacity in Middelburg, the Netherlands.
Employees
Eastman
employs approximately 10,000 men and women worldwide. Approximately 4
percent of the total worldwide labor force is represented by unions, mostly
outside the United States.
Customers
Eastman
has an extensive customer base and, while it is not dependent on any one
customer, loss of certain top customers could adversely affect the Company until
such business is replaced. The top 100 customers accounted for
approximately 70 percent of the Company's 2009 sales revenue.
Intellectual
Property and Trademarks
While the
Company's intellectual property portfolio is an important Company asset which it
expands and vigorously protects globally through a combination of patents that
expire at various times, trademarks, copyrights, and trade secrets, neither its
business as a whole nor any particular segment is materially dependent upon any
one particular patent, trademark, copyright, or trade secret. As a
producer of a broad and diverse portfolio of both specialty and commodity
chemicals, plastics, and fibers, Eastman owns over 750 active United States
patents and more than 1,200 active foreign patents, expiring at various times
over several years, and also owns over 2,500 active worldwide trademark
applications and registrations. The Company's intellectual property
relates to a wide variety of products and processes. Eastman
continues to actively protect its intellectual property. As the laws of many
countries do not protect intellectual property to the same extent as the laws of
the United States, Eastman cannot ensure that it will be able to adequately
protect its intellectual property assets outside the United States.
The
Company pursues opportunities to license proprietary technology to third parties
in areas where it has determined competitive impact to core businesses will be
minimal. These
arrangements typically are structured to require payments at significant project
milestones such as signing, completion of design, and start-up. To date,
efforts have been focused on acetyls technology in the PCI segment. The
Company also is actively pursuing licensing opportunities for oxo derivatives in
the PCI segment and its IntegRexTM
technology in the Performance Polymers segment.
Research
and Development
For 2009,
2008, and 2007, Eastman's research and development expenses totaled $137
million, $158 million, and $156 million, respectively.
Environmental
Eastman
is subject to significant and complex laws, regulations, and legal requirements
relating to the use, storage, handling, generation, transportation, emission,
discharge, disposal, and remediation of, and exposure to, hazardous and
non-hazardous substances and wastes in all of the countries in which it does
business. These health, safety, and environmental considerations are
a priority in the Company's planning for all existing and new products and
processes. The Health, Safety, Environmental and Security Committee
of Eastman's Board of Directors oversees the Company's policies and practices
concerning health, safety, and the environment and its processes for complying
with related laws and regulations, and monitors related matters.
21
The
Company's policy is to operate its plants and facilities in a manner that
protects the environment and the health and safety of its employees and the
public. The Company intends to continue to make expenditures for
environmental protection and improvements in a timely manner consistent with its
policies and with the technology available. In some cases, applicable
environmental regulations such as those adopted under the U.S. Clean Air Act and
Resource Conservation and Recovery Act, and related actions of regulatory
agencies, determine the timing and amount of environmental costs incurred by the
Company. Likewise, when finalized, proposed legislation related to
climate change and implementing regulations could impact the timing and amount
of environmental costs incurred by the Company.
The
Company accrues environmental costs when it is probable that the Company has
incurred a liability and the amount can be reasonably estimated. In
some instances, the amount cannot be reasonably estimated due to insufficient
information, particularly as to the nature and timing of future
expenditures. In these cases, the liability is monitored until such
time that sufficient data exists. With respect to a contaminated
site, the amount accrued reflects the Company's assumptions about remedial
requirements at the site, the nature of the remedy, the outcome of discussions
with regulatory agencies and other potentially responsible parties at
multi-party sites, and the number and financial viability of other potentially
responsible parties. Changes in the estimates on which the accruals
are based, unanticipated government enforcement action, or changes in health,
safety, environmental, and chemical control regulations, and testing
requirements could result in higher or lower costs.
The
Company's cash expenditures related to environmental protection and improvement
were estimated to be approximately $173 million, $218 million, and $209 million,
in 2009, 2008, and 2007, respectively. These amounts were primarily
for operating costs associated with environmental protection equipment and
facilities, but also included expenditures for construction and
development. The Company does not expect future environmental capital
expenditures arising from requirements of recently promulgated environmental
laws and regulations to materially increase the Company's planned level of
annual capital expenditures for environmental control facilities.
Other
matters concerning health, safety, and the environment are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II Item 7 and in Notes 1, "Significant Accounting Policies",
12, "Environmental Matters", and 25, "Reserve Rollforwards" to the
Company's consolidated financial statements in Part II, Item 8 of this Annual
Report.
On
January 1, 2010 and 2009, Eastman's backlog of firm sales orders represented
less than 10 percent of the Company's total consolidated revenue for the
previous year. These orders are primarily short-term and all orders
are expected to be filled in the following year. The Company manages
its inventory levels to control the backlog of products depending on customers'
needs. In areas where the Company is the single source of supply, or
competitive forces or customers' needs dictate, the Company may carry additional
inventory to meet customer requirements.
Financial
Information About Geographic Areas
For sales
revenue and long-lived assets by geographic areas, see Note 22, "Segment
Information", to the Company's consolidated financial statements in Part II,
Item 8 of this Annual Report. For information about regional sales
and earnings, see "Regional Business Overview" above in this "Business" section
of this Annual Report.
Available
Information – SEC Filings and Corporate Governance Materials
The
Company makes available free of charge, through the "Investors – SEC
Information" section of its Internet website (www.eastman.com), its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably
practicable after electronically filing such material with, or furnishing it to,
the Securities and Exchange Commission (the "SEC"). Once filed with
the SEC, such documents may be read and/or copied at the SEC's Public Reference
Room at 100 F Street N.E., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers, including Eastman Chemical Company, that electronically file
with the SEC at www.sec.gov.
22
The
Company also makes available free of charge, through the "Investors – Corporate
Governance" section of its Internet website (www.eastman.com), the Corporate
Governance Guidelines of its Board of Directors, the charters of each of the
committees of the Board, and codes of ethics and business conduct for directors,
officers and employees. Such materials are also available in print
upon the written request of any stockholder to Eastman Chemical Company, P.O.
Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor
Relations.
ITEM 1A. RISK FACTORS
For
identification and discussion of the most significant risks applicable to the
Company and its business, see Part II – Item 7 – "Management's Discussion and
Analysis of Financial Condition and Results of Operations – Forward-Looking
Statements and Risk Factors" of this Annual Report.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
23
EXECUTIVE
OFFICERS OF THE COMPANY
Certain
information about the Company's executive officers is provided
below:
J. Brian
Ferguson, age 55, is Executive Chairman of the Board. Mr. Ferguson
joined the Company in 1977. He was named Vice President, Industry and
Federal Affairs in 1994, became Managing Director, Greater China in 1996, was
named President, Eastman Chemical Asia Pacific in 1998, became President,
Polymers Group in 1999, became President, Chemicals Group in 2001, and was
elected Chairman of the Board and Chief Executive Officer in
2002. Mr. Ferguson was appointed to his current position in May 2009
when James P. Rogers succeeded him as Chief Executive Officer.
James P.
Rogers, age 58, is Chief Executive Officer, President of Eastman Chemical
Company, and is a member of the Board of Directors. He served as
President and head of the Chemicals & Fibers Business Group at the time of
his current appointment. Mr. Rogers was appointed Executive Vice
President of the Company and President of Eastman Division effective November
2003. Mr. Rogers joined the Company in 1999 as Senior Vice President
and Chief Financial Officer and in 2002 was also appointed Chief Operations
Officer of Eastman Division. Mr. Rogers served previously as
Executive Vice President and Chief Financial Officer of GAF Materials
Corporation ("GAF"). He also served as Executive Vice President,
Finance, of International Specialty Products, Inc., which was spun off from GAF
in 1997. Mr. Rogers was appointed to his current position in May
2009.
Mark J.
Costa, age 43, is Executive Vice President, Specialty Polymers, Coatings
and Adhesives, and Chief Marketing Officer. Mr. Costa joined the
Company in June 2006 as Senior Vice President, Corporate Strategy &
Marketing and was appointed Executive Vice President, Polymers Business Group
Head and Chief Marketing Officer in August 2008. Prior to joining
Eastman, Mr. Costa was a senior partner within Monitor Group's integrated North
American and global client service networks. He joined Monitor in
1988 and his experience included corporate and business unit strategies, asset
portfolio strategies, innovation and marketing, and channel strategies across a
wide range of industries, including specialty and commodity chemicals,
electricity, natural gas and truck/auto manufacturing. Mr. Costa was
appointed to his current position in May 2009.
Richard
L. Johnson, age 60, is Senior Vice President, Fibers and Global Supply Chain.
Prior to being named to this position, Mr. Johnson was Vice President and
General Manager of Fibers. Mr. Johnson joined Eastman in 1971 and
held numerous positions in environmental programs, operations and manufacturing
until he became Superintendent of the Cellulose Esters Division in
1991. He was named Superintendent of the Acetate Tow Division in
1993, became Vice President and General Manager of Fibers in 1996, and Group
Vice President of Fibers in 2002. Mr. Johnson was named Group Vice
President of Performance Chemicals, Intermediates, and Fibers in
2006. Mr. Johnson was appointed to his current position in May
2009.
Ronald C.
Lindsay, age 51, is Executive Vice President, Performance Polymers and Chemical
Intermediates. He joined
Eastman in 1980 and held a number of positions in various manufacturing and
business organizations. In 2003, Mr. Lindsay was appointed Vice
President and General Manager of Intermediates, in 2005 became Vice President,
Performance Chemicals, in 2006 was appointed Senior Vice President and Chief
Technology Officer, and in 2008 was appointed Senior Vice President, Corporate
Strategy and Regional Leadership. He was appointed to his current
position in May 2009.
Curtis E.
Espeland, age 45, is Senior Vice President and Chief Financial
Officer. Mr. Espeland joined Eastman in 1996, and has served in
various financial management positions of increasing responsibility, including
Vice President, Finance, Polymers; Vice President, Finance, Eastman Division;
Vice President and Controller; Director of Corporate Planning and Forecasting;
Director of Finance, Asia Pacific; and Director of Internal Auditing. He served as the Company's
Chief Accounting Officer from December 2002 to 2008. Prior to joining
Eastman, Mr. Espeland was an audit and business advisory manager with Arthur
Andersen LLP in the United States, Eastern Europe, and Australia. Mr.
Espeland was appointed to his current position in September 2008.
24
Theresa
K. Lee, age 57, is Senior Vice President, Chief Legal Officer and Corporate
Secretary. Ms. Lee joined Eastman as a staff attorney in 1987, and
has served in various legal management positions of increasing responsibility,
including Assistant General Counsel for the health, safety, and environmental
legal staff, Assistant General Counsel for the corporate legal staff, and Vice
President, Associate General Counsel and Secretary. She became Vice
President, General Counsel, and Corporate Secretary of Eastman in 2000 and was
appointed to her current position in 2002.
Greg W.
Nelson, age 47, is Senior Vice President and Chief Technology
Officer. Dr. Nelson joined Eastman in 1988 in the Research and
Development organization, and served in various positions in technology,
including Technology Manager for the Flexible Plastics business, Vice President,
Polymers Technology, and Vice President Corporate Technology from 2007 until
appointed to his current position in August 2008.
Norris P.
Sneed, age 54, is Senior Vice President, Manufacturing Support and Chief
Administrative Officer. Mr. Sneed joined the Company as a chemical
engineer at Eastman's South Carolina Operations in 1979. He has
served in various management positions of increasing responsibility, including
superintendent for different manufacturing and new business development
departments at Eastman's Arkansas operations, assistant to the Chief
Executive Officer, managing director for Eastman's Argentina
operations, Vice President of Organization Effectiveness, and Senior Vice
President, Human Resources, Communications and Public
Affairs. Mr. Sneed was appointed to his current position in May
2009.
Scott V.
King, age 41, is Vice President, Controller and Chief Accounting
Officer. Since joining Eastman in 1999 as Manager, Corporate
Consolidations and External Reporting, he has held various positions of
increasing responsibility in the financial organization, and was appointed Vice
President and Controller in August 2007. Prior to joining Eastman,
Mr. King was an audit and business advisory manager with PricewaterhouseCoopers
LLP. Mr. King was appointed to his current position in September
2008.
25
ITEM
2. PROPERTIES
PROPERTIES
At
December 31, 2009, Eastman operated eleven manufacturing sites in seven
countries. Utilization of these facilities may vary with product mix
and economic, seasonal, and other business conditions; however, none of the
principal plants are substantially idle. The Company's plants,
including approved expansions, generally have sufficient capacity for existing
needs and expected near-term growth. These plants are generally well
maintained, in good operating condition, and suitable and adequate for their
use. Unless otherwise indicated, all of the properties are
owned. The locations and general character of the major manufacturing
facilities are:
|
Segment using manufacturing
facility
|
|||||
|
Location
|
CASPI
|
Fibers
|
PCI
|
Performance
Polymers
|
Specialty
Plastics
|
|
USA
|
|||||
|
Jefferson,
Pennsylvania
|
x
|
||||
|
Columbia,
South Carolina
|
x
|
x
|
|||
|
Kingsport,
Tennessee
|
x
|
x
|
x
|
x
|
x
|
|
Longview,
Texas
|
x
|
x
|
x
|
x
|
|
|
Franklin,
Virginia(1)
|
x
|
||||
|
Europe
|
|||||
|
Workington,
England
|
x
|
||||
|
Middelburg,
the Netherlands
|
x
|
||||
|
Asia
Pacific
|
|||||
|
Kuantan,
Malaysia (1)
|
x
|
||||
|
Jurong
Island, Singapore (1)
|
x
|
x
|
|||
|
Zibo
City, China(2)
|
x
|
x
|
|||
|
Latin
America
|
|||||
|
Uruapan,
Mexico
|
x
|
||||
|
(1)
|
Indicates
a location that Eastman leases from a third
party.
|
|
(2)
|
Eastman
holds a 51 percent share in the joint venture Qilu Eastman Specialty
Chemical Ltd.
|
Eastman
has a 50 percent interest in Primester, a joint venture that manufactures
cellulose acetate at Eastman's Kingsport, Tennessee plant. The
production of cellulose acetate is an intermediate step in the manufacture of
acetate tow and other cellulose acetate based products. The Company
also has a 50 percent interest in a manufacturing facility in Nanjing,
China. The Nanjing facility produces EastotacTM
hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and
sealants. EastotacTM
hydrocarbon resins are also used to produce hot melt adhesives for packaging
applications in addition to glue sticks, tapes, labels, and other adhesive
applications.
Eastman
has distribution facilities at all of its plant sites. In addition,
the Company owns or leases approximately 75 stand-alone distribution facilities
in the United States and 15 other countries. Corporate headquarters
are in Kingsport, Tennessee. The Company's regional headquarters are
in Miami, Florida; Capelle aan den Ijssel, the Netherlands; Zug, Switzerland;
Singapore; and Kingsport, Tennessee. Technical service is provided to
the Company's customers from technical service centers in Kingsport, Tennessee;
Kirkby, England; Shanghai, China and Singapore. Customer service
centers are located in Kingsport, Tennessee; Capelle aan den Ijssel, the
Netherlands; Miami, Florida; and Singapore.
A summary
of properties, classified by type, is included in Note 4,
"Properties and Accumulated Depreciation", to the Company's consolidated
financial statements in Part II, Item 8 of this Annual
Report.
26
ITEM
3. LEGAL PROCEEDINGS
General
From time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
being handled and defended in the ordinary course of business. While
the Company is unable to predict the outcome of these matters, it does not
believe, based upon currently available facts, that the ultimate resolution of
any such pending matters 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, the EPA referred the
matter to the United States Department of Justice's Environmental Enforcement
Section ("DOJ"). Company representatives have met with the 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 Securities
and Exchange Commission Regulation S-K, Item 103, Instruction 5.C., which
requires disclosure of administrative proceedings commenced under environmental
laws that involve governmental authorities as parties and potential monetary
sanctions in excess of $100,000. The Company believes that the
ultimate resolution of this proceeding will not have a material impact on the
Company's financial condition, results of operations, or cash
flows.
There
were no matters submitted to a vote of the Company's stockholders during fourth
quarter of 2009.
27
PART
II
(a) Eastman
Chemical Company's ("Eastman" or the "Company") common stock is traded on the
New York Stock Exchange ("NYSE") under the symbol "EMN". The
following table presents the high and low sales prices of the common stock on
the NYSE and the cash dividends per share declared by the Company's Board of
Directors for each quarterly period of 2009 and 2008.
|
High
|
Low
|
Cash
Dividends Declared
|
|||||
|
2009
|
First
Quarter
|
$
|
34.15
|
$
|
17.76
|
$
|
0.44
|
|
Second
Quarter
|
45.85
|
26.14
|
0.44
|
||||
|
Third
Quarter
|
55.88
|
34.57
|
0.44
|
||||
|
Fourth
Quarter
|
61.95
|
49.85
|
0.44
|
||||
|
2008
|
First
Quarter
|
$
|
67.77
|
$
|
56.31
|
$
|
0.44
|
|
Second
Quarter
|
78.29
|
62.16
|
0.44
|
||||
|
Third
Quarter
|
69.45
|
52.91
|
0.44
|
||||
|
Fourth
Quarter
|
55.22
|
25.87
|
0.44
|
||||
As of
December 31, 2009, there were 72,468,042 shares of the Company's common stock
issued and outstanding, which shares were held by 23,712 stockholders of
record. These shares include 82,674 shares held by the Company's
charitable foundation. The Company has declared a cash dividend of
$0.44 per share during the first quarter of 2010, payable on April 1, 2010 to
stockholders of record on March 15, 2010. Quarterly dividends on
common stock, if declared by the Company's Board of Directors, are usually paid
on or about the first business day of the month following the end of each
quarter. The payment of dividends is a business decision made by the
Board of Directors from time to time based on the Company's earnings, financial
position and prospects, and such other considerations as the Board considers
relevant. Accordingly, while management currently expects that the
Company will continue to pay the quarterly cash dividend, its dividend practice
may change at any time.
See Part
III, Item 12 — "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters—Securities Authorized for Issuance Under Equity
Compensation Plans" of this 2009 Annual Report on Form 10-K ("Annual Report")
for the information required by Item 201(d) of Regulation S-K.
(b) Not
applicable.
28
(c) Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
|
Period
|
Total
Number
of
Shares
Purchased
(1)
|
Average
Price Paid Per Share
(2)
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
or
Programs
(3)
|
Approximate
Dollar
Value
(in Millions) that May Yet Be Purchased Under the Plans or
Programs
(3)
|
|||
|
October
1- 31, 2009
|
--
|
$
|
--
|
0
|
$
|
117
|
|
|
November
1-30, 2009
|
54,400
|
$
|
59.35
|
54,400
|
$
|
113
|
|
|
December
1-31, 2009
|
300,000
|
$
|
59.01
|
300,000
|
$
|
96
|
|
|
Total
|
354,400
|
$
|
59.06
|
354,400
|
$
|
96
|
|
(1)
|
Shares
repurchased under a previously announced Company repurchase
plan.
|
|
(2)
|
Average
price paid per share reflects the weighted average purchase price paid for
share repurchases.
|
|
(3)
|
In
October 2007, the Board of Directors authorized $700 million for
repurchase of the Company's outstanding common shares at such times, in
such amounts, and on such terms, as determined to be in the best interests
of the Company. As of December 31, 2009, a total of 9.7 million
shares have been repurchased under this authorization for a total amount
of $604 million. For
additional information, see Note 14, "Stockholders' Equity", to the
Company's consolidated financial statements in Part II, Item 8 of this
Annual Report.
|
29
ITEM
6. SELECTED FINANCIAL DATA
|
Summary
of Operating Data
|
Year
Ended December 31,
|
|||||||||||||||||||
|
(Dollars
in millions, except per share amounts)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Sales
|
$ | 5,047 | $ | 6,726 | $ | 6,830 | $ | 6,779 | $ | 6,460 | ||||||||||
|
Operating
earnings
|
317 | 519 | 504 | 654 | 740 | |||||||||||||||
|
Earnings
from continuing operations
|
136 | 328 | 321 | 427 | 541 | |||||||||||||||
|
Earnings
(loss) from discontinued operations
|
-- | -- | (10 | ) | (18 | ) | 16 | |||||||||||||
|
Gain
(loss) from disposal of discontinued operations
|
-- | 18 | (11 | ) | -- | -- | ||||||||||||||
|
Net
earnings
|
$ | 136 | $ | 346 | $ | 300 | $ | 409 | $ | 557 | ||||||||||
|
Basic
earnings per share
|
||||||||||||||||||||
|
Earnings
from continuing operations
|
$ | 1.88 | $ | 4.36 | $ | 3.89 | $ | 5.20 | $ | 6.70 | ||||||||||
|
Earnings
(loss) from discontinued operations
|
-- | 0.23 | (0.26 | ) | (0.22 | ) | 0.20 | |||||||||||||
|
Net
earnings
|
$ | 1.88 | $ | 4.59 | $ | 3.63 | $ | 4.98 | $ | 6.90 | ||||||||||
|
Diluted
earnings per share
|
||||||||||||||||||||
|
Earnings
from continuing operations
|
$ | 1.85 | $ | 4.31 | $ | 3.84 | $ | 5.12 | $ | 6.61 | ||||||||||
|
Earnings
(loss) from discontinued operations
|
-- | 0.24 | (0.26 | ) | (0.21 | ) | 0.20 | |||||||||||||
|
Net
earnings
|
$ | 1.85 | $ | 4.55 | $ | 3.58 | $ | 4.91 | $ | 6.81 | ||||||||||
|
Statement
of Financial Position Data
|
||||||||||||||||||||
|
Current
assets
|
$ | 1,735 | $ | 1,423 | $ | 2,293 | $ | 2,422 | $ | 1,924 | ||||||||||
|
Net
properties
|
3,110 | 3,198 | 2,846 | 3,069 | 3,162 | |||||||||||||||
|
Total
assets
|
5,515 | 5,281 | 6,009 | 6,132 | 5,737 | |||||||||||||||
|
Current
liabilities
|
800 | 832 | 1,122 | 1,059 | 1,051 | |||||||||||||||
|
Long-term
borrowings
|
1,604 | 1,442 | 1,535 | 1,589 | 1,621 | |||||||||||||||
|
Total
liabilities
|
4,002 | 3,728 | 3,927 | 4,103 | 4,125 | |||||||||||||||
|
Total
stockholders' equity
|
1,513 | 1,553 | 2,082 | 2,029 | 1,612 | |||||||||||||||
|
Dividends
declared per share
|
1.76 | 1.76 | 1.76 | 1.76 | 1.76 | |||||||||||||||
In fourth
quarter 2009, the Company announced its decision to discontinue the Beaumont,
Texas industrial gasification project. This decision was based on a
number of factors, including high capital costs, the current and projected
reduced spread between natural gas and oil and petroleum coke prices, and
continued uncertainty regarding U.S. energy and environmental public
policy. For more information regarding the impact of this impairment
on financial results, refer to the segment discussions of Part II, Item 7 –
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Part II, Item 8 – "Notes to the Audited Consolidated Financial
Statements" – Note 2, "Asset Impairments and Restructuring Charges, Net " of
this Annual Report.
In first
quarter 2008, the Company completed the sale of its polyethylene
terephthalate ("PET")
polymers and purified terephthalic acid ("PTA") manufacturing facilities in
Rotterdam, the Netherlands and the PET manufacturing facility in Workington,
United Kingdom and related businesses. Results from, charges related
to, and gains and losses from disposal of the San Roque, Spain, the Netherlands,
and the United Kingdom assets and businesses are presented as discontinued
operations. For more information regarding the impact of these
divestitures on financial results, refer to the segment discussions of Part II,
Item 7 – "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Part II, Item 8 – "Notes to the Audited Consolidated
Financial Statements" – Note 16, "Divestitures" and Note 17, "Discontinued
Operations" of this Annual Report.
30
In second
quarter 2007, the Company completed the sale of its San Roque, Spain PET
manufacturing facility. During fourth quarter 2007, the Company sold
its PET polymers production facilities in Cosoleacaque, Mexico and Zarate,
Argentina and the related businesses and entered into definitive agreements to
sell its PET polymers production facilities in Rotterdam, the Netherlands and
Workington, United Kingdom and the related businesses. For more
information regarding the impact of these divestitures on financial results,
refer to the segment discussions of Part II, Item 7 – "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Part II, Item
8 – "Notes to the Audited Consolidated Financial Statements" – Note 2,
"Discontinued Operations and Assets Held for Sale" and Note 17, "Divestitures"
of the 2008 Annual Report on Form 10-K.
In fourth
quarter 2006, the Company completed the sale of its Batesville, Arkansas
manufacturing facility and related assets and specialty organic chemicals
product lines in the Performance Chemicals and Intermediates ("PCI") segment and
the sale of its polyethylene and EpoleneTM
polymer businesses and related assets located at the Longview, Texas site and
the Company's ethylene pipeline. The polyethylene assets and product
lines were in the Performance Polymers segment, while the EpoleneTM
assets and product lines were in the Coatings, Adhesives, Specialty Polymers and
Inks ("CASPI") segment. For more information regarding the impact of
these divestitures on financial results, refer to the segment discussions of
Part II, Item 7 – "Management's Discussion and Analysis of Financial Reporting
and Results of Operations" and Part II, Item 8 – "Notes to the Audited
Consolidated Financial Statements" – Note 17, "Divestitures" of the 2008 Annual
Report on Form 10-K.
31
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
ITEM
|
Page
|
|
33
|
|
|
36
|
|
|
38
|
|
|
39
|
|
|
43
|
|
|
49
|
|
|
50
|
|
|
53
|
|
|
59
|
|
|
60
|
|
|
65
|
|
|
66
|
|
|
66
|
|
|
66
|
|
|
67
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the consolidated financial statements for Eastman
Chemical Company ("Eastman" or the "Company"), which have been prepared in
accordance with accounting principles generally accepted ("GAAP") in the United
States, and should be read in conjunction with the Company's consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K (this "Annual Report"). All references to earnings per
share ("EPS") contained in this report are diluted earnings per share unless
otherwise noted.
32
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
preparing the consolidated financial statements in conformity with GAAP, the
Company's management must make decisions which impact the reported amounts and
the related disclosures. Such decisions include the selection of the
appropriate accounting principles to be applied and assumptions on which to base
estimates and judgments that affect the reported amounts of assets, liabilities,
sales revenue and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to allowances for doubtful accounts,
impairment of long-lived assets, environmental costs, U.S. pension and other
post-employment benefits, litigation and contingent liabilities, and income
taxes. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions. The Company's management
believes the critical accounting estimates described below are the most
important to the fair presentation of the Company's financial condition and
results. These estimates require management's most significant
judgments in the preparation of the Company's consolidated financial
statements.
Allowances
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. The Company believes, based on historical results, the
likelihood of actual write-offs having a material impact on financial results is
low. However, if one of the Company's key customers was to file for
bankruptcy, or otherwise be unable to make its required payments, or there was a
significant continued slow-down in the economy, the Company could increase its
allowances. This could result in a material charge to
earnings. The Company's allowances were $10 million and $8 million at
December 31, 2009 and 2008, respectively.
Impairment
of Long-Lived Assets
Long-lived
assets and certain identifiable intangibles to be held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the
carrying amount is not considered to be recoverable, an analysis of fair value
is triggered. An impairment is recorded for the excess of the
carrying amount of the asset over the fair value.
The
Company conducts its annual testing of goodwill and indefinite-lived intangible
assets in third quarter of each year, unless events warrant more frequent
testing. Reporting units are identified for the purpose of assessing
potential impairments of goodwill. The carrying value of
indefinite-lived intangibles is considered impaired when their fair value, as
established by appraisal or based on undiscounted future cash flows of certain
related products, is less than their carrying value. If the fair
value of a reporting unit is less than the carrying value of goodwill,
additional steps, including an allocation of the estimated fair value to the
assets and liabilities of the reporting unit, would be necessary to determine
the amount, if any, of goodwill impairment. Goodwill and
indefinite-lived intangibles primarily consist of goodwill in the Coatings,
Adhesives, Specialty Polymers and Inks ("CASPI") segment. The Company
also had recorded goodwill and other intangibles associated with the Beaumont,
Texas industrial gasification project. In fourth quarter 2009, the
Company announced the discontinuance of the Beaumont, Texas industrial
gasification project, which resulted in an impairment of the Beaumont industrial
gasification project goodwill and other intangible assets.
As the
Company's assumptions related to long-lived assets are subject to change,
additional write-downs may be required in the future. If estimates of
fair value less costs to sell are revised, the carrying amount of the related
asset is adjusted, resulting in a charge to earnings. The Company
recognized fixed (tangible) asset impairment costs of $133 million and goodwill
and definite-lived intangible asset impairment costs of $46 million in results
from continuing operations during 2009, related to the discontinuance of the
Beaumont, Texas industrial gasification project. The Company
recognized no fixed (tangible) asset impairment costs and no definite-lived
intangible asset impairment costs in results from continuing operations during
2008.
33
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can be
reasonably estimated. When a single amount cannot be reasonably
estimated but the cost can be estimated within a range, the Company accrues the
minimum amount. This undiscounted accrued amount reflects the
Company's assumptions about remediation requirements at the contaminated site,
the nature of the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites, and the number
and financial viability of other potentially responsible
parties. Changes in the estimates on which the accruals are based,
unanticipated government enforcement action, or changes in health, safety,
environmental, and chemical control regulations and testing requirements could
result in higher or lower costs. Estimated future environmental
expenditures for remediation costs range from the minimum or best estimate of
$10 million to the maximum of $20 million at December 31, 2009.
In
accordance with GAAP, the Company also establishes reserves for
closure/postclosure costs associated with the environmental and other assets it
maintains. Environmental assets, as defined by GAAP, include but are
not limited to waste management units, such as landfills, water treatment
facilities, and ash ponds. When these types of assets are constructed
or installed, a reserve is established for the future costs anticipated to be
associated with the retirement or closure of the asset based on an expected life
of the environmental assets and the applicable regulatory closure
requirements. These future expenses are charged against earnings over
the estimated useful life of the assets. Currently, the Company
estimates the useful life of each individual asset is up to 50
years. If the Company changes its estimate of the asset retirement
obligation costs or its estimate of the useful lives of these assets, expenses
to be charged against earnings could increase or decrease.
In
accordance with GAAP, the Company also monitors conditional obligations and will
record reserves associated with them when and to the extent that more detailed
information becomes available concerning applicable retirement
costs.
The
Company's reserve, including the above remediation, was $42 million at December
31, 2009 and $41 million at December 31, 2008, representing the minimum or best
estimate for remediation costs and the best estimate of the amount accrued to
date over the regulated assets' estimated useful lives for asset retirement
obligation costs.
Pension
and Other Post-employment Benefits
The
Company maintains defined benefit pension plans that provide eligible employees
with retirement benefits. Additionally, Eastman provides life
insurance and health care and dental benefits for eligible retirees and health
care benefits for retirees' eligible survivors. The costs and
obligations related to these benefits reflect the Company's assumptions related
to general economic conditions (particularly interest rates) and expected return
on plan assets. For the U.S. plans, at December 31, 2009, the Company
assumed a discount rate of 5.72 percent on its defined benefit pension plans,
5.79 percent on its other post-employment benefit plan and an expected return on
assets of 9 percent. The cost of providing plan benefits also depends
on demographic assumptions including retirements, mortality, turnover, and plan
participation.
34
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company expects its 2010 pension expense to be slightly higher than
2009. The December 31, 2009 projected benefit obligation and 2010
expense are affected by year-end 2009 assumptions. The sensitivities
below are specific to the time periods noted. They also may not be
additive, so the impact of changing multiple factors simultaneously cannot be
calculated by combining the individual sensitivities shown. The
following table illustrates the sensitivity to changes in the Company's
long-term assumptions in the expected return on assets and assumed discount rate
for the U.S. pension plans and other postretirement welfare plans:
|
Change
in
Assumption
|
Impact
on
2010
Pre-tax U.S.
Benefits
Expense
|
Impact
on
December
31, 2009 Projected Benefit Obligation for U.S. Pension
Plans
|
Impact
on
December
31, 2009 Benefit Obligation for Other U.S. Postretirement
Plans
|
|
25
basis point
decrease
in discount
rate
|
+$5
Million
|
+$40
Million
|
+$23
Million
|
|
25
basis point
increase
in discount
rate
|
-$5
Million
|
-$38
Million
|
-$22
Million
|
|
25
basis point
decrease
in expected
return
on assets
|
+$3
Million
|
No
Impact
|
N/A
|
|
25
basis point
increase
in expected
return
on assets
|
-$3
Million
|
No
Impact
|
N/A
|
The
expected return on assets and assumed discount rate used to calculate the
Company's pension and other post-employment benefit obligations are established
each December 31. The expected return on assets is based upon the
long-term expected returns in the markets in which the pension trust invests its
funds, primarily the domestic, international, and private equity
markets. Historically, over a ten year period, excluding 2008 which
is considered an anomaly due to the global recession, the Company's average
achieved actual return has been equal to or greater than the expected return on
assets. The assumed discount rate is based upon a portfolio of
high-grade corporate bonds, which are used to develop a yield
curve. This yield curve is applied to the expected durations of the
pension and post-employment benefit obligations. As future benefits
under the U.S. benefit plan have been fixed at a certain contribution amount,
changes in the health care cost trend assumptions do not have a material impact
on the results of operations.
The
Company uses the market related valuation method to determine the value of plan
assets, which recognizes the change of the fair value of the plan assets over
five years. If actual experience differs from these long-term
assumptions, the difference is recorded as an unrecognized actuarial gain (loss)
and then amortized into earnings over a period of time based on the average
future service period, which may cause the expense related to providing these
benefits to increase or decrease. The charges applied to earnings in
2009, 2008, and 2007 due to the amortization of these unrecognized actuarial
losses, largely due to actual experience versus assumptions of discount rates,
were $45 million, $37 million, and $47 million,
respectively.
35
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company does not anticipate that a change in pension and other post-employment
obligations caused by a change in the assumed discount rate during 2010 will
impact the cash contributions to be made to the pension plans during
2010. However, an after-tax charge or credit will be recorded
directly to accumulated other comprehensive income (loss), a component of
stockholders' equity, as of December 31, 2010 for the impact on the pension's
projected benefit obligation of the change in interest rates, if
any. While the amount of the change in these obligations does not
correspond directly to cash funding requirements, it is an indication of the
amount the Company will be required to contribute to the plans in future
years. The amount and timing of such cash contributions is dependent
upon interest rates, actual returns on plan assets, retirement, attrition rates
of employees, and other factors. For further information regarding
pension and other post-employment obligations, see Note 10, "Retirement Plans",
to the Company's consolidated financial statements in Part II, Item 8 of this
Annual Report.
Litigation
and Contingent Liabilities
From time
to time, the Company and its operations are parties to or targets of lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
handled and defended in the ordinary course of business. The Company
accrues a liability for such matters when it is probable that a liability has
been incurred and the amount can be reasonably estimated. When a
single amount cannot be reasonably estimated but the cost can be estimated
within a range, the Company accrues the minimum amount. The Company
expenses legal costs, including those expected to be incurred in connection with
a loss contingency, as incurred. Based upon facts and information
currently available, the Company believes the amounts reserved are adequate for
such pending matters; however, results of operations could be affected by
monetary damages, costs or expenses, and charges against earnings in particular
periods.
Income
Taxes
The
Company records deferred tax assets and liabilities based on temporary
differences between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates expected to be in effect for the year in
which the differences are expected to reverse. The ability to realize
the deferred tax assets is evaluated through the forecasting of taxable income
using historical and projected future operating results, the reversal of
existing temporary differences, and the availability of tax planning
strategies. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be
realized. In the event that the actual outcome from future tax
consequences differs from our estimates and assumptions, the resulting change to
the provision for income taxes could have a material adverse impact on the
consolidated results of operations and statement of financial
position. As of December 31, 2009, a valuation allowance of $88
million has been provided against the deferred tax assets.
The
Company recognizes income tax positions that meet the more likely than not
threshold and accrues interest related to unrecognized income tax positions,
which is recorded as a component of the income tax provision.
During
2009, the Company recognized $200 million in asset impairment and restructuring
charges, primarily consisting of $179 million in asset impairments related to
the Company's previously announced discontinuance of its Beaumont, Texas
industrial gasification project and $23 million, net, for severance resulting
from a reduction in force. The Company's decision to discontinue the
industrial gasification project was due to a number of factors, including high
capital costs, the current and projected reduced spread between natural gas and
oil and petroleum coke prices, and continued uncertainty regarding U.S. energy
and environmental public policy.
36
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In 2008,
the Company sold certain mineral rights at an operating manufacturing site,
recognizing $16 million of other operating income.
During
2007 and 2008, the Company took certain strategic actions in its Performance
Polymers segment to address its underperforming polyethylene terephthalate
("PET") manufacturing facilities outside the United States. In second
quarter 2007, the Company completed the sale of its PET manufacturing facility
in Spain and in first quarter 2008, the Company completed the sale of its PET
polymers and purified terephthalic acid ("PTA") manufacturing facilities in the
Netherlands and the PET manufacturing facility in the United Kingdom and related
businesses. Results from, charges related to, and gains and losses
from disposal of the Spain, the Netherlands, and the United Kingdom assets and
businesses are presented as discontinued operations. In fourth
quarter 2007, the Company completed the sale of its Mexico and Argentina
manufacturing facilities. As part of this divestiture, the Company
entered into transition supply agreements for polymer intermediates 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 CASPI
segments. As part of the PE divestiture, the Company entered into a
transition supply agreement for contract ethylene sales, from which sales
revenue and operating earnings are included in the Performance Chemicals and
Intermediates ("PCI") segment results in 2009, 2008, and 2007.
Also in
fourth quarter 2006, the Company made strategic decisions relating to the
scheduled shutdown of cracking units in Longview, Texas and a planned shutdown
of higher cost PET assets in Columbia, South Carolina. Accelerated
depreciation costs resulting from these decisions were $9 million and $49
million in 2008 and 2007, respectively. For more information on
accelerated depreciation costs, see "Gross Profit" in the "Results of
Operations" section of this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes the following non-GAAP financial measures and accompanying
reconciliations to the most directly comparable GAAP financial
measures. The non-GAAP financial measures used by the Company may not
be comparable to similarly titled measures used by other companies and should
not be considered in isolation or as a substitute for measures of performance or
liquidity prepared in accordance with GAAP.
|
·
|
Company
sales and segment sales and results from continuing operations excluding
sales revenue and results from continuing operations from sales in Latin
America of PET products manufactured at the divested Mexico and Argentina
PET manufacturing sites;
|
|
·
|
Company
and segment sales excluding contract ethylene sales under a transition
agreement related to the divestiture of the PE product
lines;
|
|
·
|
Company
and segment sales excluding contract polymer intermediates sales under a
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and
Argentina;
|
|
·
|
Company
and segment gross profit, operating earnings, earnings from continuing
operations, and diluted earnings per share excluding accelerated
depreciation costs, asset impairments and restructuring charges, and other
operating income; and
|
|
·
|
Company
earnings from continuing operations and diluted earnings per share
excluding net deferred tax benefits related to the previous divestiture of
businesses.
|
37
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Eastman's
management believes that contract ethylene sales under the transition agreement
related to the divestiture of the PE product lines, the contract polymer
intermediates sales under the transition supply agreement related to the
divestiture of the PET manufacturing facilities and related businesses in Mexico
and Argentina, and the other operating income from the sale of mineral rights do
not reflect the continuing and expected future business of the PCI and
Performance Polymers segments or of the Company. In addition, for
evaluation and analysis of ongoing business results and the impact on the
Company and segments of strategic decisions and actions to reduce costs and to
improve the profitability of the Company, management believes that Company and
segment earnings from continuing operations should be considered both with and
without accelerated depreciation costs, asset impairments and restructuring
charges, and deferred tax benefits related to the previous divestiture of
businesses, and that Company and segment sales and results from continuing
operations should be considered both with and without sales revenue and results
from continuing operations from sales in Latin America of PET products
manufactured at the divested Mexico and Argentina manufacturing
facilities. Management believes that investors can better evaluate
and analyze historical and future business trends if they also consider the
reported Company and segment results, respectively, without the identified
items. Management utilizes Company and segment results including and
excluding the identified items in the measures it uses to evaluate business
performance and in determining certain performance-based
compensation. These measures, excluding the identified items, are not
recognized in accordance with GAAP and should not be viewed as alternatives to
the GAAP measures of performance.
The
Company generated sales revenue of $5.0 billion and $6.7 billion for 2009 and
2008, respectively. Excluding the results of contract ethylene sales
and contract polymer intermediates sales, sales revenue decreased by 20
percent. The sales revenue decrease was due to lower selling prices
in response to lower raw material and energy costs and lower sales volume
primarily attributed to weakened demand due to the global
recession.
Operating
earnings were $317 million in 2009 compared to $519 million in
2008. Excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and other operating income, operating earnings were
$517 million in 2009 compared with $558 million in
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, moderated
throughout 2009 resulting in stronger sales volume and operating earnings in
second half of the year. The decline was partially offset by lower
raw material and energy costs more than offsetting lower selling
prices. Operating earnings also benefited from cost reduction actions
which positively impacted results throughout the year.
During
2009, operating earnings were negatively impacted by $200 million in asset
impairment and restructuring charges, net, primarily consisting of $179 million
in asset impairments related to the Company's discontinuance of its Beaumont,
Texas industrial gasification project and $23 million, net, for severance
resulting from a reduction in force.
Primarily
as a result of strategic actions related to the Performance Polymers and PCI
segments, as well as a corporate severance program, operating earnings in 2008
were negatively impacted by $46 million in asset impairments and restructuring
charges and $9 million of accelerated depreciation costs, and were positively
impacted by $16 million in other operating income.
Earnings from continuing operations
were $136 million in 2009 compared to $328 million in 2008. Excluding
accelerated depreciation costs, asset impairments and restructuring charges,
net, and net deferred tax benefits, earnings from continuing operations were
$266 million and $342 million, respectively. Earnings from continuing
operations were $1.85 per diluted share in 2009 compared to $4.31 per diluted
share in 2008. Excluding accelerated depreciation costs, asset
impairments and restructuring charges, net, and net deferred tax benefits,
earnings were $3.63 per diluted share and $4.50 per diluted share,
respectively.
38
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company generated $758 million in cash from operating activities during 2009
compared to $653 million generated by operating activities in
2008. The increase was primarily due to cash received from a change
in tax accounting method, as well as a reduction in working capital in 2009 as
compared to an increase in working capital in 2008. In 2009, the Company
received proceeds from a public debt offering of $248 million, contributed $181
million to the U.S. defined benefit pension plan, and repaid $88 million of its
euro credit facility and $13 million of short term borrowings. In
2008, the Company received proceeds from sale of assets of $337 million,
repurchased shares totaling $501 million, and repaid $175 million of
borrowings.
The
Company continued its growth initiatives in 2009. In the Fibers
segment, construction of the Korean acetate tow facility began in first quarter
2009, with the facility expected to be operational in first quarter
2010. In the Specialty Plastics segment, the introduction of its new
Eastman TritanTM
copolyester progressed with the monomer manufacturing facility and its first
TritanTM
copolyester polymer manufacturing facility in Kingsport, Tennessee which were
both completed in 2009 and are expected to be operational in early
2010. In the CASPI segment, the 30 percent expansion of the Company's
hydrogenated hydrocarbon resins manufacturing capacity in Middelburg, the
Netherlands which was completed in 2009 with expected production in 2010 to meet
growing demand for specialty hydrocarbon resins.
The
Company's results of operations as presented in the Company's consolidated
financial statements in Part II, Item 8 of this Annual Report are summarized and
analyzed below.
|
(Dollars
in millions)
|
2009
|
2008
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
Sales
|
$ | 5,047 | $ | 6,726 | (25 | ) % | (13 | ) % | (12 | ) % | -- | % | -- | % | ||||||||||||||
|
Sales
– contract polymer intermediates sales (1)
|
-- | 138 | ||||||||||||||||||||||||||
|
Sales
- contract ethylene sales (2)
|
28 | 314 | ||||||||||||||||||||||||||
|
Sales
– excluding listed items
|
$ | 5,019 | $ | 6,274 | (20 | ) % | (7 | ) % | (12 | ) % | (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 for 2009 compared to 2008 decreased $1,679 million. Excluding
contract ethylene sales and contract polymer intermediates sales, sales revenue
decreased 20 percent 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.
39
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
(Dollars
in millions)
|
2009
|
2008
|
Change
|
|||||||||
|
Gross
Profit
|
$ | 1,053 | $ | 1,126 | (6 | ) % | ||||||
|
As
a percentage of sales
|
21 | % | 17 | % | ||||||||
|
Accelerated
depreciation included in cost of sales
|
-- | 9 | ||||||||||
|
Gross
Profit excluding accelerated depreciation costs
|
1,053 | 1,135 | (7 | ) % | ||||||||
|
As
a percentage of sales
|
21 | % | 17 | % | ||||||||
Gross
profit for 2009 decreased compared with 2008 in the PCI, Performance Polymers,
and Specialty Plastics segments 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, the Performance Polymers segment
was negatively impacted by operational challenges with the South Carolina PET
manufacturing facility. Gross profit as a percentage of sales
increased due to improved performance in the Fibers and CASPI
segments. The Fibers segment benefited from higher selling prices,
while the CASPI segment had lower raw material and energy costs more than
offsetting lower selling prices. The Company also benefited from cost
reduction actions in 2009. In addition, 2009 results included
approximately $20 million in costs related to the reconfiguration of the
Longview, Texas facility, which impacted the PCI and CASPI
segments. Gross profit included accelerated depreciation costs of $9
million in 2008 resulting from the previously reported shutdown of the cracking
units in Longview, Texas and higher cost PET polymer assets in Columbia, South
Carolina. The Company's 2009 raw material and energy costs decreased
by approximately $900 million compared with 2008.
|
(Dollars
in millions)
|
2009
|
2008
|
Change
|
|||||||||
|
Selling,
General and Administrative Expenses ("SG&A")
|
$ | 399 | $ | 419 | (5 | ) % | ||||||
|
Research
and Development Expenses ("R&D")
|
137 | 158 | (13 | ) % | ||||||||
| $ | 536 | $ | 577 | (7 | ) % | |||||||
|
As
a percentage of sales
|
11 | % | 9 | % | ||||||||
SG&A
expenses decreased for 2009 compared to 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 higher stock price.
R&D
expenses decreased for 2009 compared to 2008 primarily due to lower R&D
expenses for corporate growth initiatives, including the industrial gasification
project in Beaumont, Texas and the commercialized Eastman TritanTM
copolyester.
Asset
Impairments and Restructuring Charges, Net
Asset impairments and
restructuring charges, net, totaled $200 million and $46 million in 2009 and
2008, respectively. Asset impairments and restructuring
charges in 2009 consists primarily of $179 million in asset impairments related
to the Company's previously announced discontinuance of its Beaumont, Texas
industrial gasification project and $23 million, net for severance resulting
from a reduction in force. Asset impairments and restructuring
charges in 2008 were primarily for restructuring at the South Carolina facility
in the Performance Polymers segment, severance and pension costs from the
decision to close a previously impaired site in the United Kingdom in the PCI
segment, and severance costs resulting from a corporate severance
program. For more information regarding asset impairments and
restructuring charges, primarily related to recent strategic decisions and
actions, see the Performance Polymers and PCI segments discussion and Note 2,
"Asset Impairments and Restructuring Charges, Net", to the Company's
consolidated financial statements in Part II, Item 8 of this Annual
Report.
40
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Other
Operating Income, Net
Other
operating income, net for 2008 reflected proceeds of $16 million from the sale
of certain mineral rights at an operating manufacturing site.
Operating Earnings
| (Dollars in millions) |
2009
|
2008
|
Change
|
|||||||||
|
|
||||||||||||
|
Operating
earnings
|
$ | 317 | $ | 519 | (39 | ) % | ||||||
|
Accelerated
depreciation included in cost of sales
|
-- | 9 | ||||||||||
|
Asset
impairments and restructuring charges, net
|
200 | 46 | ||||||||||
|
Other
operating income, net
|
-- | (16 | ) | |||||||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairment and
restructuring charges, net, and other operating income,
net
|
$ | 517 | $ | 558 | (7 | ) % | ||||||
Net
Interest Expense
|
(Dollars
in millions)
|
2009
|
2008
|
Change
|
|||||||||
|
Gross
interest costs
|
$ | 99 | $ | 106 | ||||||||
|
Less:
capitalized interest
|
14 | 12 | ||||||||||
|
Interest
expense
|
85 | 94 | (10 | ) % | ||||||||
|
Interest
income
|
7 | 24 | ||||||||||
|
Net
interest expense
|
$ | 78 | $ | 70 | 11 | % | ||||||
Net
interest expense increased $8 million in 2009 compared to 2008. Gross
interest costs for 2009 compared to 2008 were lower due to lower average
borrowings and lower average interest rates. Interest income in 2009
compared to 2008 was lower due to lower average interest rates and lower average
cash balances.
For 2010,
the Company expects net interest expense to increase compared with 2009
primarily due to lower capitalized interest and higher borrowings.
Other
Charges (Income), Net
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
Foreign
exchange transactions losses
|
$ | 5 | $ | 17 | ||||
|
Investments
losses, net
|
5 | 6 | ||||||
|
Other,
net
|
3 | (3 | ) | |||||
|
Other
charges (income), net
|
$ | 13 | $ | 20 | ||||
Included
in other charges (income), net 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 ("HDC"), gains from the sale of non-operating assets,
certain litigation costs, fees on securitized receivables, other non-operating
income, and other miscellaneous items.
41
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Investments
losses, net include gains of $4 million in both 2009 and 2008 resulting from a
favorable decision in 2006 of the U.S. Department of the Army to reimburse
post-employment benefits being provided to retirees of HDC, a wholly owned
subsidiary. This gain reflected a portion of the unrecognized gain
resulting from the reimbursement decision that will be amortized into earnings
over future periods. For additional information, see Note 19,
"Other Charges (Income), Net", to the Company's consolidated financial
statements in Part II, Item 8 of this Annual Report.
Provision
for Income Taxes
|
(Dollars
in millions)
|
2009
|
2008
|
Change
|
|||||||||
|
Provision
for income taxes
|
$ | 90 | $ | 101 | (11 | ) % | ||||||
|
Effective
tax rate
|
39 | % | 24 | % | ||||||||
The 2009
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 37
percent. The 2009 effective tax rate reflects a $11 million tax
charge associated with the recapture of gasification investment tax credits, a
$7 million tax charge associated with a change in accounting method for tax
purposes to accelerate timing of deductions for manufacturing repairs expense
and a $5 million tax benefit from the reversal of tax reserves due to the
expiration of the relevant statute of limitations.
The 2008
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 27
percent. The 2008 effective tax rate was impacted by a $16 million
benefit resulting from a gasification investment tax credit of $11 million and a
research and development credit of $5 million, a $14 million benefit from state
income tax credits (net of federal tax effect), and a $6 million benefit from
the settlement of a non-U.S. income tax audit.
The Company expects
its effective tax rate in 2010 will be approximately 33 percent.
|
Earnings
from Continuing Operations and Diluted Earnings per Share
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
(Dollars
in millions, except diluted EPS)
|
$ | EPS | $ | EPS | ||||||||||||
|
Earnings
from continuing operations
|
$ | 136 | $ | 1.85 | $ | 328 | $ | 4.31 | ||||||||
|
Accelerated
depreciation included in cost of sales, net of tax
|
-- | -- | 6 | 0.08 | ||||||||||||
|
Asset
impairments and restructuring charges, net of tax
|
130 | 1.78 | 32 | 0.42 | ||||||||||||
|
Other
operating income, net of tax
|
-- | -- | (10 | ) | (0.13 | ) | ||||||||||
|
Net
deferred tax benefits related to the previous divestiture of
businesses
|
-- | -- | (14 | ) | (0.18 | ) | ||||||||||
|
Earnings
from continuing operations excluding accelerated depreciation costs, net
of tax, asset impairments and restructuring charges, net of tax, other
operating income, net of tax, and net deferred tax benefits related to the
previous divesture of businesses
|
$ | 266 | $ | 3.63 | $ | 342 | $ | 4.50 | ||||||||
42
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Net
Earnings and Diluted Earnings per Share
|
(Dollars
in millions, except diluted EPS)
|
2009
|
2008
|
||||||||||||||
| $ | EPS | $ | EPS | |||||||||||||
|
Earnings
from continuing operations
|
$ | 136 | $ | 1.85 | $ | 328 | $ | 4.31 | ||||||||
|
Gain
from disposal of discontinued operations, net of tax
|
-- | -- | 18 | 0.24 | ||||||||||||
|
Net
earnings
|
$ | 136 | $ | 1.85 | $ | 346 | $ | 4.55 | ||||||||
The gain
on disposal of discontinued operations, net of tax of $18 million in 2008 is
from the sale of the Company's PET polymers and PTA production facilities in the
Netherlands and its PET production facility in the United Kingdom and related
businesses for approximately $329 million in first quarter
2008. For additional information, see Note 17, "Discontinued
Operations", to the Company's consolidated financial statements in Part II, Item
8 of this Annual Report.
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the PCI
segment, the Performance Polymers segment, and the Specialty Plastics
segment. For additional information concerning the Company's
operating businesses and products, refer to Note
22, "Segment Information", to the consolidated financial statements in Part II,
Item 8 of this Annual Report.
Sales
revenue and expenses not identifiable to an operating segment are not included
in segment operating results for either of the periods presented and are shown
in Note 22, "Segment Information", as "other" sales revenue and operating
losses. As discussed in Note 22, these "other" operating losses are
$217 million and $52 million in 2009 and 2008, respectively. Included
in 2009 is $179 million in asset impairments related to the discontinuance of
its Beaumont, Texas industrial gasification project.
|
CASPI
Segment
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
$ | % | ||||||||||||
|
Sales
|
$ | 1,217 | $ | 1,524 | $ | (307 | ) | (20 | ) % | |||||||
|
Volume
effect
|
(184 | ) | (12 | ) % | ||||||||||||
|
Price
effect
|
(96 | ) | (6 | ) % | ||||||||||||
|
Product
mix effect
|
(30 | ) | (2 | ) % | ||||||||||||
|
Exchange rate effect
|
3 | -- | % | |||||||||||||
|
Operating
earnings
|
227 | 202 | 25 | 12 | % | |||||||||||
|
Asset
impairments and restructuring charges, net
|
3 | -- | 3 | |||||||||||||
|
Other
operating income
|
-- | (5 | ) | 5 | ||||||||||||
|
Operating
earnings excluding asset impairments and restructuring charges, net, and
other operating income
|
230 | 197 | 33 | 17 | % | |||||||||||
43
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue for 2009 decreased $307 million compared to 2008 due primarily 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 building and
construction, transportation, and packaging markets. The lower
selling prices were primarily due to lower raw material and energy
costs.
Excluding
asset impairments and restructuring charges, net, and other operating income,
operating earnings for 2009 increased $33 million compared to 2008 due primarily
to lower raw material and energy costs and cost reduction actions partially
offset by lower sales volume and approximately $5 million in costs related to
the reconfiguration of the Longview, Texas facility. 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 an adjustment to a reserve for previously divested businesses and product
lines. Other operating income for 2008 reflects the segment's
allocated portion of proceeds from the sale of certain mineral rights at an
operating manufacturing site.
Fibers
Segment
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
$ | % | ||||||||||||
|
Sales
|
$ | 1,032 | $ | 1,045 | $ | (13 | ) | (1 | ) % | |||||||
|
Volume
effect
|
(88 | ) | (8 | ) % | ||||||||||||
|
Price
effect
|
83 | 8 | % | |||||||||||||
|
Product
mix effect
|
(11 | ) | (1 | ) % | ||||||||||||
|
Exchange
rate effect
|
3 | -- | % | |||||||||||||
|
Operating
earnings
|
296 | 238 | 58 | 24 | % | |||||||||||
|
Asset
impairments and restructuring charges
|
4 | -- | 4 | |||||||||||||
|
Operating
earnings excluding asset impairments and restructuring
charges
|
300 | 238 | 62 | 26 | % | |||||||||||
Sales
revenue for 2009 decreased $13 million compared to 2008 due primarily to lower
sales volume mostly offset by higher selling prices. The lower sales
volume was primarily for acetyl chemical products. The higher selling
prices were in response to higher wood pulp costs.
Excluding
the segment's portion of the severance charge for a reduction in force in first
quarter 2009, operating earnings for 2009 increased $62 million compared to 2008
primarily due to higher selling prices and cost reduction actions, partially
offset by lower sales volume.
In
December 2008, the Company announced an alliance with SK to form a company to
acquire and operate a cellulose acetate tow manufacturing facility and related
business, with the facility being constructed by SK Chemicals Company Ltd.
("SK") in Korea. Eastman will have majority ownership in the
business. Construction began in first quarter 2009 and the facility
is expected to be operational in first quarter 2010.
44
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
PCI
Segment
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
$ | % | ||||||||||||
|
Sales
|
$ | 1,330 | $ | 2,160 | $ | (830 | ) | (38 | ) % | |||||||
|
Volume
effect
|
(375 | ) | (17 | ) % | ||||||||||||
|
Price
effect
|
(481 | ) | (22 | ) % | ||||||||||||
|
Product
mix effect
|
23 | 1 | % | |||||||||||||
|
Exchange
rate effect
|
3 | -- | % | |||||||||||||
|
Sales
– contract ethylene sales (1)
|
28 | 314 | (286 | ) | ||||||||||||
|
Sales
– excluding listed items
|
1,302 | 1,846 | (544 | ) | (29 | ) % | ||||||||||
|
Volume
effect
|
(47 | ) | (2 | ) % | ||||||||||||
|
Price
effect
|
(472 | ) | (26 | ) % | ||||||||||||
|
Product
mix effect
|
(28 | ) | (1 | ) % | ||||||||||||
|
Exchange
rate effect
|
3 | -- | % | |||||||||||||
|
Operating
earnings
|
63 | 153 | (90 | ) | (59 | ) % | ||||||||||
|
Accelerated
depreciation costs included in cost of sales
|
-- | 5 | (5 | ) | ||||||||||||
|
Asset
impairments and restructuring charges, net
|
6 | 22 | (16 | ) | ||||||||||||
|
Other
operating income
|
-- | (9 | ) | 9 | ||||||||||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and other operating income
|
69 | 171 | (102 | ) | (60 | ) % | ||||||||||
|
(1)
|
Sales revenue for 2009 and 2008 included
contract ethylene sales under the transition supply agreement related to
the divestiture of the PE businesses in fourth quarter
2006.
|
Sales
revenue for 2009 decreased $830 million compared to 2008. Excluding
contract ethylene sales under the transition agreement resulting from the
divestiture of the Performance Polymers segment's PE business in fourth quarter
2006, sales revenue decreased $544 million in 2009 compared to 2008 due to lower
selling prices. The lower selling prices were primarily due to lower
raw material and energy costs.
Excluding
accelerated depreciation costs, asset impairments and restructuring charges,
net, and other operating income, operating earnings in 2009 decreased $102
million compared to 2008. The decline was primarily due to lower
selling prices and 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 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.
45
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In first
quarter 2010, the Company transferred certain intermediates product lines from
the Performance Polymers segment to the PCI segment to improve optimization of
manufacturing assets supporting the three raw material streams that supply the
Company's downstream businesses. For more information, see Exhibit
99.01 to this Annual Report.
The
Company also evaluates licensing opportunities for acetic acid and oxo
derivatives on a selective basis, and has licensed technology to produce acetyl
products to Saudi International Petrochemical Company ("SIPCHEM") in Saudi
Arabia and to Chang Chun Petrochemical Company ("Chang Chun") in Taiwan in 2005
and 2007, respectively. SIPCHEM started operations in 2009 at its
plant based on this technology and Chang Chun is in the process of building its
plant. In first half of 2010, the Company expects to achieve the
final milestones under the SIPCHEM agreement and to recognize the remaining
revenue related to the license. The Company will also purchase acetic
anhydride from the SIPCHEM facility.
46
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
$ | % | ||||||||||||
|
Sales
|
$ | 719 | $ | 1,074 | $ | (355 | ) | (33 | ) % | |||||||
|
Volume
effect
|
(137 | ) | (13 | ) % | ||||||||||||
|
Price
effect
|
(233 | ) | (22 | ) % | ||||||||||||
|
Product
mix effect
|
15 | 2 | % | |||||||||||||
|
Exchange
rate effect
|
-- | -- | % | |||||||||||||
|
Sales
– contract polymer intermediates sales (1)
|
-- | 138 | (138 | ) | ||||||||||||
|
Sales
– U.S. PET manufacturing facilities
|
719 | 936 | (217 | ) | (23 | ) % | ||||||||||
|
Volume
effect
|
-- | -- | % | |||||||||||||
|
Price
effect
|
(233 | ) | (25 | ) % | ||||||||||||
|
Product
mix effect
|
16 | 2 | % | |||||||||||||
|
Exchange
rate effect
|
-- | -- | % | |||||||||||||
|
Operating
loss (2)
|
(66 | ) | (57 | ) | (9 | ) | (16 | ) % | ||||||||
|
Operating
loss - from sales from Mexico and Argentina PET
manufacturing facilities (2)
|
-- | (3 | ) | 3 | ||||||||||||
|
Operating
loss - U.S. PET manufacturing facilities (3)
|
(66 | ) | (54 | ) | (12 | ) | (22 | ) % | ||||||||
|
Operating
loss excluding certain items - U.S. PET manufacturing
facilities (3)
|
(62 | ) | (29 | ) | (33 | ) |
>(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)
|
Operating
results for 2008 include an operating loss from PET manufacturing
facilities and related businesses in Cosoleacaque, Mexico and Zarate,
Argentina divested in fourth quarter
2007.
|
|
(3)
|
Items
are accelerated depreciation costs and asset impairments and restructuring
charges, net. In 2009, asset impairments and restructuring
charges of $4 million consisted of the segment's portion of the severance
charge for a reduction in force. In 2008, asset
impairments and restructuring charges of $24 million related to
restructuring at the South Carolina facility using IntegRexTM
technology, the divested PET manufacturing facilities in Mexico and
Argentina, and charges related to a corporate severance program, partially
offset by a resolution of a contingency from the sale of the Company's PE
and EpoleneTM
polymer businesses divested in fourth quarter 2006. Accelerated
depreciation costs of $4 million resulted from restructuring actions
associated with higher cost PET polymer assets in Columbia, South
Carolina.
|
Excluding
contract polymer intermediates sales to the buyer of the divested Mexico and
Argentina facilities, sales revenue for 2009 decreased $217 million compared to
2008 due to lower selling prices primarily attributed to lower raw material and
energy costs.
Excluding
accelerated depreciation costs and asset impairments and restructuring charges,
net, operating results for 2009 for U.S. PET manufacturing facilities decreased
$33 million compared to 2008 due to lower selling prices and the unfavorable
impact on sales revenue and manufacturing costs due to operational challenges
with the South Carolina PET manufacturing facility partially offset by lower raw
material and energy costs.
47
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In first
quarter 2010, the IntegRexTM-based
facility located in Columbia, South Carolina is demonstrating the capability to
produce improved quality ParaStar TM PET
products at the facility's nameplate capacity of 525,000 metric tons. The
Company expects smaller Performance Polymer segment losses in 2010 based on this
improved operational performance and the resulting capability for a more
profitable mix of product sales.
In first
quarter 2010, the Company transferred certain intermediates product lines from
the Performance Polymers segment to the PCI segment to improve optimization of
manufacturing assets supporting the three raw material streams that supply the
Company's downstream businesses. For more information, see Exhibit
99.01 to this Annual Report.
|
Specialty
Plastics Segment
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
$ | % | ||||||||||||
| Sales | $ | 749 | $ | 923 | $ | (174 | ) | (19 | ) % | |||||||
|
Volume
effect
|
(91 | ) | (10 | ) % | ||||||||||||
|
Price
effect
|
(66 | ) | (7 | ) % | ||||||||||||
|
Product
mix effect
|
(23 | ) | (3 | ) % | ||||||||||||
|
Exchange
rate effect
|
6 | 1 | % | |||||||||||||
|
Operating
earnings
|
14 | 35 | (21 | ) | (60 | ) % | ||||||||||
|
Asset
impairments and restructuring charges, net
|
4 | -- | 4 | |||||||||||||
|
Other
operating income
|
-- | (2 | ) | 2 | ||||||||||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and other operating income
|
18 | 33 | (15 | ) | (45 | ) % | ||||||||||
Sales
revenue for 2009 decreased $174 million compared to 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,
particularly for paraxylene.
Excluding
the segment's portion of a severance charge for a reduction in force in first
quarter 2009 and other operating income related to the sale of certain mineral
rights at an operating manufacturing site in 2008, operating earnings for 2009
decreased $15 million compared to 2008 due to lower sales volume, lower capacity
utilization resulting in higher unit costs, an unfavorable shift in product mix
with less cellulosic plastics sold into various markets, and lower selling
prices, partially offset by lower raw material and energy costs and cost
reduction actions.
The
Specialty Plastics segment is progressing with the introduction of its new
Eastman TritanTM
copolyester, which it will supply from the monomer manufacturing facility and
its first TritanTM
copolyester polymer manufacturing facility in Kingsport, Tennessee which were
both completed in 2009 and are expected to be operational in early
2010.
48
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
Revenue
|
(Dollars
in millions)
|
2009
|
2008
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
United
States and Canada
|
$ | 2,797 | $ | 4,065 | (31 | ) % | (16 | ) % | (16 | ) % | 1 | % | -- | % | ||||||||||||||
|
Asia
Pacific
|
1,062 | 1,185 | (10 | ) % | (1 | ) % | (5 | ) % | (4 | ) % | -- | % | ||||||||||||||||
|
Europe,
Middle East, and Africa
|
838 | 977 | (14 | ) % | (8 | ) % | (1 | ) % | (6 | ) % | 1 | % | ||||||||||||||||
|
Latin
America
|
350 | 499 | (30 | ) % | (22 | ) % | (17 | ) % | 9 | % | -- | % | ||||||||||||||||
| $ | 5,047 | $ | 6,726 | (25 | ) % | (13 | ) % | (12 | ) % | -- | % | -- | % | |||||||||||||||
Sales
revenue in the United States and Canada decreased in 2009 compared to 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
26 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 2009 compared to 2008 primarily due to
lower selling prices in the PCI, Specialty Plastics, and CASPI segments
partially offset by higher selling prices in the Fibers segment and an
unfavorable shift in product mix, particularly in the CASPI and Specialty
Plastics segments. The unfavorable shift in product mix was due to
the CASPI segment pursuing favorable market conditions for solvent product lines
resulting in a lower average selling price, while the Specialty Plastics segment
sold less cellulosic plastics into various markets. The region
experienced less of a sales volume decrease as a result of stronger PCI segment
volume in 2009 due to raw material supply issues restricting production in 2008
and increased sales volume in the CASPI segment.
Sales
revenue in Europe, Middle East and Africa decreased in 2009 compared to 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 and fewer sales from commodity product lines.
Sales
revenue in Latin America decreased in 2009 compared to 2008 primarily due to
lower sales volume and lower selling prices partially offset by a favorable
shift in product mix. Lower selling prices were primarily in the
Performance Polymers and PCI segments. Lower sales volume and the
favorable shift in product mix were primarily related to contract polymer
intermediates sales in 2008 and not in 2009, with the lower sales volume
partially offset by increased sales volume in the PCI, Performance Polymers and
CASPI segments. Excluding contract polymer intermediates sales, sales
revenue decreased 3 percent.
With a
substantial portion of sales to customers outside the United States, Eastman is
subject to the risks associated with operating in international
markets. To mitigate its exchange rate risks, the Company frequently
seeks to negotiate payment terms in U.S. dollars or euros. In
addition, where it deems such actions advisable, the Company engages in foreign
currency hedging transactions and requires letters of credit and prepayment for
shipments where its assessment of individual customer and country risks
indicates their use is appropriate. For more information on these
practices see Note 9, "Fair Value of Financial Instruments", to the Company's
consolidated financial statements in Part II, Item 8 of this Annual Report and
Part II, Item 7A--"Quantitative and Qualitative Disclosures About Market
Risk."
49
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
Sales
|
$ | 6,726 | $ | 6,830 | (1 | ) % | (11 | ) % | 9 | % | -- | % | 1 | % | ||||||||||||||
|
Sales
- sales from Mexico and Argentina PET manufacturing facilities (1)
|
-- | 413 | ||||||||||||||||||||||||||
|
Sales
– contract polymer intermediates sales (2)
|
138 | 15 | ||||||||||||||||||||||||||
|
Sales
- contract ethylene sales (3)
|
314 | 314 | ||||||||||||||||||||||||||
|
Sales
– excluding listed items
|
$ | 6,274 | $ | 6,088 | 3 | % | (7 | ) % | 9 | % | -- | % | 1 | % | ||||||||||||||
|
(1)
|
Sales
revenue for 2007 includes sales revenue from PET manufacturing facilities
and related businesses in Cosoleacaque, Mexico and Zarate, Argentina
divested in fourth quarter 2007.
|
|
(2)
|
Included
in 2008 sales revenue are contract polymer intermediates sales under the
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and Argentina in
fourth quarter 2007.
|
|
(3)
|
Included
in 2008 and 2007 sales revenue are contract ethylene sales under the
transition supply agreement related to the divestiture of the PE
businesses.
|
Sales
revenue for 2008 compared to 2007 decreased $104 million. Excluding
contract ethylene sales, contract polymer intermediates sales, and sales from
Mexico and Argentina PET manufacturing facilities, sales revenue increased 3
percent primarily due to higher selling prices in all segments in response to
higher raw material and energy costs more than offsetting lower sales volume,
particularly in the Performance Polymers, PCI, and CASPI
segments. Although the Company experienced some volume decline
through the first nine months 2008 compared to first nine months 2007, the
global recession, experienced particularly in fourth quarter 2008, resulted in
an unprecedented decrease in sales volume across all segments and all regions in
fourth quarter 2008 compared to fourth quarter 2007.
|
(Dollars in
millions)
|
2008
|
2007
|
Change
|
|||||||||
|
Gross
Profit
|
$ | 1,126 | $ | 1,192 | (6 | ) % | ||||||
|
As
a percentage of sales
|
17 | % | 17 | % | ||||||||
|
Accelerated
depreciation included in cost of sales
|
9 | 49 | ||||||||||
|
Gross
Profit excluding accelerated depreciation costs
|
1,135 | 1,241 | (9 | ) % | ||||||||
|
As
a percentage of sales
|
17 | % | 18 | % | ||||||||
50
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Gross
profit for 2008 decreased compared with 2007 in the PCI, Specialty Plastics and
CASPI segments partially offset by increases in the Performance Polymers and
Fibers segments, as higher raw material and energy costs more than offset higher
selling prices. Gross profit included accelerated depreciation costs
of $9 million and $49 million in 2008 and 2007, respectively, resulting from the
previously reported shutdowns of the cracking units in Longview, Texas and of
higher cost PET polymer assets in Columbia, South Carolina. The
Company's 2008 raw material and energy costs increased by approximately $600
million compared with 2007.
An
unprecedented decline in demand caused lower sales volume and historically low
capacity utilization resulting in higher unit costs in fourth quarter
2008. The historically low capacity utilization rates in the fourth
quarter negatively affected the average capacity utilization rate for the full
year 2008.
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
|||||||||
|
Selling,
General and Administrative Expenses ("SG&A")
|
$ | 419 | $ | 420 | -- | % | ||||||
|
Research
and Development Expenses ("R&D")
|
158 | 156 | 1 | % | ||||||||
| $ | 577 | $ | 576 | -- | % | |||||||
|
As
a percentage of sales
|
9 | % | 8 | % | ||||||||
Asset
Impairments and Restructuring Charges, Net
Asset impairments and
restructuring charges totaled $46 million and $112 million in 2008 and 2007,
respectively. Asset impairments and restructuring charges in
2008 were primarily for restructuring at the South Carolina facility in the
Performance Polymers segment, severance and pension costs from the decision to
close a previously impaired site in the United Kingdom in the PCI segment, and
severance costs resulting from a corporate severance program. Asset
impairments and restructuring charges in 2007 were primarily costs associated
with the PET manufacturing facilities in Mexico and Argentina sold in fourth
quarter 2007. For more information regarding asset impairments and
restructuring charges, primarily related to strategic decisions and actions, see
the Performance Polymers and PCI segments discussion and Note 2, "Asset
Impairments and Restructuring Charges, Net", to the Company's consolidated
financial statements in Part II, Item 8 of this Annual Report.
Other
Operating Income, Net
Other
operating income, net for 2008 reflected proceeds of $16 million from the sale
of certain mineral rights at an operating manufacturing site.
Operating
Earnings
|
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
(Dollars
in millions)
|
||||||||||||
|
Operating
earnings
|
$ | 519 | $ | 504 | 3 | % | ||||||
|
Accelerated
depreciation included in cost of sales
|
9 | 49 | ||||||||||
|
Asset
impairments and restructuring charges, net
|
46 | 112 | ||||||||||
|
Other
operating income, net
|
(16 | ) | -- | |||||||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairment and
restructuring charges, net, and other operating income,
net
|
$ | 558 | $ | 665 | (16 | ) % | ||||||
51
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Net
Interest Expense
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
|||||||||
|
Gross
interest costs
|
$ | 106 | $ | 113 | ||||||||
|
Less:
capitalized interest
|
12 | 10 | ||||||||||
|
Interest
expense
|
94 | 103 | (9 | ) % | ||||||||
|
Interest
income
|
24 | 41 | ||||||||||
|
Net
interest expense
|
$ | 70 | $ | 62 | 13 | % | ||||||
Gross
interest costs for 2008 compared to 2007 were lower due to lower average
interest rates and lower average borrowings. Interest income in 2008
compared to 2007 was lower due to lower average invested cash balances and lower
average interest rates.
Other
Charges (Income), Net
|
(Dollars
in millions)
|
2008
|
2007
|
||||||
|
Foreign
exchange transactions losses (gains)
|
$ | 17 | $ | (11 | ) | |||
|
Investments
losses (gains)
|
6 | (12 | ) | |||||
|
Other,
net
|
(3 | ) | (5 | ) | ||||
|
Other
charges (income), net
|
$ | 20 | $ | (28 | ) | |||
Included
in other charges (income), net were 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 HDC, gains
from the sale of non-operating assets, royalty income, certain litigation costs,
fees on securitized receivables, other non-operating income, and other
miscellaneous items.
Investments
losses (gains) included gains of $4 million in both 2008 and 2007 resulting from
a favorable decision in 2006 of the U.S. Department of the Army to reimburse
post-employment benefits being provided to retirees of HDC, a wholly owned
subsidiary. This gain reflected a portion of the unrecognized gain
resulting from the reimbursement decision that is being amortized into earnings
over future periods. For additional information, see Note 19,
"Other Charges (Income), Net", to the Company's consolidated financial
statements in Part II, Item 8 of this Annual Report.
Provision
for Income Taxes
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
|||||||||
|
Provision
for income taxes
|
$ | 101 | $ | 149 | (32 | ) % | ||||||
|
Effective
tax rate
|
24 | % | 32 | % | ||||||||
The 2008
effective tax rate reflected the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 27
percent. The 2008 effective tax rate was impacted by a $16 million
benefit resulting from a gasification investment tax credit of $11 million and a
research and development credit of $5 million, a $14 million benefit from state
income tax credits (net of federal tax effect), and a $6 million benefit from
the settlement of a non-U.S. income tax audit.
The 2007
effective tax rate reflected the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 33
percent.
52
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Earnings
from Continuing Operations and Diluted Earnings per Share
|
2008
|
2007
|
|||||||||||||||
|
(Dollars
in millions, except diluted EPS)
|
$ | EPS | $ | EPS | ||||||||||||
|
Earnings
from continuing operations
|
$ | 328 | $ | 4.31 | $ | 321 | $ | 3.84 | ||||||||
|
Accelerated
depreciation included in cost of sales, net of tax
|
6 | 0.08 | 31 | 0.37 | ||||||||||||
|
Asset
impairments and restructuring charges, net of tax
|
32 | 0.42 | 71 | 0.85 | ||||||||||||
|
Other
operating income, net of tax
|
(10 | ) | (0.13 | ) | -- | -- | ||||||||||
|
Net
deferred tax benefits related to the previous divestiture of
businesses
|
(14 | ) | (0.18 | ) | -- | -- | ||||||||||
|
Earnings
from continuing operations excluding accelerated depreciation costs, net
of tax, asset impairments and restructuring charges, net of tax, other
operating income, net of tax, and net deferred tax benefits related to the
previous divesture of businesses
|
$ | 342 | $ | 4.50 | $ | 423 | $ | 5.06 | ||||||||
Net
Earnings and Diluted Earnings per Share
|
(Dollars
in millions, except diluted EPS)
|
2008
|
2007
|
||||||||||||||
| $ | EPS | $ | EPS | |||||||||||||
|
Earnings
from continuing operations
|
$ | 328 | $ | 4.31 | $ | 321 | $ | 3.84 | ||||||||
|
Loss
from discontinued operations, net of tax
|
-- | -- | (10 | ) | (0.12 | ) | ||||||||||
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
18 | 0.24 | (11 | ) | (0.14 | ) | ||||||||||
|
Net
earnings
|
$ | 346 | $ | 4.55 | $ | 300 | $ | 3.58 | ||||||||
The gain
on disposal of discontinued operations, net of tax of $18 million in 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. The
loss on disposal of discontinued operations, net of tax of $11 million in 2007
was from the sale of the Company's PET polymers manufacturing facility in Spain
for approximately $40 million. During 2007, the Company also
recognized site closure costs of $4 million, net of tax, for the San Roque PET
site. For additional information, see Note 17, "Discontinued
Operations", to the Company's consolidated financial statements in Part II, Item
8 of this Annual Report.
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the PCI
segment, the Performance Polymers segment, and the Specialty Plastics
segment. For additional information concerning the Company's
operating businesses and products, refer to Note
22, "Segment Information", to the consolidated financial statements in Part II,
Item 8 of this Annual Report.
Sales
revenue and expenses not identifiable to an operating segment are not included
in segment operating results for either of the periods presented and are shown
in Note 22, "Segment Information", as "other" sales revenue and operating
losses.
53
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
CASPI
Segment
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$ | % | ||||||||||||
|
Sales
|
$ | 1,524 | $ | 1,451 | $ | 73 | 5 | % | ||||||||
|
Volume
effect
|
(148 | ) | (10 | ) % | ||||||||||||
|
Price
effect
|
167 | 12 | % | |||||||||||||
|
Product
mix effect
|
34 | 2 | % | |||||||||||||
|
Exchange
rate effect
|
20 | 1 | % | |||||||||||||
|
Operating
earnings
|
202 | 235 | (33 | ) | (14 | ) % | ||||||||||
|
Asset
impairments and restructuring gains
|
-- | (1 | ) | 1 | ||||||||||||
|
Other
operating income
|
(5 | ) | -- | (5 | ) | |||||||||||
|
Operating
earnings excluding asset impairments and restructuring gains and other
operating income
|
197 | 234 | (37 | ) | (16 | ) % | ||||||||||
Sales
revenue for 2008 increased $73 million compared to 2007 due to higher selling
prices partially offset by lower sales volume. The higher selling
prices were in response to higher raw material and energy costs, particularly
for propane, propylene, and adhesives raw materials. Sales volume
declined due primarily to the recession in North America and the divestiture of
certain adhesives product lines, partially offset by slightly higher sales
volume in Asia Pacific.
Excluding
asset impairments and restructuring gains and other operating income, operating
earnings for 2008 decreased $37 million compared to 2007 due primarily to lower
sales volume and lower capacity utilization, particularly in fourth quarter,
causing higher unit costs. Other operating income for 2008 reflects
the segment's allocated portion of proceeds from the sale of certain mineral
rights at an operating manufacturing site.
|
Fibers
Segment
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$ | % | ||||||||||||
|
Sales
|
$ | 1,045 | $ | 999 | $ | 46 | 5 | % | ||||||||
|
Volume
effect
|
(11 | ) | (1 | ) % | ||||||||||||
|
Price
effect
|
59 | 6 | % | |||||||||||||
|
Product
mix effect
|
(3 | ) | -- | % | ||||||||||||
|
Exchange
rate effect
|
1 | -- | % | |||||||||||||
|
Operating
earnings
|
238 | 238 | -- | -- | % | |||||||||||
Sales
revenue for 2008 increased $46 million compared to 2007 due to higher selling
prices. The higher selling prices were in response to higher raw
material and energy costs, particularly for wood pulp and coal. An
increase in acetate tow sales volume was offset by a decrease in acetyl chemical
and acetate yarn sales volume.
54
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings for 2008 were flat compared to 2007, as an increase in acetate tow
sales volume was offset by a decrease in acetyl chemical and acetate yarn sales
volume.
The
capacity expansion of the Company's acetate tow plant in Workington, England was
completed in 2008, expanding Eastman's world-wide capacity by five percent,
better enabling Eastman to serve existing customers in Western Europe and the
growing demand in Eastern Europe.
|
PCI
Segment
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$ | % | ||||||||||||
|
Sales
|
$ | 2,160 | $ | 2,095 | $ | 65 | 3 | % | ||||||||
|
Volume
effect
|
(219 | ) | (10 | ) % | ||||||||||||
|
Price
effect
|
289 | 14 | % | |||||||||||||
|
Product
mix effect
|
(15 | ) | (1 | ) % | ||||||||||||
|
Exchange
rate effect
|
10 | -- | % | |||||||||||||
|
Sales
– contract ethylene sales
|
314 | 314 | -- | |||||||||||||
|
Sales
– excluding listed items
|
1,846 | 1,781 | 65 | 4 | % | |||||||||||
|
Volume
effect
|
(135 | ) | (8 | ) % | ||||||||||||
|
Price
effect
|
225 | 13 | % | |||||||||||||
|
Product
mix effect
|
(35 | ) | (2 | ) % | ||||||||||||
|
Exchange
rate effect
|
10 | 1 | % | |||||||||||||
|
Operating
earnings
|
153 | 220 | (67 | ) | (31 | ) % | ||||||||||
|
Accelerated
depreciation costs included in cost of sales
|
5 | 19 | (14 | ) | ||||||||||||
|
Asset
impairments and restructuring charges (gains)
|
22 | (1 | ) | 23 | ||||||||||||
|
Other
operating income
|
(9 | ) | -- | (9 | ) | |||||||||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges (gains), and other operating income
|
171 | 238 | (67 | ) | (28 | ) % | ||||||||||
Sales
revenue for 2008 increased $65 million compared to 2007. Excluding
contract ethylene sales under the transition agreement resulting from the
divestiture of the Performance Polymers segment's PE business in fourth quarter
2006, sales revenue increased due to higher selling prices in response to higher
raw material and energy costs, partially offset by lower sales volume,
particularly in fourth quarter 2008. Lower sales volume were
primarily in olefin derivative products, particularly for Asia, and bulk olefins
product lines related to the previously reported shutdown of a cracking unit in
fourth quarter 2007. Contract ethylene sales revenues remained
unchanged as higher selling prices offset lower sales volume resulting from the
shutdown of one of the Company's cracking units.
55
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Excluding
accelerated depreciation costs, asset impairments and restructuring charges
(gains), and other operating income, operating earnings in 2008 decreased $67
million compared to 2007. The decline was primarily in the Asia
Pacific region due to lower sales volume, particularly for olefin derivative
product lines, and higher raw material and energy costs partially offset by
higher selling prices. Sales revenue and operating earnings for 2007
included $22 million of earnings from the licensing of acetyl
technology. In addition, 2007 operating earnings were impacted by
favorable market conditions. In 2007, contract ethylene sales had
minimal impact on operating earnings. The accelerated depreciation
costs were related to the continuation of the previously reported planned staged
phase-out of older cracking units at the Company's Longview, Texas
facility. Asset impairments and restructuring charges for 2008
consisted primarily of severance and pension costs from the decision to close a
previously impaired site in the United Kingdom. Asset impairments and
restructuring gains for 2007 were primarily related to severance costs related
to a voluntary reduction in force in 2006. Other operating income for
2008 reflects the segment's allocated portion of proceeds from the sale of
certain mineral rights at an operating manufacturing site.
Performance
Polymers Segment
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$ | % | ||||||||||||
|
Sales
|
$ | 1,074 | $ | 1,413 | $ | (339 | ) | (24 | ) % | |||||||
|
Volume
effect
|
(369 | ) | (26 | ) % | ||||||||||||
|
Price
effect
|
51 | 4 | % | |||||||||||||
|
Product
mix effect
|
(23 | ) | (2 | ) % | ||||||||||||
|
Exchange
rate effect
|
2 | -- | % | |||||||||||||
|
Sales
from Mexico and Argentina PET manufacturing facilities (1)
|
-- | 413 | (413 | ) | ||||||||||||
|
Sales
– contract polymer intermediates sales (2)
|
138 | 15 | 123 | |||||||||||||
|
Sales
– U.S. PET manufacturing facilities
|
936 | 985 | (49 | ) | (5 | ) % | ||||||||||
|
Volume
effect
|
(115 | ) | (12 | ) % | ||||||||||||
|
Price
effect
|
47 | 5 | % | |||||||||||||
|
Product
mix effect
|
17 | 2 | % | |||||||||||||
|
Exchange
rate effect
|
2 | -- | % | |||||||||||||
|
Operating
loss (3)
|
(57 | ) | (207 | ) | 150 | 73 | % | |||||||||
|
Operating
loss - from sales from Mexico and Argentina PET
manufacturing facilities (1)(3)
|
(3 | ) | (127 | ) | 124 | 98 | % | |||||||||
|
Operating
loss - U.S. PET manufacturing facilities (3)
|
(54 | ) | (80 | ) | 26 | 33 | % | |||||||||
|
(1)
|
Sales
revenue and operating results for 2007 includes sales revenue from PET
manufacturing facilities and related businesses in Cosoleacaque, Mexico
and Zarate, Argentina divested in fourth quarter
2007.
|
|
(2)
|
Sales
revenue for 2008 includes contract polymer intermediates sales under the
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and Argentina in
fourth quarter 2007.
|
|
(3)
|
Includes
allocated costs consistent with the Company's historical practices, some
of which may remain and could be reallocated to the remainder of the
segment and other segments.
|
56
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Performance
Polymers Segment
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$ | % | ||||||||||||
|
Operating
loss excluding certain items (1)(2)
|
$ | (29 | ) | $ | (65 | ) | $ | 36 | 55 | % | ||||||
|
Operating
loss excluding certain items - from sales from Mexico and Argentina PET
manufacturing facilities (1)(3)(4)
|
-- | (12 | ) | 12 | 100 | % | ||||||||||
|
Operating
loss excluding certain items - U.S. PET manufacturing
facilities (1)(5)
|
(29 | ) | (53 | ) | 24 | 45 | % | |||||||||
|
(1)
|
Includes
allocated costs consistent with the Company's historical practices, some
of which may remain and could be reallocated to the remainder of the
segment and other segments.
|
|
(2)
|
Items
are accelerated depreciation costs and asset impairments and restructuring
charges, net. In 2008, asset impairments and restructuring
charges of $24 million related to restructuring at the South Carolina
facility using IntegRexTM
technology, the divested PET manufacturing facilities in Mexico and
Argentina, and charges related to a corporate severance program, partially
offset by a resolution of a contingency from the sale of the Company's PE
and EpoleneTM
polymer businesses divested in fourth quarter 2006. Accelerated
depreciation costs of $4 million resulted from restructuring actions
associated with higher cost PET polymer assets in Columbia, South
Carolina. In 2007, asset impairments and restructuring charges
of $113 million primarily related to the Mexico and Argentina PET
manufacturing facilities sale. Accelerated depreciation costs of $29
million resulted from restructuring actions associated with higher cost
PET polymer assets in Columbia, South
Carolina.
|
|
(3)
|
Operating
results for 2007 includes sales revenue from PET manufacturing facilities
and related businesses in Cosoleacaque, Mexico and Zarate, Argentina
divested in fourth quarter 2007.
|
|
(4)
|
Items
are asset impairments and restructuring charges (gains) relating to the
Mexico and Argentina PET manufacturing facilities, and were $3 million and
$115 million in 2008 and 2007,
respectively.
|
|
(5)
|
Items
are accelerated depreciation costs and asset impairments and restructuring
charges (gains) related to the U.S. PET manufacturing
facilities. Asset impairments and restructuring charges (gains)
were $21 million and $(2) million in 2008 and 2007,
respectively. Accelerated depreciation costs were $4 million
and $29 million in 2008 and 2007,
respectively.
|
Sales
revenue for 2008 decreased $339 million compared to 2007 due to the divestiture
of PET manufacturing facilities and related businesses in Cosoleacaque, Mexico
and Zarate, Argentina.
For U.S.
PET manufacturing facilities, excluding contract polymer intermediates sales to
the buyer of the divested Mexico and Argentina facilities and sales from the
divested PET facilities in Mexico and Argentina, sales revenue for 2008
decreased $49 million compared to 2007 due to lower sales volume resulting from
the shutdown of higher cost PET assets in the first half of 2008, weaker demand
for bottled carbonated soft drinks, and lighter-weight water
bottles.
Excluding
accelerated depreciation costs, asset impairments and restructuring charges and
other operating expense, operating results for 2008 for U.S. PET manufacturing
facilities improved $24 million compared to 2007 due primarily to actions
at the Company's South Carolina PET facility, including the PET facility based
on IntegRex™ technology and higher selling prices, partially offset by higher
raw material and energy costs and higher unit costs due to lower capacity
utilization particularly in fourth quarter 2008.
Manufacturing
ParaStarTM PET
resins, the 350,000 metric ton PET manufacturing facility utilizing
IntegRexTM technology in Columbia,
South Carolina was fully operational in first quarter of 2007. A
previously disclosed reduction of $30 million in annual costs at this facility
was completed in second quarter 2008. The debottleneck of the PET
facility based on IntegRexTM technology was
completed in fourth quarter 2008, expanding annual capacity of the plant to
525,000 metric tons of ParaStarTM PET
resins.
57
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Specialty
Plastics Segment
|
||||||||||||||||
|
Change
|
||||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$ | % | ||||||||||||
| Sales | $ | 923 | $ | 872 | $ | 51 | 6 | % | ||||||||
|
Volume
effect
|
(9 | ) | (1 | ) % | ||||||||||||
|
Price
effect
|
28 | 3 | % | |||||||||||||
|
Product
mix effect
|
16 | 2 | % | |||||||||||||
|
Exchange
rate effect
|
16 | 2 | % | |||||||||||||
|
Operating
earnings
|
35 | 65 | (30 | ) | (46 | ) % | ||||||||||
|
Accelerated
depreciation included in cost of sales
|
-- | 1 | (1 | ) | ||||||||||||
|
Asset
impairments and restructuring charges
|
-- | 1 | (1 | ) | ||||||||||||
|
Other
operating income
|
(2 | ) | -- | (2 | ) | |||||||||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and other operating income
|
33 | 67 | (34 | ) | (51 | ) % | ||||||||||
Sales
revenue for 2008 increased $51 million compared to 2007 due to higher selling
prices, a favorable exchange rate and a favorable shift in product
mix. Selling prices increased in response to higher raw material and
energy costs, particularly for paraxylene and ethylene glycol. While
sales volume in full year 2008 decreased only slightly, increases through nine
months 2008 compared to nine months 2007 were more than offset by a sharp
decline in sales volume in fourth quarter 2008 attributed to the global
recession particularly impacting end-use demand for consumer and durable goods
(appliances and electronics), in-store fixtures and displays, and specialty
packaging.
Excluding
accelerated depreciation costs, asset impairments and restructuring charges and
other operating income, operating earnings for 2008 decreased $34 million
compared to 2007 due to higher raw material and energy costs and lower capacity
utilization resulting in higher unit costs, particularly in fourth quarter
2008. The 2008 operating results included $2 million in other
operating income related to the segment's allocated portion of proceeds from the
sale of certain mineral rights at an operating manufacturing
site. The 2007 operating results included $1 million in asset
impairment and restructuring costs primarily for the Spain cyclohexane
dimethanol ("CHDM") facility and $1 million of accelerated depreciation costs
for restructuring actions associated with higher cost PET polymer assets in
Columbia, South Carolina.
58
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
Revenue
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
United
States and Canada
|
$ | 4,065 | $ | 4,043 | 1 | % | (12 | ) % | 12 | % | 1 | % | -- | % | ||||||||||||||
|
Asia
Pacific
|
1,185 | 1,103 | 8 | % | 1 | % | 6 | % | -- | % | 1 | % | ||||||||||||||||
|
Europe,
Middle East, and Africa
|
977 | 932 | 5 | % | (2 | ) % | 1 | % | 2 | % | 4 | % | ||||||||||||||||
|
Latin
America
|
499 | 752 | (34 | ) % | (33 | ) % | 4 | % | (5 | ) % | -- | % | ||||||||||||||||
| $ | 6,726 | $ | 6,830 | (1 | ) % | (11 | ) % | 9 | % | -- | % | 1 | % | |||||||||||||||
Sales
revenue in the United States and Canada increased slightly primarily due to
higher selling prices in all segments and a favorable shift in product mix,
particularly in the CASPI segment, partially offset by lower sales volume in all
segments.
Sales
revenue in Asia Pacific increased primarily due to higher selling prices in all
segments in response to higher raw material and energy costs. Sales
volume increased in the CASPI, Fibers, and Specialty Plastics segments,
partially offset by lower sales volume primarily in the PCI
segment.
Sales
revenue in Europe, Middle East and Africa increased primarily due to the effect
of the foreign currency exchange rates, particularly in the CASPI, Specialty
Plastics, and Fibers segments.
Sales
revenue in Latin America decreased primarily due to lower sales volume,
particularly in the Performance Polymers segment. Excluding divested
PET manufacturing facilities and related businesses in Cosoleacaque, Mexico and
Zarate, Argentina and contract polymer intermediates sales to those facilities,
sales revenue increased 12 percent primarily due to higher selling prices in all
segments as a result of higher raw material and energy costs and higher sales
volume, particularly in the PCI segment. During fourth quarter 2007,
the Company sold its PET polymers production facilities in Mexico and Argentina
and the related businesses, which is expected to result in significantly lower
sales revenue in Latin America in future periods. However, subject to
certain product-specific agreements associated with the sale of the
manufacturing facilities in Mexico and Argentina, the Company sold a limited set
of PET products manufactured in the U.S. in certain Latin American markets
through 2008.
59
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Cash
Flows
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
cash provided by (used in):
|
||||||||||||
|
Operating
activities
|
$ | 758 | $ | 653 | $ | 732 | ||||||
|
Investing
activities
|
(369 | ) | (376 | ) | (335 | ) | ||||||
|
Financing
activities
|
18 | (779 | ) | (448 | ) | |||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(1 | ) | 1 | -- | ||||||||
|
Net
change in cash and cash equivalents
|
$ | 406 | $ | (501 | ) | $ | (51 | ) | ||||
|
|
||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 793 | $ | 387 | $ | 888 | ||||||
Cash
provided by operating activities increased $105 million to $758 million in
2009. The 2009 operating cash flow includes cash generated by a
change in the tax method for capitalizing assets of approximately $125 million
and a reduction in working capital of $118 million partially offset by a $181
million contribution to the Company's U.S. defined benefit pension
plan. The change in tax method accelerated timing of deductions for
manufacturing repairs expense resulting in lower estimated tax payments and a
refund of previously paid taxes. The reduced working capital
primarily resulted from inventory reductions in all segments in response to the
lower level of economic activity. End of year receivables remained
constant between 2009 and 2008 which is consistent with the declines in fourth
quarter revenues. Trade payables increased because of a higher level
of purchasing activity at the end of 2009 versus the recessionary levels at the
end of 2008. Operating cash flow in 2008 also included the
monetization of interest rate, commodity, and foreign exchange
hedges.
In 2008,
cash provided by operating activities of $653 million decreased by $79 million
when compared to 2007. This decrease was primarily caused by lower
net earnings, excluding accelerated depreciation and asset impairments and
restructuring charges, net, which were attributed primarily to the challenging
economic environment in fourth quarter 2008. Working capital
increased $45 million, due to a $95 million increase in inventory because of the
unexpected sharp decline in economic activity late in 2008. The
increase in inventory was partially offset by a net reduction in receivables of
$261 million and payables of $211 million which were due to the declines in
sales and purchasing activities in late 2008. Operating cash flow in 2008
also included the monetization of interest rate, commodity, and foreign exchange
hedges.
Cash used
in investing activities, primarily for capital spending for additions to
properties and equipment, was $310 million, $634 million, and $518 million in
2009, 2008, and 2007, respectively. Also in 2009, the Company
contributed $68 million to an alliance with SK for the construction of a Korean
cellulose acetate tow manufacturing facility which is reported in "acquisitions
of and investments in joint ventures". The Company received
approximately $25 million net cash proceeds in 2009 primarily from the
settlement of working capital from the sale in 2008 of the Company's PET
polymers and PTA manufacturing facilities in the Netherlands and the PET
manufacturing facility in the United Kingdom. In 2008, the Company
received $337 million net cash proceeds primarily from the sale of the Company's
PET polymers and PTA manufacturing facilities in the Netherlands and the PET
manufacturing facility in the United Kingdom. In 2007, the Company
received approximately $40 million in proceeds from the sale of its San Roque,
Spain manufacturing facility and related assets and approximately $160 million
in proceeds from the sale of its Mexico and Argentina manufacturing facilities
and related assets. For more information concerning divestitures, see
Note 16, "Divestitures" and Note 17, "Discontinued Operations", to the Company's
consolidated financial statements in Part II, Item 8 of this Annual
Report.
60
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Cash provided by financing activities
totaled $18 million in 2009. Cash used in financing activities
totaled $779 million and $448 million in 2008 and 2007,
respectively. Financing activities in 2009 included $248 million of
net proceeds from the issuance of notes due 2019, a repayment of $88 million of
the Company's euro credit facility, and a repayment of $13 million of short term
borrowings. The Company also repurchased stock totaling $21 million
offset by cash received from stock option exercises and other items of $17
million. Financing activities in 2008 included the Company's
repayment of $72 million of notes that matured in 2008, a repayment of $103
million of the euro credit facility, a decrease in credit facility and other
borrowings, including bank overdrafts, of $7 million, and repurchases of stock
totaling $501 million offset by cash received from stock option exercises and
other items of $39 million. In 2007, financing activities included a
decrease in credit facility and other borrowings, including bank overdrafts, of
$22 million and repurchases of stock totaling $382 million offset by cash
received from stock option exercises and other items of $103
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
excluding the $200 million decrease in cash resulting from the increase in
accounts receivable due to the adoption of new accounting guidance, less capital
expenditures and dividends) in 2010 of greater than $100 million, assuming
capital expenditures of between $250 million and $275 million and U.S. defined
benefit pension plan funding of less than $25 million. The priorities
for uses of available cash in 2010 are payment of the quarterly cash dividend,
funding targeted growth initiatives, including organic initiatives, joint
ventures and acquisitions, and repurchasing shares.
Liquidity
At
December 31, 2009, the Company had a $700 million revolving credit facility
("Credit Facility") in two tranches, with $125 million expiring in 2012 and $575
million expiring in 2013. Borrowings under the Credit Facility are
subject to interest at varying spreads above quoted market rates and a facility
fee is paid on the total commitment. In addition, the Credit Facility
contains a number of customary covenants and events of default, including the
maintenance of certain financial ratios. The Company was in
compliance with all such covenants for all periods presented. At
December 31, 2009, the Company had no outstanding borrowings under the Credit
Facility. At December 31, 2008, the Company had both the Credit
Facility and a 60 million euro credit facility ("Euro Facility"), with
borrowings totaling $84 million at an effective interest rate of 3.74
percent.
On
November 2, 2009, the Company issued notes in the principal amount of $250
million due 2019 and bearing interest at 5.50% per annum. Proceeds
from the sale of notes, net of approximately $2 million in transaction fees,
were $248 million.
The
Company used part of the proceeds from the sale of its PET polymers and PTA
production facilities in the Netherlands and its PET production facility in the
United Kingdom and related businesses to reduce the balance outstanding on its
Euro Facility by $103 million in second quarter 2008.
The
Credit Facility provides liquidity support for commercial paper borrowings and
general corporate purposes. Accordingly, any outstanding commercial
paper borrowings reduce borrowings available under the Credit
Facility. 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 accounts receivable securitization
program that is available to provide liquidity through the sale of
receivables and was fully drawn at December 31, 2009 and 2008. For
more information, see "Off Balance Sheet and Other Financing Arrangements" below
and Note 11, "Commitments", to the Company's consolidated financial statements
in Part II, Item 8 of this 2009 Annual Report on Form 10-K.
For more
information regarding interest rates, see Note 8, "Borrowings", to the Company's
consolidated financial statements in Part II, Item 8 of this Annual
Report.
61
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In 2009,
the Company made $181 million in contributions to its U.S. defined benefit
pension plan, and made no contribution in 2008.
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 $310 million, $634 million, and $518 million for 2009, 2008,
and 2007, respectively. The decrease of $324 million in 2009 compared
with 2008 was primarily due to a decrease in spending on capital projects as a
response to a more challenging economic environment. The Company
expects that 2010 capital spending will be $250 million to $275 million, which
is sufficient for required maintenance and certain strategic growth
initiatives.
The
Company expects 2010 depreciation and amortization to be slightly higher than
2009 expenses of approximately $274 million, primarily due to the start-up of
new manufacturing facilities in 2010.
Other
Commitments
At
December 31, 2009, the Company's obligations related to notes and debentures
totaled approximately $1.6 billion to be paid over a period of approximately 20
years.
The
Company had various purchase obligations at December 31, 2009 totaling
approximately $1.1 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 $104 million over a period of several years. Of the
total lease commitments, approximately 15 percent relate to machinery and
equipment, including computer and communications equipment and production
equipment; approximately 45 percent relate to real property, including office
space, storage facilities, and land; and approximately 40 percent relate to
railcars.
In
addition, the Company had other liabilities at December 31, 2009 totaling
approximately $1.4 billion related primarily to pension, retiree medical, other
post-employment obligations, and environmental reserves.
62
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
obligations described above are summarized in the following table:
|
(Dollars
in millions)
|
Payments
Due for
|
|||||||||||||||||||||||||||
|
Period
|
Notes
and Debentures
|
Credit
Facility Borrowings and Other
|
Interest
Payable
|
Purchase
Obligations
|
Operating
Leases
|
Other
Liabilities (a)
|
Total
|
|||||||||||||||||||||
|
2010
|
$ | -- | $ | -- | $ | 111 | $ | 257 | $ | 25 | $ | 215 | $ | 608 | ||||||||||||||
|
2011
|
2 | -- | 111 | 248 | 25 | 61 | 447 | |||||||||||||||||||||
|
2012
|
152 | -- | 106 | 242 | 17 | 53 | 570 | |||||||||||||||||||||
|
2013
|
-- | -- | 99 | 227 | 12 | 54 | 392 | |||||||||||||||||||||
|
2014
|
-- | -- | 99 | 33 | 10 | 56 | 198 | |||||||||||||||||||||
|
2015
and beyond
|
1,450 | -- | 889 | 85 | 15 | 997 | 3,436 | |||||||||||||||||||||
|
Total
|
$ | 1,604 | $ | -- | $ | 1,415 | $ | 1,092 | $ | 104 | $ | 1,436 | $ | 5,651 | ||||||||||||||
(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 cost trends, actual returns on plan
assets, retirement and attrition rates of employees, continuation or
modification of the benefit plans, and other factors. Such factors
can significantly impact the amount and timing of any future contributions by
the Company.
Off
Balance Sheet and Other Financing Arrangements
If
certain operating leases are terminated by the Company, it has guaranteed a
portion of the residual value loss, if any, incurred by the lessors in disposing
of the related assets. Under these operating leases, the residual
value guarantees at December 31, 2009 totaled $160 million and consisted
primarily of leases for railcars and company aircraft. Leases with
guarantee amounts totaling $11 million, $139 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.
As
described in Note 6, "Equity Investments ", to the Company's consolidated
financial statements in Part II, Item 8 of this Annual Report, Eastman has a 50
percent interest in and serves as the operating partner in Primester, a joint
venture which manufactures cellulose acetate at Eastman's Kingsport, Tennessee
plant. This investment is accounted for under the equity
method. Eastman's net investment
in the joint venture at December 31, 2009 and 2008 was approximately $36 million
and $39 million, respectively, which was comprised of the recognized portion of
the venture's accumulated deficits, long-term amounts owed to Primester, and a
line of credit from Eastman to Primester.
As
described in Note 11, "Commitments", to the Company's consolidated financial
statements in Part II, Item 8 of this Annual Report, Eastman entered into an
agreement in 1999 that allows it to generate cash by reducing its working
capital through the sale of undivided interests in certain domestic trade
accounts receivable under a planned continuous sale program to a third
party. Under this agreement, receivables sold to the third party
totaled $200 million at December 31, 2009 and 2008. Undivided
interests in designated receivable pools were sold to the purchaser with
recourse limited to the purchased interest in the receivable pools.
In first
quarter 2010, the Company will adopt new accounting guidance on the transfer of
financial assets which impacts the accounting treatment of the accounts
receivable securitization program. For additional information on
these changes, refer to "Recently Issued Accounting Standards" in this
Management Discussion and Analysis.
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.
63
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not Variable Interest
Entities ("VIE's") or, in the case of Primester, a joint venture that
manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the
Company is not the primary beneficiary of the VIE. As such, in
accordance with 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 December 31,
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 $40 million and $50 million of raw materials and
utilities in 2009 and 2008, respectively, and expects to purchase approximately
$50 million of raw materials and utilities in 2010. 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 other parties 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 Transactions
On
February 4, 1999, the Company was authorized by its Board of Directors to
repurchase up to $400 million of its common stock. Through January
2007, a total of 2.7 million shares of common stock were repurchased under the
authorization at a cost of approximately $112 million.
On
February 20, 2007, the Board of Directors cancelled its prior authorization and
approved a new authorization for the repurchase of up to $300 million of the
Company's outstanding common stock. The Company completed the $300
million repurchase authorization in September 2007, acquiring a total of 4.6
million shares.
In
October 2007, the Board of Directors authorized an additional $700 million for
repurchase of the Company's outstanding common shares at such times, in such
amounts, and on such terms, as determined to be in the best interests of the
Company. As of December 31, 2009, a total of 9.7 million shares have
been repurchased under this authorization for a total amount of approximately
$604 million.
Dividends
The
Company declared quarterly cash dividends of $0.44 per share for a total of
$1.76 per share in 2009, 2008, and 2007. The Company has declared a
cash dividend of $0.44 per share during the first quarter of 2010, payable on
April 1, 2010 to stockholders of record on March 15, 2010.
64
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes of which
the treatment, storage, transportation, and disposal are regulated by various
governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP") by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be
required to incur costs for environmental remediation and closure and
postclosure under the Federal Resource Conservation and Recovery
Act. Reserves for environmental contingencies have been established
in accordance with Eastman's policies as described in Note 1, "Significant
Accounting Policies", to the Company's consolidated financial statements in Part
II, Item 8 of this Annual Report. Because of expected sharing of
costs, the availability of legal defenses, and the Company's preliminary
assessment of actions that may be required, it does not believe its liability
for these environmental matters, individually or in the aggregate, will be
material to the Company's consolidated financial position, results of
operations, or cash flows.
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can be
reasonably estimated. When a single amount cannot be reasonably estimated
but the cost can be estimated within a range, the Company accrues the minimum
amount. This undiscounted accrued amount reflects the Company's
assumptions about remediation requirements at the contaminated site, the nature
of the remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties. Changes
in the estimates on which the accruals are based, unanticipated government
enforcement action, or changes in health, safety, environmental, and chemical
control regulations and testing requirements could result in higher or lower
costs. Estimated future environmental expenditures for remediation
costs range from the minimum or best estimate of $10 million to the maximum of
$20 million at December 31, 2009.
In
addition to remediation activities, the Company establishes reserves for closure
and postclosure costs associated with the environmental assets it
maintains. Environmental assets include but are not limited to waste
management units, such as landfills, water treatment facilities, and ash
ponds. When these types of assets are constructed or installed, a
reserve is established for the anticipated future costs associated with the
closure of the asset based on its expected life and the applicable regulatory
closure requirements. These future expenses are charged into earnings
over the estimated useful life of the assets. The best estimate
accrued to date over the facilities' estimated useful lives for asset retirement
obligation costs is $32 million at December 31, 2009.
GAAP
requires an entity to recognize a liability for a conditional asset retirement
obligation ("CARO") when incurred if the liability can be reasonably
estimated. The Company has performed a thorough examination of
various asset categories as of December 31, 2009. Although it may
have CAROs at certain of
its facilities, including, but not limited to, the potential for asbestos
abatement activities, the Company is unable to determine potential settlement
dates to be used in fair value calculations for estimating these obligations as
a result of an absence of plans or expectations to undertake a major renovation
or demolition project that would require the removal of asbestos. The
Company continues to monitor these conditional obligations, as well as any new
ones that may develop, and will record reserves associated with them
when and to the extent that more detailed information becomes available
concerning applicable retirement costs. The recorded obligations did
not have a material impact on its consolidated financial position, results of
operations and cash flows.
Reserves
related to environmental assets accounted for approximately 75 percent of the
total environmental reserve at December 31, 2009. Currently, the
Company's environmental assets are expected to reach the end of their useful
lives at different times over the next 50 years. If the Company was
to invest in numerous new environmental assets, or, these assets were to require
closure a significant number of years before the Company anticipated they would,
the amortization on them would increase, and could have a material negative
impact on the Company's financial condition and results of
operations. The Company views the likelihood of this occurrence to be
remote, and does not anticipate, based on its past experience with this type of
planned remediation, that an additional accrual related to environmental assets
will be necessary.
65
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company's cash expenditures related to environmental protection and improvement
were approximately $173 million, $218 million, and $209 million in 2009, 2008,
and 2007, respectively. These amounts were primarily for operating
costs associated with environmental protection equipment and facilities, but
also included expenditures for construction and development. The
Company does not expect future environmental capital expenditures arising from
requirements of recently promulgated environmental laws and regulations to
materially increase the Company's planned level of annual capital expenditures
for environmental control facilities.
In recent
years, general economic inflation has not had a material adverse impact on
Eastman's costs. The cost of raw materials is generally based on
market price, although derivative financial instruments were utilized, as
appropriate, to mitigate short-term market price fluctuations. The
volatility of raw material and energy costs will continue and the Company will
continue to pursue pricing and hedging strategies and ongoing cost control
initiatives to offset the effects on gross profit. For additional
information see Note 9, "Fair Value of Financial Instruments", to the Company's
consolidated financial statements in Part II, Item 8 of this Annual
Report.
In June
2009, the Financial Accounting Standards Board ("FASB") issued new guidance
related to the transfers of financial assets. The new guidance
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 for all Company financial asset transfers occurring on or after
January 1, 2010. The
Company has concluded that this new guidance will impact the Company's
consolidated financial position and cash flows upon adoption in first quarter
2010. Prior to
adoption of the new accounting guidance, the transfer of accounts receivable
under the accounts receivable securitization program was accounted for as a sale
which resulted in increased cash from operations at inception of the program in
1999. The program has been consistently utilized every year since
2000 and, therefore, has had no impact on cash from operations since that
time. Going forward, any future transfers of accounts
receivable will be treated as secured borrowings in the Statements of Financial
Position. These secured borrowings will be reflected as cash from
financing activities in the Statements of Cash Flows. The adoption of
the new guidance, regardless of whether the Company continues to transfer
accounts receivable subsequent to December 31, 2009, will result in an increase
in accounts receivable of $200 million in the Statements of Financial Position
and a corresponding decrease in cash flows from operations in the Statements of
Cash Flows for the quarter ending March 31, 2010.
In June
2009, the FASB issued new guidance on the consolidation of variable interest
entities. The new guidance addresses improvements to 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 for all variable interest
entities the Company is involved with on or after January 1,
2010. The Company has concluded that this new guidance will not have
a material impact on the Company's consolidated financial position, liquidity,
or results of operations upon adoption in first quarter 2010.
For 2010,
the Company expects:
|
·
|
increases
in volume due to the expected recovery from the global recession and
continued substitution of Eastman products for other materials and new
applications for existing
products;
|
|
·
|
the
volatility of market prices for raw materials and energy to continue and
that the Company will continue to use pricing and hedging strategies to
offset this volatility and for raw material and energy costs to be higher
than 2009;
|
66
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
●
|
to
acquire and operate a cellulose acetate tow manufacturing facility and
related business in Korea, with the facility to be operational in first
quarter 2010 and fully integrated into the Fibers segment's production and
sales processes in 2011;
|
|
·
|
to
continue to progress with the introduction of its new Eastman TritanTM
copolyester, which it will supply from the monomer manufacturing facility
and its first TritanTM
copolyester polymer manufacturing facility in Kingsport, Tennessee which
were both completed in 2009 and are expected to be operational in early
2010;
|
|
·
|
to
improve the profitability of its PET product lines in the Performance
Polymers segment as a result of improved operational performance of the
South Carolina facility and more profitable mix of PET product sales, and
to continue to pursue licensing
opportunities;
|
|
·
|
depreciation
and amortization to be slightly higher than 2009 primarily due to expected
completion of manufacturing facilities in
2010;
|
|
·
|
pension
expense to be slightly higher than 2009, and to fund the U.S. defined
benefit pension plan in an amount less than $25
million;
|
|
·
|
net
interest expense to increase compared with 2009 primarily due to lower
capitalized interest and higher
borrowings;
|
|
·
|
the
effective tax rate to be approximately 33
percent;
|
|
·
|
capital
spending to be between $250 million and $275 million for required
maintenance and certain strategic growth
initiatives;
|
|
·
|
to
generate more than $100 million of positive free cash flow (operating cash
flow excluding
the $200 million decrease in cash resulting from the increase in accounts
receivable due to the adoption of new accounting guidance, less
capital expenditures and
dividends);
|
|
·
|
priorities for
uses of available cash to be payment of the quarterly cash dividend,
funding targeted growth initiatives, including organic initiatives, joint
ventures and acquisitions, and repurchasing shares;
and
|
|
·
|
earnings
per share to be 20 percent above 2009 earnings per share excluding charges
related to asset impairments, restructuring, and cost reduction
actions.
|
See
"Forward-Looking Statements and Risk Factors below."
The
expectations under "Outlook" and certain other statements in this Annual Report
which are not statements of historical fact may be "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995 and other
federal securities laws. 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; cash requirements and uses of available cash; financing plans; pension
expenses and funding; credit ratings; anticipated restructuring, divestiture,
and consolidation activities; cost reduction and control efforts and targets;
integration of any acquired businesses; strategic initiatives and development,
production, commercialization, and acceptance of new products, services and
technologies and related costs; asset, business and product portfolio changes;
and expected tax rates and net interest costs.
67
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
These
plans and expectations are based upon certain underlying assumptions, including
those mentioned with the specific statements. Such assumptions are
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 underlying assumptions
are necessarily subject to risks and uncertainties inherent in projecting future
conditions and results. Actual results could differ materially from
expectations expressed in any forward-looking statement if one or more of the
underlying assumptions or expectations proves to be inaccurate or is
unrealized. In addition to the factors described elsewhere in this
Annual Report, the following are the most significant known factors that could
cause the Company's actual results to differ materially from those in any such
forward-looking statement. Additional factors not presently known to
the Company, or that the Company does not currently believe to be material, may
also cause actual results to differ materially from expectations:
Continued adverse and uncertain conditions in
the global economy and the financial markets could continue to negatively impact
the Company.
Conditions
in the global economy and global capital markets may continue to adversely affect the
Company's results of operations, financial condition, and cash
flows. The Company's business and operating results have been and are
expected to continue
to be affected by the impact of the recent global recession,
including the credit market crisis, declining consumer and business confidence,
fluctuating commodity prices, volatile exchange rates, and other challenges
currently affecting the global economy. The Company's customers may
experience deterioration of their businesses, cash flow shortages, and
difficulty obtaining financing. As a result, existing or potential
customers may delay or cancel plans to purchase products and may not be able
to, or may be unwilling
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 weakness in the global economy
continues for significant future periods or if the global economy further
deteriorates, the Company's results of operations, financial condition and cash
flows could be materially adversely affected. If weakness in the
global economy continues for significant future periods, or if the global
economy or financial markets experience significant new disruptions
or deterioration, the Company's ability to access the credit and capital markets
under attractive rates and terms could be constrained, which may negatively
impact the Company's liquidity or ability to pursue certain growth
initiatives.
Volatility
in costs for strategic raw material and energy commodities or disruption in the
supply of these commodities could adversely affect our financial
results.
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. It is unlikely, however, that these risk mitigation
measures will eliminate all exposure to market fluctuations. In
addition, natural disasters, plant interruptions, changes in laws or
regulations, war or other outbreak of hostilities or terrorism, and breakdown or
degradation of transportation infrastructure used for delivery of strategic raw
material and energy commodities, could adversely impact both the cost and
availability of these commodities.
The
Company could be materially adversely affected by disruptions to manufacturing
operations or related infrastructure.
Significant
limitation of the Company's ability to manufacture products due to disruption of
manufacturing operations or related infrastructure could have a material adverse
affect on sales revenue, costs, results of operations, and financial
condition. Disruptions could occur due to internal factors such as
computer or equipment malfunction, operator error, or process failures; or
external factors such as natural disasters, pandemic illness, changes in laws or
regulations, war or other outbreak of hostilities or terrorism, or breakdown or
degradation of transportation infrastructure used for delivery of supplies to
the Company or for delivery of products to customers.
68
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Loss
or financial weakness of the Company's largest customers could adversely affect
our financial results.
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.
Growth
initiatives may not achieve desired business or financial objectives and may
require a significant use of resources.
The
Company continues to identify and pursue growth opportunities through both
internal development and acquisitions and joint ventures to diversify and extend
the portfolio of our businesses. These growth opportunities include
development and commercialization of new products and technologies, expansion
into new markets and geographic regions, and alliances, ventures, and
acquisitions that complement and extend the Company's portfolio of businesses
and capabilities. There can be no assurance that such efforts,
investments, or acquisitions and alliances will result in financially successful
commercialization of products or acceptance by existing or new customers or new
markets or achieve their underlying strategic business objectives or that they
will be beneficial to the Company's results of operations. There also
can be no assurance that 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. Any 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 any proposed investments and
projects.
Legislative
and regulatory actions could increase the Company's future compliance
costs.
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
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.
In
addition to the foregoing most significant known risk factors to the Company,
there may be other factors, not currently known to the Company, which could, in
the future, materially adversely affect the Company, its business, financial
condition, or results of operations. The foregoing discussion of the
most significant risk factors to the Company does not necessarily present them
in order of importance. This disclosure, including that under
"Outlook" and "Forward-Looking Statements and Risk Factors," and other
forward-looking statements and related disclosures made by the Company in this
Annual Report 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.
69
ITEM
7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Eastman
Chemical Company and subsidiaries ("Eastman" or the "Company") are exposed to
changes in financial market conditions in the normal course of its business due
to its use of certain financial instruments as well as transacting in various
foreign currencies and funding foreign operations. To mitigate the
Company's exposure to these market risks, Eastman has established policies,
procedures, and internal processes governing its management of financial market
risks and the use of financial instruments to manage its exposure to such
risks.
The
Company determines its market risk utilizing sensitivity analyses, which measure
the potential losses in fair value resulting from one or more selected
hypothetical changes in interest rates, foreign currency exchange rates, and/or
commodity prices.
The
Company is exposed to changes in interest rates primarily as a result of its
borrowing and investing activities, which include long-term borrowings used to
maintain liquidity and to fund its business operations and capital requirements.
Currently, these borrowings and investments are predominately U.S. dollar
denominated. The nature and amount of the Company's long-term and
short-term debt may vary as a result of future business requirements, market
conditions, and other factors. For purposes of calculating the market
risks associated with the fair value of interest-rate-sensitive instruments, the
Company uses a one percent or less absolute shift in interest
rates. For 2009 and 2008, the market risks associated with the fair
value of interest-rate-sensitive instruments, assuming an instantaneous absolute
shift in interest rates of one percent or less were approximately $120 million
and $107 million, respectively. This exposure is primarily related to
long-term debt with fixed interest rates.
The
Company's operating cash flows and borrowings denominated in foreign currencies
are exposed to changes in foreign currency exchange rates. The
Company continually evaluates its foreign currency exposure based on current
market conditions and the locations in which the Company conducts
business. In order to mitigate the effect of foreign currency risk,
the Company enters into currency options to hedge probable anticipated, but not
yet committed, export sales and purchase transactions expected within no more
than five years and denominated in foreign currencies; and forward exchange
contracts to hedge certain firm commitments denominated in foreign
currencies. The gains and losses on these contracts offset changes in
the value of related exposures. It is the Company's policy to enter
into foreign currency derivative financial instruments only to the extent
considered necessary to meet its objectives as stated above. The
Company does not enter into foreign currency derivative financial instruments
for speculative purposes. For 2009, the market risks associated with
borrowings denominated in foreign currencies assuming a 10 percent adverse move
in the U.S. dollar relative to each foreign currency was approximately $51
million and an additional $5 million for each additional one percentage point
adverse change in foreign currency rates. For 2008, the market risks
associated with borrowings denominated in foreign currencies assuming a 10
percent adverse move in the U.S. dollar relative to each foreign currency was
approximately $39 million and an additional $4 million for each additional one
percentage point adverse change in foreign currency
rates. Furthermore, since the Company utilizes currency-sensitive
derivative instruments for hedging anticipated foreign currency transactions, a
loss in fair value for those instruments is generally offset by increases in the
value of the underlying anticipated transactions.
The
Company is exposed to fluctuations in market prices for certain of its major raw
materials and energy. To mitigate short-term fluctuations in market
prices for certain commodities, principally propane, natural gas, and ethane,
the Company enters into option and forward contracts. For 2009, the
market risk associated with forwards and options for feedstock and natural gas,
assuming an instantaneous parallel shift in the underlying commodity price of 10
percent, was $4 million and less than an additional $1 million for each one
percentage point move in closing price thereafter. For 2008, there
was limited market risk associated with options and forwards for these same
commodities.
70
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ITEM
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71
MANAGEMENT'S
RESPONSIBILITY FOR FINANCIAL
STATEMENTS
Management
is responsible for the preparation and integrity of the accompanying
consolidated financial statements of Eastman appearing on pages 74 through
120. Eastman has prepared these consolidated financial statements in
accordance with accounting principles generally accepted in the United States,
and the statements of necessity include some amounts that are based on
management's best estimates and judgments.
Eastman's
accounting systems include extensive internal controls designed to provide
reasonable assurance of the reliability of its financial records and the proper
safeguarding and use of its assets. Such controls are based on
established policies and procedures, are implemented by trained, skilled
personnel with an appropriate segregation of duties, and are monitored through a
comprehensive internal audit program. The Company's policies and
procedures prescribe that the Company and all employees are to maintain the
highest ethical standards and that its business practices throughout the world
are to be conducted in a manner that is above reproach.
The
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, who were responsible for
conducting their audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Their report is included
herein.
The Board
of Directors exercises its responsibility for these financial statements through
its Audit Committee, which consists entirely of non-management Board
members. The independent registered public accounting firm and
internal auditors have full and free access to the Audit
Committee. The Audit Committee meets periodically with
PricewaterhouseCoopers LLP and Eastman's director of internal auditing, both
privately and with management present, to discuss accounting, auditing, policies
and procedures, internal controls, and financial reporting matters.
|
/s/
James P. Rogers
|
/s/
Curtis E. Espeland
|
|
|
James
P. Rogers
|
Curtis
E. Espeland
|
|
|
President
and
|
Senior
Vice President and
|
|
|
Chief
Executive Officer
|
Chief
Financial Officer
|
|
|
February
24, 2010
|
72
To the Board of Directors and Stockholders of
Eastman
Chemical Company
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Eastman Chemical Company and its subsidiaries at December 31, 2009
and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal
Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
LLP
Cincinnati,
Ohio
February
24, 2010
73
COMPREHENSIVE
INCOME and RETAINED EARNINGS
|
For
years ended December 31,
|
||||||||||||
|
(Dollars
in millions, except per share amounts)
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
|
$ | 5,047 | $ | 6,726 | $ | 6,830 | ||||||
|
Cost
of sales
|
3,994 | 5,600 | 5,638 | |||||||||
|
Gross
profit
|
1,053 | 1,126 | 1,192 | |||||||||
|
Selling,
general and administrative expenses
|
399 | 419 | 420 | |||||||||
|
Research
and development expenses
|
137 | 158 | 156 | |||||||||
|
Asset
impairments and restructuring charges, net
|
200 | 46 | 112 | |||||||||
|
Other
operating income, net
|
-- | (16 | ) | -- | ||||||||
|
Operating
earnings
|
317 | 519 | 504 | |||||||||
|
Net
interest expense
|
78 | 70 | 62 | |||||||||
|
Other
charges (income), net
|
13 | 20 | (28 | ) | ||||||||
|
Earnings
from continuing operations before income taxes
|
226 | 429 | 470 | |||||||||
|
Provision
for income taxes from continuing operations
|
90 | 101 | 149 | |||||||||
|
Earnings
from continuing operations
|
136 | 328 | 321 | |||||||||
|
Loss
from discontinued operations, net of tax
|
-- | -- | (10 | ) | ||||||||
|
Gain
(loss) from disposal of discontinued operations, net of
tax
|
-- | 18 | (11 | ) | ||||||||
|
Net
earnings
|
$ | 136 | $ | 346 | $ | 300 | ||||||
|
Basic
earnings per share
|
||||||||||||
|
Earnings
from continuing operations
|
$ | 1.88 | $ | 4.36 | $ | 3.89 | ||||||
|
Earnings
(loss) from discontinued operations
|
-- | 0.23 | (0.26 | ) | ||||||||
|
Basic
earnings per share
|
$ | 1.88 | $ | 4.59 | $ | 3.63 | ||||||
|
Diluted
earnings per share
|
||||||||||||
|
Earnings
from continuing operations
|
$ | 1.85 | $ | 4.31 | $ | 3.84 | ||||||
|
Earnings
(loss) from discontinued operations
|
-- | 0.24 | (0.26 | ) | ||||||||
|
Diluted
earnings per share
|
$ | 1.85 | $ | 4.55 | $ | 3.58 | ||||||
|
Comprehensive
Income
|
||||||||||||
|
Net
earnings
|
$ | 136 | $ | 346 | $ | 300 | ||||||
|
Other
comprehensive income (loss), net of tax
|
||||||||||||
|
Change
in cumulative translation adjustment
|
17 | (97 | ) | 36 | ||||||||
|
Change
in unrecognized gains (losses) and prior service credits for benefit
plans
|
(74 | ) | (232 | ) | 106 | |||||||
|
Change
in unrealized gains on derivative instruments
|
7 | 23 | 3 | |||||||||
|
Change
in unrealized gains (losses) on investments
|
-- | (1 | ) | 1 | ||||||||
|
Total
other comprehensive income (loss), net of tax
|
(50 | ) | (307 | ) | 146 | |||||||
|
Comprehensive
income
|
$ | 86 | $ | 39 | $ | 446 | ||||||
|
Retained
Earnings
|
||||||||||||
|
Retained
earnings at beginning of period
|
$ | 2,563 | $ | 2,349 | $ | 2,186 | ||||||
|
Net
earnings
|
136 | 346 | 300 | |||||||||
|
Cash
dividends declared
|
(128 | ) | (132 | ) | (145 | ) | ||||||
|
Effect
of adoption of accounting for uncertain income tax
positions
|
-- | -- | 8 | |||||||||
|
Retained
earnings at end of period
|
$ | 2,571 | $ | 2,563 | $ | 2,349 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
74
|
December
31,
|
December
31,
|
|||||||
|
(Dollars
in millions, except per share amounts)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 793 | $ | 387 | ||||
|
Trade
receivables, net
|
277 | 275 | ||||||
|
Miscellaneous
receivables
|
102 | 79 | ||||||
|
Inventories
|
531 | 637 | ||||||
|
Other
current assets
|
32 | 45 | ||||||
|
Total
current assets
|
1,735 | 1,423 | ||||||
|
Properties
|
||||||||
|
Properties
and equipment at cost
|
8,525 | 8,527 | ||||||
|
Less: Accumulated
depreciation
|
5,415 | 5,329 | ||||||
|
Net
properties
|
3,110 | 3,198 | ||||||
|
Goodwill
|
315 | 325 | ||||||
|
Other
noncurrent assets
|
355 | 335 | ||||||
|
Total
assets
|
$ | 5,515 | $ | 5,281 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Payables
and other current liabilities
|
$ | 800 | $ | 819 | ||||
|
Borrowings
due within one year
|
-- | 13 | ||||||
|
Total
current liabilities
|
800 | 832 | ||||||
|
Long-term
borrowings
|
1,604 | 1,442 | ||||||
|
Deferred
income tax liabilities
|
258 | 106 | ||||||
|
Post-employment
obligations
|
1,221 | 1,246 | ||||||
|
Other
long-term liabilities
|
119 | 102 | ||||||
|
Total
liabilities
|
4,002 | 3,728 | ||||||
|
Commitments
and contingencies (Note 12)
|
||||||||
|
Stockholders'
equity
|
||||||||
|
Common
stock ($0.01 par value – 350,000,000 shares authorized; shares issued –
94,775,064 and 94,495,860 for 2009 and 2008, respectively)
|
1 | 1 | ||||||
|
Additional
paid-in capital
|
661 | 638 | ||||||
|
Retained
earnings
|
2,571 | 2,563 | ||||||
|
Accumulated
other comprehensive loss
|
(385 | ) | (335 | ) | ||||
| 2,848 | 2,867 | |||||||
|
Less:
Treasury stock at cost (22,389,696 shares for 2009 and 22,031,357 shares
for 2008 )
|
1,335 | 1,314 | ||||||
|
Total
stockholders' equity
|
1,513 | 1,553 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 5,515 | $ | 5,281 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
75
|
For
years ended December 31,
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
earnings
|
$ | 136 | $ | 346 | $ | 300 | ||||||
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
274 | 267 | 327 | |||||||||
|
Asset
impairments charges
|
179 | 1 | 138 | |||||||||
|
Gains
on sale of assets
|
-- | (14 | ) | (8 | ) | |||||||
|
Provision
(benefit) for deferred income taxes
|
185 | (71 | ) | (9 | ) | |||||||
|
Changes
in operating assets and liabilities, net of effect of acquisitions and
divestitures:
|
||||||||||||
|
(Increase)
decrease in trade receivables
|
2 | 261 | (28 | ) | ||||||||
|
(Increase)
decrease in inventories
|
100 | (95 | ) | 66 | ||||||||
|
Increase
(decrease) in trade payables
|
16 | (211 | ) | 48 | ||||||||
|
Increase
(decrease) in liabilities for employee benefits and incentive
pay
|
(141 | ) | 7 | (55 | ) | |||||||
|
Other
items, net
|
7 | 162 | (47 | ) | ||||||||
|
Net
cash provided by operating activities
|
758 | 653 | 732 | |||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Additions
to properties and equipment
|
(310 | ) | (634 | ) | (518 | ) | ||||||
|
Proceeds
from sale of assets and investments
|
30 | 337 | 202 | |||||||||
|
Acquisitions
of and investments in joint ventures
|
(68 | ) | (38 | ) | (40 | ) | ||||||
|
Additions
to capitalized software
|
(8 | ) | (10 | ) | (11 | ) | ||||||
|
Other
items, net
|
(13 | ) | (31 | ) | 32 | |||||||
|
Net
cash used in investing activities
|
(369 | ) | (376 | ) | (335 | ) | ||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Net
increase (decrease) in commercial paper, credit facility, and other
borrowings
|
3 | (7 | ) | (5 | ) | |||||||
|
Proceeds
from borrowings
|
248 | -- | -- | |||||||||
|
Repayment
of borrowings
|
(101 | ) | (175 | ) | (17 | ) | ||||||
|
Dividends
paid to stockholders
|
(128 | ) | (135 | ) | (147 | ) | ||||||
|
Treasury
stock purchases
|
(21 | ) | (501 | ) | (382 | ) | ||||||
|
Proceeds
from stock option exercises and other items
|
17 | 39 | 103 | |||||||||
|
Net
cash provided by (used in) financing activities
|
18 | (779 | ) | (448 | ) | |||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(1 | ) | 1 | -- | ||||||||
|
Net
change in cash and cash equivalents
|
406 | (501 | ) | (51 | ) | |||||||
|
Cash
and cash equivalents at beginning of period
|
387 | 888 | 939 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 793 | $ | 387 | $ | 888 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
76
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Financial
Statement Presentation
The
consolidated financial statements of Eastman Chemical Company and subsidiaries
("Eastman" or the "Company") are prepared in conformity with accounting
principles generally accepted in the United States and of necessity include some
amounts that are based upon management estimates and
judgments. Future actual results could differ from such current
estimates. The consolidated financial statements include assets,
liabilities, sales revenue, and expenses of all majority-owned subsidiaries and
joint ventures. Eastman accounts for other joint ventures and
investments in minority-owned companies where it exercises significant influence
on the equity basis. Intercompany transactions and balances are
eliminated in consolidation. 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 December 31, 2009, the date of the
financial statements, through February 24, 2010, 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.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash, time deposits, and readily marketable securities
with maturities of three months or less at the purchase date.
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.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. The allowances are based on the number of days an
individual receivable is delinquent and management's regular assessment of the
financial condition of the Company's customers. The Company considers
that a receivable is delinquent if it is unpaid after the terms of the related
invoice have expired. The Company evaluates the allowance based on a
monthly assessment of the aged receivables. Write-offs are recorded
at the time a customer receivable is deemed uncollectible. Allowance
for doubtful accounts was $10 million and $8 million at December 31, 2009 and
2008, respectively.
Inventories
Inventories
are valued at the lower of cost or market. The Company determines the
cost of most raw materials, work in process, and finished goods inventories in
the United States by the last-in, first-out ("LIFO") method. The cost
of all other inventories, including inventories outside the United States, is
determined by the average cost method, which approximates the first-in,
first-out ("FIFO") method. The Company writes-down its inventories
for estimated obsolescence or unmarketable inventory equal to the difference
between the carrying value of inventory and the estimated market value based
upon assumptions about future demand and market conditions.
77
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Properties
The
Company records properties at cost. Maintenance and repairs are
charged to earnings; replacements and betterments are
capitalized. When Eastman retires or otherwise disposes of assets, it
removes the cost of such assets and related accumulated depreciation from the
accounts. The Company records any profit or loss on retirement or
other disposition in earnings. Asset impairments are reflected as
increases in accumulated depreciation for properties that have been placed in
service. In instances when an asset has not been placed in service
and is impaired, the associated costs are removed from the appropriate property
accounts.
Depreciation
Depreciation
expense is calculated based on historical cost and the estimated useful lives of
the assets (buildings and building equipment 20 to 50 years; machinery and
equipment 3 to 33 years), generally using the straight-line
method. Accelerated depreciation is reported when the estimated
useful life is shortened and continues to be reported in Cost of
Sales.
Computer
Software Costs
Capitalized
software costs are amortized primarily on a straight-line basis over three
years, the expected useful life of such assets, beginning when the software
project is substantially complete and placed in service. Capitalized
software in 2009, 2008, and 2007 was approximately $8 million, $10 million, and
$11 million, respectively. During those same periods, approximately
$11 million, $11 million, and $13 million, respectively, of previously
capitalized costs were amortized. At December 31, 2009 and 2008, the
unamortized capitalized software costs were $21 million and $24 million,
respectively. Capitalized software costs are reflected in other
noncurrent assets.
Impairment
of Long Lived Assets
Long-lived
assets and certain identifiable intangibles to be held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the
carrying amount is not considered to be recoverable, an analysis of fair value
is triggered. An impairment is recorded for the excess of the
carrying amount of the asset over the fair value.
The
Company conducts its annual testing of goodwill and indefinite-lived intangible
assets in third quarter of each year, unless events warrant more frequent
testing. Reporting units are identified for the purpose of assessing
potential impairments of goodwill. The carrying value of
indefinite-lived intangibles is considered impaired when their fair value, as
established by appraisal or based on undiscounted future cash flows of certain
related products, is less than their carrying value. If the fair
value of a reporting unit is less than the carrying value of goodwill,
additional steps, including an allocation of the estimated fair value to the
assets and liabilities of the reporting unit, would be necessary to determine
the amount, if any, of goodwill impairment.
Investments
The
consolidated financial statements include the accounts of the Company and all
its subsidiaries in which a controlling interest is maintained.
Investments
in affiliates over which the Company has significant influence but not a
controlling interest are carried on the equity basis. Under the
equity method of accounting, these investments are included in other noncurrent
assets. The Company includes its share of earnings and losses of such
investments in other charges (income), net and its share of other comprehensive
income (loss) in the appropriate component of other accumulated comprehensive
income (loss) in stockholders' equity.
78
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Pension
and Other Post-employment Benefits
The
Company maintains defined benefit pension plans that provide eligible employees
with retirement benefits. Additionally, Eastman provides life
insurance and health care and dental benefits for eligible retirees and health
care benefits for retirees' eligible survivors. The costs and
obligations related to these benefits reflect the Company's assumptions related
to general economic conditions (particularly interest rates), expected return on
plan assets, rate of compensation increase for employees, and health care cost
trends. The cost of providing plan benefits depends on demographic
assumptions including retirements, mortality, turnover, and plan
participation. For additional information, see Note 10, "Retirement
Plans."
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can be
reasonably estimated. When a single amount cannot be reasonably
estimated but the cost can be estimated within a range, the Company accrues the
minimum amount. This undiscounted accrued amount reflects the
Company's assumptions about remediation requirements at the contaminated site,
the nature of the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites, and the number
and financial viability of other potentially responsible
parties. Changes in the estimates on which the accruals are based,
unanticipated government enforcement action, or changes in health, safety,
environmental, and chemical control regulations and testing requirements could
result in higher or lower costs.
The
Company also establishes reserves for closure/postclosure costs associated with
the environmental and other assets it maintains. Environmental assets
include but are not limited to waste management units, such as landfills, water
treatment facilities, and ash ponds. When these types of assets are
constructed or installed, a reserve is established for the future costs
anticipated to be associated with the closure of the site based on an expected
life of the environmental assets and the applicable regulatory closure
requirements. These expenses are charged into earnings over the
estimated useful life of the assets. Currently, the Company estimates
the useful life of each individual asset up to 50 years. If the
Company changes its estimate of the asset retirement obligation costs or its
estimate of the useful lives of these assets, the expenses to be charged into
earnings could increase or decrease. The Company also monitors
conditional obligations and will record reserves associated with them when and
to the extent that more detailed information becomes available concerning
applicable retirement costs.
Accruals
for environmental liabilities are included in other long-term liabilities and
exclude claims for recoveries from insurance companies or other third
parties. Environmental costs are capitalized if they extend the life
of the related property, increase its capacity, and/or mitigate or prevent
future contamination. The cost of operating and maintaining
environmental control facilities is charged to expense.
The
Company's cash expenditures related to environmental protection and improvement
were approximately $173 million, $218 million, and $209 million in 2009, 2008,
and 2007, respectively. These amounts were primarily for operating
costs associated with environmental protection equipment and facilities, but
also included expenditures for construction and development. The
Company does not expect future environmental capital expenditures arising from
requirements of recently promulgated environmental laws and regulations to
materially increase the Company's planned level of annual capital expenditures
for environmental control facilities.
For
additional information see Note 12, "Environmental Matters" and Note 25,
"Reserve Rollforwards".
Derivative
Financial Instruments
Derivative
financial instruments are used by the Company in the management of its exposures
to fluctuations in foreign currency, raw material and energy costs, and interest
rates. Such instruments are used to mitigate the risk that changes in
exchange rates, interest rates or raw material and energy costs will adversely
affect the eventual dollar cash flows resulting from the hedged
transactions.
79
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company enters into currency option and forward contracts to hedge anticipated,
but not yet committed, export sales and purchase transactions expected within no
more than five years and denominated in foreign currencies (principally the
euro, British pound and the Japanese yen); and forward exchange contracts to
hedge certain firm commitments denominated in foreign currencies. To
mitigate short-term fluctuations in market prices for propane, ethane, and
natural gas (major raw material and energy used in the manufacturing process),
the Company enters into option and forward contracts. From time to
time, the Company also utilizes interest rate derivative instruments, primarily
swaps, to hedge the Company's exposure to movements in interest
rates.
The
Company's qualifying option and forward contracts are accounted for as hedges
because the derivative instruments are designated and effective as hedges and
reduce the Company's exposure to identified risks. Gains and losses
resulting from effective hedges of existing liabilities, firm commitments, or
anticipated transactions are deferred and recognized when the offsetting gains
and losses are recognized on the related hedged items and are reported as a
component of operating earnings. Derivative assets and liabilities
are recorded at fair value.
Deferred
currency option premiums are included in the fair market value of the
hedges. The related obligation for payment is generally included in
other liabilities and is paid in the period in which the options are exercised
or expire.
For
additional information see Note 9, "Fair Value of Financial
Instruments".
Litigation
and Contingent Liabilities
The
Company and its operations from time to time are parties to or targets of
lawsuits, claims, investigations, and proceedings, including product liability,
personal injury, asbestos, patent and intellectual property, commercial,
contract, environmental, antitrust, health and safety, and employment matters,
which are handled and defended in the ordinary course of
business. The Company accrues a liability for such matters when it is
probable that a liability has been incurred and the amount can be reasonably
estimated. When a single amount cannot be reasonably estimated but
the cost can be estimated within a range, the Company accrues the minimum
amount. The Company expenses legal costs, including those expected to
be incurred in connection with a loss contingency, as incurred.
Revenue
Recognition and Customer Incentives
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price to the customer
is fixed or determinable, and collectability is reasonably assured.
The
Company records estimated obligations for customer programs and incentive
offerings, which consist primarily of revenue or volume-based amounts that a
customer must achieve over a specified period of time, as a reduction of revenue
to each underlying revenue transaction as the customer progresses toward
reaching goals specified in incentive agreements. These estimates are
based on a combination of forecast of customer sales and actual sales volume and
revenues against established goals, the customer's current level of purchases,
Eastman's knowledge of customer purchasing habits, and industry pricing
practice. The incentive payment rate may be variable, based upon the
customer reaching higher sales volume or revenue levels over a specified period
of time in order to receive an agreed upon incentive payment.
Shipping
and Handling Fees and Costs
Shipping
and handling fees related to sales transactions are billed to customers and are
recorded as sales revenue. Shipping and handling costs incurred are
recorded in cost of sales.
80
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Restructuring
of Operations
The
Company records restructuring charges incurred in connection with consolidation
of operations, exited business lines, or shutdowns of specific sites that are
expected to be substantially completed within twelve months. These
restructuring charges are recorded as incurred, and are associated with site
closures, legal and environmental matters, demolition, contract terminations, or
other costs directly related to the restructuring. The Company
records severance charges for involuntary employee separations when the
separation is probable and reasonably estimable. The Company records
severance charges for voluntary employee separations ratably over the remaining
service period of those employees.
Share-based
Compensation
The
Company recognizes compensation expense in the financial statements for stock
options and other share-based compensation awards based upon the grant-date fair
value over the substantive vesting period. For additional
information, see Note 15, "Share-Based Compensation Plans and
Awards."
Compensated
Absences
The
Company accrues compensated absences and related benefits as current charges to
earnings in the period earned.
Research
and Development
All costs
identified as research and development costs are charged to expense when
incurred with the exception of third-party reimbursed and government-funded
research and development. Expenses for third-party reimbursed and
government-funded research and development are deferred until reimbursement is
received to ensure appropriate matching of revenue and expense, provided
specific criteria are met.
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach,
deferred taxes represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable for the
current year plus the change in deferred taxes during the
year. Deferred taxes result from differences between the financial
and tax bases of the Company's assets and liabilities and are adjusted for
changes in tax rates and tax laws when changes are enacted. Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized. Provision has been
made for income taxes on unremitted earnings of subsidiaries and affiliates,
except for subsidiaries in which earnings are deemed to be permanently
reinvested.
The
Company recognizes income tax positions that meet the more likely than not
threshold and accrues interest related to unrecognized income tax positions
which is recorded as a component of the income tax provision.
|
ASSET
IMPAIRMENTS AND RESTRUCTURING CHARGES,
NET
|
Asset
impairment and restructuring charges totaled $200 million during 2009,
consisting primarily of $179 million in asset impairments related to the
discontinuance of the Beaumont, Texas industrial gasification project and $23
million, net, for severance resulting from a reduction in
force. Restructuring charges totaled $46 million during
2008. Impairments and restructuring charges totaled $112 million
during 2007.
81
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes the 2009, 2008, and 2007 charges by
segment:
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
CASPI:
|
||||||||||||
|
Severance
charges
|
$ | 5 | $ | -- | $ | (1 | ) | |||||
|
Site
closure and restructuring costs
|
(2 | ) | -- | -- | ||||||||
|
Fibers:
|
||||||||||||
|
Severance
charges
|
4 | -- | -- | |||||||||
|
PCI:
|
||||||||||||
|
Severance
charges
|
6 | 8 | (1 | ) | ||||||||
|
Site
closure and restructuring costs
|
-- | 14 | -- | |||||||||
|
Performance
Polymers:
|
||||||||||||
|
Fixed
asset impairments
|
-- | -- | 118 | |||||||||
|
Severance
charges
|
4 | 2 | (5 | ) | ||||||||
|
Site
closure and restructuring costs
|
-- | 22 | -- | |||||||||
|
Specialty
Plastics:
|
||||||||||||
|
Fixed
asset impairments
|
-- | -- | 2 | |||||||||
|
Severance
charges
|
4 | -- | (2 | ) | ||||||||
|
Site
closure and restructuring costs
|
-- | -- | 1 | |||||||||
|
Other:
|
||||||||||||
|
Fixed
asset impairments
|
133 | -- | -- | |||||||||
|
Intangible
asset and goodwill impairments
|
46 | -- | 2 | |||||||||
|
Site
closure and restructuring costs
|
-- | -- | (2 | ) | ||||||||
|
Total
Eastman Chemical Company
|
||||||||||||
|
Fixed
asset impairments
|
$ | 133 | $ | -- | $ | 120 | ||||||
|
Intangible
asset and goodwill impairments
|
46 | -- | 2 | |||||||||
|
Severance
charges
|
23 | 10 | (9 | ) | ||||||||
|
Site
closure and restructuring costs
|
(2 | ) | 36 | (1 | ) | |||||||
|
Total
Eastman Chemical Company
|
$ | 200 | $ | 46 | $ | 112 | ||||||
2009
The
Company announced during fourth quarter 2009, its decision to discontinue the
Beaumont, Texas industrial gasification project due to a number of factors,
including high capital costs, the current and projected reduced spread between
natural gas and oil and petroleum coke prices, and continued uncertainty
regarding U.S. energy and environmental public policy. As a result of
this decision the Company recorded an asset impairment of $179 million in fourth
quarter 2009, reducing the project's book value to $56 million for assets the
Company expects to recover. For the purpose of calculating an
impairment, the fair value of these assets was determined using Level 2 and
Level 3 inputs as defined in the fair value hierarchy. Of the $56
million, $8 million related to certain environmental credits classified as a
Level 2, using observable prices for similar assets, and $48 million related to
land and tangible assets is classified as a Level 3, based on various inputs,
including real estate appraisals and unobservable market information for similar
assets based on management's experience, including the evaluation of assumptions
that market participants would use in pricing similar assets. For additional
information on fair value measurement, see Note 1,
"Significant Accounting Policies".
In first
quarter 2009, the Company announced a reduction in force of approximately 300
employees, resulting in restructuring charges of $23 million, net for related
severance.
82
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
2008
During
2008, the Company recorded $46 million in restructuring
charges. These charges consist of approximately $24 million in the
Performance Polymers segment for restructuring at the South Carolina facility
and $22 million in asset impairments and restructuring charges primarily for
severance and pension charges in the Performance Chemicals and Intermediates
("PCI") segment resulting from the decision to close a previously impaired site
in the United Kingdom.
2007
In fourth
quarter 2007 asset impairments and restructuring gains totaled $4 million
related primarily to the adjustments to previously recorded charges for Cendian
Corporation, the Company's logistics subsidiary, and the polyethylene
terephthalate ("PET") manufacturing facilities in Latin America which were sold
in third quarter 2007.
In third
quarter 2007 asset impairments and restructuring charges totaled $114 million
were primarily the impairment of assets of Eastman's PET manufacturing
facilities in Cosoleacaque, Mexico, and Zarate, Argentina which were classified
as held for sale as of September 30, 2007. The Company wrote down the
value of the assets of these facilities in third quarter 2007 to the expected
sales proceeds less cost to sell. These charges were in the Performance Polymers
segment. Also in third quarter 2007, the Company adjusted the
severance accrual recorded in fourth quarter 2006 which resulted in a reversal
of approximately $5 million, which was reflected in all segments.
In first
and second quarter 2007, the Company recorded $2 million in charges related
primarily to the site closure and asset removal related to the shutdown of the
Company's Spanish cyclohexane dimethanol ("CHDM") manufacturing facility,
located adjacent to the PET manufacturing facility. These charges
were offset by the reversal of fourth quarter 2006 severance accrual at the same
site, as the employees included in the CHDM severance accrual were employed by
the purchaser of the San Roque, Spain PET manufacturing facility, relieving the
Company of the severance obligation. These charges were reflected in
the Performance Polymers and Specialty Plastics segments.
83
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes the charges and changes in estimates described above,
other asset impairments and restructuring charges, the non-cash reductions
attributable to asset impairments, and the cash reductions in shutdown reserves
for severance costs and site closure costs paid:
|
(Dollars
in millions)
|
Balance
at
January
1, 2007
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
December
31, 2007
|
|||||||||||||||
|
Noncash
charges
|
$ | -- | $ | 122 | $ | (122 | ) | $ | -- | $ | -- | |||||||||
|
Severance
costs
|
34 | (9 | ) | -- | (18 | ) | 7 | |||||||||||||
|
Site
closure and restructuring costs
|
14 | (1 | ) | -- | (2 | ) | 11 | |||||||||||||
|
Total
|
$ | 48 | $ | 112 | $ | (122 | ) | $ | (20 | ) | $ | 18 | ||||||||
|
Balance
at
January
1, 2008
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
December
31, 2008
|
||||||||||||||||
|
Noncash
charges
|
$ | -- | $ | 2 | $ | (2 | ) | $ | -- | $ | -- | |||||||||
|
Severance
costs
|
7 | 10 | -- | (12 | ) | 5 | ||||||||||||||
|
Site
closure and restructuring costs
|
11 | 34 | -- | (20 | ) | 25 | ||||||||||||||
|
Total
|
$ | 18 | $ | 46 | $ | (2 | ) | $ | (32 | ) | $ | 30 | ||||||||
|
Balance
at
January
1, 2009
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
December
31, 2009
|
||||||||||||||||
|
Noncash
charges
|
$ | -- | $ | 179 | $ | (179 | ) | $ | -- | $ | -- | |||||||||
|
Severance
costs
|
5 | 23 | -- | (23 | ) | 5 | ||||||||||||||
|
Site
closure and restructuring costs
|
25 | (2 | ) | -- | (18 | ) | 5 | |||||||||||||
|
Total
|
$ | 30 | $ | 200 | $ | (179 | ) | $ | (41 | ) | $ | 10 | ||||||||
A
majority of costs remaining for severance is expected to be applied to the
reserves within one year.
During
2009, the Company accrued for approximately 300 employee
separations. As of the end of 2009, approximately 120 separations for
the 2009 accrual were completed and all of the 2008 and 2007 separations were
completed. During 2008 and 2007, the Company accrued for
approximately 40 and 25 employee separations, respectively.
84
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
INVENTORIES
|
|
December
31,
|
||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
At
FIFO or average cost (approximates current cost)
|
||||||||
|
Finished
goods
|
$ | 547 | $ | 634 | ||||
|
Work
in process
|
168 | 200 | ||||||
|
Raw
materials and supplies
|
262 | 328 | ||||||
|
Total
inventories
|
977 | 1,162 | ||||||
|
LIFO
Reserve
|
(446 | ) | (525 | ) | ||||
|
Total
inventories
|
$ | 531 | $ | 637 | ||||
Inventories
valued on the LIFO method were approximately 75 percent of total inventories for
2009 and 2008, respectively.
|
PROPERTIES
AND ACCUMULATED DEPRECIATION
|
|
December
31,
|
||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
Properties
|
||||||||
|
Land
|
$ | 78 | $ | 79 | ||||
|
Buildings
and building equipment
|
849 | 803 | ||||||
|
Machinery
and equipment
|
7,456 | 7,190 | ||||||
|
Construction
in progress
|
142 | 455 | ||||||
|
Properties
and equipment at cost
|
$ | 8,525 | $ | 8,527 | ||||
|
Less: Accumulated
depreciation
|
5,415 | 5,329 | ||||||
|
Net
properties
|
$ | 3,110 | $ | 3,198 | ||||
Cumulative
construction-period interest of $208 million and $204 million, reduced by
accumulated depreciation of $127 million and $130 million, is included in net
properties at December 31, 2009 and 2008, respectively. During fourth
quarter 2009, the Company recognized asset impairments of $133 million related
to the Beaumont, Texas industrial gasification project. For
additional information see Note 2, "Asset Impairments and Restructuring Charges,
Net".
Interest
capitalized during 2009, 2008, and 2007 was $14 million, $12 million, and $10
million, respectively.
Depreciation
expense related to continuing operations was $262 million, $256 million, and
$313 million for 2009, 2008, and 2007, respectively. Depreciation
expense for the year ended December 31, 2008 included $9 million of accelerated
depreciation costs related to restructuring decisions in association with
cracking units in Longview, Texas, and higher cost PET polymer intermediates
assets in Columbia, South Carolina. The accelerated depreciation at
Longview, Texas and the transformation at Columbia, South Carolina were
completed in 2008. The Company shut down the first of three cracking
units as part of the stage phase-out of its three oldest cracking units in
Longview, Texas in fourth quarter 2007. Shutdown timing for the
remaining two units will depend on feedstock and olefin market
conditions.
85
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Changes
in the carrying amount of goodwill follow:
|
(Dollars
in millions)
|
CASPI
Segment
|
Other
Segments
|
Total
|
|||||||||
|
Reported
balance at December 31, 2007
|
$ | 310 | $ | 6 | $ | 316 | ||||||
|
Additions
|
-- | 10 | 10 | |||||||||
|
Currency
translation adjustments
|
(1 | ) | -- | (1 | ) | |||||||
|
Reported
balance at December 31, 2008
|
$ | 309 | $ | 16 | $ | 325 | ||||||
|
Impairment
|
-- | (10 | ) | (10 | ) | |||||||
|
Reported
balance at December 31, 2009
|
$ | 309 | $ | 6 | $ | 315 | ||||||
Goodwill
and indefinite-lived intangibles primarily consist of goodwill in the Coatings,
Adhesives, Specialty Polymers and Inks ("CASPI") segment. The Company
also had recorded goodwill and other intangibles associated with the Beaumont,
Texas industrial gasification project. In fourth quarter 2009, the
Company announced the discontinuance of the Beaumont, Texas industrial
gasification project, which resulted in an impairment of the Beaumont industrial
gasification project goodwill and other intangible assets.
Included
in the reported balance for goodwill are accumulated impairment losses of $44
million at December 31, 2009 and $34 million at December 31, 2008 and
2007.
Intangible
assets include developed technology, customer lists, patents and patent
licenses, and trademarks with a net book value of $43 million in 2009 and $79
million in 2008. Other intangible assets are included in other
noncurrent assets on the balance sheet.
|
EQUITY
INVESTMENTS
|
Eastman has a 50 percent
interest in and serves as the operating partner in Primester, a joint venture
which manufactures cellulose acetate at Eastman's Kingsport, Tennessee
plant. This investment is accounted for under the equity
method. Eastman's net investment in the joint venture at
December 31, 2009 and 2008 was approximately $36 million and $39 million,
respectively, which was comprised of the recognized portion of the venture's
accumulated deficits, long-term amounts owed to Primester, and a line of credit
from Eastman to Primester. Such amounts are included in other noncurrent
assets.
Eastman
owns a 50 percent interest in Nanjing Yangzi Eastman Chemical Ltd. ("Nanjing"),
a company which manufactures EastotacTM
hydrocarbon tackifying resins for the adhesives market. This joint
venture is accounted for under the equity method and is included in other
noncurrent assets. At December 31, 2009 and 2008, the Company's
investment in Nanjing was approximately $6 million and $5 million,
respectively.
86
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
PAYABLES
AND OTHER CURRENT LIABILITIES
|
|
December
31,
|
||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
Trade
creditors
|
$ | 427 | $ | 390 | ||||
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
125 | 129 | ||||||
|
Accrued
taxes
|
33 | 41 | ||||||
|
Post-employment
obligations
|
61 | 60 | ||||||
|
Interest
payable
|
32 | 30 | ||||||
|
Bank
overdrafts
|
6 | 4 | ||||||
|
Other
|
116 | 165 | ||||||
|
Total
payables and other current liabilities
|
$ | 800 | $ | 819 | ||||
The
current portion of post-employment obligations is an estimate of current year
payments in excess of plan assets.
|
BORROWINGS
|
|
December
31,
|
||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
Borrowings
consisted of:
|
||||||||
| 7% notes due 2012 | $ | 152 | $ | 154 | ||||
|
6.30%
notes due 2018
|
205 | 207 | ||||||
|
5.5%
notes due 2019
|
250 | -- | ||||||
|
7
1/4% debentures due 2024
|
497 | 497 | ||||||
|
7
5/8% debentures due 2024
|
200 | 200 | ||||||
|
7.60%
debentures due 2027
|
298 | 298 | ||||||
|
Credit
facility borrowings
|
-- | 84 | ||||||
|
Other
|
2 | 15 | ||||||
|
Total
borrowings
|
1,604 | 1,455 | ||||||
|
Borrowings
due within one year
|
-- | (13 | ) | |||||
| Long-term borrowings | $ | 1,604 | $ | 1,442 | ||||
At
December 31, 2009, the Company had a $700 million revolving credit facility (the
"Credit Facility") in two tranches, with $125 million expiring in 2012 and $575
million expiring in 2013. Borrowings under the Credit Facility are
subject to interest at varying spreads above quoted market rates and a facility
fee is paid on the total commitment. In addition, the Credit Facility
contains a number of customary covenants and events of default, including the
maintenance of certain financial ratios. The Company was in
compliance with all such covenants for all periods presented. At
December 31, 2009, the Company had no outstanding borrowings under the Credit
Facility. At December 31, 2008, the Company had both the Credit
Facility and a 60 million euro credit facility, with borrowings totaling $84
million at an effective interest rate of 3.74 percent.
On
November 2, 2009, the Company issued notes in the principal amount of $250
million due 2019 and bearing interest at 5.50% per annum. Proceeds
from the sale of notes, net of approximately $2 million in transaction fees,
were $248 million.
At
December 31, 2009 the Company had no outstanding interest rate
swaps. In December 2008, outstanding interest rate swaps were settled
with an unrecognized gain of $36 million which will be amortized into interest
expense over the remaining term of the respective bonds resulting in effective
interest rates of 5.22 percent for the 7% notes due in 2012 and 4.14 percent for
the 6.30% notes due in 2018.
87
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Fair
Value of Borrowings
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.
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
(Dollars
in millions)
|
Recorded
Amount
|
Fair
Value
|
Recorded
Amount
|
Fair
Value
|
||||||||||||
|
Long-term
borrowings
|
$ | 1,604 | $ | 1,656 | $ | 1,442 | $ | 1,369 | ||||||||
Fair
Value Measurements
For
additional information on fair value measurement, see Note 1,
"Significant Accounting Policies".
The
following chart shows the financial assets and liabilities valued on a recurring
basis.
|
(Dollars
in millions)
|
Fair
Value Measurements at December 31, 2009
|
|||||||||||||||
|
Description
|
December
31, 2009
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
||||||||||||
|
Derivative
Assets
|
$ | 52 | $ | -- | $ | 52 | $ | -- | ||||||||
|
Derivative
Liabilities
|
(21 | ) | -- | (21 | ) | -- | ||||||||||
| $ | 31 | $ | -- | $ | 31 | $ | -- | |||||||||
|
(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.
Fair Value
Hedges
Fair
value hedges are defined by accounting principles generally accepted in the U.S.
("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
December 31, 2009, the Company had no active fair value hedges.
88
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
December 31, 2009, the total amount of the Company's foreign exchange forward
and option contracts was a $25 million asset. As of December 31,
2009, the total amount of the Company's feedstock/energy forward and option
contracts was a $6 million net asset.
Fair Value of Derivatives
Designated as Cash Flow Hedging Instruments
|
(Dollars
in millions)
|
December
31, 2009
|
||||
|
Asset
Derivatives
|
Balance
Sheet Location
|
Fair
Value
|
|||
|
Commodity
contract
|
Other
current assets
|
$ | 7 | ||
|
Foreign
exchange contracts
|
Other
current assets
|
14 | |||
|
Foreign
exchange contracts
|
Other
noncurrent assets
|
11 | |||
| $ | 32 | ||||
|
(Dollars
in millions)
|
December
31, 2009
|
||||
|
Liability
Derivatives
|
Balance
Sheet Location
|
Fair
Value
|
|||
|
Commodity contract
|
Payables
and other current liabilities
|
$ | 1 | ||
| $ | 1 | ||||
Derivatives' Cash Flow
Hedging Relationships
|
(Dollars
in millions)
|
Twelve Months 2009
|
|||||
|
Derivatives
Cash Flow Hedging Relationships
|
Amount
after tax of gain/ (loss) recognized in Other Comprehensive Income on
derivatives (effective portion)
December
31, 2009
|
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)
December
31, 2009
|
|||
|
Commodity contract
|
$
|
9
|
Cost
of sales
|
$
|
(6)
|
|
|
Foreign
exchange contracts
|
(2)
|
Sales
|
23
|
|||
|
$
|
7
|
$
|
17
|
|||
For twelve months ended December 31, 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 $1
million net loss on nonqualifying derivatives during 2009.
89
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Currency
Rate Hedging
The
Company manufactures and sells its products in a number of countries throughout
the world and, as a result, is exposed to movements in foreign currency exchange
rates. To manage the volatility relating to these exposures, the
Company nets the exposures on a consolidated basis to take advantage of natural
offsets. To manage the remaining exposure, the Company enters into
currency options and forwards to hedge probable anticipated, but not yet
committed, export sales and purchase transactions expected within no more than
five years and denominated in foreign currencies (principally the euro, British
pound, and the Japanese yen) and forward exchange contracts to hedge certain
firm commitments denominated in foreign currencies. These contracts
are designated as cash flow hedges. The mark-to-market gains or
losses on qualifying hedges are included in accumulated other comprehensive
income (loss) to the extent effective, and reclassified into sales in the period
during which the hedged transaction affects earnings.
Raw
Material and Energy Hedging
Raw
material and energy sources used by the Company are subject to price volatility
caused by weather, supply conditions, economic variables and other unpredictable
factors. To mitigate short-term fluctuations in market prices for
propane, ethane, and natural gas, the Company enters into option and forward
contracts. These contracts are designated as cash flow
hedges. The mark-to-market gains or losses on qualifying hedges are
included in accumulated other comprehensive income (loss) to the extent
effective, and reclassified into cost of sales in the period during which the
hedged transaction affects earnings.
Interest
Rate Hedging
The
Company's policy is to manage interest expense using a mix of fixed and variable
rate debt. To manage this mix effectively, the Company enters into
interest rate swaps in which the Company agrees to exchange the difference
between fixed and variable interest amounts calculated by reference to an agreed
upon notional principal amount. These swaps are designated as hedges
of the fair value of the underlying debt obligations and the interest rate
differential is reflected as an adjustment to interest expense over the life of
the swaps. As these instruments are 100 percent effective, there is
no impact on earnings due to hedge ineffectiveness.
From time
to time, the Company also utilizes interest rate derivative instruments,
primarily forwards, to hedge the Company's exposure to movements in interest
rates prior to anticipated debt offerings. These instruments are
designated as cash flow hedges and are typically 100 percent
effective. As a result, there is no current impact on earnings due to
hedge ineffectiveness.
The
mark-to-market gains or losses on these hedges are included in accumulated other
comprehensive income (loss) to the extent effective, and are reclassified into
interest expense over the term of the related debt instruments.
Hedging
Summary
At
December 31, 2009 and 2008, monetized positions and mark-to-market gains from
raw materials and energy, currency, and certain interest rate hedges that were
included in accumulated other comprehensive income totaled approximately $27
million and $20 million, respectively. If realized, approximately $20
million in gains will be reclassified into earnings during the next 12
months. The mark-to-market gains or losses on non-qualifying,
excluded and ineffective portions of hedges are immediately recognized in cost
of sales or other charges (income), net. There were no material gains
or losses recognized in 2009 and 2008.
90
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
RETIREMENT
PLANS
|
Eastman
maintains defined benefit pension plans that provide eligible employees with
retirement benefits. Prior to 2000, benefits were calculated using a
defined benefit formula based on age, years of service, and the employee's final
average compensation as defined in the plans. Effective January 1,
2000, the Company's U.S. defined benefit pension plan, the Eastman Retirement
Assistance Plan, was amended. Employees' accrued pension benefits
earned prior to January 1, 2000 are calculated based on previous plan provisions
using the employee's age, years of service, and final average compensation as
defined in the plans. The amended defined benefit pension plan uses a
pension equity formula based on age, years of service, and final average
compensation to calculate an employee's retirement benefits from January 1, 2000
forward. Benefits payable will be the combined pre-2000 and post-1999
benefits. Employees hired on or after January 1, 2007 are not
eligible to participate in the U.S. defined benefit pension plans.
Benefits
are paid to employees from trust funds. Contributions to the plan are
made as permitted by laws and regulations. The pension trust fund
does not directly own any of the Company's common stock.
Pension
coverage for employees of Eastman's non-U.S. operations is provided, to the
extent deemed appropriate, through separate plans. The Company
systematically provides for obligations under such plans by depositing funds
with trustees, under insurance policies, or by book reserves.
Below is
a summary balance sheet of the change in plan assets during 2009 and 2008, the
funded status of the plans, amounts recognized in the Consolidated Statements of
Financial Position, and a summary of amounts recognized in accumulated other
comprehensive income.
91
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
assumptions used to develop the projected benefit obligation for the Company's
significant U.S. and non-U.S. defined benefit pension plans are also provided in
the following tables.
|
Summary
Balance Sheet
|
||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
Change
in projected benefit obligation:
|
||||||||
|
Benefit
obligation, beginning of year
|
$ | 1,423 | $ | 1,470 | ||||
|
Service
cost
|
42 | 46 | ||||||
|
Interest
cost
|
87 | 88 | ||||||
|
Actuarial
loss
|
72 | -- | ||||||
|
Plan
amendments and other
|
-- | (22 | ) | |||||
|
Effect
of currency exchange
|
17 | (53 | ) | |||||
|
Benefits
paid
|
(133 | ) | (106 | ) | ||||
|
Benefit
obligation, end of year
|
$ | 1,508 | $ | 1,423 | ||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets, beginning of year
|
$ | 930 | $ | 1,346 | ||||
|
Actual
return on plan assets
|
76 | (290 | ) | |||||
|
Effect
of currency exchange
|
14 | (41 | ) | |||||
|
Company
contributions
|
200 | 21 | ||||||
|
Benefits
paid
|
(133 | ) | (106 | ) | ||||
|
Fair
value of plan assets, end of year
|
$ | 1,087 | $ | 930 | ||||
|
Funded
Status at end of year
|
$ | (421 | ) | $ | (493 | ) | ||
|
Amounts
recognized in the Consolidated Statements of Financial Position consist
of:
|
||||||||
|
Current
liability
|
$ | (4 | ) | $ | (3 | ) | ||
|
Noncurrent
liability
|
(417 | ) | (490 | ) | ||||
|
Net
amount recognized, end of year
|
$ | (421 | ) | $ | (493 | ) | ||
|
Amounts
recognized in accumulated other comprehensive income consist
of:
|
||||||||
|
Net
actuarial loss
|
$ | 779 | $ | 712 | ||||
|
Prior
service credit
|
(54 | ) | (70 | ) | ||||
|
Accumulated
other comprehensive loss
|
$ | 725 | $ | 642 | ||||
The
accumulated benefit obligation basis at the end of 2009 and 2008 was $1,415
million and $1,345 million, respectively.
92
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary
of the components of net periodic benefit cost recognized for Eastman's
significant U.S. and non-U.S. defined benefit pension plans
follows:
|
Summary
of Benefit Costs and Other Amounts Recognized in Other Comprehensive
Income
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Components
of net periodic benefit cost:
|
||||||||||||
|
Service
cost
|
$ | 42 | $ | 46 | $ | 48 | ||||||
|
Interest
cost
|
87 | 88 | 90 | |||||||||
|
Expected
return on assets
|
(100 | ) | (105 | ) | (105 | ) | ||||||
|
Curtailment
charge
|
-- | 9 | 4 | |||||||||
|
Amortization
of:
|
||||||||||||
|
Prior
service credit
|
(16 | ) | (16 | ) | (9 | ) | ||||||
|
Actuarial
loss
|
32 | 27 | 35 | |||||||||
|
Net
periodic benefit cost
|
$ | 45 | $ | 49 | $ | 63 | ||||||
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income:
|
||||||||||||
|
Curtailment
effect
|
$ | -- | $ | 15 | $ | 10 | ||||||
|
Current
year actuarial (loss) gain
|
(96 | ) | (395 | ) | 68 | |||||||
|
Current
year prior service credit
|
-- | 16 | 49 | |||||||||
|
Amortization
of:
|
||||||||||||
|
Prior
service credit
|
(16 | ) | (16 | ) | (9 | ) | ||||||
|
Actuarial
loss
|
32 | 27 | 35 | |||||||||
|
Effect
of currency exchange
|
(3 | ) | 13 | (3 | ) | |||||||
|
Total
|
$ | (83 | ) | $ | (340 | ) | $ | 150 | ||||
|
2009
|
2008
|
2007
|
||||||||||
|
Weighted-average
assumptions used to determine benefit obligations for years ended December
31:
|
||||||||||||
|
Discount
rate
|
5.73 | % | 6.05 | % | 6.03 | % | ||||||
|
Expected
return on assets
|
8.44 | % | 8.47 | % | 8.54 | % | ||||||
|
Rate
of compensation increase
|
3.53 | % | 3.57 | % | 3.83 | % | ||||||
|
Weighted-average
assumptions used to determine net periodic pension cost for years ended
December 31:
|
||||||||||||
|
Discount
rate
|
6.05 | % | 6.03 | % | 5.66 | % | ||||||
|
Expected
return on assets
|
8.47 | % | 8.54 | % | 8.57 | % | ||||||
|
Rate
of compensation increase
|
3.57 | % | 3.83 | % | 3.78 | % | ||||||
The fair
value of plan assets for domestic plans at December 31, 2009 and 2008 was $854
million and $739 million, respectively, while the fair value of plan assets at
December 31, 2009 and 2008 for non-U.S. plans was $233 million and $191 million,
respectively. At December 31, 2009 and 2008, the expected long-term
rate of return on the U.S. plan assets was 9 percent, while the expected
weighted-average long-term rate of return on non-U.S. plan assets was 6.41
percent and 6.40 percent at December 31, 2009 and 2008,
respectively.
93
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following chart reflects the fair value of the defined pension plans assets as
of December 31, 2009:
|
(Dollars
in millions)
|
Fair
Value Measurements at December 31, 2009
|
|||||||||||||||
|
Description
|
December
31, 2009
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
||||||||||||
|
Cash
|
$ | 18 | $ | 18 | $ | -- | $ | -- | ||||||||
|
Fixed
Income
|
186 | -- | 186 | -- | ||||||||||||
|
Public
Equity Funds
|
569 | -- | 569 | -- | ||||||||||||
|
Private
Equity, Real Estate Funds, and Other Alternative
Investments
|
314 | -- | 10 | 304 | ||||||||||||
|
Total
|
$ | 1,087 | $ | 18 | $ | 765 | $ | 304 | ||||||||
The
Company valued assets with unobservable inputs (Level 3), alternative
investments, in private equity and real estate and other funds under the
practical expedient method. The practical expedient method allows
reporting entities to use the most recently reported net asset value ("NAV") of
qualifying investment companies provided it is not probable that the investment
will be sold by the reporting entity at an amount different from the most
recently reported NAV.
|
(Dollars
in millions)
|
Fair
Value Measurements Using Significant Unobservable Inputs (Level
3)
|
|||||||||||||||
|
Private
Equity
|
Real
Estate
|
Other
Alternative Investments(1)
|
Total
|
|||||||||||||
|
Beginning
balance at December 31, 2008
|
$ | 106 | $ | 113 | $ | 101 | $ | 320 | ||||||||
|
Return
(loss) on plan assets
|
(9 | ) | (30 | ) | (3 | ) | (42 | ) | ||||||||
|
Purchases,
sales, and settlements, net
|
10 | 9 | 7 | 26 | ||||||||||||
|
Ending
balance at December 31, 2009
|
$ | 107 | $ | 92 | $ | 105 | $ | 304 | ||||||||
(1)
Primarily consists of natural resource and energy related limited partnership
investments.
The
target allocation for the Company's U.S. pension plan for 2010 and the asset
allocation at December 31, 2009 and 2008, by asset category, is as
follows:
|
Target
Allocation
|
Plan
Assets at December 31, 2009
|
Plan
Assets at December 31, 2008
|
|
|
Asset
category
|
|||
|
Equity
securities
|
59%
|
58%
|
50%
|
|
Debt
securities
|
12%
|
7%
|
6%
|
|
Real
estate
|
9%
|
11%
|
16%
|
|
Other
investments(1)
|
20%
|
24%
|
28%
|
|
Total
|
100%
|
100%
|
100%
|
(1) Primarily consists of
private equity and natural resource and energy related limited partnership
investments.
94
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The asset
allocation for the Company's non-U.S. pension plans at December 31, 2009 and
2008, and the target allocation for 2010, by asset category, is as
follows:
|
Target
Allocation
|
Plan
Assets at December 31, 2009
|
Plan
Assets at December 31, 2008
|
|
|
Asset
category
|
|||
|
Equity
securities
|
33
%
|
33
%
|
31
%
|
|
Debt
securities
|
50
%
|
53
%
|
54
%
|
|
Other
investments(1)
|
17
%
|
14
%
|
15
%
|
|
Total
|
100
%
|
100
%
|
100
%
|
(1)
Primarily consists of an annuity contract and alternative
investments.
The
Company's investment strategy for its defined benefit pension plans is to
maximize long-term rate of return on plan assets within an acceptable level of
risk in order to minimize the cost of providing pension benefits. A
periodic asset/liability study is conducted in order to assist in the
modification of the Company's long-term investment policy for the
plan. The investment policy establishes a target allocation range for
each asset class and the fund is managed within those ranges. The
plans use a number of investment approaches including equity, real estate, and
fixed income funds in which the underlying securities are marketable in order to
achieve this target allocation. The U.S. plan also invests in private
equity and other funds. This investment process provides for a well
diversified portfolio which results in a portfolio of investments with no
significant concentration of risk. This diversification is created
through investment across various asset classes, geographies, fund managers and
individual securities. The investment process is monitored by an
investment committee comprised of various senior executives from within
Eastman.
The
expected rate of return for the portfolio was determined by modeling the
expected long-term rates of return for the categories of investments held by the
plan and the targeted allocation percentage against a number of various
potential economic scenarios.
The
Company funded its U.S. defined benefit pension plan by $181 million in 2009 and
$100 million in 2007.
Benefits
expected to be paid from pension plans are as follows:
|
(Dollars
in millions)
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015-2019 | ||||||||||||||||||
|
U.S.
plans
|
$ | 111 | $ | 117 | $ | 117 | $ | 122 | $ | 124 | $ | 635 | ||||||||||||
|
Non
U.S. plans
|
$ | 6 | $ | 7 | $ | 7 | $ | 8 | $ | 8 | $ | 51 | ||||||||||||
The
estimated net actuarial loss and prior service credit for the pension plans that
will be amortized from accumulated other comprehensive income into net periodic
cost in 2010 are $42 million and $16 million, respectively.
DEFINED
CONTRIBUTION PLANS
The
Company sponsors a defined contribution employee stock ownership plan (the
"ESOP"), a qualified plan under Section 401(a) of the Internal Revenue Code,
which is a component of the Eastman Investment Plan and Employee Stock Ownership
Plan ("EIP/ESOP"). Eastman anticipates that it will make annual
contributions for substantially all U.S. employees equal to 5 percent of
eligible compensation to the ESOP, or for employees who have five or more prior
ESOP contributions, to other investment options within the EIP including the
Eastman Stock Fund. Employees may diversify to other investment funds
within the EIP from the ESOP at any time without
restrictions. Allocated shares in the ESOP totaled 1,508,712;
1,465,656; and 1,540,303 shares as of December 31, 2009, 2008, and 2007,
respectively. Dividends on shares held by the EIP/ESOP are charged to
retained earnings. All shares held by the EIP/ESOP are treated as
outstanding in computing earnings per share.
95
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In July
2006, the Company amended its EIP/ESOP to provide a company match of 50 percent
of the first 7 percent of an employee's compensation contributed to the plan for
employees who are hired on or after January 1, 2007. Employees who
are hired on or after January 1, 2007, will also be eligible for the 5 percent
contribution to the ESOP as described above.
Charges
for domestic contributions to the EIP/ESOP were $34 million, $37 million, and
$34 million for 2009, 2008, and 2007, respectively.
POSTRETIREMENT
WELFARE PLANS
Eastman
provides a subsidy toward life insurance and health care and dental benefits for
eligible retirees hired prior to January 1, 2007, and a subsidy toward health
care benefits for retirees' eligible survivors. In general, Eastman
provides those benefits to retirees eligible under the Company's U.S.
plans. Similar benefits are also made available to retirees of
Holston Defense Corporation ("HDC"), a wholly-owned subsidiary of the Company
that, prior to January 1, 1999, operated a government-owned ammunition
plant. For additional information on HDC, see Note 19,
"Other Charges (Income), Net".
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 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.
96
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Below is
a summary balance sheet of the change in plan assets during 2009 and 2008, the
funded status of the plans, amounts recognized in the Consolidated Statements of
Financial Position, and a summary of amounts recognized in accumulated other
comprehensive income.
|
Summary
Balance Sheet
|
||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
Change
in benefit obligation:
|
||||||||
|
Benefit
obligation, beginning of year
|
$ | 746 | $ | 716 | ||||
|
Service
cost
|
8 | 7 | ||||||
|
Interest
cost
|
45 | 43 | ||||||
|
Plan
participants' contributions
|
12 | 18 | ||||||
|
Actuarial
loss
|
24 | 26 | ||||||
|
Benefits
paid
|
(58 | ) | (64 | ) | ||||
|
Benefit
obligation, end of year
|
$ | 777 | $ | 746 | ||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets, beginning of year
|
$ | 55 | $ | 56 | ||||
|
Actual
return on plan assets
|
13 | (19 | ) | |||||
|
Company
contributions
|
40 | 39 | ||||||
|
Reserve
for third party contributions
|
(11 | ) | 25 | |||||
|
Plan
participants' contributions
|
12 | 18 | ||||||
|
Benefits
paid
|
(58 | ) | (64 | ) | ||||
|
Fair
value of plan assets, end of year
|
$ | 51 | $ | 55 | ||||
|
Funded
status
|
$ | (726 | ) | $ | (691 | ) | ||
|
Amounts
recognized in the Consolidated Statements of Financial Position consist
of:
|
||||||||
|
Current
liabilities
|
$ | (40 | ) | $ | (40 | ) | ||
|
Non-current
liabilities
|
(686 | ) | (651 | ) | ||||
|
Net
amount recognized, end of year
|
$ | (726 | ) | $ | (691 | ) | ||
|
Amounts
recognized in accumulated other comprehensive income consist
of:
|
||||||||
|
Actuarial
loss
|
$ | 203 | $ | 191 | ||||
|
Prior
service credit
|
(148 | ) | (172 | ) | ||||
|
Accumulated
other comprehensive loss
|
$ | 55 | $ | 19 | ||||
97
NOTES TO
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary
of the components of net periodic benefit cost recognized for Eastman's
postretirement benefit cost follows:
|
Summary
of Benefit Costs
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Components
of net periodic benefit cost:
|
||||||||||||
|
Service
cost
|
$ | 8 | $ | 6 | $ | 7 | ||||||
|
Interest
cost
|
45 | 43 | 43 | |||||||||
|
Expected
return on assets
|
(3 | ) | (4 | ) | (3 | ) | ||||||
|
Amortization
of:
|
||||||||||||
|
Prior
service credit
|
(23 | ) | (23 | ) | (23 | ) | ||||||
|
Actuarial
loss
|
13 | 10 | 12 | |||||||||
|
Net
periodic benefit cost
|
$ | 40 | $ | 32 | $ | 36 | ||||||
|
Weighted-average
assumptions used to determine end of year benefit
obligations:
|
2009
|
2008
|
2007
|
|||||||||
|
Discount
rate
|
5.76 | % | 6.08 | % | 6.19 | % | ||||||
|
Rate
of compensation increase
|
3.50 | % | 3.50 | % | 3.75 | % | ||||||
|
Health
care cost trend
|
||||||||||||
|
Initial
|
8.00 | % | 8.00 | % | 9.00 | % | ||||||
|
Decreasing
to ultimate trend of
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
in
year
|
2016 | 2015 | 2012 | |||||||||
|
Weighted-average
assumptions used to determine end of year net benefit
cost:
|
2009
|
2008
|
2007
|
|||||||||
|
Discount
rate
|
6.08 | % | 6.19 | % | 5.86 | % | ||||||
|
Rate
of compensation increase
|
3.50 | % | 3.75 | % | 3.75 | % | ||||||
|
Health
care cost trend
|
||||||||||||
|
Initial
|
8.00 | % | 9.00 | % | 9.00 | % | ||||||
|
Decreasing
to ultimate trend of
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
in
year
|
2015 | 2012 | 2011 | |||||||||
Benefits,
net of participant contributions, expected to be paid for post-employment
obligations are as follows:
(Dollars
in millions)
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015-2019 | |||||||||||||||||||
|
U.S.
plans
|
$ | 44 | $ | 45 | $ | 46 | $ | 47 | $ | 49 | $ | 271 | ||||||||||||
An 8
percent rate of increase in per capita cost of covered health care benefits is
assumed for 2010. The rate is assumed to decrease gradually to 5
percent for 2016 and remain at that level thereafter. A 1 percent
increase or decrease in health care cost trend would have had no material impact
on the 2009 service and interest costs or the 2009 benefit obligation, because
the Company's contributions for benefits are fixed.
The
estimated net actuarial loss and prior service credit for the postretirement
benefit plans that will be amortized from accumulated other comprehensive income
into net periodic cost in 2010 are $12 million and $23 million,
respectively.
98
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
COMMITMENTS
|
Purchase
Obligations and Lease Commitments
At
December 31, 2009, the Company had various purchase obligations totaling
approximately $1.1 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 $104 million over a period of several years. Of the
total lease commitments, approximately 15 percent relate to machinery and
equipment, including computer and communications equipment and production
equipment; approximately 45 percent relate to real property, including office
space, storage facilities and land; and approximately 40 percent relate to
railcars. Rental expense, net of sublease income, was approximately
$35 million, $44 million, and $56 million in 2009, 2008, and 2007,
respectively.
The
obligations described above are summarized in the following table:
|
(Dollars
in millions)
|
Payments
Due For
|
|||||||||||||||||||||||
|
Period
|
Notes
and Debentures
|
Credit
Facility Borrowings and Other
|
Interest
Payable
|
Purchase
Obligations
|
Operating
Leases
|
Total
|
||||||||||||||||||
|
2010
|
$ | -- | $ | -- | $ | 111 | $ | 257 | $ | 25 | $ | 393 | ||||||||||||
|
2011
|
2 | -- | 111 | 248 | 25 | 386 | ||||||||||||||||||
|
2012
|
152 | -- | 106 | 242 | 17 | 517 | ||||||||||||||||||
|
2013
|
-- | -- | 99 | 227 | 12 | 338 | ||||||||||||||||||
|
2014
|
-- | -- | 99 | 33 | 10 | 142 | ||||||||||||||||||
|
2015
and beyond
|
1,450 | -- | 889 | 85 | 15 | 2,439 | ||||||||||||||||||
|
Total
|
$ | 1,604 | $ | -- | $ | 1,415 | $ | 1,092 | $ | 104 | $ | 4,215 | ||||||||||||
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 December 31, 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 $228 million and
$339 million in 2009 and 2008, respectively. The securitization
program was fully drawn at December 31, 2009 and renewed in July
2009.
In first
quarter 2010, the Company will adopt new accounting guidance on the transfer of
financial assets. Outstanding accounts receivable that were
previously treated as sold and removed from the balance sheet will be included
in trade receivables, net on the balance sheet. Going forward, any
amounts outstanding under the accounts receivable securitization program will be
accounted for as a secured borrowing and reflected on the Statements of
Financial Position. In addition, the adoption of this new guidance
will be reflected on the Statements of Cash Flows in first quarter 2010 as an
increase in trade receivables which will reduce cash flows from operations by
$200 million.
99
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. Disclosures about each group of similar guarantees are
provided below.
Residual
Value Guarantees
If
certain operating leases are terminated by the Company, it has agreed to
guarantee a portion of the residual value loss, if any, incurred by the lessors
in disposing of the related assets. Under these operating leases, the
residual value guarantees at December 31, 2009 totaled $160 million and
consisted primarily of leases for railcars and company
aircraft. Leases with guarantee amounts totaling $11 million, $139
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.
Other
Guarantees
Guarantees
and claims also arise during the ordinary course of business from relationships
with suppliers, customers, and other parties when the Company undertakes an
obligation to guarantee the performance of others if specified triggering events
occur. Non-performance under a contract could trigger an obligation
of the Company. These potential claims include actions based upon
alleged exposures to products, intellectual property and environmental matters,
and other indemnifications. The ultimate effect on future financial
results is not subject to reasonable estimation because considerable uncertainty
exists as to the final outcome of these claims. However, while the
ultimate liabilities resulting from such claims may be significant to results of
operations in the period recognized, management does not anticipate they will
have a material adverse effect on the Company's consolidated financial position
or liquidity.
Variable
Interest Entities
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not VIEs or, in the case
of Primester, a joint venture that manufactures cellulose acetate at the
Company's Kingsport, Tennessee plant, the Company is not the primary beneficiary
of the VIE. As such, in accordance with 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 December 31,
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 $40 million and $50 million of raw materials and
utilities in 2009 and 2008, respectively. 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.
100
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
ENVIRONMENTAL
MATTERS
|
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of
various hazardous waste sites, the Company, along with many other entities, has
been designated a potentially responsible party ("PRP"), by the U.S.
Environmental Protection Agency under the Comprehensive Environmental Response,
Compensation and Liability Act, which potentially subjects PRPs to joint and
several liability for such cleanup costs. In addition, the Company
will be required to incur costs for environmental remediation and closure and
postclosure under the federal Resource Conservation and Recovery
Act. Reserves for environmental contingencies have been established
in accordance with Eastman's policies described in Note 1, "Significant
Accounting Policies." Because of expected sharing of costs, the
availability of legal defenses, and the Company's preliminary assessment of
actions that may be required, management does not believe that the Company's
liability for these environmental matters, individually or in the aggregate,
will be material to the Company's consolidated financial position, results of
operations or cash flows. The Company's total reserve for
environmental contingencies was $42 million and $41 million at December 31, 2009
and 2008, respectively.
Estimated
future environmental expenditures for remediation costs range from the minimum
or best estimate of $10 million to the maximum of $20 million at December 31,
2009. The best estimate accrued to date over the facilities'
estimated useful lives for asset retirement obligation costs is $32 million at
December 31, 2009.
For
additional information, refer to Note 25, "Reserve Rollforwards."
|
LEGAL
MATTERS
|
General
From time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
being handled and defended in the ordinary course of business. While
the Company is unable to predict the outcome of these matters, it does not
believe, based upon currently available facts, that the ultimate resolution of
any such pending matters 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.
101
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
STOCKHOLDERS'
EQUITY
|
A
reconciliation of the changes in stockholders' equity for 2007, 2008, and 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, 2006
|
1 | 448 | 2,186 | (174 | ) | (432 | ) | 2,029 | ||||||||||||||||
|
Net
Earnings
|
-- | -- | 300 | -- | -- | 300 | ||||||||||||||||||
|
Effect
of adoption of accounting for uncertain income tax
positions
|
-- | -- | 8 | -- | -- | 8 | ||||||||||||||||||
|
Cash
Dividends Declared (1)
|
-- | -- | (145 | ) | -- | -- | (145 | ) | ||||||||||||||||
|
Other
Comprehensive Income
|
-- | -- | -- | 146 | -- | 146 | ||||||||||||||||||
|
Share-based
Compensation Costs (2)
|
-- | 18 | -- | -- | -- | 18 | ||||||||||||||||||
|
Stock
Option Exercises
|
-- | 91 | -- | -- | -- | 91 | ||||||||||||||||||
|
Other
(3)
|
-- | 16 | -- | -- | 1 | 17 | ||||||||||||||||||
|
Stock
Repurchases
|
-- | -- | -- | -- | (382 | ) | (382 | ) | ||||||||||||||||
|
Balance
at December 31, 2007
|
1 | 573 | 2,349 | (28 | ) | (813 | ) | 2,082 | ||||||||||||||||
|
Net
Earnings
|
-- | -- | 346 | -- | -- | 346 | ||||||||||||||||||
|
Cash
Dividends Declared (1)
|
-- | -- | (132 | ) | -- | -- | (132 | ) | ||||||||||||||||
|
Other
Comprehensive Loss
|
-- | -- | -- | (307 | ) | -- | (307 | ) | ||||||||||||||||
|
Share-based
Compensation Costs (2)
|
-- | 25 | -- | -- | -- | 25 | ||||||||||||||||||
|
Stock
Option Exercises
|
-- | 35 | -- | -- | -- | 35 | ||||||||||||||||||
|
Other
(3)
|
-- | 5 | -- | -- | -- | 5 | ||||||||||||||||||
|
Stock
Repurchases
|
-- | -- | -- | -- | (501 | ) | (501 | ) | ||||||||||||||||
|
Balance
at December 31, 2008
|
1 | 638 | 2,563 | (335 | ) | (1,314 | ) | 1,553 | ||||||||||||||||
|
Net
Earnings
|
-- | -- | 136 | -- | -- | 136 | ||||||||||||||||||
|
Cash
Dividends Declared (1)
|
-- | -- | (128 | ) | -- | -- | (128 | ) | ||||||||||||||||
|
Other
Comprehensive Loss
|
-- | -- | -- | (50 | ) | -- | (50 | ) | ||||||||||||||||
|
Share-based
Compensation Costs (2)
|
-- | 19 | -- | -- | -- | 19 | ||||||||||||||||||
|
Stock
Option Exercises
|
-- | 7 | -- | -- | -- | 7 | ||||||||||||||||||
|
Other
(3)
|
-- | (3 | ) | -- | -- | -- | (3 | ) | ||||||||||||||||
|
Stock
Repurchases
|
-- | -- | -- | -- | (21 | ) | (21 | ) | ||||||||||||||||
|
Balance
at December 31, 2009
|
1 | 661 | 2,571 | (385 | ) | (1,335 | ) | 1,513 | ||||||||||||||||
|
(1)
|
Includes
cash dividends paid and dividends declared, but unpaid. Also,
includes the redemption of the outstanding preferred stock purchase
rights.
|
|
(2)
|
Includes
the fair value of equity share-based awards recognized for share-based
compensation.
|
|
(3)
|
Includes
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 and other
items.
|
The
Company is authorized to issue 400 million shares of all classes of stock, of
which 50 million may be preferred stock, par value $0.01 per share, and 350
million may be common stock, par value $0.01 per share. The Company
declared dividends of $1.76 per share in each of 2009, 2008, and
2007.
102
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company established a benefit security trust in 1997 to provide a degree of
financial security for unfunded obligations under certain plans and contributed
to the trust a warrant to purchase up to 1 million shares of common stock of the
Company for par value. The warrant, which remains outstanding, is
exercisable by the trustee if the Company does not meet certain funding
obligations, which obligations would be triggered by certain occurrences,
including a change in control or potential change in control, as defined, or
failure by the Company to meet its payment obligations under covered unfunded
plans. Such warrant is excluded from the computation of diluted
earnings per share because the conditions upon which the warrant becomes
exercisable have not been met.
The
additions to paid-in capital for 2009, 2008, and 2007 are primarily the result
of employee stock option exercises and compensation expense of equity
awards.
On February 4, 1999, the
Company was authorized by its Board of Directors to repurchase up to $400
million of its common stock. Through January 2007, a total of 2.7
million shares of common stock was repurchased under the authorization at a cost
of approximately $112 million.On February 20, 2007, the Board of
Directors cancelled its prior authorization for stock repurchases and approved a
new authorization for the repurchase of up to $300 million of the Company's
outstanding common stock. The Company completed the $300 million
repurchase authorization in September 2007 acquiring a total of 4.6 million
shares. In October 2007, the Board of Directors authorized an
additional $700 million for repurchase of the Company's outstanding common
shares at such times, in such amounts, and on such terms, as determined to be in
the best interests of the Company. As of December 31, 2009, a total
of 9.7 million shares have been repurchased under this authorization for a total
amount of approximately $604 million.
The
Company's charitable foundation held 82,674 shares of the Company's common stock
at December 31, 2009, 2008, and 2007 which are reflected in treasury
stock.
For 2009,
2008, and 2007, the weighted average number of common shares outstanding used to
compute basic earnings per share was 72.5 million, 75.2 million, and 82.8
million, respectively, and for diluted earnings per share was 73.4 million, 76.0
million, and 83.9 million, respectively, reflecting the effect of dilutive
share-based equity awards outstanding. Stock options excluded from
the 2009, 2008, and 2007 calculation of diluted earnings per share were
3,498,489; 2,355,954; and 1,026,284, respectively, because the total market
value of option exercises for these awards was less than the total cash proceeds
that would be received from these exercises.
|
Shares
of common stock issued (1)
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at beginning of year
|
94,495,860 | 93,630,292 | 91,579,441 | |||||||||
|
Issued
for employee compensation and benefit plans
|
279,204 | 865,568 | 2,050,851 | |||||||||
|
Balance
at end of year
|
94,775,064 | 94,495,860 | 93,630,292 | |||||||||
|
(1)
Includes shares held in treasury.
|
||||||||||||
103
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
|
(Dollars
in millions)
|
Cumulative
Translation Adjustment
$
|
Benefit
Plans Unrecognized Losses and Prior Service Credits
$
|
Unrealized
Gains (Losses) on Cash Flow Hedges
$
|
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 | (74 | ) | 7 | -- | (50 | ) | |||||||||||||
|
Balance
at December 31, 2009
|
77 | (488 | ) | 27 | (1 | ) | (385 | ) | ||||||||||||
Amounts
of other comprehensive income (loss) are presented net of applicable
taxes. The Company records deferred income taxes on the cumulative
translation adjustment related to branch operations and other entities included
in the Company's consolidated U.S. tax return. No deferred income
taxes are provided on the cumulative translation adjustment of subsidiaries
outside the United States, as such cumulative translation adjustment is
considered to be a component of permanently invested, unremitted earnings of
these foreign subsidiaries.
|
SHARE-BASED
COMPENSATION PLANS AND AWARDS
|
2007
Omnibus Long-Term Compensation Plan
Eastman's
2007 Omnibus Long-Term Compensation Plan ("2007 Omnibus Plan") was approved by
stockholders at the May 3, 2007 Annual Meeting of Stockholders and shall remain
in effect until its fifth anniversary. The 2007 Omnibus Plan
authorizes the Compensation and Management Development Committee of the Board of
Directors to: grant awards, designate participants, determine the
types and numbers of awards, determine the terms and conditions of awards and
determine the form of award settlement. Under the 2007 Omnibus Plan,
the aggregate number of shares reserved and available for issuance is 4.1
million. Any stock distributed pursuant to an award may consist of,
in whole or in part, authorized and unissued stock, treasury stock, or stock
purchased on the open market. Under the 2007 Omnibus Plan and
previous plans, the form of awards have included: restricted stock
and restricted stock units, stock options, stock appreciation rights ("SARs"),
and performance shares. The 2007 Omnibus Plan is flexible as to the
number of specific forms of awards, but provides that stock options and SARs are
to be granted at an exercise price not less than 100 percent of the per share
fair market value on the date of the grant.
2008
Director Long-Term Compensation Subplan
Eastman's
2008 Director Long-Term Compensation Subplan ("2008 Directors' Subplan"), a
component of the 2007 Omnibus Plan, remains in effect until terminated by the
Board of Directors or the earlier termination of the 2007 Omnibus
Plan. The 2008 Directors' Subplan provides for structured awards of
restricted shares to non-employee members of the Board of
Directors. Restricted shares awarded under the 2008 Directors'
Subplan are subject to the same terms and conditions of the 2007 Omnibus
Plan. The 2008 Directors' Subplan does not constitute a separate
source of shares for grant of equity awards and all shares awarded are part of
the 4.1 million shares authorized by the 2007 Omnibus Plan. Shares of
restricted stock are granted upon the first day of a non-employee director's
initial term of service and shares of restricted stock are granted each year to
each non-employee director on the date of the annual meeting of
stockholders.
104
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company is authorized by the Board of Directors under the 2007 Omnibus Plan and
2008 Directors' Subplan to provide grants to employees and non-employee members
of the Board of Directors. It has been the Company's practice to
issue new shares rather than treasury shares for equity awards that require
payment by the issuance of common stock and to withhold or accept back shares
awarded to cover the income taxes of employee participants. Shares of
non-employee directors are not withheld or acquired for the withholding of their
income taxes. Shares of unrestricted common stock owned by specified
senior management level employees are accepted by the Company to pay for the
exercise price of stock options in accordance with the terms and conditions of
their awards.
For 2009,
2008, and 2007, total share-based compensation expense (before tax) of
approximately $20 million, $21 million, and $26 million, respectively, was
recognized in selling, general and administrative expense in the consolidated
statement of earnings for all share-based awards of which approximately $5
million, $9 million, and $13 million, respectively, related to stock
options. The compensation expense is recognized over the substantive
vesting period, which may be a shorter time period than the stated vesting
period for retirement-eligible employees. For 2009, 2008, and 2007,
approximately $2 million, $2 million and $3 million, respectively, of stock
option compensation expense was recognized due to retirement eligibility
preceding the requisite vesting period.
Stock
Option Awards
Options
have been granted on an annual basis to non-employee directors under predecessor
plans to the 2008 Directors' Subplan and by the Compensation and Management
Development Committee of the Board of Directors under the 2007 Omnibus Plan and
predecessor plans to employees. Option awards have an exercise price
equal to the closing price of the Company's stock on the date of
grant. The term life of options is ten years with vesting periods
that vary up to three years. Vesting usually occurs ratably over the
vesting period or at the end of the vesting period. The Company
utilizes the Black Scholes Merton option valuation model which relies on certain
assumptions to estimate an option's fair value.
The
weighted average assumptions used in the determination of fair value for stock
options awarded in 2009, 2008, and 2007 are provided in the table
below:
|
Assumptions
|
2009
|
2008
|
2007
|
|
Expected
volatility rate
|
31.69
%
|
21.96
%
|
20.80
%
|
|
Expected
dividend yield
|
4.84
%
|
2.66
%
|
2.92
%
|
|
Average
risk-free interest rate
|
2.47
%
|
2.76
%
|
4.24
%
|
|
Expected
forfeiture rate
|
0.75
%
|
0.75
%
|
0.75
%
|
|
Expected
term years
|
5.20
|
5.00
|
4.40
|
The
volatility rate of grants is derived from historical Company common stock price
volatility over the same time period as the expected term of each stock option
award. The volatility rate is derived by mathematical formula
utilizing the weekly high closing stock price data over the expected
term.
The
expected dividend yield is calculated using the Company's average of the last
four quarterly dividend yields.
The
average risk-free interest rate is derived from United States Department of
Treasury published interest rates of daily yield curves for the same time period
as the expected term.
GAAP
specifies only share-based awards expected to vest be included in share-based
compensation expense. Estimated forfeiture rates are determined using
historical forfeiture experience for each type of award and are excluded from
the quantity of awards included in share-based compensation
expense.
The
weighted average expected term reflects the analysis of historical share-based
award transactions and includes option swap and reload grants which may have
much shorter remaining expected terms than new option grants.
105
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary
of the activity of the Company's stock option awards for 2009, 2008, and 2007
are presented below:
|
2009
|
2008
|
2007
|
|||||||||
|
Options
|
Weighted-Average
Exercise Price
|
Options
|
Weighted-Average
Exercise Price
|
Options
|
Weighted-Average
Exercise Price
|
||||||
|
Outstanding
at beginning of year
|
4,217,700
|
$
|
54
|
4,481,300
|
$
|
55
|
5,866,900
|
$
|
52
|
||
|
Granted
|
355,300
|
56
|
445,700
|
38
|
643,000
|
65
|
|||||
|
Exercised
|
(167,600)
|
41
|
(691,500)
|
51
|
(2,010,100)
|
50
|
|||||
|
Cancelled,
forfeited, or expired
|
(64,000)
|
46
|
(17,800)
|
55
|
(18,500)
|
59
|
|||||
|
Outstanding
at end of year
|
4,341,400
|
$
|
55
|
4,217,700
|
$
|
54
|
4,481,300
|
$
|
55
|
||
|
Options
exercisable at year-end
|
3,493,800
|
2,980,100
|
2,686,800
|
||||||||
|
Available
for grant at end of year
|
1,899,323
|
2,545,400
|
3,379,200
|
||||||||
The
following table provides the remaining contractual term and weighted average
exercise prices of stock options outstanding and exercisable at December 31,
2009:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||
|
Range
of Exercise Prices
|
Number Outstanding
at 12/31/09
|
Weighted-Average
Remaining Contractual Life (Years)
|
Weighted-Average
Exercise Price
|
Number
Exercisable at 12/31/09
|
Weighted-Average
Exercise Price
|
|||||
|
$30-45
|
576,800
|
7.2
|
$
|
37
|
293,100
|
$
|
37
|
|||
|
$46-52
|
568,400
|
2.8
|
48
|
568,400
|
48
|
|||||
|
$53-59
|
1,360,000
|
6.8
|
55
|
945,600
|
54
|
|||||
|
$60-64
|
1,239,900
|
6.5
|
61
|
1,239,700
|
61
|
|||||
|
$65-74
|
596,300
|
6.5
|
66
|
447,000
|
66
|
|||||
|
4,341,400
|
6.2
|
$
|
55
|
3,493,800
|
$
|
56
|
||||
The range
of exercise prices of options outstanding at December 31, 2009 is approximately
$30 to $74 per share. The aggregate intrinsic value of total options
outstanding and total options exercisable at December 31, 2009 is $28 million
and $20 million, respectively. Intrinsic value is the amount by which
the closing market price of the stock at December 31, 2009 exceeds the exercise
price of the option grants.
The
weighted average remaining contractual life of all exercisable options at
December 31, 2009 is 5.6 years.
The
weighted average fair value of options granted during 2009, 2008, and 2007 was
$10.48, $6.59, and $11.12, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2009, 2008, and
2007, was $2 million, $15 million, and $30 million,
respectively. Cash proceeds received by the Company from option
exercises and the related tax benefit totals $7 million and $0.5 million,
respectively for 2009, $35 million and $4 million, respectively, for 2008, and
$91 million and $10 million, respectively, for 2007. The total fair
value of shares vested during the years ended December 31, 2009, 2008, and 2007
was $8 million, $11 million, and $13 million, respectively.
106
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary
of the status of the Company's nonvested options as of December 31, 2009 and
changes during the year then ended is presented below:
|
Nonvested
Options
|
Number
of Options
|
Weighted-Average
Grant Date Fair Value
|
|
|
Nonvested
at January 1, 2009
|
1,237,500
|
$
|
9.46
|
|
Granted
|
355,300
|
10.48
|
|
|
Vested
|
(743,800)
|
10.12
|
|
|
Forfeited
|
(1,300)
|
10.67
|
|
|
Nonvested
Options at December 31, 2009
|
847,700
|
$
|
9.31
|
For
options unvested at December 31, 2009, approximately $2 million in compensation
expense will be recognized over the next three years.
Other
Share-Based Compensation Awards
In
addition to stock option awards, the Company has awarded long-term performance
stock awards, restricted stock awards, and stock appreciation
rights. The long-term performance awards are based upon actual return
on capital compared to a target return on capital and total stockholder return
compared to a peer group ranking by total stockholder return. The
recognized compensation cost before tax for these other share-based awards in
the years ended December 31, 2009, 2008, and 2007 is approximately $15 million,
$12 million, and $13 million, respectively. The unrecognized
compensation expense before tax for these same type awards at December 31, 2009
is approximately $35 million and will be recognized primarily over a period of
three years.
|
DIVESTITURES
|
Certain
Businesses and Product Lines and Related Assets in the Performance Polymers
Segment
On
November 30, 2007, the Company sold its PET polymers production facilities in
Mexico and Argentina and the related businesses for net proceeds of
approximately $160 million and an earn-out provision based on certain future
sales amounts. The Company continued to produce certain
intermediates products for the buyer under supply agreements through
2008. In addition, the Company indemnified the buyer against certain
liabilities primarily related to taxes, legal matters, environmental matters,
and other representations and warranties. The results related to the
Mexico and Argentina facilities are not presented as discontinued operations due
to continuing involvement of the Company's Performance Polymers segment in the
region including certain intermediates products sales to the divested
sites. During 2007, the Company recorded asset impairments and
restructuring charges of approximately $115 million related to the Mexico and
Argentina PET sites.
|
DISCONTINUED
OPERATIONS
|
In first
quarter 2008, the Company sold its PET polymers and purified terephthalic acid
("PTA") production facilities in the Netherlands and its PET production facility
in the United Kingdom and related businesses for approximately $329
million. The Company recognized a gain of $18 million, net of tax,
related to the sale of these businesses which includes the recognition of
deferred currency translation adjustments of approximately $40 million, net of
tax. In addition, the Company indemnified the buyer against certain
liabilities primarily related to taxes, legal matters, environmental matters,
and other representations and warranties. During first quarter 2007,
the Company recorded asset impairments and restructuring charges of $21 million
for its PET polymers manufacturing facility in Spain, which it sold in second
quarter 2007. Net proceeds from the sale of the Spain site were
approximately $40 million. In addition, the Company indemnified the
buyer against certain liabilities primarily related to taxes, legal matters,
environmental matters, and other representations and warranties.
107
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
manufacturing facilities in the Netherlands, United Kingdom, and Spain, and
related businesses represent the Company's European PET business and qualify as
a component of an entity under 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 all periods
presented in the Company's unaudited consolidated financial
statements.
In fourth
quarter 2007, the Company sold its PET polymers production facilities in Mexico
and Argentina and the related businesses. The results related to the
Mexico and Argentina facilities are not presented as discontinued operations due
to continuing involvement of the Company's Performance Polymers segment in the
region including contract polymer intermediates sales under a transition supply
agreement to the divested sites through 2008.
Operating
results of the discontinued operations which were formerly included in the
Performance Polymers segment are summarized below:
|
For
years ended December 31,
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
|
$ | -- | $ | 169 | $ | 542 | ||||||
|
Earnings
(loss) before income taxes
|
-- | 6 | (9 | ) | ||||||||
|
Loss
from discontinued operations, net of tax
|
-- | -- | (10 | ) | ||||||||
|
Gain
(loss) on disposal, net of tax
|
-- | 18 | (11 | ) | ||||||||
|
OTHER
OPERATING INCOME, NET
|
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Other
operating income, net
|
$ | -- | $ | (16 | ) | $ | -- | |||||
Other
operating income, net for 2008 reflected a gain of $16 million from the sale of
certain mineral rights at an operating manufacturing site.
|
OTHER
CHARGES (INCOME), NET
|
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Foreign
exchange transactions losses (gains)
|
$ | 5 | $ | 17 | $ | (11 | ) | |||||
|
Investments
losses (gains)
|
5 | 6 | (12 | ) | ||||||||
|
Other,
net
|
3 | (3 | ) | (5 | ) | |||||||
|
Other
charges (income), net
|
$ | 13 | $ | 20 | $ | (28 | ) | |||||
Included
in other charges (income), net 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 HDC, gains
from the sale of non-operating assets, certain litigation costs, fees on
securitized receivables, other non-operating income, and other miscellaneous
items.
Investment
losses (gains) for 2009, 2008, and 2007 included gains of $4 million in each
year resulting from a favorable decision in 2006 of the U.S. Department of the
Army to reimburse post-employment benefits being provided to retirees of HDC, a
wholly owned subsidiary. This gain reflected a portion of the
unrecognized gain resulting from the reimbursement decision that will be
amortized into earnings over future periods.
108
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
INCOME
TAXES
|
Components
of earnings (loss) before income taxes and the provision (benefit) for U.S. and
other income taxes from continuing operations follow:
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Earnings
(loss) from continuing operations before income taxes
|
||||||||||||
|
United
States
|
$ | 165 | $ | 355 | $ | 489 | ||||||
|
Outside
the United States
|
61 | 74 | (19 | ) | ||||||||
|
Total
|
$ | 226 | $ | 429 | $ | 470 | ||||||
|
Provision
(benefit) for income taxes on earnings from continuing
operations
|
||||||||||||
|
United
States
|
||||||||||||
|
Current
|
$ | (101 | ) | $ | 88 | $ | 173 | |||||
|
Deferred
|
165 | 7 | (24 | ) | ||||||||
|
Outside
the United States
|
||||||||||||
|
Current
|
17 | 16 | (30 | ) | ||||||||
|
Deferred
|
1 | (1 | ) | 21 | ||||||||
|
State
and other
|
||||||||||||
|
Current
|
(12 | ) | 2 | 10 | ||||||||
|
Deferred
|
20 | (11 | ) | (1 | ) | |||||||
|
Total
|
$ | 90 | $ | 101 | $ | 149 | ||||||
The
following represents the deferred tax charge (benefit) recorded as a component
of accumulated other comprehensive income (loss) in stockholders'
equity.
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Unrecognized
gains (losses) and prior service credits for benefit plans
|
$ | (47 | ) | $ | (142 | ) | $ | 56 | ||||
|
Cumulative
translation adjustment
|
2 | 16 | 5 | |||||||||
|
Unrealized
gains (losses) on cash flow hedges
|
4 | 14 | 3 | |||||||||
|
Total
|
$ | (41 | ) | $ | (112 | ) | $ | 64 | ||||
Total
income tax expense (benefit) included in the consolidated financial statements
was composed of the following:
| (Dollars in millions) |
2009
|
2008
|
2007
|
|||||||||
|
Continuing
operations
|
$ | 90 | $ | 101 | $ | 149 | ||||||
|
Discontinued
operations
|
-- | (12 | ) | (3 | ) | |||||||
|
Other
comprehensive income
|
(41 | ) | (112 | ) | 64 | |||||||
|
Total
|
$ | 49 | $ | (23 | ) | $ | 210 | |||||
109
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Differences
between the provision for income taxes on earnings from continuing operations
and income taxes computed using the U.S. federal statutory income tax rate
follow:
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Amount
computed using the statutory rate
|
$ | 79 | $ | 150 | $ | 165 | ||||||
|
State
income taxes, net
|
5 | (6 | ) | 8 | ||||||||
|
Foreign
rate variance
|
(2 | ) | (4 | ) | (3 | ) | ||||||
|
Domestic
manufacturing deduction
|
5 | (7 | ) | (11 | ) | |||||||
|
ESOP
dividend payout
|
(1 | ) | (1 | ) | (1 | ) | ||||||
|
Capital
loss benefits
|
-- | (12 | ) | (3 | ) | |||||||
|
Change
in reserves for tax contingencies
|
(5 | ) | (8 | ) | (2 | ) | ||||||
|
General
business credits
|
7 | (16 | ) | (5 | ) | |||||||
|
Other
|
2 | 5 | 1 | |||||||||
|
Provision
for income taxes
|
$ | 90 | $ | 101 | $ | 149 | ||||||
The 2009
effective tax rate reflects a $11 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 and a $5 million tax
benefit from the reversal of tax reserves due to the expiration of the relevant
statute of limitations.
The 2008
effective tax rate was impacted by a $16 million benefit resulting from a
gasification investment tax credit of $11 million and a research and development
tax credit of $5 million, a $14 million benefit from state income tax credits
(net of federal effect), a $12 million benefit from the reversal of a U.S.
capital loss valuation allowance associated with the sale of businesses, and a
$6 million benefit from the settlement of a non-U.S. income tax
audit.
110
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
significant components of deferred tax assets and liabilities
follow:
|
December
31,
|
||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
Deferred
tax assets
|
||||||||
|
Post-employment
obligations
|
$ | 496 | $ | 491 | ||||
|
Net
operating loss carry forwards
|
97 | 113 | ||||||
|
Capital
loss carry forwards
|
-- | 33 | ||||||
|
Other
|
70 | 37 | ||||||
|
Total
deferred tax assets
|
663 | 674 | ||||||
|
Less
valuation allowance
|
(88 | ) | (131 | ) | ||||
|
Deferred
tax assets less valuation allowance
|
$ | 575 | $ | 543 | ||||
|
Deferred
tax liabilities
|
||||||||
|
Depreciation
|
$ | (771 | ) | $ | (599 | ) | ||
|
Inventory
reserves
|
(26 | ) | (23 | ) | ||||
|
Total
deferred tax liabilities
|
$ | (797 | ) | $ | (622 | ) | ||
|
Net
deferred tax liabilities
|
$ | (222 | ) | $ | (79 | ) | ||
|
As
recorded in the Consolidated Statements of Financial
Position:
|
||||||||
|
Other
current assets
|
$ | 11 | $ | 2 | ||||
|
Other
noncurrent assets
|
30 | 28 | ||||||
|
Payables
and other current liabilities
|
(5 | ) | (3 | ) | ||||
|
Deferred
income tax liabilities
|
(258 | ) | (106 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (222 | ) | $ | (79 | ) | ||
Unremitted
earnings of subsidiaries outside the United States, considered to be reinvested
indefinitely, totaled $310 million at December 31, 2009. It is not
practicable to determine the deferred tax liability for temporary differences
related to those unremitted earnings.
For
certain consolidated foreign subsidiaries, income and losses directly flow
through to taxable income in the United States. These entities are
also subject to taxation in the foreign tax jurisdictions. Net
operating loss carryforwards exist to offset future taxable income in foreign
tax jurisdictions and valuation allowances are provided to reduce deferred
related tax assets if it is more likely than not that this benefit will not be
realized. Changes in the estimated realizable amount of deferred tax
assets associated with net operating losses for these entities could result in
changes in the deferred tax asset valuation allowance in the foreign tax
jurisdiction. At the same time, because these entities are also
subject to tax in the United States, a deferred tax liability for the expected
future taxable income will be established concurrently. Therefore,
the impact of any reversal of valuation allowances on consolidated income tax
expense will only be to the extent that there are differences between the United
States statutory tax rate and the tax rate in the foreign
jurisdiction. A valuation allowance of $73 million at December 31,
2009, has been provided against the deferred tax asset resulting from these
operating loss carryforwards.
At
December 31, 2009, foreign net operating loss carryforwards totaled $346
million. Of this total, $238 million will expire in 3 to 15 years;
and $108 million has no expiration date.
111
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Amounts
due to and from tax authorities as recorded in the Consolidated Statements of
Financial Position:
|
December
31,
|
||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
||||||
|
Miscellaneous
receivables
|
$ | 23 | $ | 10 | ||||
|
Payables
and other current liabilities
|
2 | 11 | ||||||
|
Other
long-term liabilities
|
6 | 11 | ||||||
|
Total
income taxes payable
|
$ | 8 | $ | 22 | ||||
A
reconciliation of the beginning and ending amounts of unrecognized tax benefits
is as follows:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(Dollars
in millions)
|
||||||||||||
|
Balance
at January 1
|
$ | 11 | $ | 24 | $ | 28 | ||||||
|
Additions
based on tax positions related to current year
|
-- | -- | 1 | |||||||||
|
Reductions
for tax positions of prior years
|
-- | (4 | ) | (3 | ) | |||||||
|
Settlements
|
-- | (7 | ) | -- | ||||||||
|
Lapse
of statute of limitations
|
(5 | ) | (2 | ) | (2 | ) | ||||||
|
Balance
at December 31
|
$ | 6 | $ | 11 | $ | 24 | ||||||
As of
December 31, 2009, 2008, and 2007, $6 million, $11 million, and $24 million,
respectively, of unrecognized tax benefits would, if recognized, impact the
Company's effective tax rate.
Interest,
net of tax, related to unrecognized tax benefits are recorded as a component of
income tax expense. As of January 1, 2009 and 2008, the Company had
accrued a liability of approximately $2 million and $4 million, respectively,
for interest, net of tax and had no accrual for tax penalties. During
2009, the Company recognized income of $1 million for interest, net of tax and
no penalties associated with unrecognized tax benefits, resulting in an accrued
balance of $1 million for interest, net of tax benefit and no amount of
penalties as of December 31, 2009. During 2008, the Company
recognized income of $2 million for interest, net of tax and no penalties
associated with unrecognized tax benefits, resulting in an accrued balance of $2
million for interest, net of tax benefit and no amount of penalties as of
December 31, 2008.
The
Company or one of its subsidiaries files tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations by tax authorities for years before
2005. It is reasonably possible that within the next 12 months the
Company will recognize approximately $2 million of unrecognized tax benefits as
a result of the expiration of relevant statutes of limitations.
112
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
Included
in the line item "Other items, net" of the "Cash flows from operating
activities" section of the Consolidated Statements of Cash Flows are specific
changes to certain balance sheet accounts as follows:
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Current
assets
|
$ | (2 | ) | $ | 113 | $ | (29 | ) | ||||
|
Other
assets
|
27 | 18 | 10 | |||||||||
|
Current
liabilities
|
(23 | ) | 10 | (33 | ) | |||||||
|
Long-term
liabilities and equity
|
5 | 21 | 5 | |||||||||
|
Total
|
$ | 7 | $ | 162 | $ | (47 | ) | |||||
The above
changes included transactions such as monetized positions from raw material and
energy, currency, and certain interest rate hedges, prepaid insurance,
miscellaneous deferrals, accrued taxes, and value-added taxes. The
2008 changes in current assets were primarily related to the monetization of
interest rate, commodity, and foreign exchange hedges during
2008. Monetizations in 2009 and 2007 were significantly less than in
2008.
Derivative
financial instruments treated as hedges and related gains and losses are
included in cash flows from operating activities.
Non-cash
portion of losses from the Company's equity investments was $5 million and $9
million for 2009 and 2008, respectively. Non-cash portions of
earnings from the Company's equity investments in 2007 were $3
million.
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
paid for interest and income taxes is as follows:
|
||||||||||||
|
Interest,
net of amounts capitalized
|
$ | 82 | $ | 96 | $ | 108 | ||||||
|
Income
taxes paid (refunded)
|
(71 | ) | 150 | 173 | ||||||||
|
SEGMENT
INFORMATION
|
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the PCI
segment, the Performance Polymers segment, and the Specialty Plastics
segment.
The CASPI
segment manufactures raw materials, additives, and specialty polymers, primarily
for the paints and coatings, inks, and adhesives markets. The CASPI
segment's products consist of liquid vehicles, coatings additives, and
hydrocarbon resins and rosins and rosin esters. Liquid vehicles, such
as ester, ketone and alcohol solvents, maintain the binders in liquid form for
ease of application. Coatings additives, such as cellulosic polymers,
TexanolTM
ester alcohol and chlorinated polyolefins, enhance the rheological, film
formation and adhesion properties of paints, coatings, and
inks. Hydrocarbon resins and rosins and rosin esters are used in
adhesive, ink, and polymers compounding applications. Additional
products are developed in response to, or in anticipation of, new applications
where the Company believes significant value can be achieved.
The
Fibers segment manufactures EstronTM
acetate tow and EstrobondTM
triacetin plasticizers which are used primarily in cigarette filters;
EstronTM and
ChromspunTM
acetate yarns for use in apparel, home furnishings and industrial fabrics;
acetate flake for use by other acetate tow producers; and acetyl
chemicals.
113
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The PCI
segment manufactures diversified products that are used in a variety of markets
and industrial and consumer applications, including chemicals for agricultural
intermediates, fibers, food and beverage ingredients, photographic chemicals,
pharmaceutical intermediates, polymer compounding, and chemical manufacturing
intermediates. As part of the sale of the Performance Polymers
segment's polyethylene business, the Company has agreed to supply ethylene to
the buyer. These sales of ethylene, previously used internally as a
raw material, are reported in the PCI segment.
The
Performance Polymers segment manufactures and supplies PET intermediates and
polymers for use primarily in beverage and food packaging, including carbonated
soft drinks, water, juices, sports drinks, beer, and food containers that are
suitable for both conventional and microwave oven use. Other end-uses
for PET packaging include bottles for non-food items such as household cleaners
and clear, disposable clamshell trays such as those used in delis and salad
bars. In 2007, the Company's PET manufacturing facility based
on IntegRexTM
technology became fully operational and produces ParaStarTM, the
next generation PET resins. During fourth quarter 2007, the Company
sold its Mexico and Argentina PET manufacturing sites.
The
Specialty Plastics segment's key products include engineering and specialty
polymers, specialty film and sheet products, and packaging film and fiber
products. Included in these are highly specialized copolyesters and
cellulosic plastics that possess unique performance properties for value-added
end uses such as appliances, store fixtures and displays, building and
construction, electronic packaging, medical packaging, personal care and
cosmetics, performance films, tape and labels, fiber, photographic and optical
film, graphic arts, and general packaging. In fourth quarter 2007,
Eastman commercialized a new family of high-temperature copolyester products,
Eastman TritanTM
copolyester.
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.
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
by Segment
|
||||||||||||
|
CASPI
|
$ | 1,217 | $ | 1,524 | $ | 1,451 | ||||||
|
Fibers
|
1,032 | 1,045 | 999 | |||||||||
|
PCI
|
1,330 | 2,160 | 2,095 | |||||||||
|
Performance
Polymers
|
719 | 1,074 | 1,413 | |||||||||
|
Specialty
Plastics
|
749 | 923 | 872 | |||||||||
|
Total
Sales by Segment
|
5,047 | 6,726 | 6,830 | |||||||||
|
Other
|
-- | -- | -- | |||||||||
|
Total
Sales
|
$ | 5,047 | $ | 6,726 | $ | 6,830 | ||||||
114
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Operating
Earnings (Loss)
|
||||||||||||
|
CASPI
(1)
|
$ | 227 | $ | 202 | $ | 235 | ||||||
|
Fibers
(2)
|
296 | 238 | 238 | |||||||||
|
PCI
(3)
|
63 | 153 | 220 | |||||||||
|
Performance
Polymers (4)
|
(66 | ) | (57 | ) | (207 | ) | ||||||
|
Specialty
Plastics (5)
|
14 | 35 | 65 | |||||||||
|
Total
Operating Earnings by Segment
|
534 | 571 | 551 | |||||||||
|
Other
(6)
|
(217 | ) | (52 | ) | (47 | ) | ||||||
|
Total
Operating Earnings
|
$ | 317 | $ | 519 | $ | 504 | ||||||
|
(1)
|
CASPI
includes $3 million and $(1) million in 2009 and 2007, respectively, in
asset impairments and restructuring charges (gains) for the segment's
portion of severance costs of a reduction in force and previously closed
manufacturing facilities and $5 million in 2008 in other operating income
related to the sale of certain mineral rights at an operating
manufacturing site.
|
|
(2)
|
Fibers
includes $4 million in 2009 in asset impairments and restructuring charges
related to severance cost of a reduction in
force.
|
|
(3)
|
PCI
includes $6 million, $22 million, and $(1) million in 2009, 2008, and
2007, respectively, in asset impairments and restructuring charges (gains)
related to severance costs of a reduction in force and the divestiture of
the Batesville, Arkansas facility, manufacturing facilities outside the
U.S., $5 million and $19 million in 2008 and 2007, respectively, in
accelerated depreciation related to crackers at the Company's Longview,
Texas facility, and other operating income of $9 million in 2008 related
to the sale of certain mineral rights at an operating manufacturing
site.
|
|
(4)
|
Performance
Polymers includes $4 million, $24 million, and $113 million in 2009, 2008,
and 2007, respectively, in asset impairments and restructuring charges
related to severance costs related to a reduction in force, restructuring
at the South Carolina facility, partially offset by a resolution of a
contingency from the sale of the Company's PE and EpoleneTM
polymer businesses divested in fourth quarter 2006, the PET divestitures
in Mexico and Argentina, and the shutdown of a research and development
pilot plant in Kingsport, Tennessee and $4 million and $29 million in 2008
and 2007, respectively, of accelerated depreciation related to assets in
Columbia, South Carolina.
|
|
(5)
|
Specialty
Plastics includes $4 million and $1 million in 2009 and 2007,
respectively, in asset impairments and restructuring charges related to
severance costs for a reduction in force, $1 million in 2007 of
accelerated depreciation related to assets in Columbia, South Carolina,
and $2 million in 2008 in other operating income related to the sale of
certain mineral rights at an operating manufacturing
site.
|
|
(6)
|
Other
includes $179 million in 2009 in asset impairments and restructuring
charges related to the discontinued industrial gasification project in
Beaumont, Texas.
|
115
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Assets
by Segment (1)
|
||||||||||||
|
CASPI
|
$ | 1,113 | $ | 1,160 | $ | 1,114 | ||||||
|
Fibers
|
726 | 758 | 692 | |||||||||
|
PCI
|
784 | 844 | 1,062 | |||||||||
|
Performance
Polymers (2)
|
635 | 606 | 727 | |||||||||
|
Specialty
Plastics
|
910 | 828 | 622 | |||||||||
|
Total
Assets by Segment
|
4,168 | 4,196 | 4,217 | |||||||||
|
Corporate
Assets (4)
|
1,347 | 1,085 | 1,417 | |||||||||
|
Assets
Held for Sale (2)(3)
|
-- | -- | 375 | |||||||||
|
Total
Assets
|
$ | 5,515 | $ | 5,281 | $ | 6,009 | ||||||
|
(1)
|
The
chief operating decision maker holds segment management accountable for
accounts receivable, inventory, fixed assets, and
goodwill.
|
|
(2)
|
The
Performance Polymers assets have decreased as a result of asset
impairments, divestitures in Spain and Latin America, and classification
of European assets as assets held for sale as of December 31,
2007.
|
|
(3)
|
For
more information regarding assets held for sale, see Note 17,
"Discontinued Operations."
|
|
(4)
|
For
more information regarding the impairment of Beaumont, Texas industrial
gasification project, see Note 2 "Asset Impairments and Restructuring
Charges, Net".
|
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Depreciation
Expense by Segment (1)
|
||||||||||||
|
CASPI
|
$ | 56 | $ | 50 | $ | 53 | ||||||
|
Fibers
|
59 | 50 | 57 | |||||||||
|
PCI
|
53 | 53 | 70 | |||||||||
|
Performance
Polymers
|
39 | 49 | 81 | |||||||||
|
Specialty
Plastics
|
53 | 53 | 50 | |||||||||
|
Total
Depreciation Expense by Segment
|
260 | 255 | 311 | |||||||||
|
Other
|
2 | 1 | 2 | |||||||||
|
Total
Depreciation Expense
|
$ | 262 | $ | 256 | $ | 313 | ||||||
|
(1)
|
In
the fourth quarter 2006, the Company made strategic decisions relating to
the scheduled shutdown of cracking units in Longview, Texas and a planned
shutdown of higher cost PET assets in Columbia, South
Carolina. In 2008, accelerated depreciation costs resulting
from these decisions were $5 million and $4 million in PCI and Performance
Polymers, respectively. In 2007, accelerated depreciation costs
were $19 million, $29 million, and $1 million in PCI, Performance
Polymers, and Specialty Plastics segments, respectively. In
2006, accelerated depreciation costs were $2 million, $7 million, and $1
million in PCI, Performance Polymers, and Specialty Plastics segments,
respectively.
|
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Capital
Expenditures by Segment
|
||||||||||||
|
CASPI
|
$ | 42 | $ | 69 | $ | 73 | ||||||
|
Fibers
|
29 | 87 | 87 | |||||||||
|
PCI
|
49 | 126 | 104 | |||||||||
|
Performance
Polymers
|
27 | 126 | 126 | |||||||||
|
Specialty
Plastics
|
125 | 152 | 111 | |||||||||
|
Total
Capital Expenditures by Segment
|
272 | 560 | 501 | |||||||||
|
Other
|
38 | 74 | 17 | |||||||||
|
Total
Capital Expenditures
|
$ | 310 | $ | 634 | $ | 518 | ||||||
116
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Sales are
attributed to geographic areas based on customer location; long-lived assets are
attributed to geographic areas based on asset location.
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Geographic
Information
|
||||||||||||
|
Sales
|
||||||||||||
|
United
States
|
$ | 2,716 | $ | 3,965 | $ | 3,959 | ||||||
|
All
foreign countries
|
2,331 | 2,761 | 2,871 | |||||||||
|
Total
|
$ | 5,047 | $ | 6,726 | $ | 6,830 | ||||||
|
Long-Lived
Assets, Net
|
||||||||||||
|
United
States
|
$ | 2,789 | $ | 2,794 | $ | 2,564 | ||||||
|
All
foreign countries
|
321 | 404 | 518 | |||||||||
|
Total
|
$ | 3,110 | $ | 3,198 | $ | 3,082 | ||||||
|
QUARTERLY
SALES AND EARNINGS DATA – UNAUDITED
|
|
(Dollars
in millions, except per share amounts)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
|
2009
|
||||||||||||||||
|
Sales
|
$ | 1,129 | $ | 1,253 | $ | 1,337 | $ | 1,328 | ||||||||
|
Gross
profit
|
179 | 260 | 328 | 286 | ||||||||||||
|
Asset
impairment and restructuring charges, net
|
26 | (3 | ) | -- | 177 | |||||||||||
|
Earnings
(loss) from continuing operations
|
2 | 65 | 101 | (32 | ) | |||||||||||
|
Net
earnings (loss)
|
2 | 65 | 101 | (32 | ) | |||||||||||
|
Earnings
(loss) from continuing operations per share (1)
|
||||||||||||||||
|
Basic
|
$ | 0.03 | $ | 0.89 | $ | 1.40 | $ | (0.44 | ) | |||||||
|
Diluted
|
$ | 0.03 | $ | 0.89 | $ | 1.38 | $ | (0.44 | ) | |||||||
|
Net
earnings (loss) per share (1)
|
||||||||||||||||
|
Basic
|
$ | 0.03 | $ | 0.89 | $ | 1.40 | $ | (0.44 | ) | |||||||
|
Diluted
|
$ | 0.03 | $ | 0.89 | $ | 1.38 | $ | (0.44 | ) | |||||||
|
(1)
|
Each
quarter is calculated as a discrete period; the sum of the four quarters
may not equal the calculated full year
amount.
|
117
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| (Dollars in millions, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
|
2008
|
||||||||||||||||
|
Sales
|
$ | 1,727 | $ | 1,834 | $ | 1,819 | $ | 1,346 | ||||||||
|
Gross
profit
|
337 | 321 | 322 | 146 | ||||||||||||
|
Asset
impairment and restructuring charges, net
|
17 | 3 | 2 | 24 | ||||||||||||
|
Other
operating income
|
-- | -- | -- | (16 | ) | |||||||||||
|
Earnings
(loss) from continuing operations
|
115 | 115 | 100 | (2 | ) | |||||||||||
|
Gain
from disposal of discontinued operations, net of tax
|
18 | -- | -- | -- | ||||||||||||
|
Net
earnings (loss)
|
133 | 115 | 100 | (2 | ) | |||||||||||
|
Earnings
(loss) from continuing operations per share (1)
|
||||||||||||||||
|
Basic
|
$ | 1.47 | $ | 1.51 | $ | 1.35 | $ | (0.03 | ) | |||||||
|
Diluted
|
$ | 1.46 | $ | 1.48 | $ | 1.33 | $ | (0.03 | ) | |||||||
|
Earnings
from discontinued operations per share (1)(2)
|
||||||||||||||||
|
Basic
|
$ | 0.23 | $ | -- | $ | -- | $ | -- | ||||||||
|
Diluted
|
$ | 0.22 | $ | -- | $ | -- | $ | -- | ||||||||
|
Net
earnings (loss) per share (1)
|
||||||||||||||||
|
Basic
|
$ | 1.70 | $ | 1.51 | $ | 1.35 | $ | (0.03 | ) | |||||||
|
Diluted
|
$ | 1.68 | $ | 1.48 | $ | 1.33 | $ | (0.03 | ) | |||||||
|
(1)
|
Each
quarter is calculated as a discrete period; the sum of the four quarters
may not equal the calculated full year
amount.
|
|
(2)
|
In
first quarter 2008, the Company sold its PET polymers and PTA production
facilities in the Netherlands and its PET production facility in the
United Kingdom and related
businesses.
|
118
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In June
2009, the Financial Accounting Standards Board ("FASB") issued new guidance
related to the transfers of financial assets. The new guidance
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 for all Company financial asset transfers occurring on or after
January 1, 2010. The
Company has concluded that this new guidance will impact the Company's
consolidated financial position and cash flows upon adoption in first quarter
2010. Prior to
adoption of the new accounting guidance, the transfer of accounts receivable
under the accounts receivable securitization program was accounted for as a sale
which resulted in increased cash from operations at inception of the program in
1999. The program has been consistently utilized every year since 2000
and, therefore, has had no impact on cash from operations since that time.
Going forward, any future transfers of accounts receivable will be
treated as secured borrowings in the Statements of Financial
Position. These secured borrowings will be reflected as cash from
financing activities in the Statements of Cash Flows. The adoption of
the new guidance, regardless of whether the Company continues to transfer
accounts receivable subsequent to December 31, 2009, will result in an increase
in accounts receivable of $200 million in the Statements of Financial Position
and a corresponding decrease in cash flows from operations in the Statements of
Cash Flows for the quarter ending March 31, 2010.
In June
2009, the FASB issued new guidance on the consolidation of variable interest
entities. The new guidance addresses improvements to 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 for all variable interest
entities the Company is involved with on or after January 1,
2010. The Company has concluded that this new guidance will not have
a material impact on the Company's consolidated financial position,
liquidity, or results of operations upon adoption.
119
NOTES
TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
RESERVE
ROLLFORWARDS
|
Valuation
and Qualifying Accounts
|
Additions
|
||||||||||||||||||||
|
Balance
at January 1, 2007
|
Charged
to Cost and Expense
|
Charged
to Other Accounts
|
Deductions
|
Balance
at December 31, 2007
|
||||||||||||||||
|
Reserve
for:
|
||||||||||||||||||||
|
Doubtful
accounts and returns
|
$ | 15 | $ | (1 | ) | $ | -- | $ | 8 | $ | 6 | |||||||||
|
LIFO
Inventory
|
464 | 46 | -- | -- | 510 | |||||||||||||||
|
Environmental
contingencies
|
47 | 3 | -- | 8 | 42 | |||||||||||||||
|
Deferred
tax valuation allowance
|
130 | 8 | 8 | -- | 146 | |||||||||||||||
| $ | 656 | $ | 56 | $ | 8 | $ | 16 | $ | 704 | |||||||||||
|
Balance
at January 1, 2008
|
Charged
to Cost and Expense
|
Charged
to Other Accounts
|
Deductions
|
Balance
at December 31, 2008
|
||||||||||||||||
|
Reserve
for:
|
||||||||||||||||||||
|
Doubtful
accounts and returns
|
$ | 6 | $ | 6 | $ | -- | $ | 4 | $ | 8 | ||||||||||
|
LIFO
Inventory
|
510 | 15 | -- | -- | 525 | |||||||||||||||
|
Environmental
contingencies
|
42 | 5 | -- | 6 | 41 | |||||||||||||||
|
Deferred
tax valuation allowance
|
146 | (10 | ) | (5 | ) | -- | 131 | |||||||||||||
| $ | 704 | $ | 16 | $ | (5 | ) | $ | 10 | $ | 705 | ||||||||||
|
Balance
at January 1, 2009
|
Charged
to Cost and Expense
|
Charged
to Other Accounts
|
Deductions
|
Balance
at December 31, 2009
|
||||||||||||||||
|
Reserve
for:
|
||||||||||||||||||||
|
Doubtful
accounts and returns
|
$ | 8 | $ | 3 | $ | -- | $ | 1 | $ | 10 | ||||||||||
|
LIFO
Inventory
|
525 | (79 | ) | -- | -- | 446 | ||||||||||||||
|
Environmental
contingencies
|
41 | 3 | -- | 2 | 42 | |||||||||||||||
|
Deferred
tax valuation allowance
|
131 | (45 | ) | 2 | -- | 88 | ||||||||||||||
| $ | 705 | $ | (118 | ) | $ | 2 | $ | 3 | $ | 586 | ||||||||||
120
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
|
CONTROLS
AND PROCEDURES
|
Disclosure Controls and
Procedures
The
Company maintains a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. An evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded
that as of December 31, 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.
Management's Report on
Internal Control Over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control over
financial reporting is a process designed under the supervision of the Company's
CEO and CFO to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company's financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles.
The
Company's internal control over financial reporting includes policies and
procedures that:
|
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and acquisitions and dispositions of assets of
the Company;
|
|
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and the directors of the Company;
and
|
|
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's financial
statements.
|
Management
has assessed the effectiveness of its internal control over financial reporting
as of December 31, 2009 based on the framework established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on this assessment, management
has determined that the Company's internal control over financial reporting was
effective as of December 31, 2009.
The
effectiveness of the Company's internal control over financial reporting as of
December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
Changes in Internal Control
Over Financial Reporting
There has
been no change in the Company's internal control over financial reporting that
occurred during the fourth quarter of 2009 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
121
|
OTHER
INFORMATION
|
None.
122
|
PART
III
|
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors" to (but not including) the subheading "The Board of
Directors and Corporate Governance" and under the subheading "Board
Committees--Audit Committee" (except for the material under the subheading
"Board Committees--Audit Committee--Audit Committee Report", which is not
incorporated by reference herein), each as included and to be filed in
the 2010 Proxy Statement, is incorporated by reference herein in response
to this Item. Certain information concerning executive officers of the
Company is set forth under the heading "Executive Officers of the Company" in
Part I of this Annual Report.
The
Company has adopted a Code of Ethics and Business Conduct applicable to the
Chief Executive Officer, the Chief Financial Officer, and the Controller of the
Company. See "Part I - Item 1. Business - Available Information - SEC Filings
and Corporate Governance Materials".
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors—Board Committees – Compensation and Management
Development Committee – Compensation Committee Report", under the subheading
"Director Compensation", and under the heading "Executive Compensation", each as
included and to be filed in the 2010 Proxy Statement, is incorporated by
reference herein in response to this Item.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The
material under the headings "Stock Ownership of Directors and Executive
Officers--Common Stock" and "Principal Stockholders " as included and to be
filed in the 2010 Proxy Statement is incorporated by reference herein in
response to this Item.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity
Compensation Plans Approved by Stockholders
Stockholders
approved the Company's 1997, 2002, and 2007 Omnibus Long-Term Compensation Plans
and the 1999 and 2002 Director Long-Term Compensation Plans. Although
stock and stock-based awards are still outstanding under the 1997 and 2002
Omnibus Long-Term Compensation Plans, as well as the 1999 and 2002 Director
Long-Term Compensation Plans, no new shares are available under these plans for
future awards. All future share-based awards will be made from the
2007 Omnibus Long-Term Compensation Plan and the 2008 Director Long-Term
Compensation Subplan, a component of the 2007 Omnibus Long-Term Compensation
Plan.
Equity
Compensation Plans Not Approved by Stockholders
Stockholders
have approved all compensation plans under which shares of Eastman common stock
are authorized for issuance.
123
Summary
Equity Compensation Plan Information Table
The
following table sets forth certain information as of December 31, 2009 with
respect to compensation plans under which shares of Eastman common stock may be
issued.
|
Plan
Category
|
Number
of Securities to be Issued upon Exercise of Outstanding
Options
(a)
|
Weighted-Average
Exercise Price of Outstanding Options
(b)
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities reflected in Column
(a))
(c)
|
||||
|
Equity
compensation plans approved by stockholders
|
4,341,400
|
(1)
|
$55
|
1,899,300
|
(2)
|
||
|
Equity
compensation plans not approved by stockholders
|
--
|
--
|
--
|
||||
|
TOTAL
|
4,341,400
|
$55
|
1,899,300
|
|
(1)
|
Represents
shares of common stock issuable upon exercise of outstanding options
granted under Eastman Chemical Company's 1997, 2002, and 2007 Omnibus
Long-Term Compensation Plans; the 1999 and 2002 Director Long-Term
Compensation Plans; and the 2007 Director Long Term Compensation Subplan
and the 2008 Director Long-Term Compensation Subplan, components of the
2007 Omnibus Long-Term Compensation
Plan.
|
|
(2)
|
Shares
of common stock available for future awards under the Company's 2007
Omnibus Long-Term Compensation Plan including the 2008 Director Long-Term
Compensation Subplan, a component of the 2007 Omnibus Long-Term
Compensation Plan.
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
material under the heading "Proposals to be Voted On at the Annual Meeting--Item
1--Election of Directors", subheadings "Director Independence" and "Transactions
with Directors, Executive Officers, and Related Persons", each as included and
to be filed in the 2010 Proxy Statement, is incorporated by reference herein in
response to this Item.
The
information concerning amounts billed for professional services rendered by the
principal accountant and pre-approval of such services by the Audit Committee of
the Company's Board of Directors under the heading "Item 2 - Ratification of
Appointment of Independent Auditors" as included and to be filed in the
2010 Proxy Statement is incorporated by reference herein in response to
this Item.
124
PART
IV
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
Page
|
||||
|
(a)
|
1.
|
Consolidated
Financial Statements:
|
||
|
72
|
||||
|
73
|
||||
|
74
|
||||
|
75
|
||||
|
76
|
||||
|
77
|
||||
|
2.
|
Exhibits
filed as part of this report are listed in the Exhibit Index beginning at page
128
|
128
|
||
|
(b)
|
The
Exhibit Index and required Exhibits to this
report are included beginning at page 128
|
|||
125
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Eastman
Chemical Company
|
||
|
By:
|
/s/ James P. Rogers | |
|
James
P. Rogers
|
||
|
President
and Chief Executive Officer
|
||
|
Date:
|
February
24, 2010
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
PRINCIPAL
EXECUTIVE OFFICER:
|
||||
| /s/ James P. Rogers |
President
and
|
February
24, 2010
|
||
|
James
P. Rogers
|
Chief
Executive Officer
|
|||
|
PRINCIPAL
FINANCIAL OFFICER:
|
||||
| /s/ Curtis E. Espeland |
Senior
Vice President and
|
February
24, 2010
|
||
|
Curtis
E. Espeland
|
Chief
Financial Officer
|
|||
|
PRINCIPAL
ACCOUNTING OFFICER:
|
||||
| /s/ Scott V. King |
Vice
President, Controller and
|
February
24, 2010
|
||
|
Scott
V. King
|
Chief
Accounting Officer
|
|||
126
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
DIRECTORS:
|
||||
| /s/ Gary E. Anderson |
Director
|
February
24, 2010
|
||
|
Gary
E. Anderson
|
||||
| /s/ Michael P. Connors |
Director
|
February
24, 2010
|
||
|
Michael
P. Connors
|
||||
| /s/ Stephen R. Demeritt |
Director
|
February
24, 2010
|
||
|
Stephen
R. Demeritt
|
||||
| /s/ J. Brian Ferguson |
Executive
Chairman of the Board
|
February
24, 2010
|
||
|
J.
Brian Ferguson
|
||||
| /s/ Robert M. Hernandez |
Director
|
February
24, 2010
|
||
|
Robert
M. Hernandez
|
||||
| /s/ Renée J. Hornbaker |
Director
|
February
24, 2010
|
||
|
Renée
J. Hornbaker
|
||||
| /s/ Lewis M. Kling |
Director
|
February
24, 2010
|
||
|
Lewis
M. Kling
|
||||
| /s/ Howard L. Lance |
Director
|
February
24, 2010
|
||
|
Howard
L. Lance
|
||||
| /s/ Thomas H. McLain |
Director
|
February
24, 2010
|
||
|
Thomas
H. McLain
|
||||
| /s/ David W. Raisbeck |
Director
|
February
24, 2010
|
||
|
David
W. Raisbeck
|
||||
| /s/ Peter M. Wood |
Director
|
February
24, 2010
|
||
127
|
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 the 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 May 7, 2009
(incorporated herein by referenced to Exhibit 3(ii) to the Company's
Current Report on Form 8-K dated May 7, 2009
|
|||
|
4.01
|
Form
of Eastman Chemical Company common stock certificate as amended February
1, 2001 (incorporated herein by reference to Exhibit 4.01 to the 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 the Company's Current Report on Form 8-K
dated January 10, 1994)
|
|||
|
4.03
|
Form
of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the Company's Current Report on Form 8-K
dated January 10, 1994)
|
|||
|
4.04
|
Officers'
Certificate pursuant to Sections 201 and 301 of the Indenture
(incorporated herein by reference to Exhibit 4(a) to the Company's Current
Report on Form 8-K dated June 8, 1994)
|
|||
|
4.05
|
Form
of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference
to Exhibit 4(b) to the Company's Current Report on Form 8-K dated June 8,
1994)
|
|||
|
4.06
|
Form
of 7.60% Debentures due February 1, 2027 (incorporated herein by reference
to Exhibit 4.08 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
|
|||
|
4.07
|
Form
of 7% Notes due April 15, 2012 (incorporated herein by reference to
Exhibit 4.09 to the 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 Company's Annual Report on Form 10-K for the year
ended December 31, 2006)
|
|||
|
4.09
|
Form
of 5.500% Notes due 2019 (incorporated herein by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated November 2,
2009)
|
|||
|
4.10
|
$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 the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2009)
|
|||
|
4.11
|
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, as amended on November 16, 2007 and
March 10, 2008 (incorporated herein by reference to Exhibit 4.11 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2006 and Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2008)
|
128
|
EXHIBIT
INDEX
|
Sequential
|
|||
|
Exhibit
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
4.12
|
Form
of 6.30% Notes due 2018 (incorporated herein by reference to Exhibit 4.14
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003)
|
|||
|
10.01*
|
Eastman
Excess Retirement Income Plan (incorporated herein by reference to Exhibit
10.02 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2008)
|
|||
|
10.02*
|
Form
of Executive Change in Control Severance Agreements (incorporated herein
by reference to Exhibit 10.03 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2008)
|
|||
|
10.03*
|
Eastman
Unfunded Retirement Income Plan (incorporated herein by reference to
Exhibit 10.04 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2008)
|
|||
|
10.04*
|
2002
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.02 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2007)
|
|||
|
10.05*
|
2002
Director Long-Term Compensation Plan, as amended (incorporated herein by
reference to Appendix B to Eastman Chemical Company's 2002 Annual Meeting
Proxy Statement)
|
|||
|
10.06*
|
Amended
and Restated Eastman Chemical Company Benefit Security Trust dated January
2, 2002 (incorporated herein by reference to Exhibit 10.04 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002)
|
|||
|
10.07*
|
Amended
and Restated Warrant to Purchase Shares of Common Stock of Eastman
Chemical Company, dated January 2, 2002 (incorporated herein by reference
to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002)
|
|||
|
10.08*
|
Amended
and Restated Registration Rights Agreement, dated January 2, 2002
(incorporated herein by reference to Exhibit 10.03 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002)
|
|||
129
|
EXHIBIT
INDEX
|
Sequential
|
|||
|
Exhibit
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
10.09*
|
Amended
and Restated Eastman Executive Deferred Compensation Plan (incorporated
herein by reference to Exhibit 10.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2009)
|
|||
|
10.10*
|
Amended
Directors' Deferred Compensation Plan (incorporated herein by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2008)
|
|||
|
10.11*
|
133
|
|||
|
10.12*
|
Form
of Indemnification Agreements with Directors and Executive Officers
(incorporated herein by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003)
|
|||
|
10.13*
|
Unit
Performance Plan ("UPP") performance measures and goals, specific target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool if the
performance goals are attained, and the eligibility criteria for employee
participation in the UPP, for the 2009 performance year (incorporated
herein by reference to the Company's Current Report on Form 8-K dated
December 4, 2008)
|
|||
|
10.14*
|
Employment
Agreement between Eastman Chemical Company and Mark J. Costa dated May 4,
2006 (incorporated herein by reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006)
|
|||
|
10.15*
|
139
|
|||
|
10.16*
|
Notice
of Stock Option Granted to Mark J. Costa on June 1, 2006 (incorporated
herein by reference to Exhibit 10.03 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006)
|
|||
|
10.17*
|
Form
of Award Notice for Stock Options Granted to Executive Officers under the
2002 Omnibus Long-Term Compensation Plan (incorporated herein by reference
to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006)
|
|||
130
|
EXHIBIT
INDEX
|
Sequential
|
|||
|
Exhibit
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
10.18*
|
Forms
of Award Notice for Stock Options Granted to Executive Officers under the
2007 Omnibus Long-Term Compensation Plan (incorporated herein by reference
to Exhibit 10.08 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2007 and Exhibit 10.01 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2008)
|
|||
|
10.19*
|
Forms
of Award Notice for Stock Options Granted to Mark J. Costa (incorporated
herein by reference to Exhibit 10.02 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006 and Exhibit 10.02 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008)
|
|||
|
10.20*
|
Form
of Performance Share Awards to Executive Officers (2007 – 2009 Performance
Period) (incorporated herein by reference to Exhibit 10.03 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2006)
|
|||
|
10.21*
|
Form
of Performance Share Award to Mark J. Costa (2007-2009 Performance Period)
(incorporated herein by reference to Exhibit 10.04 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2006)
|
|||
|
10.22*
|
1997
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.03 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2007)
|
|||
|
10.23*
|
2007
Omnibus Long-Term Compensation Plan, as amended (incorporated
herein by reference to Exhibit 10.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2007)
|
|||
|
10.24*
|
Forms
of Performance Share Awards to Executive Officers (2008 – 2010 Performance
Period) (incorporated herein by reference to Exhibit 10.09 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2007)
|
|||
|
10.25*
|
Forms
of Performance Share Awards to Executive Officers (2009 – 2011 Performance
Period) (incorporated herein by reference to Exhibit 10.03 and 10.04 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008)
|
|||
|
10.26*
|
Forms
of Performance Share Awards to Executive Officers (2010 – 2012 Performance
Period) (incorporated herein by reference to Exhibit 10.01 and 10.02 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009)
|
|||
|
10.27*
|
2007
Director Long-Term Compensation Subplan of the 2007 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.10 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007)
|
|||
|
10.28*
|
2008
Director Long-Term Compensation Subplan of the 2007 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.05 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008)
|
|||
131
|
EXHIBIT
INDEX
|
Sequential
|
|||
|
Exhibit
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
10.29*
|
Unit
Performance Plan ("UPP") performance measures and goals, specific target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool if the
performance goals are attained, and the eligibility criteria for employee
participation in the UPP, for the 2010 performance year (incorporated
herein by reference to the Company's Current Report on Form 8-K dated
December 2, 2009)
|
|||
|
10.30*
|
Forms
of Restricted Stock Unit Awards to James P. Rogers, Mark J. Costa and
Ronald C. Lindsay (incorporated herein by reference to Exhibit 10.32 to
the Company's Annual Report on Form 10-K for the year ended December 31,
2008)
|
|||
|
10.31*
|
140
|
|||
|
12.01
|
142
|
|||
|
21.01
|
143
|
|||
|
23.01
|
145
|
|||
|
31.01
|
146
|
|||
|
31.02
|
147
|
|||
|
32.01
|
148
|
|||
|
32.02
|
149
|
|||
|
99.01
|
150
|
|||
|
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)
|
|||
|
* Management contract or
compensatory plan or arrangement filed pursuant to Item 601(b) (10) (iii)
of Regulation S-K.
|
||||
132