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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 62-1539359
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
100 N. EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
Securities registered pursuant to Section 12(g) of the Act: None
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PAGE 1 OF 133 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 73
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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.
Yes [X] No [ ]
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 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. [X]
The aggregate market value (based upon the closing price on the New York Stock
Exchange on January 31, 2000) of the 77,951,004 shares of voting stock held by
nonaffiliates as of December 31, 1999 was approximately $3,108,296,285, using
beneficial ownership rules adopted pursuant to Section 13 of the Securities
Exchange Act of 1934 to exclude stock that may be deemed beneficially owned as
of December 31, 1999 by directors, executive officers, or the Company's
charitable foundation, some of whom might not be held to be affiliates upon
judicial determination. At December 31, 1999, 78,248,638 shares of Common Stock
of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 2000
Annual Meeting of Shareowners (the "2000 Proxy Statement"), to be filed with
the Securities and Exchange Commission, are incorporated by reference in Part
III, Items 10-12 of this Annual Report on Form 10-K as indicated herein.
FORWARD-LOOKING STATEMENTS
Certain statements in this report are "forward-looking" in nature as defined in
the Private Securities Litigation Reform Act of 1995. These statements and
other forward-looking statements made by the Company from time to time relate
to such matters as planned capacity increases and capital spending; expected
tax rates and depreciation; environmental matters; the Year 2000 issue; legal
proceedings; global economic conditions; supply and demand, volume, price,
costs, margin, and sales and earnings and cash flow expectations and strategies
for individual products, businesses, and segments as well as for the whole of
Eastman Chemical Company; cost reduction targets; and development, production,
commercialization, and acceptance of new products and technologies.
These plans and expectations are based upon certain underlying assumptions,
including those mentioned within the text of the specific statements. Such
assumptions are in turn based upon internal estimates and analyses of current
market conditions and trends, management plans and strategies, economic
conditions, and other factors. These plans and expectations and the assumptions
underlying them are necessarily subject to risks and uncertainties inherent in
projecting future conditions and results. Actual results could differ
materially from expectations expressed in the forward-looking statements if one
or more of the underlying assumptions and expectations proves to be inaccurate
or is unrealized. Certain important factors that could cause actual results to
differ materially from those in the forward-looking statements are included in
Part II--Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations".
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business 4-14
Executive Officers of the Company 15-16
2. Properties 16-18
3. Legal Proceedings 18-19
4. Submission of Matters to a Vote of Security Holders 19
PART II
5. Market for the Registrant's Common Stock and Related Shareowner Matters 20
6. Selected Financial Data 21
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 22-34
7A. Quantitative and Qualitative Disclosures About Market Risk 35
8. Financial Statements and Supplementary Data 36-68
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 69
PART III
10. Directors and Executive Officers of the Registrant 69
11. Executive Compensation 69
12. Security Ownership of Certain Beneficial Owners and Management 69
13. Certain Relationships and Related Transactions 69
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 70
SIGNATURES
Signatures 71-72
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PART I
ITEM 1. BUSINESS
GENERAL
Eastman Chemical Company ("Eastman" or the "Company") is a global chemical
company with a broad portfolio of chemical, plastic, and fiber products. The
Company manufactures and sells chemicals and specialty polymers supplied to the
inks, coatings, adhesives, sealants, and textile industries; fine chemicals;
performance chemicals and intermediates; specialty plastics; polyester plastics
such as polyethylene terephthalate ("PET") sold under the trademark EASTAPAK
polymers; and fibers. The Company believes it has a competitive advantage in
several product areas due to its high level of manufacturing integration, the
use of state of the art process technologies, and its operating efficiencies due
to its large-scale plants. In 1999, the Company had sales of $4.59 billion,
operating earnings of $202 million, net earnings of $48 million, and diluted
earnings per share of $0.61.
The Company began business in 1920 for the purpose of producing photographic
chemicals. Today, the Company is a major chemical producer and leader in the
application of several manufacturing technologies, and in 1999 became an
industry leader in the area of e-commerce by being the first chemical company
to offer e-commerce capability to its customers in the United States and
Canada. The Company pioneered the application of coal gasification technology
for the production of chemicals (also referred to as "chemicals from coal
technology") and currently operates one of the largest coal gasification
facilities in the United States. The Company is also a leader in the
manufacture of oxo chemicals that are used in the production of numerous
coatings and resin intermediates, the manufacture of fine chemicals used in
photographic and other custom chemicals, and the application of advanced
environmental waste management practices for chemical manufacturing operations.
The Company is a world leader in production and recycling of a wide variety of
polyester plastics, including PET and other flexible packaging materials.
Recently, the Company reorganized its management structure into two major
business groups--chemicals and polymers--to enhance customer focus,
accountability and efficiency. The businesses, products, management, operations,
and reporting of financial and other matters of the Company are transitioning to
support the new organization. Effective with the first quarter 2000, two
operating segments--the Chemicals segment and the Polymers segment--will be
reported, reflecting the restructured management and internal financial
reporting of the Company. At that time, prior periods will be restated to
conform to the new segment structure. The Chemicals segment will include fine
chemicals; performance chemicals and intermediates; and chemicals and specialty
polymers supplied to the inks, coatings, adhesives, sealants, and textile
industries. The Polymers segment will include container plastics, specialty
plastics and fiber products. Through 1999, the Company managed its operations in
three segments--Specialty and Performance, Core Plastics, and Chemical
Intermediates--as discussed below.
The Specialty and Performance segment includes plastic, chemical, and fiber
products that are primarily sold to customers that base their buying decisions
principally on a product's performance attributes. The Core Plastics segment
includes the Company's major plastic product, EASTAPAK polymers for packaging
applications, as well as TENITE polyethylene for general purpose films. Core
Plastics products are produced in integrated manufacturing facilities and
compete based on price. The Chemical Intermediates segment contains industrial
intermediate chemical products that are sold to customers operating in mature
markets in which multiple sources of supply exist.
The Company has the capability to produce a wide range of products within its
manufacturing plant capacities and to change product mix depending on customer
demand and the Company's strategy. Eastman manages its diverse product portfolio
with a bias towards products that can contribute to stable earnings growth and,
over the chemical industry cycle, return the cost of capital in trough periods
and at least 5% above the cost of capital in peak periods. Executive management
continuously examines the Company's portfolio of products for potential
operational improvement and cost control opportunities. The Company's short-term
emphasis is directed to increasing earnings and growing its coatings, adhesives
and specialty polymers and specialty plastics product lines. In addition,
Eastman plans to remain at the leading edge within the chemical industry in
developing electronic business customer solutions.
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The following table summarizes the Company's recent financial performance and
identifiable assets by operating segment and geographic area:
SEGMENT FINANCIAL SUMMARY
(Dollars in millions) 1999 1998 1997
SALES
Specialty and Performance $ 2,850 $ 2,736 $ 2,878
Core Plastics 1,067 1,071 1,067
Chemical Intermediates 673 674 733
------- ------- -------
Consolidated Eastman total $ 4,590 $ 4,481 $ 4,678
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OPERATING EARNINGS (LOSS) (1)
Specialty and Performance $ 275 $ 357 $ 452
Core Plastics (118) (40) (92)
Chemical Intermediates 45 117 146
------- ------- -------
Consolidated Eastman total $ 202 $ 434 $ 506
======= ======= =======
ASSETS
Specialty and Performance $ 4,101 $ 3,395 $ 3,382
Core Plastics 1,614 1,822 1,775
Chemical Intermediates 588 633 621
------- ------- -------
Consolidated Eastman total $ 6,303 $ 5,850 $ 5,778
======= ======= =======
(1) Operating earnings for 1999 include the effect of a charge for
employee separations; a charge for the write-off of in-process
research and development related to the acquisition of Lawter
International, Inc. ("Lawter"); charges related to certain
discontinued capital projects, underperforming assets, and phase-out
of operations at certain sites; and other items; partially offset by a
gain recognized on the reimbursement of previously expensed pension
costs and a gain on pension settlement. These nonrecurring items are
reflected in segments as follows: Specialty and Performance, $77
million; Core Plastics, $33 million; and Chemical Intermediates, $7
million.
Operating earnings for 1998 include the effect of charges related to a
fine for violation of the Sherman Act; charges related to certain
underperforming assets and discontinued capital projects; the impact
of a power outage at the Kingsport, Tennessee, manufacturing site; and
other items. These nonrecurring items are reflected in segments as
follows: Specialty and Performance, $49 million; Core Plastics, $1
million; and Chemical Intermediates, $1 million.
Operating earnings for 1997 include a charge resulting from the
partial settlement and curtailment of pension and other postemployment
benefit liabilities resulting from a large number of employee
retirements. This charge is reflected in segments as follows:
Specialty and Performance, $38 million; Core Plastics, $14 million;
and Chemical Intermediates, $10 million.
(Dollars in millions) 1999 1998 1997
GEOGRAPHIC INFORMATION
REVENUES
United States $ 2,662 $ 2,764 $ 2,875
All foreign countries 1,928 1,717 1,803
------- ------- -------
Total $ 4,590 $ 4,481 $ 4,678
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(Dollars in millions) 1999 1998 1997
LONG-LIVED ASSETS, NET
United States $ 3,036 $ 3,088 $ 3,117
All foreign countries 914 946 764
------- ------- -------
Total $ 3,950 $ 4,034 $ 3,881
======= ======= =======
Revenues are attributed to countries based on customer location. No individual
foreign country is material with respect to revenues or long-lived assets.
BUSINESS STRATEGY
Eastman is a highly integrated, international supplier of a diversified
portfolio of chemicals, plastics, and fibers whose near-term business strategy
is to improve profitability and increase shareowner value. Specifically, the
Company's corporate strategy involves operational improvement in its current
businesses and assets through aggressive cost control measures and a long-term
strategy to transform the Company's portfolio of products and services to align
with customer requirements. The Company's strategic intent is "To Be The World's
Preferred Chemical Company." The following are the key elements the Company
employs to achieve this strategy:
Proprietary Products and Core Competencies
The Company has developed its broad chemical product line through the
application of three major areas of technical strength referred to by the
Company as technology core competencies: organic chemistry technology, polymer
technology, and cellulose technology. The organic chemistry core competency
includes coal gasification for chemicals, oxo chemistry and complex organic
chemistry technologies, and forms the basis of the Company's fine chemical and
intermediate chemical product lines. The polymer core competency includes
polyester, polyolefin, and other polymer technologies, and forms the technical
basis of the Company's polyester and polyethylene product lines. The cellulose
core competency includes cellulose conversion to acetate fibers and plastic
manufacturing technologies, and forms the basis of the Company's acetate fibers
and cellulose plastic product lines. The Company has developed or acquired
proprietary technologies and know-how with respect to each of these core
competencies. The Company's ongoing product development strategy is to build on
existing technology core competencies and develop new technology core
competencies.
Manufacturing Integration and Scale
The Company's strategy is to continue to use integration of its manufacturing
plants to develop a competitive advantage, while exploring innovative ways to
reduce capital intensity. This integration provides the Company with cost
efficient and flexible manufacturing operations. The Company's major
manufacturing plants are highly integrated. Intermediate chemicals produced at
one plant are frequently distributed between plants to produce other chemicals
and plastics. Starting with a limited number of basic raw materials, primarily
paraxylene, ethylene glycol, purified terephthalic acid ("PTA"), ethane and
propane, cellulose, methanol, coal and other basic chemicals, the Company uses
its integrated manufacturing capabilities to produce more than 400 major
products. Through its development of highly integrated manufacturing, Eastman
has the capability to safely and efficiently operate large-scale chemical
plants, including one of the world's largest integrated chemical plants in
Kingsport, Tennessee. The Company's development efforts include the continual
improvement of these operations to achieve capacity increases and other
earnings enhancement projects with relatively low capital expenditures.
E-business
A major initiative is Eastman's intent to be a leading e-business company in the
chemical industry. The Company believes e-commerce technology is fundamentally
changing the way business is done in the chemical industry
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and has been at the forefront leading the chemical and plastics industry into
the digital age. Aggressively pursuing this technology, the Company is focused
on ensuring the readiness of its internal systems and infrastructure to be able
to meet and exceed customer expectations for products and services in an
e-business environment.
In 1999, the Company added E-business capability to its World Wide Website,
EASTMAN.COM to give customers convenient access to the information they
require, from ordering online to accessing account status and product and
technical data, 24 hours a day, seven days a week. Additionally, the Company
successfully implemented the use of auction technology to sell products through
online auctions, and established relationships with Dell Computer Corporation
and UUNET, an MCI/WorldCom company, to create a Customer Enabling Program that
makes it easier for customers in the United States to engage in electronic
commerce.
Consistent with the Company's intent to be a leader in electronic commerce,
Eastman has invested in various Internet-based businesses such as ChemConnect,
a company that enables online trading of chemicals and plastics, and
webMethods, Inc., a company that provides a platform which enables companies to
pursue direct integration with trading partners.
Quality Management
The Company's goal is to be the leader in quality and value of products and
services, by focusing on customers, process control, continual improvement, and
innovation. The Company's highly integrated manufacturing operations support
the Company's total quality policy by providing internal control of
intermediate raw material processes. The Company has 15 quality system
registrations to the international quality standard, ISO 9000. Ten of these are
in the United States, two are in the United Kingdom, and one each are in Spain,
Mexico, and Argentina. Approximately 75% of 1999 sales were from products
manufactured in ISO 9000 registered quality systems.
Expansion in International Markets
Approximately 48% of the Company's customers representing 42% of the Company's
sales were outside the United States in 1999. On a long-term basis, the
Company's goal is to be positioned with resources and assets in strategic global
markets to respond to customer requirements. To serve the Company's growing
global customer base, operations outside the United States include a polyester
solid stating facility in Toronto, Canada; and manufacturing facilities for
EASTAPAK polymers in Zarate, Argentina, Cosoleacaque, Veracruz, Mexico,
Rotterdam, The Netherlands, San Roque, Spain and Workington, England; and
facilities in the United Kingdom and Hong Kong for the manufacture of fine
chemicals. In addition, the Company has facilities in Hartlepool, England and
Kuantan, Malaysia for the manufacture of specialty plastics products, including
SPECTAR copolymer used in sheet, molded, and extruded applications. The
Workington site also produces acetate tow. In 1999, a new oxo chemicals
manufacturing complex in Singapore was completed.
International growth has also been achieved through acquisitions. In 1999, the
acquisition of Lawter--a worldwide leader in the development, production and
marketing of specialty products for inks and coatings markets--added
manufacturing facilities in Dazhou, Fujian and Tanggu, People's Republic of
China; Singapore; Kallo, Belgium; Rexdale, Canada and Waterford, Ireland.
Included in the 1998 acquisition of Ernst Jager Fabrik Chemischer Rohstoffe and
its affiliates ("Jager")--a German manufacturer of specialty polymers--were
manufacturing facilities in Hamburg and Dusseldorf, Germany.
The Company's current and future business expansions in international markets
are dependent on projected economic conditions. Generally, the Company uses its
international marketing organizations to sell into international markets. After
achieving sufficient sales levels and developing an understanding of the
markets and earnings potential, the Company may invest in manufacturing
capacity appropriate to serve the region, taking into account the projected
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future business conditions in the region. See Part II--Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations--Summary by Customer Location" for a discussion of certain risks
to which the Company is subject as a result of its operating in international
markets.
Employee Ownership and Incentives
The Company believes that fostering employee stock ownership and providing
appropriate incentives will significantly influence achievement of its goal of
consistent, profitable growth. One program the Company uses to foster employee
ownership and to provide incentives for achieving Company objectives is its
sponsorship of the Eastman Investment and Employee Stock Ownership Plan
("EIP/ESOP"), a defined contribution employee stock ownership plan qualified
under Section 401(a) of the Internal Revenue Code. For the past five years,
approximately 5% of eligible employees' annual pay has been made to their
individual accounts in the form of a contribution by the Company of Eastman
common stock to the ESOP. The Company anticipates that it will continue to make
contributions for substantially all U. S. employees to either the ESOP or, for
employees who have received five or more ESOP contributions, to the Eastman
Stock Fund within the EIP. Additionally, to align further the interests of the
Company's directors and approximately 570 key managers with its shareowners,
stock ownership expectations have also been established.
The Eastman Performance Plan (the "EPP") places a portion of each employee's
annual compensation at risk and provides an annual lump-sum payment to plan
participants, only if the Company's financial performance meets pre-established
levels. An additional portion of management compensation is placed at risk and
tied to Company performance under the Eastman Annual Performance Plan and,
beginning in 2000, to organizational unit and individual performance under the
Eastman Unit Performance Plan. For further information concerning the Company's
EIP/ESOP and incentive pay plans, see Part II--Item 8--"Financial Statements and
Supplementary Data"--Note 10 to Consolidated Financial Statements and Part
III--Item 11--"Executive Compensation."
OPERATING SEGMENTS
Recently, the Company reorganized its management structure into two major
business groups--chemicals and polymers--to enhance customer focus,
accountability and efficiency. The businesses, products, management,
operations, and reporting of financial and other matters of the Company are
transitioning to support the new organization. Effective with first quarter
2000, two operating segments--the Chemicals segment and the Polymers
segment--will be reported, reflecting the restructured management and internal
financial reporting of the Company. At that time, prior periods will be
restated to conform to the new segment structure. The Chemicals segment will
include fine chemicals; performance chemicals and intermediates; and chemicals
and specialty polymers supplied to the inks, coatings, adhesives, sealants, and
textile industries. The Polymers segment will include container plastics,
specialty plastics and fiber products. Through 1999, the Company managed its
operations in three segments--Specialty and Performance, Core Plastics, and
Chemical Intermediates--as discussed below.
SPECIALTY AND PERFORMANCE SEGMENT
Specialty plastics are produced by the Company for value-added end uses, such
as toothbrushes, eyeglass frames, medical devices, electrical connectors,
tools, appliance housings, food and medical packaging, heavy gauge sheeting,
fabricated boxes, specialty packaging, films, extrusion coating, fibers, tape,
industrial strapping, and injection molding. The plastics supplied for these
end uses include polyesters, copolyesters, cellulosics, polyethylene, and
alloys of two or more plastics combined to provide specific performance
characteristics. The Company's strategy for these products is to identify and
serve selected niche markets that offer the potential for
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attractive returns. The Company's strong core competency in cellulose esters,
polyesters/copolyesters, and polyethylene allows it to offer a wide range of
differentiated high performance polymers in selected markets.
SPECTAR copolyester is the Company's fastest growing specialty plastic. Heavy
gauge sheet made of SPECTAR is used in supermarket bins, greeting card and
jewelry displays, indoor and outdoor signs, and vending machine fronts. Volume
growth has also been strong for the recently introduced EASTMAN HIFOR and MXSTEN
specialty polyethylene products. The Company believes it has a competitive
advantage due to product performance, reliability of supply, product
differentiation, integrated manufacturing capabilities, and customer service.
Specialty plastics accounted for approximately 29% of 1999 Specialty and
Performance segment sales.
The Company is one of the world's largest suppliers of cellulose acetate tow, a
product developed by the Company in the 1950's that is used by customers
primarily in the manufacture of cigarette filters. With approximately 400
million pounds of annual capacity at its plants in Kingsport, Tennessee, and
Workington, England, the Company accounts for approximately 28% of the annual
worldwide production of acetate tow, and sells to all major cigarette producers
throughout the world. The two primary raw materials used to manufacture acetate
tow are cellulose (from wood pulp) and acetic anhydride. The Company has
developed the world's only commercial coal gasification facility to produce
acetic anhydride. This facility reduces the Company's dependency on
petrochemicals otherwise required for the manufacture of acetate tow.
Competition for sales of acetate tow is based on price, product quality, and
reliability of supply. The Company believes that it enjoys a low-cost position
for raw materials as a result of its coal gasification technology, efficient
integrated manufacturing processes, and overall size.
Consumption of acetate tow is directly related to the production of filtered
cigarettes. During the period 1989-1996 worldwide acetate tow demand increased.
However, worldwide demand declined over the period 1997-1999, primarily due to
reduced demand in China and the United States. Industry capacity utilization
has decreased because of this lower demand and completion of new acetate tow
capacity in China. The supply/demand imbalance has led to lower operating
earnings for the acetate tow industry and for the Company. Over the next five
years, growth in worldwide demand for acetate tow is expected to be extremely
limited. Because of declining demand and industry overcapacity, the Company is
exploring alternatives for reducing its exposure to this product line.
Acetate yarn is produced by the Company for the textile industry. Product
price, quality, and service are the primary factors influencing
customer-purchasing decisions. This product line utilizes the Company's basic
cellulose technology core competence along with its large cellulose acetate
manufacturing position to compete effectively. The market for acetate yarn has
experienced essentially no growth during recent years, and declined in 1999 and
1998. The Company has focused its efforts on improving its operating
efficiencies to maintain its product quality and cost position. Fibers,
including acetate tow and acetate yarn, accounted for approximately 21% of 1999
Specialty and Performance segment sales.
The Company supplies a wide variety of raw materials and intermediate products
to the coatings, inks, and resins markets, including solvents, alcohols,
glycols, and resins. Although the majority of the Company's coatings, inks, and
resins products are produced and sold in the United States, new manufacturing
plants recently completed outside North America and the acquisition of Lawter
account for a growing share of this business. Most of the products in this area
are ingredients used in water- and solvent-based polymer coating systems.
Products include mixed cellulose esters, of which the Company is the world's
largest manufacturer, solvents and plasticizers. Competitive suppliers of
products into the coatings, inks, and resins markets compete based on
performance, breadth of product line, price, reliability of supply, and customer
service. The Company believes it has a competitive advantage due to its
technical knowledge, the efficiency of its proprietary oxo chemistry technology
and chemicals-from-coal technology, the breadth of its product line, and its
system of distribution. Coatings, inks and resins accounted for approximately
27% of 1999 Specialty and Performance segment sales.
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Fine chemicals produced by Eastman are used in the manufacture of a wide
variety of products such as photographic products, home care products,
agrocultural chemicals, and ethical pharmaceuticals. Many of these are custom
chemicals manufactured to precise customer specifications. Technical competence
and efficiency are major competitive elements in the fine chemicals industry.
The Company believes it has a competitive advantage because of its competency
in complex multi-step organic chemistry and the breadth of services, such as
regulatory compliance and process design and optimization, offered in custom
manufacturing from a global manufacturing base. The Company's current strategy
for fine chemicals is two-fold: (1) to improve pricing and to right-size
capacity for photographic chemicals and (2) to grow the pharmaceutical and
agrochemicals product lines. Fine chemicals accounted for approximately 12% of
1999 Specialty and Performance segment sales.
Eastman produces a variety of additives for fibers and plastics, raw materials
for adhesives and sealants, food and beverage ingredients, and other
performance products. Fiber and plastic additives are used to impart
specialized processing and performance characteristics to polymers used in the
production of a range of fibers and plastics products. The Company produces raw
materials for adhesives that are used in hot-melt and pressure-sensitive
applications. Eastman is a manufacturer of food-grade antioxidants that are
used to enhance the stability and extend the shelf life of many products
containing oils and fats. The Company also manufactures many other performance
products for use in nutrition, cosmetic, textile, and construction applications.
The Company believes it has a competitive advantage in many of the markets in
which these performance products are sold. Many proprietary products with
highly recognized trade names deliver to customers high quality and unique
performance attributes. Competitors and competitive conditions vary depending
on the market. Performance chemicals accounted for approximately 11% of 1999
Specialty and Performance segment sales.
CORE PLASTICS SEGMENT
The Company is the world's leading supplier of polyester plastics, including
EASTAPAK polymers, for packaging applications, with the majority of its sales
concentrated in North America, Europe, and Latin America. The market for
polyester plastics has grown significantly in recent years due to the
substitution of these plastics for other packaging materials used in soft drink,
food, and water containers. Industry estimates indicate that PET consumption
grew worldwide from 2.3 billion pounds per year in 1989 to approximately 12.4
billion pounds per year in 1999. Overcapacity worldwide continues to pressure
PET selling prices; however, continued high growth rates have improved the
supply/demand balance.
Competition for the large volume PET market is based largely on price and
service. Management believes that the Company's large-scale operations,
vertical integration, and manufacturing expertise provide it with a competitive
advantage by allowing the Company to position itself as a price-competitive,
consistently reliable source of supply across a broad product line. In
addition, the Company has developed proprietary polyester polymers that enable
it to respond to specific customer design and performance requirements. The
Company's current strategy is to maximize cash from this product line while
looking for opportunities to reduce the impact of PET on the Company as a
whole. Container plastics accounted for approximately 82% of 1999 Core Plastics
segment sales.
The Company manufactures low density polyethylene and linear low density
polyethylene polymers for general purpose film applications. The markets for
these polyethylene products are characterized generally as large volume with a
large number of customers and suppliers. The Company competes based on its
integrated manufacturing capabilities. Most of the Company's competitors are
larger. The Company's current strategy is to maximize the value of this product
line to enhance future opportunities. Flexible plastics accounted for
approximately 18% of 1999 Core Plastics segment sales.
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CHEMICAL INTERMEDIATES SEGMENT
Industrial intermediate chemicals are produced based on the Company's oxo
chemistry technology and chemicals-from-coal technology. These products include
oxo chemicals, basic acetyl, and plasticizers, and are marketed to customers
producing esters, polymers, industrial additives, agricultural chemicals,
industrial intermediates, monomers and polymers, medical delivery equipment,
and pharmaceuticals. In 1999, approximately 73% of these products were sold in
the United States. Volume growth rates of these chemicals tend to follow the
growth in the world economy.
Competition in the market for industrial intermediate chemicals is based on
price, customer relationships, and reliability of supply. The Company's
large-scale integrated manufacturing provides the Company with a low-cost
position in several of these products. In addition, the Company is able to
provide its customers with a reliable source of supply through an extensive
distribution network.
RAW MATERIALS
The Company purchases a substantial portion of its key raw materials under
long-term contracts, generally of three to five years initial duration with
renewal provisions. Most of those agreements do not require the Company to buy
materials if its operations are shut down. The cost of raw materials is
generally based on market price, although risk management tools may be utilized,
as appropriate, to mitigate short-term market price fluctuations. Key raw
materials purchased include paraxylene, ethylene glycol, PTA, propane and
ethane, cellulose, methanol, and coal. The Company has multiple suppliers for
most key raw materials and uses quality management principles, such as the
establishment of long-term relationships with suppliers and ongoing performance
assessment and benchmarking, as part of the total supplier selection process.
CAPITAL EXPENDITURES
Several significant projects in the Company's major capital investment program
have been completed, primarily in 1998, resulting in reduced capital
expenditures in 1999. Capital expenditures for 1999 declined to $292 million,
down significantly from the $500 million and $749 million spent in 1998 and
1997, respectively. In 2000, the Company estimates that capital expenditures
will be approximately $250-270 million. Efficiency of capital utilization is a
key initiative of the Company and, where appropriate, the Company uses
alliances and joint ventures to provide additional capital expansion.
ACQUISITIONS AND INVESTMENTS
In February 1999, Eastman purchased for cash a North American textile chemicals
business. This acquisition has not had a material effect on financial position
or results of operations of the Company.
In June 1999, the Company completed its acquisition of Lawter. Lawter develops,
produces and markets specialty products for the inks and coatings market. The
acquisition of Lawter contributed approximately 2% to Company volume and
revenues for 1999.
DISPOSITIONS
The Company sold its HQEE-Hydroquinone Di (Beta-hydroxyethyl) Ether specialty
chemicals assets in 1999. The effect of this divestiture on future results of
operations will not be material.
EMPLOYEES
The Company employs approximately 15,000 men and women worldwide. Approximately
4% of the total worldwide labor force (and a minimal number in the United
States) is represented by labor unions.
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CUSTOMERS
Eastman has an extensive customer base and, while it is not dependent on any
one customer or group of customers, loss of certain top customers could
adversely affect the Company until such business is replaced. The Company has
approximately 6,300 customers worldwide and the top 100 customers account for
approximately 60% of the Company's business.
The Company has received numerous preferred-supplier awards and is the sole
supplier to several major customers. The Company strives to be the preferred
supplier to customers in the markets it serves.
COMPETITION
The Company's competitive environment varies among markets. Some of the
Company's competitors are larger in size and capital base than the Company.
Major competitors of the Company for its key products are summarized as
follows:
KEY PRODUCTS MAJOR COMPETITORS
- ------------------------------- ---------------------------------------------------------------------------
Specialty plastics Akzo Nobel, AtoHaas, BASF, Bayer, Chevron, Dow, DuPont, Equistar,
Exxon, GE, Geon, ICI, KoSa, Mobil, Phillips, Shell, Union Carbide
Fibers Acordis, Celanese Acetate LLC, Daicel, Mitsubishi, Rhodia, Teijin
Coatings, inks, and resins BASF, Celanese, Exxon, International Paper Co., S. C. Johnson, Lonza,
Oxychem, Shell, Union Carbide
Fine chemicals Cambrex, DSM, LaPorte, Lonza
Performance chemicals AlliedSignal, ARCO, Bayer, Clariant, Daicel, Dow, Exxon, Hercules,
Huntsman, Nutrinova, Rhodia
Container plastics KoSa, Nan Ya, Shell, Wellman
Flexible plastics Chevron, Dow, Equistar, Exxon, Mobil, Shell, Union Carbide
Industrial intermediates BASF, BP Amoco, Celanese Ltd., Dow, Exxon, Rhodia, Union Carbide
RESEARCH AND DEVELOPMENT
The Company directs its research and development programs toward four
objectives: 1) continually improving product quality by improvement in
manufacturing technology and processes; 2) lowering manufacturing costs through
process improvement; 3) conducting exploratory research to develop new product
lines and markets; and 4) developing new products and processes that are
compatible with the Company's commitment to RESPONSIBLE CARE(R) (see
"Environmental" section).
Major achievements in research and development during the last several years
include enhancements of the oxo chemistry technology, development of new
copolyesters for specific market applications, and improved intermediates and
polyester manufacturing technology. The Company has developed wastewater
treatment technology and technology to improve PET recycling. Eastman has also
developed technology that provides a faster, lower-cost route to production
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of EpB oxirane, an intermediate used in other chemical products. In addition,
the Company has commercialized a group of new, higher-value polyolefins with
increased tear strength and impact performance--MXSTEN and EASTMAN HIFOR.
The Company's research and development expenditures during the past five years
have averaged approximately 4% of sales annually, with 1999, 1998, and 1997
expenditures totaling $187 million, $185 million, and $191 million,
respectively. Expenditures for 2000 are expected to be lower than in 1999.
PATENTS AND TRADEMARKS
The Company owns or licenses a large number of U.S. and non-U.S. patents that
relate to a wide variety of products and processes. Company patents expire at
various times during the next several years. The Company also owns or licenses
trademarks in the U.S. and in foreign countries on major products. While these
patents, licenses, and trademarks are considered important, the Company does
not consider its business as a whole to be materially dependent upon any one
particular patent, patent license, or trademark.
SEASONALITY
Seasonality is not a significant factor for the Company, although the Specialty
and Performance segment experiences some seasonal effects during the winter
months because of reduced demand for paint products, and the Core Plastics
segment experiences the effects of reduced demand for soft-drink containers
during the first and third quarters.
MARKETING AND DISTRIBUTION
The Company markets products through a worldwide sales organization with over
60 sales offices in the United States and in 38 other countries. A majority of
sales are direct; however, some sales are made through indirect selling
channels. Products are shipped to customers directly from the Company's plants
as well as from distribution centers, with the method of shipment generally
determined by the customer.
Eastman has seen the opportunities afforded by e-commerce and in 1999 became an
industry leader by being the first chemical company to offer e-commerce
capability to its customers in the United States and Canada. Through its World
Wide Web site, EASTMAN.COM customers have convenient access to the information
they require, from ordering online to accessing account status and product and
technical data, 24 hours a day, seven days a week. The Company also
successfully implemented the use of auction technology to sell products through
online auctions.
Products are shipped to customers directly from the Company's plants as well as
from distribution centers, with the method of shipment generally determined by
the customer. The Company plans to outsource its logistics operations in 2000
to ShipChem.com, a newly formed Internet-based global logistics provider for
the chemical industry, resulting in greater efficiency in the management of
transportation activities and improved customer service.
ENVIRONMENTAL
The Company is actively engaged in the ongoing development and enhancement of
products that are environmentally responsible, such as waterborne products and
recyclable plastics. In addition, the Company is an active participant in
RESPONSIBLE CARE(R), a chemical industry initiative that focuses on improving
performance in areas including community awareness and emergency response,
pollution prevention, process safety, distribution, employee health and safety,
and product stewardship.
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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 Public Policy Committee of Eastman's Board of
Directors reviews the Company's policies and practices concerning health,
safety, and the environment, and its processes for complying with related laws
and regulations, and monitors significant related matters. The Company's policy
is to operate its plants and facilities in a manner that protects the
environment and the health and safety of its employees and the public. The
Company has made and intends to continue to make expenditures for environmental
protection and improvement in a timely manner consistent with the foregoing
policies and with the technology available. In some cases, applicable
environmental regulations, such as those adopted under the federal Clean Air
Act and the Resource Conservation and Recovery Act, and related actions of
regulatory agencies, determine the timing and amount of environmental costs
incurred by the Company.
The Company's commitment to environmental stewardship has earned favorable
recognition for the corporation as well as individual manufacturing sites.
Eastman has won awards for its energy efficiency efforts each year since the
Chemical Manufacturers Association ("CMA") began its Energy Efficiency Award
Program in 1994. In 1999, the Company's U.S. plants received a total of eight
Energy Efficiency Awards, and in 1998, three of the Company's U.S. plants
received a total of five awards. Awards have also been received in a variety of
other areas, including certification of Arkansas Operations as a Wildlife
Habitat by the National Wildlife Federation, and to Tennessee Operations, the
Nature Conservancy of Tennessee Conservation Leadership Award. In 1998, the
Company was the recipient of the Chemical Education Foundation's Vanguard Award,
which recognizes outstanding chemical product stewardship practices within the
industry. Additionally, Eastman received CSX Transportation's 1998 Chemical
Safety Excellence Award and Norfolk Southern's 1998 Thoroughbred Safety Award.
Certain of the Company's 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 closure/postclosure costs relating to environmental
remediation pursuant to the federal Resource Conservation and Recovery Act.
Because of expected sharing of costs, the availability of legal defenses, and
the Company's preliminary assessment of actions that may be required, the
Company does not believe its liability for these environmental matters,
individually or in the aggregate, will be material to Eastman's consolidated
financial position, results of operations, or competitive position. The
Company's policy is to record such liabilities when loss amounts are probable
and can be reasonably estimated.
The Company's environmental protection and improvement cash expenditures were
approximately $220 million, $190 million, and $220 million in 1999, 1998, and
1997, respectively, including investments in construction, operations, 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
capital expenditures for environmental control facilities.
BACKLOG
During 1999, the Company's backlog of firm orders averaged between $150 million
and $300 million, representing approximately two to four weeks' sales. The
Company adjusts its inventory policy to control the backlog of products
dependent 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 reduce backlog. Backlog is also affected by
utilization of a given product manufacturing capacity.
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EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the Company's executive officers is provided below:
Earnest W. Deavenport, Jr., age 61, is Chairman of the Board and Chief Executive
Officer of the Company. He joined the Company in 1960. Mr. Deavenport was named
President of the Company in 1989 and also served as Group Vice President of
Eastman Kodak Company ("Kodak") from 1989 through 1993, when the Company became
an independent business upon the spin-off by Kodak of its chemical business.
J. Brian Ferguson, age 45, is President, Polymers Group of the Company. Mr.
Ferguson joined the Company in 1977. He was named Vice President, Industry and
Federal Affairs in 1994, became Managing Director, Greater China in 1997, and
was named President, Eastman Chemicals Asia Pacific in 1998. He assumed his
current position in 1999.
Allan R. Rothwell, age 52, is President, Chemicals Group of the Company. Mr.
Rothwell joined the Company in 1969, became Vice President and General Manager,
Container Plastics Business Organization in 1994, and was appointed Vice
President, Corporate Development and Strategy in 1997. He was named Senior Vice
President and Chief Financial Officer in 1998 and assumed his current position
in 1999.
Dr. James L. Chitwood, age 56, is Senior Vice President, Corporate Strategy and
Chief Technology Officer of the Company. Dr. Chitwood joined the Company in
1968, was named Senior Vice President of the Company in 1989, Group Vice
President, Specialty Business Group in 1991, Senior Vice President with
responsibility for Company business organizations in 1994, and from 1996 to 1999
was Senior Vice President with responsibility for operations outside North
America. He also served as Vice President of Kodak from 1984 through 1993.
James P. Rogers, age 48, joined the Company in 1999 as Senior Vice President
and Chief Financial Officer. Mr. Rogers served previously as Executive Vice
President and Chief Financial Officer of GAF Materials Corporation. He also
served as Executive Vice President, Finance, of International Specialty
Products, Inc., which was spun off from GAF in 1997.
Betty W. DeVinney, age 55, is Vice President, Communications and Public Affairs
of the Company. Mrs. DeVinney joined the Company in 1973. She became Manager,
Employment in 1991, Manager, Community Relations in 1995 and Manager, Corporate
Relations in 1997. She assumed her current position in 1998.
Theresa K. Lee, age 47, became Vice President, General Counsel and Secretary of
the Company effective January 1, 2000, upon the assumption by Harold L.
Henderson, formerly Senior Vice President and General Counsel, of responsibility
for coordinating special initiatives under the direction of the Chief Executive
Officer. Ms. Lee joined the Company as a staff attorney in 1987, served as
Assistant General Counsel for the health, safety and environmental legal staff
from 1993 to 1995, and served as Assistant General Counsel for the corporate
legal staff from 1995, until her appointment as Vice President, Associate
General Counsel and Secretary in 1997.
Roger K. Mowen, Jr., age 54, is Vice President, CustomerFirst and Chief
Information Officer of the Company. Mr. Mowen joined the Company in 1971. He
was named Vice President and General Manager, Polymer Modifiers in 1991,
Superintendent of the Polymers Division in 1994, and President, Carolina
Operations in 1996. In 1998 he was named Vice President, Customer Demand
Chain and assumed his current position in 1999.
B. Fielding Rolston, age 58, is Vice President, Human Resources and Quality.
Mr. Rolston joined the Company in 1964, was appointed Vice President, Customer
Service and Materials Management of the Company in 1987, and Vice President,
Human Resources and Health, Safety, Environment, and Security in 1998. He
assumed his current position in 1999.
Garland S. Williamson, age 55, is Vice President, Worldwide Operations, and
Chief Health, Safety and Environmental Officer of the Company. Mr. Williamson
joined the Company in 1967. He was named Vice President, Asia Pacific
Manufacturing in 1992, and was appointed President, Texas Operations in
1996. He assumed his current position in 1998.
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Mark W. Joslin, age 40, became Vice President and Controller of the Company
effective March 1, 2000, upon the retirement of Patrick R. Kinsey, formerly
Vice President and Controller. Mr. Joslin joined the Company in 1999 as Vice
President, Finance. Mr. Joslin previously served as Chief Financial Officer,
Treasurer and Secretary of Lawter International, Inc. Prior to joining Lawter
in 1996, he was employed by Arthur Andersen LLP, Baxter International, and
ANGUS Chemical.
ITEM 2. PROPERTIES
PROPERTIES
A summary of the Company's principal manufacturing sites and the operating
segment(s) for which products are produced at each site is shown in the table
below. Eastman's plants generally are well maintained, are in good operating
condition, and are suitable and adequate for their use. Utilization of these
facilities may vary with product mix and economic, seasonal, and other business
conditions, but 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.
LOCATION UNIT SEGMENT
- ------------------------------------------------ ------------------------------------------ -----------------------------
Batesville, Arkansas Arkansas Operations Specialty and Performance
Chemical Intermediates
Columbia, South Carolina Carolina Operations Specialty and Performance
Core Plastics
Cosoleacaque, Mexico Eastman Chemical Industrial de Mexico Specialty and Performance
Core Plastics
Dazhou, Fujian, People's Republic of China Lawter International Fujian Nanping Specialty and Performance
Limited
Dusseldorf, Germany Ernst Jager Fabrik Chemischer Rohstoffe Specialty and Performance
Hamburg, Germany Ernst Jager Fabrik Chemischer Rohstoffe Specialty and Performance
Hartlepool, England Eastman Chemical Ectona, Ltd. Specialty and Performance
Core Plastics
Hong Kong Eastman Chemical Hong Kong Limited Specialty and Performance
Jurong Town, Singapore Lawter International Products Pte. Ltd. Specialty and Performance
Kallo, Belgium Lawter International Belgium, N.V. Specialty and Performance
Kingsport, Tennessee Tennessee Operations Specialty and Performance
Core Plastics
Chemical Intermediates
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LOCATION UNIT SEGMENT
- ------------------------------------------------ ------------------------------------------ -----------------------------
Kuantan, Malaysia Eastman Chemical (Malaysia) Sdn. Bhd. Specialty and Performance
Core Plastics
La Vergne, Tennessee Lawter International, Inc. Specialty and Performance
Llangefni, Wales Eastman Chemical (UK) Limited Specialty and Performance
Longview, Texas Texas Operations Specialty and Performance
Core Plastics
Chemical Intermediates
Moundville, Alabama Lawter International, Inc. Specialty and Performance
Newark, New Jersey Lawter International, Inc. Specialty and Performance
Pleasant Prairie, Wisconsin Lawter International, Inc. Specialty and Performance
Rexdale, Ontario, Canada Lawter International (Canada) Company Specialty and Performance
Rochester, New York Distillation Products Division Specialty and Performance
Chemical Intermediates
Roebuck, South Carolina ABCO Industries, Inc. Specialty and Performance
Rotterdam, Netherlands Eastman Chemical Netherlands B.V. Specialty and Performance
Core Plastics
San Roque, Spain Eastman Chemical Espana, S.A. Specialty and Performance
Core Plastics
Singapore Eastman Chemical Singapore Pte. Ltd. Specialty and Performance
Chemical Intermediates
Tanggu, People's Republic of China Lawter International, Ltd. (Tianjin) PRC Specialty and Performance
Toronto, Ontario, Canada Eastman Chemical Canada, Inc. Specialty and Performance
Core Plastics
Waterford, Ireland Lawter International, B.V. Specialty and Performance
Workington, England Eastman Chemical Ectona, Ltd. Specialty and Performance
Core Plastics
Zarate, Argentina Eastman Chemical Argentina S.R.L. Specialty and Performance
Core Plastics
The Company has a 50% interest in Primester, a joint venture which manufactures
cellulose ester at its Kingsport, Tennessee plant. The production of cellulose
ester is an intermediate step in the manufacture of acetate tow and other
cellulose-based products.
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The Company also has a 50% interest in Genencor International, a joint venture
which develops, manufactures and markets industrial enzymes and other fine and
specialty chemicals at numerous international locations.
The Company has distribution facilities at all of its plant sites. In addition,
the Company conducts manufacturing operations at three other sites and owns or
leases over 100 stand-alone distribution facilities in the United States and 19
other countries. Corporate headquarters are in Kingsport, Tennessee. The
Company's regional headquarters are in Coral Gables, Florida; The Hague, The
Netherlands; Singapore; and Kingsport, Tennessee. Technical service is provided
to the Company's customers from technical service centers in Kallo, Belgium;
Kingsport, Tennessee; Kirkby, England; Osaka, Japan; Pleasant Prairie,
Wisconsin; and Singapore. Customer service centers are located in Kingsport,
Tennessee; Rotterdam, The Netherlands; Coral Gables, Florida; and Singapore.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal injury,
patent and intellectual property, commercial, contract, environmental,
antitrust, health and safety, and employment matters, which are being handled
and defended in the ordinary course of business. While the Company is unable to
predict the outcome of these matters, it does not believe, based upon currently
available facts, that the ultimate resolution of any of such pending matters,
including those described in the following paragraphs, will have a material
adverse effect on the Company's overall financial position or results of
operations. However, adverse developments could negatively impact earnings in a
particular period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, the Company entered into a
voluntary plea agreement with the U. S. Department of Justice and agreed to pay
an $11 million fine to resolve a charge brought against the Company for
violation of Section One of the Sherman Act. Under the agreement, the Company
entered a plea of guilty to one count of price-fixing for sorbates, a class of
food preservatives, from January 1995 through June 1997. The plea agreement was
approved by the United States District Court for the Northern District of
California on October 21, 1998. The Company recognized the entire fine in third
quarter 1998 and is paying the fine in installments over a period of five
years. On October 26, 1999, the Company pleaded guilty in a Federal Court of
Canada to a violation of the Competition Act of Canada and was fined $780,000
(Canadian). The plea admitted that the same conduct that was the subject of the
September 30, 1998, plea in the United States had occurred with respect to
sorbates sold in Canada, and prohibited repetition of the conduct and provides
for future monitoring. The fine has been paid and was recognized as a charge
against earnings in the fourth quarter 1999.
In addition, the Company, along with other companies, is currently a defendant
in seventeen antitrust lawsuits brought subsequent to the Company's plea
agreement as putative class actions on behalf of certain purchasers of
sorbates. In each case, the plaintiffs allege that the defendants engaged in a
conspiracy to fix the price of sorbates and that the class members paid more
for sorbates than they would have paid absent the defendants' conspiracy. Six
of the suits (five of which have been or are in the process of being
consolidated) were filed in Superior Courts for the State of California under
various state antitrust and consumer protection laws on behalf of classes of
indirect purchasers of sorbates; six of the proceedings (which have
subsequently been consolidated or found to be related cases) were filed in the
United States District Court for the Northern District of California under
federal antitrust laws on behalf of classes of direct purchasers of sorbates;
two cases were filed in Circuit Courts for the State of Tennessee under the
antitrust and consumer protection laws of various states, including Tennessee,
on behalf of classes of indirect purchasers of sorbates in those states; one
case was filed in the United States District Court for the Southern District of
New York (and has been transferred to the Northern District of California)
under federal antitrust laws on behalf of a class of direct purchasers of
sorbates; one action was filed in the Circuit Court for the State of Wisconsin
under various state antitrust laws on behalf of a class of indirect purchasers
of sorbates in those states; and one action was filed in the District Court for
the State of Kansas under Kansas antitrust laws on behalf of a class of
indirect purchasers of sorbates in that state. The plaintiffs in most
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cases seek treble damages of unspecified amounts, attorneys' fees and costs,
and other unspecified relief; in addition, certain of the actions claim
restitution, injunction against alleged illegal conduct, and other equitable
relief. Each proceeding is in preliminary pretrial motion and discovery stage,
and none of the proposed classes has been certified.
The Company intends vigorously to defend these actions unless they can be
settled on terms acceptable to the parties. These matters could result in the
Company being subject to monetary damages and expenses. The Company recognized
a charge to earnings in the fourth quarter 1998 and an additional charge to
earnings in the fourth quarter 1999 for the estimated costs, including legal
fees, related to the pending sorbates litigation described above. Because of
the early stage of these putative class action lawsuits, however, the ultimate
outcome of these matters cannot presently be determined, and they may result in
greater or lesser liability than that currently provided for in the Company's
financial statements.
ENVIRONMENTAL MATTER
As previously reported, in May 1997, the Company received notice from the
Tennessee Department of Environment and Conservation ("TDEC") alleging that the
manner in which hazardous waste was fed into certain boilers at the Tennessee
Eastman facility in Kingsport, Tennessee violated provisions of the Tennessee
Hazardous Waste Management Act. The Company had voluntarily disclosed this
matter to TDEC in December 1996. Over the course of the last two years, the
Company has provided extensive information relating to this matter to TDEC, the
U.S. Environmental Protection Agency ("EPA"), and the U.S. Department of
Justice. On September 7, 1999, the Company and EPA entered into a Consent
Agreement and Consent Order whereby the Company agreed to pay a civil penalty
of $2.75 million to EPA for an alleged violation concerning monitoring and
recordkeeping. The Company recognized the fine in 1999 and is paying the fine
in three installments over a period of one year. Various agencies are
continuing to review the information submitted by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareowners during
the fourth quarter of 1999.
- --------------------------------
RESPONSIBLE CARE(R) is a registered service mark of the chemical industry.
EASTAPAK, EASTMAN HIFOR, EpB, MXSTEN, SPECTAR, and TENITE
are trademarks of Eastman Chemical Company.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREOWNER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange (the
"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 1999
and 1998.
CASH DIVIDENDS
HIGH LOW DECLARED
1999
1st Quarter 48 5/8 40 3/16 $.44
2nd Quarter 60 5/16 40 5/16 .44
3rd Quarter 53 13/16 38 9/16 .44
4th Quarter 49 36 .44
1998
1st Quarter 68 1/8 56 13/16 $.44
2nd Quarter 72 15/16 60 5/8 .44
3rd Quarter 62 7/16 48 15/16 .44
4th Quarter 62 5/8 43 1/2 .44
- --------------------------------
As of December 31, 1999 there were 78,248,638 shares of the Company's Common
Stock issued and outstanding, which shares were held by 72,576 shareowners of
record. These shares include 158,424 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 2000, and currently anticipates continuing to pay
quarterly cash dividends. 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 to be 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, the
Company's dividend policy may change at any time.
The Company did not sell any equity securities during the fourth quarter of
1999 in transactions not registered under the Securities Act of 1933. For
information concerning issuance of shares and option grants in 1999 under
compensation and benefit plans and shares held by the Company's charitable
foundation, see Part II--Item 8--"Financial Statements and Supplementary Data"
- -- Notes 7 and 10 to Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts) 1999 1998 1997 1996 1995
SUMMARY OF OPERATING DATA
Sales $4,590 $4,481 $4,678 $4,782 $5,040
Operating earnings 202 434 506 663 964
Earnings from operations
before income taxes 72 360 446 607 899
Net earnings 48 249 286 380 559
Basic earnings per share .61 3.15 3.66 4.84 6.84
Diluted earnings per share .61 3.13 3.63 4.79 6.78
STATEMENT OF FINANCIAL POSITION DATA
Current assets $1,489 $1,398 $1,490 $1,345 $1,487
Properties at cost 8,820 8,594 8,104 7,530 6,791
Accumulated depreciation 4,870 4,560 4,223 4,010 3,742
Total assets 6,303 5,850 5,778 5,266 4,872
Current liabilities 1,608 959 954 787 873
Long-term borrowings 1,506 1,649 1,714 1,523 1,217
Total liabilities 4,544 3,916 4,025 3,627 3,344
Total shareowners' equity 1,759 1,934 1,753 1,639 1,528
Dividends declared per share 1.76 1.76 1.76 1.72 1.64
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's consolidated
financial statements included elsewhere in this report. All references to
earnings per share contained in this report are diluted earnings per share
unless otherwise noted.
RESULTS OF OPERATIONS
EARNINGS
(Dollars in millions, except per share amounts) 1999 1998 CHANGE 1997
Operating earnings $ 202 $ 434 (53)% $ 506
Net earnings 48 249 (81) 286
Earnings per share
- --Basic .61 3.15 (81) 3.66
- --Diluted .61 3.13 (81) 3.63
1999 COMPARED WITH 1998
Earnings declined significantly in 1999 reflecting the impact of challenging
market conditions and a number of nonrecurring items mainly related to the
Company's cost control efforts and changes in the portfolio of products,
partially offset by a reimbursement of previously expensed pension costs.
Although sales volumes were higher in all three segments and were substantially
higher outside the United States, lower selling prices coupled with higher
costs for major raw materials pressured margins for many products.
Sales volumes increased 11% overall mainly due to improvement in worldwide
demand for polyethylene terephthalate ("PET"), the acquisition of Lawter
International, Inc. ("Lawter"), the completion and startup of a new oxo plant
in Singapore, and strong demand for specialty plastics. However, lower selling
prices and sharply rising costs for propane eroded margins for many products.
The Company's 1999 net earnings reflected returns of 3% on equity and 4% on
capital. The Company's cost control efforts and changes in the portfolio of
products resulted in several nonrecurring charges which significantly impacted
results for the fourth quarter and full year 1999. A program to decrease labor
costs resulted in a reduction of 1,200 employees and a pre-tax net charge of
$53 million in the fourth quarter. A pre-tax charge of $25 million was recorded
in the fourth quarter for the write-off of acquired in-process research and
development related to Lawter. In the fourth quarter, a decision was made to
discontinue production at the Company's sorbates facilities in Chocolate Bayou,
Texas and to discontinue a purified terephthalic acid ("PTA") plant project in
Columbia, South Carolina, resulting in pre-tax charges of approximately $33
million. Other nonrecurring charges which negatively affected the fourth
quarter and full year 1999 by approximately $12 million before taxes included
an adjustment to the reserve for civil litigation related to sorbates and
others matters, the write-off of purchased technology which was determined to
have no future value, and a loss recognized on an investment. A reimbursement
of previously expensed pension costs related to Holston Defense Corporation had
a positive impact on pre-tax earnings in the fourth quarter and full year 1999
of approximately $21 million.
Results for full year 1999 were also impacted by nonrecurring items including
approximately $15 million of pre-tax charges related to the phase-out of
operations at Distillation Products Industries in Rochester, New York and the
write-off of construction in progress related to an epoxybutene ("EpB") plant
project, and a pre-tax gain of approximately $8 million recognized on the sale
of assets.
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Results for the fourth quarter and full year 1999 were also negatively impacted
by pre-tax charges totaling approximately $17 million related to the write-up
of Lawter's inventory required by purchase accounting, a decrement recognized
using the last-in, first-out inventory valuation method, loss on sales of
excess spare parts, and two months of unplanned downtime at the Company's
Malaysia facility. Amendments to the Company's defined benefit pension plan
resulted in a pre-tax decrease in pension expense for the full year 1999 of
approximately $37 million. As a result of the adoption of AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"), the Company capitalized $22 million,
net of $2 million amortization, of certain internal-use software costs which
otherwise would have been expensed.
Net earnings for 1998 were negatively impacted by nonrecurring items including
an $11 million charge for violation of the Sherman Act, pre-tax charges of
approximately $33 million related to certain underperforming assets and
discontinued capital projects, and pre-tax charges of approximately $7 million
related to the impact of a power outage at the Kingsport, Tennessee,
manufacturing site, partially offset by the effect of a lower tax rate
resulting from a tax settlement which favorably affected net earnings by $15
million.
The U.S. dollar produced an unfavorable effect on sales denominated in
currencies other than U.S. dollars, although the impact on earnings was
mitigated somewhat by gains realized on currency hedging transactions.
SUMMARY BY OPERATING SEGMENT
SPECIALTY AND PERFORMANCE SEGMENT
(Dollars in millions) 1999 1998 CHANGE 1997
Sales $ 2,850 $ 2,736 4% $ 2,878
Operating earnings 275 357 (23) 452
1999 COMPARED WITH 1998
Sales for the segment increased slightly as higher sales volume, mainly
attributable to specialty plastics and the Lawter acquisition, was partially
offset by lower selling prices and product mix. Operating earnings for
individual product lines and the segment overall declined significantly as a
result of lower selling prices, higher raw materials costs, particularly for
propane, and several nonrecurring items.
In 1999, nonrecurring items totaling $77 million impacted segment results and
include charges related to exiting sorbates production at Chocolate Bayou,
Texas, phase-out of operations at Distillation Products Industries in
Rochester, New York, the write-off of construction in progress related to an
EpB plant project, write-off of acquired in-process research and development
related to Lawter, an adjustment to the reserve for sorbates civil litigation,
write-off of technology which was determined to have no future value, and a net
charge related to employee separations and pension settlement, partially offset
by the reimbursement of previously expensed pension costs related to Holston
Defense Corporation. Operating earnings for the segment were positively
affected by decreased pension expense. As a result of the adoption of SOP 98-1,
certain internal-use software costs were capitalized which otherwise would have
been expensed. For additional information, see Notes to Consolidated Financial
Statements.
Operating earnings for 1998 were impacted by nonrecurring charges totaling $49
million related to a fine for violation of the Sherman Act; charges related to
certain underperforming assets and discontinued capital projects; the impact of
a power outage at the Kingsport, Tennessee, manufacturing site; and other
items.
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Revenues for specialty plastics were moderately higher as significantly higher
volume for performance products including SPECTAR copolymer, EASTMAN HIFOR and
MXSTEN more than offset the effect of lower selling prices. Performance
chemicals sales volumes were significantly higher but the impact on revenues
was somewhat offset by lower selling prices. Fine chemicals sales volume was
significantly higher, but the effect on revenues was mitigated by a shift in
product mix. Lower selling prices and lower sales volume resulted in a decline
in revenue for fibers. Significantly higher sales volume and revenues for
coatings, inks and resins resulted mainly from the acquisition of Lawter.
CORE PLASTICS SEGMENT
(Dollars in millions) 1999 1998 CHANGE 1997
Sales $ 1,067 $ 1,071 -% $ 1,067
Operating loss (118) (40) >(100) (92)
1999 COMPARED WITH 1998
Continued strong worldwide demand for PET resulted in significantly higher
sales volumes for EASTAPAK polymers. Although selling prices for container
plastics for the year overall were lower than 1998, prices increased during the
latter half of 1999. Flexible plastics sales volumes declined as the Company
continued to move the product line to more specialty products, but selling
prices were higher.
Operating earnings were negatively impacted by overall lower selling prices,
higher costs for raw materials, particularly for propane, and nonrecurring
charges totaling $33 million pertaining to write-off of construction in
progress related to a PTA plant project in Columbia, South Carolina, a loss
recognized on an investment, and a net charge related to employee separations
and pension settlement. Operating earnings for the segment were positively
affected by decreased pension expense. As a result of the adoption of SOP 98-1,
certain internal-use software costs were capitalized which otherwise would have
been expensed. For additional information, see Notes to Consolidated Financial
Statements.
CHEMICAL INTERMEDIATES SEGMENT
(Dollars in millions) 1999 1998 CHANGE 1997
Sales $ 673 $ 674 -% $ 733
Operating earnings 45 117 (62) 146
1999 COMPARED WITH 1998
Revenues were flat as moderately higher sales volume was offset by lower
selling prices. Operating earnings declined significantly reflecting lower
selling prices, higher costs for raw materials, particularly for propane, and a
net charge of $7 million related to employee separations and pension
settlement. Operating earnings for the segment were positively affected by
decreased pension expense. As a result of the adoption of SOP 98-1, certain
internal-use software costs were capitalized which otherwise would have been
expensed. For additional information, see Notes to Consolidated Financial
Statements.
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SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
(Dollars in millions) 1999 1998 CHANGE 1997
United States and Canada $ 2,869 $ 2,933 (2)% $ 3,051
Europe, Middle East, and Africa 849 752 13 780
Asia Pacific 486 429 13 506
Latin America 386 367 5 341
------- ------- -------
Total $ 4,590 $ 4,481 2 $ 4,678
======= ======= =======
1999 COMPARED WITH 1998
Sales in the United States for 1999 were $2.662 billion, down 4% from 1998
sales of $2.764 billion. Although polyethylene prices improved, selling prices
declined overall and were significantly lower for EASTAPAK polymers, oxo
chemicals products and imaging chemicals. Sales volume overall was relatively
flat as volume gains, mainly attributable to the Lawter acquisition and fine
chemicals, were offset by lower sales volume for EASTAPAK polymers, acetyls and
fibers.
Sales to customers outside the United States for 1999 were $1.928 billion, up
12% from 1998 sales of $1.717 billion due to significantly higher sales volume.
Sales outside the United States were 42% of total sales in 1999 compared with
38% for 1998. The Lawter acquisition contributed to higher sales volumes and
revenues in Asia Pacific and Europe, Middle East and Africa. Asia Pacific sales
volumes for fibers declined, but oxo chemicals products increased following the
startup of a new manufacturing site in Singapore. Latin America and Europe,
Middle East, and Africa had significant sales volume improvement for EASTAPAK
polymers, but selling prices declined.
With a substantial portion of 1999 sales to customers outside the United States
and approximately 20% of its products manufactured outside the United States in
1999 based on sales volume, Eastman is subject to the risks associated with
operating in international markets. To mitigate its exchange rate risks, the
Company frequently seeks to negotiate payment terms in U.S. dollars. In
addition, where it deems such actions advisable, the Company engages in foreign
currency hedging transactions and requires letters of credit and prepayment for
shipments where its assessment of individual customer and country risks
indicates their use is appropriate. A strong U.S. dollar against foreign
currencies resulted in an overall slightly unfavorable currency exchange
effect, primarily in Europe and Latin America. See Note 12 to Consolidated
Financial Statements and Part II--Item 7A--"Quantitative and Qualitative
Disclosures About Market Risk."
SUMMARY OF CONSOLIDATED RESULTS
(Dollars in millions) 1999 1998 CHANGE 1997
SALES $ 4,590 $ 4,481 2% $ 4,678
Sales volumes were higher in all regions and in all three segments driven by
improvement in worldwide demand for PET, volume attributable to the Lawter
acquisition, completion and startup of a new oxo plant in Singapore, and strong
demand for specialty plastics. However, a decline in selling prices
substantially offset the effect of the volume gains. Sales were negatively
affected by the strength of the U.S. dollar against foreign currencies,
primarily in Europe and Latin America.
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(Dollars in millions) 1999 1998 CHANGE 1997
GROSS PROFIT $ 822 $ 935 (12)% $ 1,096
As a percentage of sales 17.9% 20.9% 23.4%
Gross profit declined in 1999 primarily as a result of lower selling prices,
higher costs for raw materials, particularly for propane, and the effect of
several nonrecurring items. The nonrecurring items included charges related to
the phase-out of operations at certain sites, the write-off of construction in
progress related to certain plant projects, and other items, partially offset by
a reimbursement of previously expensed pension costs related to Holston Defense
Corporation. Gross profit was positively affected by lower pension expense
resulting from amendments to the Company's defined benefit pension plan. As a
result of the adoption of SOP 98-1, certain internal-use software costs were
capitalized which otherwise would have been expensed. For additional
information, see Notes to Consolidated Financial Statements.
In 1998, gross profit was impacted by lower selling prices and nonrecurring
charges related to impaired assets, a power outage at the Kingsport, Tennessee,
manufacturing site, and charges for violation of the Sherman Act.
(Dollars in millions) 1999 1998 CHANGE 1997
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 355 $ 316 12% $ 337
As a percentage of sales 7.7% 7.1% 7.2%
Selling and general administrative expenses increased as a result of the Lawter
and Jager acquisitions, E-business development, and timing of expenditures.
(Dollars in millions) 1999 1998 CHANGE 1997
RESEARCH AND DEVELOPMENT COSTS $ 187 $ 185 1% $ 191
As a percentage of sales 4.1% 4.1% 4.1%
(Dollars in millions) 1999 1998 CHANGE 1997
INTEREST COSTS $ 139 $ 127 $ 128
LESS CAPITALIZED INTEREST 13 31 41
------- ------- -------
NET INTEREST EXPENSE $ 126 $ 96 31% $ 87
======= ======= =======
Gross interest costs increased in 1999 reflecting debt assumed and incurred
related to the Lawter acquisition. Capitalized interest declined in 1999 and
1998 reflecting completion of several substantial projects in the Company's
major capital investment program during 1999 and 1998.
(Dollars in millions) 1999 1998 CHANGE 1997
OTHER (INCOME) CHARGES, NET $ 4 $ (22) >(100)% $ (27)
Other income and other charges include interest and royalty income, gains and
losses on asset sales, results from equity investments, foreign exchange
transactions, and other items. Included in 1999 is a loss on foreign
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exchange transactions, offset partially by a gain recognized on the sale of
assets. Included in 1998 is a gain on foreign exchange transactions.
(Dollars in millions) 1999 1998 CHANGE 1997
PROVISION FOR INCOME TAXES $ 24 $ 111 (78)% $ 160
Effective tax rate 33% 30.8% 35.8%
The Company recorded an income tax benefit of $15 million in 1998 attributable
to amended returns reflecting redetermined foreign sales corporation results
and the results of the completed Internal Revenue Service examination for the
years 1994 to 1996.
1998 COMPARED WITH 1997
Results for 1998 were significantly impacted by global economic conditions that
produced extreme pressure on selling prices. For the year, downward pressure on
selling prices was particularly evident for fibers, flexible plastics,
industrial intermediates, coatings, inks and resins. Average selling prices for
EASTAPAK polymers for the year were level with 1997 but declined significantly
in fourth quarter due to competitive activity. Sales volumes improved slightly
for the year and were higher in all three segments, partially offsetting the
overall decline in selling prices. The Company recognized volume improvements
in part due to the 1998 startup of new manufacturing facilities.
The Company's 1998 net earnings reflected returns of 14% on equity and 9% on
capital. Net earnings for 1998 were impacted by nonrecurring items including
charges for violation of the Sherman Act, charges related to certain
underperforming assets and discontinued projects, partially offset by the
effect of a lower tax rate. Net earnings for 1997 were impacted by nonrecurring
items, including a gain from damages awarded for patent infringement and a
charge for partial settlement and curtailment of pension and other
postemployment benefit liabilities arising from a large number of employee
retirements.
Costs for most major raw materials, including propane feedstock, paraxylene,
PTA, ethylene glycol and natural gas, were below 1997 levels but the effect of
the decline in selling prices generally offset the effect of lower raw
materials costs. Unit costs were unfavorably impacted by unused available
manufacturing capacity resulting from lower demand and inventory reductions
occurring primarily in the fourth quarter. Higher net interest costs resulted
from lower capitalized interest following the completion of several substantial
capital projects in 1998. Depreciation also increased as a result of capital
projects completed in 1998 and 1997. Selling and general administrative
expenses were positively impacted by a reduction in labor hours and lower
incentive compensation expense. The Company continued to achieve productivity
gains and cost structure improvements as a result of the Advantaged Cost 2000
initiative.
The U.S. dollar produced an unfavorable effect on sales denominated in
currencies other than U.S. dollars, although the earnings impact was generally
offset by gains realized on currency hedging transactions.
Sales volume for the Specialty and Performance segment increased for the year
but revenue declined, reflecting the effect of lower selling prices caused by
global economic conditions, industry overcapacities and competitive market
conditions. Strong volume growth for SPECTAR copolymer and growing market
acceptance of new specialty plastics such as MXSTEN and EASTMAN HIFOR were
partially offset by a decline in sales volumes for cellulosic plastics. Sales
volumes for coatings, inks and resins improved slightly from 1997, but prices
reflected industry oversupply, particularly for neopentyl glycols ("NPG").
Sales volumes for fibers for the year were lower than 1997. Performance
chemicals volumes for the year were negatively affected by competitive market
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conditions, including the effect of industry oversupply of sorbates. Fine
chemicals sales volumes declined for the year, reflecting decreased sales into
photographic markets and customer delays of custom manufacturing projects.
Specialty and Performance segment operating earnings were significantly
decreased by nonrecurring charges which included recognition of an impairment
loss related to the CHDA plant in Kingsport, Tennessee, costs related to
abandonment of certain capital projects, and charges for violation of the
Sherman Act. Operating earnings were also negatively impacted by operational
and maintenance problems which occurred primarily in the fourth quarter 1998,
including a power outage at the Kingsport, Tennessee, manufacturing site.
Operating earnings for the segment overall were positively impacted by lower
costs for raw materials, energy, selling and general administrative expenses,
and cost structure improvements resulting from the Company's Advantaged Cost
2000 initiative.
Sales revenue for the Core Plastics segment overall was relatively unchanged as
global economic conditions pressured selling prices, effectively offsetting
higher sales volume. The effect of higher selling prices for EASTAPAK polymers
achieved earlier in the year was mitigated by a significant downturn in pricing
late in the year. Sales volumes for commodity grade polyethylenes were higher
but selling prices were lower, reflecting competitive market conditions.
Operating losses for the Core Plastics segment reflected lower selling prices
and operational and maintenance problems which occurred primarily in the fourth
quarter, including a power outage at the Kingsport, Tennessee, manufacturing
site, offset somewhat by lower raw materials costs. Segment results were
positively impacted by lower selling and general administrative expenses and
cost structure improvements resulting from the Company's Advantaged Cost 2000
initiative.
Sales volumes for the Chemical Intermediates segment increased slightly for the
year but excess industry capacity, strong competitive activity, and overall
global economic conditions negatively impacted revenues and earnings. Earnings
were also impacted by operational and maintenance problems which occurred
primarily in fourth quarter, including a power outage at the Kingsport,
Tennessee, manufacturing site, and preproduction costs related to new
manufacturing facilities in Singapore. Lower raw materials costs positively
affected results. Operating earnings for the segment were positively impacted
by lower selling and general administrative expenses and cost structure
improvements resulting from the Company's Advantaged Cost 2000 initiative.
Sales in the United States for 1998 were $2.764 billion, down 4% from 1997
sales of $2.875 billion. Although sales volume was up slightly, selling prices
declined as a result of global economic conditions, particularly for
polyethylenes and oxo products.
Sales to customers outside the United States for 1998 were $1.717 billion, down
5% from 1997 sales of $1.803 billion. Sales outside the United States were 38%
of total sales in 1998 compared with 39% for 1997. Decreased sales volumes and
prices for fibers were experienced in Asia Pacific and Middle Eastern regions,
although sales volumes in Asia Pacific improved during the fourth quarter.
Latin American sales revenue improvement primarily reflected increased
manufacturing capacity in Argentina and growth in customer demand for EASTAPAK
polymers.
A strong U.S. dollar against foreign currencies resulted in unfavorable
currency exchange effects, primarily in Europe and Asia Pacific.
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LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
1999 1998 1997
FINANCIAL INDICATORS
Ratio of earnings to fixed charges 1.5x 3.2x 3.7x
Current ratio 0.9x 1.4x 1.6x
Percent of total borrowings to total capital 54% 46% 49%
Percent of floating-rate borrowings to total borrowings 23% 7% 12%
CASH FLOW
(Dollars in millions)
Net cash provided by (used in)
Operating activities $ 744 $ 731 $ 698
Investing activities (715) (545) (745)
Financing activities 128 (186) 52
------- ------- -------
Net change in cash and cash equivalents $ 157 $ -- $ 5
======= ======= =======
Cash and cash equivalents at end of period $ 186 $ 29 $ 29
======= ======= =======
Cash provided by operating activities includes the effect of lower net earnings
over the periods presented resulting from business conditions and nonrecurring
items previously discussed. Cash provided by operating activities also
increased due to cash provided by a continuous sale of accounts receivable
program. Cash used in investing activities reflects lower capital expenditures
over the periods presented as the Company's major capital expansion projects
were completed. Cash used in investing in 1999 reflects the Lawter acquisition
and the acquisition of a North American textile chemicals business, and in 1998
reflects the acquisition of Jager. Cash provided by financing activities in
1999 reflects an increase in commercial paper borrowings primarily related to
funding the Lawter acquisition and additional borrowings at yearend as a
precautionary measure related to the Year 2000 issue. In 1998, cash provided by
financing activities reflects proceeds received from an issuance of tax-exempt
bonds. In 1999, the bonds were redeemed. Cash provided by financing activities
in 1997 reflects proceeds received from an issuance of 7.60% debentures due
February 1, 2027 which were used to repay commercial paper borrowings
outstanding at that time. Also reflected in cash flows from financing activities
is the payment of dividends in all years presented and common stock repurchases
in 1999 and 1997.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 2000, the Company estimates that depreciation will be about $370 million
and that capital expenditures will be approximately $250-270 million. Long-term
commitments related to planned capital expenditures are not material. The
Company had various purchase commitments at the end of 1999 for materials,
supplies, and energy incident to the ordinary conduct of business. These
commitments, over a period of several years, approximate $1.5 billion. Eastman
has other long-term commitments relating to joint venture agreements as
described in Note 4 to Consolidated Financial Statements.
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LIQUIDITY
Eastman has access to an $800 million revolving credit facility (the "Credit
Facility") expiring in December 2000. Although the Company does not have any
amounts outstanding under the Credit Facility, any such borrowings would be
subject to interest at varying spreads above quoted market rates, principally
LIBOR. The Credit Facility also requires a facility fee on the total commitment
that varies based on Eastman's credit rating. The annual rate for such fee was
.085% in 1999 and .075% in 1998 and 1997. The Credit Facility contains a number
of covenants and events of default, including the maintenance of certain
financial ratios. Eastman was in compliance with all such covenants for all
periods. Management expects to renegotiate or replace the Credit Facility with a
similar source of funds before the Credit Facility expires in December 2000.
Eastman utilizes commercial paper, generally with maturities of 90 days or less,
to meet its liquidity needs. Because the Credit Facility, which provides
liquidity support for the commercial paper, expires in December 2000, the
commercial paper borrowings at yearend 1999 have been classified as short-term
borrowings. In 1998 and 1997, commercial paper borrowings were classified as
long-term borrowings. As of December 31, 1999, the Company's short-term
borrowings totaled $599 million, at interest rates ranging between 6.2% and
6.91%. The Company borrowed an additional $100 million prior to yearend 1999 as
a precautionary measure related to the Year 2000 issue. These additional
borrowings allowed the Company to meet certain January 2000 cash requirements
without utilizing the commercial paper markets in early January 2000. At
December 31, 1998, a total of $123 million of commercial paper was outstanding,
at interest rates ranging between 5.25% and 5.81%. In 1997, Eastman issued $300
million of 7.60% debentures due February 1, 2027, and used the proceeds to repay
commercial paper borrowings outstanding at that time.
The Company has an effective registration statement on file with the Securities
and Exchange Commission to issue up to $1 billion of debt or equity securities.
No securities have been sold from this shelf registration.
During 1998, the Company issued $23 million of tax-exempt bonds at variable
interest rates and in 1999 redeemed the bonds.
On April 13, 1999, the Company entered into an agreement that allows the
Company to sell certain domestic accounts receivable under a planned continuous
sale program to a third party. The agreement permits the sale of undivided
interests in domestic trade accounts receivable. Receivables totaling $150
million have been sold to the third party. Undivided interests in designated
receivable pools were sold to the purchaser with recourse limited to the
receivables purchased. Fees to be paid by the Company under this agreement are
based on certain variable market rate indices and are included in other
(income) charges, net, in the Consolidated Statements of Earnings,
Comprehensive Income, and Retained Earnings.
On June 9, 1999, the Company completed its acquisition of Lawter. The Company
purchased all outstanding shares of Lawter common stock for $12.25 per share.
The purchase price included cash consideration of approximately $370 million
(net of $41 million cash acquired) and the assumption of $145 million of
Lawter's debt. The transaction was financed with available cash and commercial
paper borrowings. In January 2000, the Company retired $125 million of Lawter's
obligations, financed through commercial paper borrowings.
The Company is currently authorized to repurchase up to $400 million of its
common stock. Under this authorization, a total of 1,094,800 shares of common
stock at a cost of approximately $50 million were repurchased during 1999.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes. Share repurchases
are weighed against alternative uses for available cash.
The Company expects a significant decrease in Company contributions to its
defined benefit pension plan in 2000 as a result of amendments to the plan in
1999 (discussed below) and significant return on plan assets during 1999.
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
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DIVIDENDS 1999 1998 1997
Cash dividends declared per share $ 1.76 $ 1.76 $ 1.76
AMENDMENTS TO RETIREMENT PLAN
In June 1999, the Company announced amendments to its defined benefit pension
plan, the Eastman Retirement Assistance Plan, effective January 1, 2000. The
amendments were made to align retirement benefit costs with the Company's
overall business strategies. 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 will use a pension equity
formula based on age, years of service, and final average compensation to
calculate an employee's retirement benefit from January 1, 2000 forward.
Benefits payable will be the combined pre-2000 and post-1999 benefits.
The Company's 1999 pension expense was remeasured as of June 1, 1999 based on
amended plan provisions and changes in certain plan assumptions. The plan
amendments and changes in plan assumptions resulted in a decrease in 1999
pension expense of approximately $37 million. Approximately $24 million related
to plan amendments and $13 million related to changes in plan assumptions.
The plan experienced a significant return on plan assets during 1999
(approximately 23%). This will reduce plan expense in 2000 and later years.
Annual pension expense and funding are expected to be lower under the
provisions of the amended plan.
ENVIRONMENTAL
Certain of the Company's 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 closure/postclosure costs relating to environmental
remediation pursuant to the federal Resource Conservation and Recovery Act.
Because of expected sharing of costs, the availability of legal defenses, and
the Company's preliminary assessment of actions that may be required, the
Company does not believe its liability for these environmental matters,
individually or in the aggregate, will be material to Eastman's consolidated
financial position, results of operations, or competitive position. The
Company's policy is to record such liabilities when loss amounts are probable
and can be reasonably estimated.
The Company's environmental protection and improvement cash expenditures were
approximately $220 million, $190 million, and $220 million in 1999, 1998, and
1997, respectively, including investments in construction, operations, 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
capital expenditures for environmental control facilities.
INFLATION
In recent years, inflation has not had a material adverse impact on Eastman's
costs, primarily because of price competition among suppliers of raw materials.
The cost of raw materials is generally based on market price, although risk
management tools may be utilized, as appropriate, to mitigate short-term market
price fluctuations. Significant changes in raw materials prices, particularly
petroleum derivatives, had a significant impact on costs in 1999, which the
Company was not able to fully recapture in its pricing structure.
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YEAR 2000 ISSUE UPDATE
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operation since January 1, 2000, the Company does not expect any significant
impact to its on-going business as a result of the Year 2000 issue. However, it
is possible that the full impact of the date change, which was of concern due
to computer programs that use two digits instead of four digits to define
years, has not been fully recognized. For example, it is possible that Year
2000 or similar issues such as leap-year related problems may occur with
billing, payroll, or financial closings at month, quarter, or yearend. The
Company believes that any such problems are likely to be minor and correctable.
In addition, the Company could still be negatively impacted if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The
Company is not currently aware of any significant Year 2000 or similar problems
that have arisen for its customers and suppliers.
The Company expended less than $20 million on Year 2000 readiness efforts over
a period of several years. These efforts included replacing some outdated,
non-compliant hardware and non-compliant software, as well as identifying and
remediating Year 2000 problems.
HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly-owned subsidiary of the
Company, managed the government-owned Holston Army Ammunition Plant in
Kingsport, Tennessee (the "Facility") under contract with the Department of
Army ("DOA") from 1949 until expiration of the contract (the "Contract") on
December 31, 1998. The DOA awarded a contract to manage the Facility to a third
party effective January 1, 1999.
The Contract provided for reimbursement of allowable costs incurred by Holston.
The Company recognized liabilities associated with Holston's pension, other
postretirement benefits and other termination costs in accordance with
generally accepted accounting principles. A portion of such costs has been
funded by the Company and subsequently reimbursed by the DOA.
The recording of previously unrecognized liabilities for pension and other
termination costs had no effect on 1998 or 1999 earnings because the Company
also recorded a receivable from the DOA for reimbursement of such amounts.
Reimbursement of certain previously recognized pension and postretirement
benefit costs have been or will be credited to earnings at the time of receipt
of reimbursement from the DOA. See Note 19 to Consolidated Financial
Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company is evaluating the effect of this
standard on its financial statements and will comply with requirements of the
new standard which become effective for the Company's 2001 financial reporting
cycle.
OUTLOOK
Sales volume growth is expected to continue, driving higher utilization of
capacity which the Company brought on-line in recent years. Although overall
business conditions are expected to improve, higher costs for raw materials are
expected to continue to negatively impact earnings in the near-term. The supply
and demand balance for many of the Company's products, particularly EASTAPAK
polymers, is expected to continue to improve, but sales volume for fibers is
expected to continue to decline. Through aggressive cost management and actions
taken during the fourth quarter 1999, the Company expects to achieve $100
million savings in labor-related costs during 2000 and to implement strategies
by the end of 2000 which will achieve an additional $100 million savings in
non-labor costs. To develop a portfolio which management believes would achieve
the Company's strategies for growth and value creation, the Company continues to
examine alternatives for diminishing the impact of specific products, such as
fibers and PET, while maximizing value for other products, such as fine
chemicals and polyethylene.
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FORWARD-LOOKING STATEMENTS
The above-stated expectations and certain statements in this report may be
forward-looking in nature as defined in the Private Securities Litigation
Reform Act of 1995. These statements and other forward-looking statements made
by the Company from time to time relate to such matters as planned capacity
increases and capital spending; expected tax rates and depreciation;
environmental matters; the Year 2000 issue; legal proceedings; global economic
conditions; supply and demand, volume, price, costs, margin, and sales and
earnings and cash flow expectations and strategies for individual products,
businesses, and segments as well as for the whole of Eastman Chemical Company;
cost reduction targets; and development, production, commercialization, and
acceptance of new products and technologies.
These plans and expectations are based upon certain underlying assumptions,
including those mentioned within the text of the specific statements. Such
assumptions are in turn based upon internal estimates and analyses of current
market conditions and trends, management plans and strategies, economic
conditions, and other factors. These plans and expectations and the assumptions
underlying them are necessarily subject to risks and uncertainties inherent in
projecting future conditions and results. Actual results could differ
materially from expectations expressed in the forward-looking statements if one
or more of the underlying assumptions and expectations proves to be inaccurate
or is unrealized. In addition to the factors discussed in this report, the
following are some of the important factors that could cause the Company's
actual results to differ materially from those projected in any such
forward-looking statements:
- - The Company has manufacturing and marketing operations throughout the
world, with over 40% of the Company's revenues attributable to sales
outside the United States. Economic factors, including foreign currency
exchange rates, could affect the Company's revenues, expenses and results.
Changes in laws, regulations, or other political factors in any of the
countries in which the Company operates could affect business in that
country or region, as well the Company's results of operations.
- - The Company has made and may continue to make acquisitions, divestitures
and alliances, as part of its growth strategy. There can be no assurance
that these will be completed or that such transactions will be beneficial
to the Company's results of operations.
- - The Company has undertaken and may continue to undertake productivity and
cost reduction initiatives and organizational restructurings to improve
performance and generate cost savings. There can be no assurance that
these will be completed or beneficial or that estimated cost savings from
such activities will be realized.
- - In addition to cost reduction initiatives, the Company is striving to
improve margins on its products through price increases, where warranted
and accepted by the market; however, the Company's earnings could be
negatively impacted should such increases be unrealized or not be
sufficient to cover increased raw materials costs.
- - The Company's competitive position in the markets in which it participates
is, in part, subject to external factors. For example, supply and demand
for certain of the Company's products is driven by end-use markets and
worldwide capacities which, in turn, impact demand for and pricing of the
Company's products.
- - The Company has an extensive customer base; however, loss of certain top
customers could adversely affect the Company's financial condition and
results of operations until such business is replaced.
- - Limitation of the Company's available manufacturing capacity due to
significant disruption in its manufacturing operations could have a
material adverse affect on revenues, expenses and results.
33
34
- - The Company's facilities are subject to complex 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
liabilities are believed to be adequate, but are subject to changes in
estimates on which the accruals are based and depend on a number of factors
including the nature of the allegation, the complexity of the site, the
nature of the remedy, the outcome of discussions with regulatory agencies
and other PRPs at multi-party sites, and the number and financial viability
of other PRPs.
- - The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which
are being handled and defended in the ordinary course of business. The
Company believes amounts reserved are adequate for such pending matters;
however, results of operations could be affected by significant litigation
adverse to the Company.
The foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure represents
management's best judgment as of the date of filing. The Company does not
undertake responsibility for updating such information.
- ----------------------------
EASTAPAK, EASTMAN HIFOR, EpB, MXSTEN, NPG, and
SPECTAR are trademarks of Eastman Chemical Company.
34
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in financial market conditions in the normal
course of its business due to its use of certain financial instruments as well
as transacting in various foreign currencies and funding of 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 is exposed to changes in interest rates primarily as a result of
its borrowing activities, which include short-term commercial paper and
long-term borrowings used to maintain liquidity and fund its business
operations. The Company continues to utilize U.S. dollar-denominated commercial
paper to fund capital requirements. 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.
The Company's operating cash flows denominated in foreign currencies are
exposed to changes in foreign 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 forward exchange
contracts to hedge certain firm commitments denominated in foreign currencies
and 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. The gains and losses on these contracts
offset changes in the value of related exposures. It is the Company's policy to
enter into foreign currency transactions only to the extent considered
necessary to meet its objectives as stated above. The Company does not enter
into foreign currency transactions for speculative purposes.
The Company determines its market risk utilizing sensitivity analysis, which
measures the potential losses in fair value resulting from one or more selected
hypothetical changes in interest rates and/or foreign currency exchange rates.
The market risk associated with the fair value of interest-rate-sensitive
instruments assuming an instantaneous parallel shift in interest rates of 10%
is approximately $90 million and an additional $10 million for each one
percentage point change in interest rates thereafter. This exposure is
primarily related to long-term debt with fixed interest rates. The market risk
associated with foreign currency-sensitive instruments utilizing a modified
Black-Scholes option pricing model and a 10% adverse move in the U.S. dollar
relative to each foreign currency hedged by the Company is approximately $46
million ($39 million options; $7 million forwards) and an additional $4 million
($3 million options; $1 million forwards) for an additional one percentage
point adverse change in foreign currency exchange rates. Further adverse
movements in foreign currencies would create losses in fair value; however,
such losses would not be linear to that disclosed above. This exposure, which
is primarily related to foreign currency options purchased by the Company to
manage fluctuations in foreign currencies, is limited to the dollar value of
option premiums payable by the Company for the related financial instruments.
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.
35
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM PAGE
Management's responsibility for financial statements 37
Report of independent accountants 38
Consolidated statements of earnings, comprehensive income, and retained earnings 39
Consolidated statements of financial position 40
Consolidated statements of cash flows 41
Notes to consolidated financial statements 42-68
36
37
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the accompanying
consolidated financial statements of Eastman Chemical Company and subsidiaries
appearing on pages 39 through 68. 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, independent accountants, who were responsible for
conducting their audits in accordance with auditing standards generally
accepted in the 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
nonmanagement Board members. The independent accountants 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/ Earnest W. Deavenport, Jr. /s/ James P. Rogers
- -------------------------------- --------------------------------------
Earnest W. Deavenport, Jr. James P. Rogers
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
January 28, 2000
37
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of
Eastman Chemical Company
In our opinion, the accompanying consolidated financial statements listed in
the index appearing under Item 14(a)(1) on page 70 present fairly, in all
material respects, the financial position of Eastman Chemical Company and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes 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. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, on January 1,
1999, the Company adopted AICPA Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use."
/s/ PricewaterhouseCoopers LLP
- -------------------------------------------
PRICEWATERHOUSECOOPERS LLP
New York, New York
January 28, 2000
38
39
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE
INCOME, AND RETAINED EARNINGS
(Dollars in millions, except per share amounts)
1999 1998 1997
------- ------- -------
Sales $ 4,590 $ 4,481 $ 4,678
Cost of sales 3,768 3,546 3,582
------- ------- -------
Gross profit 822 935 1,096
Selling and general administrative expenses 355 316 337
Research and development costs 187 185 191
Employee separations and pension settlement/curtailment 53 -- 62
Acquired in-process research and development 25 -- --
------- ------- -------
Operating earnings 202 434 506
Interest expense, net 126 96 87
Other (income) charges, net 4 (22) (27)
------- ------- -------
Earnings before income taxes 72 360 446
Provision for income taxes 24 111 160
------- ------- -------
Net earnings $ 48 $ 249 $ 286
======= ======= =======
Basic earnings per share $ .61 $ 3.15 $ 3.66
======= ======= =======
Diluted earnings per share $ .61 $ 3.13 $ 3.63
======= ======= =======
COMPREHENSIVE INCOME
Net earnings $ 48 $ 249 $ 286
Other comprehensive income (loss) (36) 19 (68)
------- ------- -------
Comprehensive income $ 12 $ 268 $ 218
======= ======= =======
RETAINED EARNINGS
Retained earnings at beginning of year $ 2,188 $ 2,078 $ 1,929
Net earnings 48 249 286
Cash dividends declared (138) (139) (137)
------- ------- -------
Retained earnings at end of year $ 2,098 $ 2,188 $ 2,078
======= ======= =======
The accompanying notes are an integral part of these financial statements.
39
40
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions)
DECEMBER 31,
1999 1998
------- -------
ASSETS
Current assets
Cash and cash equivalents $ 186 $ 29
Trade receivables, net of allowance of $13 and $12 572 624
Miscellaneous receivables 59 135
Inventories 485 493
Other current assets 187 117
------- -------
Total current assets 1,489 1,398
------- -------
Properties
Properties and equipment at cost 8,820 8,594
Less: Accumulated depreciation 4,870 4,560
------- -------
Net properties 3,950 4,034
------- -------
Goodwill, net of accumulated amortization of $14 and $5 271 16
Other intangibles, net of accumulated amortization of $6 and $0 175 3
Other noncurrent assets 418 399
------- -------
Total assets $ 6,303 $ 5,850
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 1,009 $ 959
Borrowings due within one year 599 --
------- -------
Total current liabilities 1,608 959
Long-term borrowings 1,506 1,649
Deferred income tax credits 485 415
Postemployment obligations 789 712
Other long-term liabilities 156 181
------- -------
Total liabilities 4,544 3,916
------- -------
Commitments and contingencies
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued -- 84,512,004 and 84,432,114) 1 1
Paid-in capital 95 94
Retained earnings 2,098 2,188
Other comprehensive loss (54) (18)
------- -------
2,140 2,265
Less: Treasury stock at cost (6,421,790 and 5,326,990 shares) 381 331
------- -------
Total shareowners' equity 1,759 1,934
------- -------
Total liabilities and shareowners' equity $ 6,303 $ 5,850
======= =======
The accompanying notes are an integral part of these financial statements.
40
41
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
1999 1998 1997
----- ----- -----
Cash flows from operating activities
Net earnings $ 48 $ 249 $ 286
----- ----- -----
Adjustments to reconcile net earnings to net cash provided
by operating activities, net of effect of acquisitions
Depreciation and amortization 383 351 327
Write-off of impaired assets 54 33 --
Write-off of acquired in-process research and
development 25 -- --
Provision (benefit) for deferred income taxes (18) 66 7
(Increase) decrease in receivables 163 19 (53)
(Increase) decrease in inventories 63 19 (65)
Increase (decrease) in incentive pay and employee
benefit liabilities (69) 57 134
Increase (decrease) in liabilities excluding
borrowings, employee benefit liabilities, and
incentive pay 115 (35) 60
Other items, net (20) (28) 2
----- ----- -----
Total adjustments 696 482 412
----- ----- -----
Net cash provided by operating activities 744 731 698
----- ----- -----
Cash flows from investing activities
Additions to properties and equipment (292) (500) (749)
Acquisitions and investments in joint ventures,
net of cash acquired (381) (27) 5
Additions to capitalized software (24) -- --
Capital advances to suppliers (21) (21) (21)
Other items 3 3 20
----- ----- -----
Net cash used in investing activities (715) (545) (745)
----- ----- -----
Cash flows from financing activities
Proceeds from long-term borrowings -- 24 295
Net increase (decrease) in commercial paper borrowings 348 (90) (82)
Repayment of borrowings (34) -- (22)
Dividends paid to shareowners (138) (138) (138)
Treasury stock purchases (51) -- (8)
Other items 3 18 7
----- ----- -----
Net cash provided by (used in) financing activities 128 (186) 52
----- ----- -----
Net change in cash and cash equivalents 157 -- 5
Cash and cash equivalents at beginning of year 29 29 24
----- ----- -----
Cash and cash equivalents at end of year $ 186 $ 29 $ 29
===== ===== =====
The accompanying notes are an integral part of these financial statements.
41
42
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of Eastman Chemical Company and
subsidiaries ("Eastman" or the "Company") are prepared in conformity
with generally accepted accounting principles 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,
revenues, and expenses of all wholly-owned subsidiaries. Eastman
accounts for joint ventures and investments in minority-owned companies
where it exercises significant influence on the equity basis.
Intercompany transactions and balances are eliminated in consolidation.
TRANSLATION OF NON-U.S. CURRENCIES
Eastman uses the local currency as the "functional currency" to
translate the accounts of all consolidated entities outside the United
States where cash flows are primarily denominated in local currencies.
The effects of translating those operations that use the local currency
as the functional currency are included as a component of comprehensive
income and shareowners' equity. The effects of remeasuring those
operations where the U.S. dollar is used as the functional currency and
all transaction gains and losses are reflected in current earnings.
REVENUE RECOGNITION
Sales are recognized when products are shipped and the earnings process
is complete. Appropriate accruals for discounts, volume incentives, and
other allowances are recorded as reductions in sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits, and readily
marketable securities with original maturities of three months or less.
INVENTORIES
Inventories are valued at cost, which is not in excess of 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 first-in,
first-out ("FIFO") or average cost method.
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.
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
42
43
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the straight-line method. For U.S. assets acquired before January 1,
1992, the Company generally uses accelerated methods to calculate the
provision for depreciation.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are amortized on a straight-line basis
over the expected useful lives of the underlying assets, generally from
5 to 40 years.
IMPAIRED ASSETS
The Company reviews the carrying values of long-lived assets,
identifiable intangibles and goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss for an asset to be held and
used is recognized when the fair value of the asset, generally based on
discounted estimated future cash flows, is less than the carrying value
of the asset. An impairment loss for assets to be disposed of is
recognized when the fair value of the asset, less costs to dispose, is
less than the carrying value of the asset.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its foreign currency exposures. The purpose of the
Company's foreign currency hedging activities is to protect the Company
from the risk that changes in exchange rates will adversely affect the
eventual dollar cash flows resulting from such transactions. The
Company enters into forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies and 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 (principally the British pound,
French franc, German mark, Japanese yen and the Euro). The Company's
forward and option contracts are accounted for as hedges because the
derivative instruments are designated and effective as hedges and
reduce the Company's exposure to foreign currency risks. Gains and
losses resulting from effective hedges of existing assets, liabilities,
firm commitments, or anticipated transactions are deferred and
recognized when the offsetting gains and losses are recognized on the
related hedged items and are reported as a component of operating
earnings. Deferred premiums are generally included in other noncurrent
assets and are amortized over the life of the contract. 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 and
forward exchange contracts mature.
INVESTMENTS
The Company includes in other noncurrent assets its investments in
joint ventures, which are managed as integral parts of the Company's
operations and accounted for on the equity basis. Eastman carries
certain investments at negative values, based on its intention to fund
its share of deficits in such investments, and includes such negative
carrying values in other long-term liabilities. The Company includes
its share of earnings and losses of such joint ventures in other income
and charges.
Marketable securities held by the Company, currently common or
preferred stock, are deemed by management to be available-for-sale and
are reported at fair value, with net unrealized gains or losses
reported as a component of other comprehensive income in shareowners'
equity. Realized gains and losses are included in earnings and are
derived using the specific identification method for determining the
cost of securities. The Company includes these investments in other
noncurrent assets.
43
44
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other equity investments, for which fair values are not readily
determinable, are carried at historical cost and are included in other
noncurrent assets.
EARNINGS PER SHARE
Basic earnings per share reflect reported earnings divided by the
weighted average number of common shares outstanding. Diluted earnings
per share include the effect of dilutive stock options outstanding
during the year.
INCOME TAXES
Deferred income taxes, reflecting the impact of temporary differences
between the assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes, are based on tax laws
currently enacted.
STOCK-BASED COMPENSATION
Compensation cost attributable to stock option and similar plans is
recognized based on the difference, if any, between the quoted market
price of the stock on the date of grant over the amount the employee is
required to pay to acquire the stock (intrinsic value method). Such
amount, if any, is accrued over the related vesting period, as
appropriate.
COMPENSATED ABSENCES
The Company accrues compensated absences and related benefits as
current charges to earnings.
COMPUTER SOFTWARE COSTS
On January 1, 1999, the Company adopted AICPA Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which requires the capitalization of
certain costs, including internal payroll costs, incurred in connection
with the development or acquisition of software for internal use.
Capitalized software costs will be amortized 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. The adoption of this standard resulted in capitalization in
1999 of $24 million, of which $2 million was amortized, for certain
internal-use software costs which otherwise would have been expensed.
The impact on 1999 net earnings was approximately $14.7 million or
$0.19 per diluted share. No restatement of prior year results was
required.
ENVIRONMENTAL COSTS
The Company accrues environmental costs when it is probable that the
Company has incurred a liability and the amount can be reasonably
estimated. Estimated costs associated with closure/postclosure are
accrued over the facilities' estimated remaining useful lives. Accruals
for environmental liabilities are included in other long-term
liabilities at undiscounted amounts 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.
44
45
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME
Components of other comprehensive income (loss) include cumulative
translation adjustments, additional minimum pension liabilities, and
unrecognized gain or loss on investments. Amounts of other
comprehensive income (loss) are presented net of applicable taxes.
Because cumulative translation adjustments are considered a component
of permanently invested unremitted earnings of subsidiaries outside the
United States, no taxes are provided on such amounts.
RECLASSIFICATIONS
The Company has reclassified certain 1998 and 1997 amounts to conform
to the 1999 presentation.
2. INVENTORIES
DECEMBER 31,
(Dollars in millions) 1999 1998
-------- --------
At FIFO or average cost (approximates current cost)
Finished goods $ 404 $ 409
Work in process 128 138
Raw materials and supplies 210 203
-------- --------
Total inventories 742 750
Reduction to LIFO value (257) (257)
-------- --------
Total inventories at LIFO value $ 485 $ 493
======== ========
Inventories valued on the LIFO method were approximately 70% of total
inventories in 1999 and 1998.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
(Dollars in millions) 1999 1998
-------- --------
Balance at beginning of year $ 8,594 $ 8,104
Additions 393 539
Deductions (167) (49)
-------- --------
Balance at end of year $ 8,820 $ 8,594
======== ========
Properties
Land $ 61 $ 45
Buildings and building equipment 884 766
Machinery and equipment 7,685 7,414
Construction in progress 190 369
-------- --------
Balance at end of year $ 8,820 $ 8,594
======== ========
45
46
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 1999 1998
-------- --------
ACCUMULATED DEPRECIATION
Balance at beginning of year $ 4,560 $ 4,223
Provision for depreciation 368 351
Deductions (58) (14)
-------- --------
Balance at end of year $ 4,870 $ 4,560
======== ========
Construction-period interest of $336 million, $325 million, and $295
million, reduced by accumulated depreciation of $157 million, $141
million, and $125 million is included in cost of properties at
December 31, 1999, 1998, and 1997, respectively.
Depreciation expense was $368 million, $351 million, and $327 million
for 1999, 1998, and 1997, respectively.
4. EQUITY INVESTMENTS AND OTHER NONCURRENT ASSETS AND LIABILITIES
Eastman has a 50% interest in Genencor International, a joint venture
engaged in developing, manufacturing, and marketing industrial enzymes
and other fine and specialty chemicals, accounted for under the equity
method and included in other noncurrent assets. At December 31, 1999
and 1998, Eastman's equity in the joint venture was $157 million and
$148 million, respectively. The Company guarantees a portion of the
joint venture's third-party borrowings. Such guarantees are not
considered material to Eastman. Management believes, based on current
facts and circumstances and the joint venture's financial position,
that the likelihood of a payment pursuant to such guarantees is remote.
Eastman has a 50% interest in and serves as the operating partner in
Primester, a joint venture engaged in the manufacture of cellulose
esters at its Kingsport, Tennessee plant, accounted for under the
equity method. The Company guarantees a portion of the principal amount
of the joint venture's third-party borrowings; however, management
believes, based on current facts and circumstances and the structure of
the venture, that the likelihood of a payment pursuant to such
guarantee is remote. At December 31, 1999 and 1998, Eastman had a
negative investment in the joint venture of $41 million for both
periods, representing the recognized portion of the venture's
accumulated deficits and the debt guarantee that it has a commitment to
fund, as necessary. Such amounts are included in other long-term
liabilities. The Company provides certain utilities and general plant
services to the joint venture. In return for Eastman providing those
services, the joint venture paid Eastman a total of $39 million in
three equal installments in 1991, 1992, and 1993. Eastman is amortizing
the deferred credit to earnings over a 10-year period.
Eastman has entered into an agreement with a supplier that guarantees
the Company's right to buy a specified quantity of a certain raw
material annually through 2007 at prices determined by the pricing
formula specified in the agreement. In return, the Company paid a total
of $239 million to the supplier through 1999 and approximately $218
million through December 31, 1998. The Company defers and amortizes
those costs over the 15-year period during which the product is
received. The Company began amortizing those costs in 1993 and has
recorded accumulated amortization of $112 million and $96 million at
December 31, 1999 and 1998, respectively.
46
47
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PAYABLES AND OTHER CURRENT LIABILITIES
DECEMBER 31,
(Dollars in millions) 1999 1998
-------- --------
Trade creditors $ 323 $ 265
Accrued payrolls, vacation, and variable-incentive compensation 143 174
Accrued pension liabilities - current -- 182
Accrued taxes 112 58
Other 431 280
-------- --------
Total $ 1,009 $ 959
======== ========
6. BORROWINGS
DECEMBER 31,
(Dollars in millions) 1999 1998
-------- --------
SHORT-TERM BORROWINGS
Commercial paper $ 398 $ --
Notes payable 125 --
Other 76 --
-------- --------
Total short-term borrowings $ 599 $ --
-------- --------
LONG-TERM BORROWINGS
6 3/8% notes due 2004 $ 500 $ 500
Variable interest rate tax-exempt bonds due 2022 -- 23
7 1/4% debentures due 2024 496 495
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 297 296
Commercial paper -- 123
Other 13 12
-------- --------
Total long-term borrowings $ 1,506 $ 1,649
-------- --------
Total borrowings $ 2,105 $ 1,649
======== ========
Eastman has access to an $800 million revolving credit facility (the
"Credit Facility") expiring in December 2000. Although the Company does
not have any amounts outstanding under the Credit Facility, any such
borrowings would be subject to interest at varying spreads above quoted
market rates, principally LIBOR. The Credit Facility also requires a
facility fee on the total commitment that varies based on Eastman's
credit rating. The annual rate for such fee was 0.085% in 1999 and
0.075% in 1998 and 1997. The Credit Facility contains a number of
covenants and events of default, including the maintenance of certain
financial ratios. Eastman was in compliance with all such covenants for
all periods.
Eastman utilizes commercial paper, generally with maturities of 90 days
or less, to meet its liquidity needs. As commercial paper is supported
by the Credit Facility that expires in December 2000, the commercial
paper borrowings at yearend 1999 have been classified as short-term
borrowings. In 1998, commercial paper borrowings were classified as
long-term borrowings. As of December 31, 1999, the Company's short-term
borrowings totaled $599 million, at interest rates ranging between 6.2%
and 6.91%.
47
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company borrowed an additional $100 million prior to yearend 1999
as a precautionary measure related to the Year 2000 issue. These
additional borrowings assured our ability to meet certain January 2000
cash requirements without utilizing the commercial paper markets in
early January 2000. At December 31, 1998, a total of $123 million of
commercial paper was outstanding, at interest rates ranging between
5.25% and 5.81%. In 1997, Eastman issued $300 million of 7.60%
debentures due February 1, 2027, and used the proceeds to repay
commercial paper borrowings outstanding at that time.
During 1998, the Company issued $23 million of tax-exempt bonds at
variable interest rates and in 1999 redeemed the bonds.
In January 2000, the Company retired $125 million of Lawter
International, Inc.'s ("Lawter") notes, with interest rates of 6.33%
and 6.91%, and financed this with commercial paper. Consequently, these
notes are classified in the consolidated financial statements at
December 31, 1999 as short-term borrowings.
7. SHAREOWNERS' EQUITY
(Dollars in millions) 1999 1998 1997
------------ ------------ ------------
Common stock at par value $ 1 $ 1 $ 1
------------ ------------ ------------
Paid-in capital
Balance at beginning of year 94 77 37
Additions 1 17 40
------------ ------------ ------------
Balance at end of year 95 94 77
------------ ------------ ------------
Retained earnings 2,098 2,188 2,078
------------ ------------ ------------
Accumulated other comprehensive income (loss)
Balance at beginning of year $ (18) $ (37) $ 31
Change in cumulative translation adjustment (46) 24 (52)
Change in unfunded minimum pension liability 7 (5) (16)
Change in unrecognized gain or loss on investment 3 -- --
------------ ------------ ------------
Balance at end of year (54) (18) (37)
------------ ------------ ------------
Treasury stock at cost (381) (331) (366)
------------ ------------ ------------
Total $ 1,759 $ 1,934 $ 1,753
============ ============ ============
Shares of common stock issued(1)
Balance at beginning of year 84,432,114 84,144,672 83,386,459
Issued for employee compensation and
benefit plans 79,890 287,442 758,213
------------ ------------ ------------
Balance at end of year 84,512,004 84,432,114 84,144,672
============ ============ ============
(1) Includes shares held in treasury.
The Company has authority 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 1999, 1998, and
1997.
48
49
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO 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. The Company has contributed to the trust a warrant to purchase
up to one million shares of common stock of the Company for par value.
The warrant 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 is exercisable have not been met.
The additions to paid-in capital for the three years are the result of
exercises of stock options by employees and the issuance of shares to
the Employee Stock Ownership Plan to settle Eastman Performance Plan
obligations.
The Company repurchased 1,094,800 shares of Eastman common stock at a
cost of approximately $50 million in 1999, no shares in 1998, and
140,801 shares at a cost of $8 million in 1997. Repurchased common
shares may be used to meet common stock requirements for benefit plans
and other corporate purposes. Treasury stock at a cost of approximately
$33 million (536,188 shares) and $1 million (18,018 shares) were
reissued in 1998 and 1997, respectively. The Company's charitable
foundation held 158,424 shares of Eastman common stock at December 31,
1999 and December 31, 1998 and 184,557 shares at December 31, 1997.
For 1999, 1998, and 1997, respectively, the weighted average number of
common shares outstanding used to compute basic earnings per share was
78.2 million, 78.9 million, and 78.1 million and for diluted earnings
per share was 78.4 million, 79.5 million, and 78.8 million, reflecting
the effect of dilutive options outstanding. Excluded were options to
purchase 2,331,341 shares of common stock at a range of prices from
$48.4375 to $74.25; 994,503 shares of common stock at a range of prices
from $56.875 to $74.25; and 790,324 shares of common stock at a range
of prices from $59.00 to $74.25, outstanding at the end of 1999, 1998,
and 1997, respectively.
In 1999, several key executive officers were awarded performance-based
stock options to further align their compensation with the return to
Eastman's shareowners and to provide additional incentive and
opportunity for reward to individuals in key positions having direct
influence over corporate actions that are expected to impact the market
price of Eastman's stock. A total of 574,000 shares will become
exercisable through October 19, 2001, if both the stock price and time
vesting conditions are met. At December 31, 1999, 45,920 shares
underlying such options were included in diluted earnings per share
calculations as a result of the stock price conditions for vesting
being met.
Additionally, 200,000 shares underlying an option issued to the Chief
Executive Officer in third quarter 1997 were excluded from diluted
earnings per share calculations because the stock price conditions to
exercise had not been met as to any of the shares as of December 31,
1999, 1998, and 1997.
8. IMPAIRMENT OF ASSETS
In 1999, the Company recorded pre-tax charges to earnings of $10
million ($6.7 million after tax) for the write-off of construction in
progress related to an epoxybutene ("EpB") plant project which was
terminated and determined to have no future value. These charges were
recorded in Cost of Sales for the Specialty and Performance segment.
In first quarter 1999, the Company announced a phase-out of operations
at Distillation Products Industries in Rochester, New York. The Company
recorded pre-tax charges to earnings of $9 million ($6 million after
49
50
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
tax) for costs associated with employee termination benefits and the
write-down of plant and equipment used at the site. These charges were
recorded in Cost of Sales for the Specialty and Performance segment.
During the fourth quarter 1999, the Company decided to discontinue
production at its sorbates facilities in Chocolate Bayou, Texas
effective June 30, 2000. The projected economic performance and cash
flows for this product line were determined to be insufficient for
remaining in this business. The Company recorded a pre-tax charge to
earnings of $17 million ($11.4 million after tax) for the write-down of
plant and equipment used at the site. This charge was recorded in Cost
of Sales for the Specialty and Performance segment.
In the fourth quarter 1999, the Company recorded pre-tax charges to
earnings of $16.3 million ($10.9 million after tax) for the write-off
of construction in progress related to a purified terephthalic acid
("PTA") plant project. This project was terminated due to unfavorable
market conditions and unsuccessful discussions with several potential
buyers of this product. A significant portion of the construction in
progress was determined to have no alternative use and no future value.
This charge was recorded in Cost of Sales for the Core Plastics
segment.
In the fourth quarter 1998, the Company recorded a pre-tax charge to
earnings of $20.3 million ($14.1 million after tax) for the write-down
of property, plant and equipment used in the production of CHDA, a
product sold in the Specialty and Performance segment. Based on
responses from customers surveyed in the fourth quarter 1998, market
outlook and estimated future cash flows for this product declined
significantly. The carrying values of assets related to CHDA production
were written down to fair market value based on estimated discounted
future cash flows. The charge was recorded in Cost of Sales for the
Specialty and Performance segment.
The Company also recorded in the fourth quarter 1998 a pre-tax charge
to earnings of $12.4 million ($8.6 million after tax) for the write-off
of construction in progress related to an EASTOTAC expansion project
and an EpB plant project. Process improvements leading to increased
EASTOTAC manufacturing capacity at the existing Longview, Texas plant
and a planned joint venture in China lead to cancellation of the
EASTOTAC expansion project. A portion of work done to date on an EpB
plant project had no future value. The EASTOTAC expansion project and
EpB plant project costs were written off and recorded in Cost of Sales
for the Specialty and Performance segment.
9. ACQUISITION OF LAWTER INTERNATIONAL, INC.
On June 9, 1999, the Company completed its acquisition of Lawter for
cash consideration of approximately $370 million (net of $41 million
cash acquired) and the assumption of $145 million of Lawter's debt.
Lawter develops, produces and markets specialty products for the inks
and coatings market.
The acquisition of Lawter has been accounted for by the purchase method
of accounting. Assets acquired and liabilities assumed have been
recorded at their fair values. Goodwill and other intangible assets are
approximately $455 million, representing the excess of cost over the
estimated fair value of net tangible assets acquired. Based on an
independent appraisal completed in the fourth quarter 1999, purchased
in-process research and development, for which no alternative uses
exist, was valued at $25 million. A charge for this amount was
recognized in the fourth quarter 1999. Goodwill will be amortized on a
straight-line basis over 40 years. Other intangibles will be amortized
on a straight-line basis over 5-40 years.
The Company has included in its consolidated financial statements the
results of operations of Lawter from the date of acquisition. Assuming
this acquisition had been made at January 1, 1999, 1998, and 1997, the
proforma results for the years then ended would not be materially
different from reported results.
50
51
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION AND COMPENSATION PLANS
OMNIBUS PLAN
Eastman's 1997 Omnibus Long-Term Compensation Plan (the "1997 Omnibus
Plan"), which is substantially similar to and intended to replace the
1994 Omnibus Long-Term Compensation Plan (the "1994 Omnibus Plan"),
provides for grants to employees of nonqualified stock options,
incentive stock options, tandem and freestanding stock appreciation
rights, performance shares, and various other stock and stock-based
awards. Certain of these awards may be based on criteria relating to
Eastman performance as established by the Compensation and Management
Development Committee of the Board of Directors. No new awards have
been made under the 1994 Omnibus Plan following the effectiveness of
the 1997 Omnibus Plan. Outstanding grants and awards under the 1994
Omnibus Plan are unaffected by the replacement of the 1994 Omnibus Plan
with the 1997 Omnibus Plan. The 1997 Omnibus Plan provides that options
can be granted through April 30, 2002, for the purchase of Eastman
common stock at an option price not less than 50% of the per share fair
market value on the date of the stock option's grant. Substantially all
grants awarded under the 1994 Omnibus Plan and under the 1997 Omnibus
Plan have been at option prices equal to the fair market value on the
date of grant. Options typically become exercisable 50% one year after
grant and 100% after two years and expire 10 years after grant. There
is a maximum of 7 million shares of common stock available for option
grants and other awards during the term of the 1997 Omnibus Plan. The
maximum number of shares of common stock with respect to one or more
options and/or SARs that may be granted during any one calendar year
under the 1997 Omnibus Plan to the Chief Executive Officer or to any of
the next four most highly compensated executive officers (each, a
"Covered Employee") is 200,000. The maximum fair market value of any
awards (other than options and SARs) that may be received by a Covered
Employee during any one calendar year under the 1997 Omnibus Plan is
equal to the fair market value of 100,000 shares of common stock as of
December 31 of the preceding year.
DIRECTOR LONG-TERM COMPENSATION PLAN
Eastman's 1999 Director Long-Term Compensation Plan (the "Director
Plan") which is substantially similar to and intended to replace the
1994 Director Long-Term Compensation Plan, provides for grants of
nonqualified stock options and restricted shares to nonemployee members
of the Board of Directors. No new awards have been made under the 1994
Director Long-Term Compensation Plan, following the effectiveness of
the 1999 Director Plan. Outstanding grants and awards under the 1994
Director Long-Term Compensation Plan are unaffected by the replacement
of the 1994 Director Plan with the 1999 Director Plan. Shares of
restricted stock are granted upon the first day of the directors'
initial term of service, and nonqualified stock options are granted
each year following the annual meeting of shareowners. The Director
Plan provides that options can be granted through the later of May 1,
2003 or the date of the annual meeting of shareowners in 2003 for the
purchase of Eastman common stock at an option price not less than the
stock's fair market value on the date of the grant. The options vest in
50% increments on the first two anniversaries of the grant date.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
Eastman's 1996 Nonemployee Director Stock Option Plan provides for
grants of nonqualified stock options to nonemployee members of the
Board of Directors in lieu of all or a portion of each member's annual
retainer. The Nonemployee Director Stock Option Plan provides that
options may be granted for the purchase of Eastman common stock at an
option price not less than the stock's fair market value on the date of
grant. The options become exercisable six months after the grant date.
The maximum number of shares of Eastman common stock available for
grant under the Plan is 150,000.
51
52
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION BALANCES AND ACTIVITY
The Company applies intrinsic value accounting for its stock option
plans. If the Company had elected to recognize compensation expense
based upon the fair value at the grant dates for awards under these
plans, the Company's net earnings and earnings per share would be
reduced to the unaudited pro forma amounts indicated below.
(Dollars in millions, except per share amounts) 1999 1998 1997
------ ------ ------
Net earnings As reported $ 48 $ 249 $ 286
Pro forma $ 45 $ 248 $ 285
Basic earnings per share As reported $ .61 $ 3.15 $ 3.66
Pro forma $ .58 $ 3.14 $ 3.65
Diluted earnings per share As reported $ .61 $ 3.13 $ 3.63
Pro forma $ .57 $ 3.12 $ 3.62
The fair value of each option is estimated on the grant date using the
Black-Scholes option-pricing model, which requires input of highly
subjective assumptions. Some of these assumptions used for grants in
1999, 1998, and 1997, respectively, include: average expected
volatility of 25.48%, 20.87%, and 21.61%; average expected dividend
yield of 4.05%, 3.07%, and 2.92%; and average risk-free interest rates
of 5.74%, 5.48%, and 6.14%. An expected option term of six years for
all periods was developed based on historical experience information.
The expected term for reloads was considered as part of this
calculation and is equivalent to the remaining term of the original
grant at the time of reload.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of
its employee stock options.
A summary of the status of the Company's stock option plans is
presented below:
1999 1998 1997
---------------------- ------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------------- ------------------------ -----------------------
Outstanding at beginning of year 3,865,101 $ 51 3,716,208 $ 50 3,216,437 $ 47
Granted 1,019,977 47 479,446 57 623,735 60
Exercised 81,504 39 316,360 42 123,964 40
Forfeited or canceled 18,617 57 14,193 64 -- --
-------------------- ----------------------- ----------------------
Outstanding at end of year 4,784,957 $ 50 3,865,101 $ 51 3,716,208 $ 50
========= ========== =========
Options exercisable at yearend 3,400,079 3,267,275 2,842,573
========= ========== =========
Weighted-average fair value of
options granted during the year $ 9.82 $ 12.40 $ 14.65
Available for grant at end of year 7,503,969 8,439,445 8,766,755
========= ========== =========
52
53
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
-------- ----------- ---------- --------- ----------- ---------
$31-$40 287,151 2.8 Years $ 35 246,231 $ 34
42 6,000 9.8 42 0 --
43-44 1,440,034 4.0 43 1,440,034 43
45-46 719,351 9.0 46 551 45
48-63 1,766,777 6.8 57 1,147,619 57
64-74 565,644 5.4 65 565,644 65
--------- ---------
$31-$74 4,784,957 5.9 $ 50 3,400,079 $ 51
========= =========
EASTMAN INVESTMENT AND EMPLOYEE STOCK OWNERSHIP PLAN
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
and Employee Stock Ownership Plan ("EIP/ESOP"). Eastman anticipates
that it will make contributions for substantially all U.S. employees
equal to 5% of eligible compensation to either the ESOP, or for
employees who have five or more prior ESOP contributions, to the
Eastman Stock Fund within the Eastman Investment Plan. The Company also
sponsors an employee stock ownership plan, which is substantially
similar to the ESOP, for its international employees. Allocated shares
in the ESOP totaled 3,249,519, 2,626,880, and 2,289,826 as of December
31, 1999, 1998, and 1997, respectively.
Compensation expense is measured based on the fair value of the shares
contributed to or committed to be contributed to the EIP/ESOP. The
shares are allocated to participant accounts and held by the EIP/ESOP
until distributed to the employees at a future date, such as on the
date of termination or retirement, or until moved by the employee to
other investment funds within Eastman Investment Plan. 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.
Charges for contributions to the EIP/ESOP were $37 million, $36
million, and $36 million for 1999, 1998, and 1997, respectively.
Charges related to 1998 and 1997 were previously reported as part of
the Eastman Performance Plan.
EASTMAN PERFORMANCE PLAN
The Eastman Performance Plan (the "EPP") places a portion of each
employee's annual compensation at risk and provides a lump-sum payment
to plan participants based on the Company's financial performance. The
EPP previously included a cash component and a stock component, but
effective for performance year 1999, the stock component was separated
from the EPP. Beginning with performance year 1999, the stock
53
54
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
component is reported as a Company contribution to the EIP/ESOP.
Charges for the stock component of the EPP in 1998 and 1997 have been
reclassified and reported above as part of the EIP/ESOP.
Charges under the EPP were $3 million, $30 million, and $45 million in
1999, 1998, and 1997, respectively.
ANNUAL PERFORMANCE PLAN
Eastman's managers and executive officers participate in an Annual
Performance Plan (the "APP"), which places a portion of annual cash
compensation at risk based upon Company performance as measured by
specified annual goals. Charges under the APP for 1999, 1998, and 1997
were $13 million, $8 million, and $11 million, respectively.
UNIT PERFORMANCE PLAN
Beginning in 2000, Eastman managers and executive officers will also
participate in a new variable compensation plan, the Unit Performance
Plan (the "UPP"), under which a portion of annual cash compensation is
at risk based upon organizational unit performance and the attainment
of individual objectives and expectations. The portion of a
participant's targeted pay that is at risk under the existing APP and
the new UPP will be equal to the portion of the targeted pay that would
have been at risk under the APP.
11. INCOME TAXES
Components of earnings before income taxes and the provision for U.S.
and other income taxes follow:
(Dollars in millions) 1999 1998 1997
------ ------ ------
Earnings (loss) before income taxes
United States $ 185 $ 463 $ 541
Outside the United States (113) (103) (95)
------ ------ ------
Total $ 72 $ 360 $ 446
====== ====== ======
Provision (benefit) for income taxes
United States
Current $ 31 $ 35 $ 134
Deferred (14) 64 14
Non-United States
Current 10 6 6
Deferred (3) (3) (8)
State and other
Current 1 4 13
Deferred (1) 5 1
------ ------ ------
Total $ 24 $ 111 $ 160
====== ====== ======
54
55
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Differences between the provision for income taxes and income taxes
computed using the U.S. federal statutory income tax rate follow:
(Dollars in millions) 1999 1998 1997
------ ------ ------
Amount computed using the statutory rate $ 25 $ 126 $ 156
State income taxes -- 6 9
Foreign rate variance 7 (3) (4)
Foreign sales corporation benefit (7) (24) (8)
ESOP dividend payout (1) (1) (1)
Other -- 7 8
------ ------ ------
Provision for income taxes $ 24 $ 111 $ 160
====== ====== ======
The 1998 foreign sales corporation benefit includes $12 million
attributable to amended returns reflecting redetermined foreign sales
corporation results for the years prior to 1998.
The significant components of deferred tax assets and liabilities
follow:
DECEMBER 31,
(Dollars in millions) 1999 1998
---- ----
Deferred tax assets
Postemployment obligations $285 $272
Payroll and related items 40 43
Inventories -- 1
Deferred revenue 15 17
Miscellaneous reserves 51 29
Preproduction and start-up costs 10 14
Other 55 53
---- ----
Total $456 $429
==== ====
Deferred tax liabilities
Depreciation $775 $747
Inventories 5 --
Other 96 29
---- ----
Total $876 $776
==== ====
Unremitted earnings of subsidiaries outside the United States totaling
$145 million at December 31, 1999, are considered to be reinvested
indefinitely. If remitted, they would be substantially free of
additional tax. It is not practicable to determine the deferred tax
liability for temporary differences related to those unremitted
earnings.
Current income taxes payable totaling $81 million and $16 million are
included in current liabilities at December 31, 1999 and 1998,
respectively.
55
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------- -------------------
RECORDED FAIR RECORDED FAIR
(Dollars in millions) AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Long-term borrowings $ 1,506 $ 1,424 $ 1,649 $ 1,650
Foreign exchange contracts 28 87 46 67
Eastman uses the following methods and assumptions in estimating its
fair-value disclosures for financial instruments:
LONG-TERM BORROWINGS
The Company has based the fair value for fixed-rate borrowings on
current interest rates for comparable securities. The Company's
floating-rate borrowings approximate fair value.
FOREIGN EXCHANGE CONTRACTS
The Company estimates the fair value of its foreign exchange contracts
based on dealer-quoted market prices of comparable instruments.
OTHER FINANCIAL INSTRUMENTS
Because of the nature of all other financial instruments, recorded
amounts approximate fair value. In the judgment of management, exposure
to third-party guarantees is remote and the potential earnings impact
pursuant to such guarantees is insignificant.
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
Eastman had currency options with maturities of not more than three
years to exchange various foreign currencies for U.S. dollars in the
aggregate notional amount of $639 million and $960 million at December
31, 1999 and 1998, respectively. The net unrealized gain deferred on
such options was $59 million and $21 million as of December 31, 1999
and 1998, respectively. Those amounts, based on dealer-quoted prices,
represent the estimated gain that would have been recognized had those
hedges been liquidated at estimated market value on the last day of
each year presented.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts but anticipates no such
nonperformance. The Company minimizes such risk exposure by limiting
the counterparties to major international banks and financial
institutions. Concentrations of credit risk with respect to trade
accounts receivable are generally diversified because of the large
number of entities constituting the Company's customer base and their
dispersion across many different industries and geographies.
56
57
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS
LEASE COMMITMENTS
Eastman leases facilities, principally property, machinery, and
equipment, under cancelable, noncancelable, and month-to-month
operating leases. Future lease payments, reduced by sublease income,
follow:
(Dollars in millions)
Year ending December 31,
2000 $ 55
2001 50
2002 36
2003 22
2004 12
2005 and beyond 82
-----
Total minimum payments required $ 257
=====
If certain operating leases are terminated by the Company, it
guarantees a portion of the residual value loss, if any, incurred by
the lessors in disposing of the related assets. Management believes,
based on current facts and circumstances and current values of such
equipment, that a material payment pursuant to such guarantees is
remote.
Rental expense, net of sublease income, was $83 million, $83 million,
and $80 million in 1999, 1998, and 1997, respectively.
OTHER COMMITMENTS
The Company had various purchase commitments at the end of 1999 for
materials, supplies, and energy incident to the ordinary conduct of
business. These commitments, over a period of several years,
approximate $1.5 billion. Eastman has other long-term commitments
relating to joint venture agreements as described in Note 4 to
Consolidated Financial Statements.
In 1999, the Company entered into an agreement that allows the Company
to sell certain domestic accounts receivable under a planned continuous
sale program to a third party. The agreement permits the sale of
undivided interests in domestic trade accounts receivable. Receivables
totaling $150 million have been sold to the third party. Undivided
interests in designated receivable pools were sold to the purchaser
with recourse limited to the receivables purchased. Fees paid by the
Company under this agreement are based on certain variable market rate
indices and are included in other (income) charges, net, in the
Consolidated Statements of Earnings, Comprehensive Income, and Retained
Earnings.
14. RETIREMENT PLANS
Eastman maintains defined benefit plans that provide eligible employees
with retirement benefits. Prior to 2000, benefits were calculated using
a traditional defined benefit formula based on age, years of service,
and the employees' final average compensation as defined in the plans.
Effective January 1, 2000, the defined benefit pension plan, the
Eastman Retirement Assistance Plan, has been 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
57
58
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amended defined benefit pension plan will use a pension equity formula
based on age, years of service, and final average compensation to
calculate an employee's retirement benefit from January 1, 2000
forward. Benefits payable will be the combined pre-2000 and post-1999
benefits.
Benefits are paid to employees from trust funds. Contributions to the
plan are made as permitted by laws and regulations.
Pension coverage for employees of Eastman's international operations is
provided, to the extent deemed appropriate, through separate plans. The
Company systematically provides for obligations under such plans by
depositing funds with trustees, under insurance policies, or by book
reserves.
A summary balance sheet of the change in plan assets during 1999 and
1998, the funded status of the plans, amount recognized in the
statement of financial position, and the assumptions used to develop
the projected benefit obligation for the Company's U.S. defined pension
plans are provided in the following tables. Non-U.S. plans are not
material.
SUMMARY BALANCE SHEET
(Dollars in millions)
1999 1998
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 1,511 $ 1,346
Service cost 41 47
Interest cost 87 100
Plan amendments (241) --
Actuarial loss (gain) (54) 133
Curtailments/settlements (429) 20
Benefits paid (38) (135)
-------- --------
Benefit obligation, end of year $ 877 $ 1,511
======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 990 $ 857
Actual return on plan assets 232 137
Company contributions 145 128
Benefits paid (456) (132)
-------- --------
Fair value of plan assets, end of year $ 911 $ 990
======== ========
Benefit obligations in excess of (less than) plan assets $ (34) $ 521
Unrecognized actuarial (loss) gain 7 (279)
Unrecognized prior service (decrease) cost 140 (40)
Unrecognized net transition asset 12 27
-------- --------
Net amount recognized, end of year $ 125 $ 229
======== ========
58
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 1998
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ 125 $ 229
Additional minimum liability 23 33
Accumulated other comprehensive income (23) (33)
------ ------
Net amount recognized, end of year $ 125 $ 229
====== ======
Eastman's worldwide net pension cost was $58 million, $93 million, and
$59 million in 1999, 1998, and 1997, respectively.
A summary of the components of net periodic benefit cost recognized for
Eastman's U.S. defined benefit pension plans follow:
SUMMARY OF BENEFIT COSTS
(Dollars in millions) 1999 1998 1997
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 42 $ 47 $ 49
Interest cost 86 93 103
Expected return on assets (78) (73) (99)
Amortization of:
Transition asset (6) (4) (7)
Prior service cost (5) 5 5
Actuarial loss 14 19 3
------ ------ ------
Net periodic benefit cost $ 53 $ 87 $ 54
====== ====== ======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 8.15% 6.75% 7.25%
Expected return on plan assets 9.50% 9.50% 9.50%
Rate of compensation increase 4.50% 3.75% 4.00%
In 1999, the Company recorded a $12 million gain ($8 million after tax)
for the partial settlement of pension benefit liabilities resulting
from a large number of employee retirements related to a voluntary and
involuntary separation program. In 1998, a partial settlement and
curtailment of pension and other postemployment benefit liabilities
resulted from the expiration of the Holston Defense Corporation
contract. This resulted in recognition of approximately $35 million of
previously unrecognized liabilities, but had no effect on earnings
because the Company also recorded a receivable from the Department of
Army for expected reimbursement of such amounts (see Note 19 to
Consolidated Financial Statements). In 1997, the Company recorded a $62
million charge ($40 million after tax) for the partial settlement and
curtailment of pension and other postemployment benefit liabilities
resulting from a large number of employee retirements.
15. POSTRETIREMENT WELFARE PLANS
Eastman provides life insurance and health care benefits for eligible
retirees, and health care benefits for retirees' eligible survivors. In
general, Eastman provides those benefits to retirees eligible under the
Company's U.S. pension plans.
59
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following tables set forth the status of the Company's U.S. plans
at December 31, 1999 and 1998:
SUMMARY BALANCE SHEET
(Dollars in millions) 1999 1998
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 617 $ 584
Service cost 7 8
Interest cost 43 39
Plan amendments 1 --
Actuarial loss (gain) (50) --
Curtailments/settlements -- 4
Benefits paid (31) (18)
------ ------
Benefit obligation, end of year $ 587 $ 617
====== ======
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 45 $ 34
Actual return on plan assets -- 3
Company contributions 21 27
Plan participants' contributions 1 --
Benefits paid (26) (19)
------ ------
Fair value of plan assets, end of year $ 41 $ 45
====== ======
Benefit obligations in excess of plan assets $ 546 $ 572
Unrecognized actuarial loss (47) (101)
Unrecognized prior service cost 39 42
------ ------
Net amount recognized, end of year $ 538 $ 513
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ 538 $ 513
------ ------
Net amount recognized, end of year $ 538 $ 513
====== ======
A 1% increase in health care cost trend would increase the 1999 service
and interest costs by $2.5 million, and the 1999 benefit obligation by
$35.7 million. A 1% decrease in health care cost trend would decrease
the 1999 service and interest costs by $2.1 million, and the 1999
benefit obligation by $30.4 million.
60
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net periodic postretirement benefit cost follows:
SUMMARY OF BENEFIT COSTS
(Dollars in millions) 1999 1998 1997
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 7 $ 8 $ 9
Interest cost 42 39 38
Expected return on assets (2) (2) (2)
Amortization of:
Prior service cost (3) (4) (2)
Actuarial loss 2 1 --
------ ------ ------
Net periodic benefit cost $ 46 $ 42 $ 43
====== ====== ======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 8.15% 6.75% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 3.75% 4.00%
Health care cost trend
Initial 7.00% 7.00% 7.00%
Decreasing to ultimate trend of 5.25% 4.75% 5.00%
in year 2005 2004 2002
In 1998, a partial settlement and curtailment of pension and other
postemployment benefit liabilities resulted from the December 31, 1998,
expiration of the Holston Defense Corporation contract. This resulted
in recognition of approximately $35 million of previously unrecognized
liabilities, but had no effect on earnings because the Company also
recorded a receivable from the Department of Army for expected
reimbursement of such amounts (see Note 19 to Consolidated Financial
Statements). In 1997, the Company recorded a $62 million charge ($40
million after tax) for the partial settlement and curtailment of
pension and other postemployment benefit liabilities resulting from a
large number of employee retirements.
16. EMPLOYEE SEPARATIONS AND PENSION SETTLEMENT
In the fourth quarter 1999, the Company recorded a net pre-tax charge
of $53.4 million ($36.1 million after tax) for employee termination
allowance resulting from voluntary and involuntary employee separations
which occurred during the fourth quarter 1999. The voluntary and
involuntary separations resulted in a reduction of about 1,200
employees. About 760 employees who were eligible for full retirement
benefits left the Company under a voluntary separation program and
approximately 400 additional employees were involuntarily separated
from the Company. Employees separated under these programs each
received a separation package equaling two weeks' pay for each year of
employment, up to a maximum of one year's pay and subject to certain
minimum payments. As of December 31, 1999, approximately $6 million had
been paid out under the separation programs and a balance of $65
million, which will be paid substantially during 2000, was accrued and
is included in other current liabilities in the Consolidated Statement
of Financial Position.
61
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter 1999, the Company recorded the following
amounts in the Consolidated Statement of Earnings in connection with
the employee separations and pension settlement:
(Dollars in millions)
Termination allowance $ 70.6
Gain on pension settlement (11.9)
Reduction in vacation accrual (6.5)
Other 1.2
--------
Total $ 53.4
========
17. SEGMENT INFORMATION
Recently, the Company reorganized its management structure into two
major business groups--chemicals and polymers--to enhance customer
focus, accountability and efficiency. The businesses, products,
management, operations, and reporting of financial and other matters of
the Company are transitioning to support the new organization.
Effective with the first quarter 2000, two operating segments--the
Chemicals segment and the Polymers segment--will be reported,
reflecting the restructured management and internal financial reporting
of the Company. At that time, prior periods will be restated to conform
to the new segment structure. The Chemicals segment will include fine
chemicals; performance chemicals and intermediates; and chemicals and
specialty polymers supplied to the inks, coatings, adhesives, sealants,
and textile industries. The Polymers segment will include container
plastics, specialty plastics, and fiber products. Through 1999, the
Company managed its operations in three segments--Specialty and
Performance, Core Plastics, and Chemical Intermediates--as discussed
below.
The Specialty and Performance segment contains products that are sold
to customers that base their buying decisions principally on product
performance attributes. The major products in this segment include
specialty plastics, chemicals and specialty polymers supplied to the
inks, coatings, adhesives, sealants, and textile industries, fine
chemicals, performance chemicals, and fibers. Targeted markets for this
segment are diverse and include medical, electronics, pharmaceutical,
agricultural, recreation, consumer durables, photographic, additives
for fibers and plastics, adhesives, sealants, food and beverages,
nutrition, cosmetics, textiles, construction, coatings, inks, paints,
filters, and specialty plastics and specialty packaging applications.
Competitive factors for this segment include price, product
performance, reliability of supply, customer service, environmental
responsibility, and technical competence. Specialty plastics are sold
to selected niche markets primarily in North America for value-added
end uses. Coatings and paint raw materials are sold primarily to North
American industrial concerns. The principal markets for Eastman's fine
chemicals are largely U.S. photographic, agricultural, and
pharmaceutical companies. Performance chemicals are sold primarily to
North American industries as additives for fibers and plastics, raw
materials for adhesives and sealants, food and beverage ingredients and
other performance products. Acetate tow is sold worldwide to the
tobacco industry for use in cigarette filters. The operations of
Holston Defense Corporation are included in the Specialty and
Performance segment (see Note 19 to Consolidated Financial Statements).
The Core Plastics segment includes the Company's major plastics
products, EASTAPAK polymers and TENITE polyethylene. These container
and general film products share similar physical characteristics and
compete based on price and integrated manufacturing capabilities.
Polyester plastics are sold to soft-drink and other packaging
manufacturers principally in North America, Europe, and Latin America.
Polyethylene is sold generally to North American industries.
The Chemical Intermediates segment contains industrial intermediate
chemicals that are produced based on the Company's oxo chemistry
technology and chemicals-from-coal technology and are sold to customers
62
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operating in mature markets in which multiple sources of supply exist.
They are sold generally in large volume mostly to North American
industries, with increasing focus in Southeast Asia. These products are
targeted at markets for industrial additives, agricultural chemicals,
esters, pharmaceuticals, and vinyl compounding. Competitive factors
include price, reliability of supply, and integrated manufacturing
capability. Favorable cost position, proprietary products, and
improving standards of living worldwide are key value drivers for this
segment.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Corporate and
certain other costs are allocated to operating segments using
systematic allocation methods consistently applied. Senior management
believes presenting the operating segments' performance with these
costs allocated is appropriate in the circumstances. Non-operating
income and expense, including interest cost, are not allocated to
operating segments.
(Dollars in millions) 1999 1998 1997
SALES
Specialty and Performance $ 2,850 $ 2,736 $ 2,878
Core Plastics 1,067 1,071 1,067
Chemical Intermediates 673 674 733
------- ------- -------
Consolidated Eastman total $ 4,590 $ 4,481 $ 4,678
======= ======= =======
OPERATING EARNINGS (LOSS)(1)
Specialty and Performance $ 275 $ 357 $ 452
Core Plastics (118) (40) (92)
Chemical Intermediates 45 117 146
------- ------- -------
Consolidated Eastman total $ 202 $ 434 $ 506
======= ======= =======
ASSETS
Specialty and Performance $ 4,101 $ 3,395 $ 3,382
Core Plastics 1,614 1,822 1,775
Chemical Intermediates 588 633 621
------- ------- -------
Consolidated Eastman total $ 6,303 $ 5,850 $ 5,778
======= ======= =======
(1)Operating earnings for 1999 include the effect of a charge for
employee separations; a charge for the write-off of acquired in-process
research and development related to Lawter; charges related to certain
discontinued capital projects, underperforming assets, and phase-out of
operations at certain sites; and other items; partially offset by a
gain recognized on the reimbursement of previously expensed pension
costs and a gain on pension settlement. These nonrecurring items are
reflected in segments as follows: Specialty and Performance, $77
million; Core Plastics, $33 million; and Chemical Intermediates, $7
million.
Operating earnings for 1998 include the effect of charges related to a
fine for violation of the Sherman Act; charges related to certain
underperforming assets and discontinued capital projects; the impact of
a power outage at the Kingsport, Tennessee, manufacturing site; and
other items. These nonrecurring items are reflected in segments as
follows: Specialty and Performance, $49 million; Core Plastics, $1
million; and Chemical Intermediates, $1 million.
Operating earnings for 1997 include a charge resulting from the partial
settlement and curtailment of pension and other postemployment benefit
liabilities resulting from a large number of employee retirements. The
charge is reflected in segments as follows: Specialty and Performance,
$38 million; Core Plastics, $14 million; and Chemical Intermediates,
$10 million.
63
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 1999 1998 1997
DEPRECIATION EXPENSE
Specialty and Performance $ 210 $ 202 $ 187
Core Plastics 116 110 102
Chemical Intermediates 42 39 38
------ ------ ------
Consolidated Eastman total $ 368 $ 351 $ 327
====== ====== ======
CAPITAL EXPENDITURES
Specialty and Performance $ 218 $ 264 $ 263
Core Plastics 45 109 354
Chemical Intermediates 29 127 132
------ ------ ------
Consolidated Eastman total $ 292 $ 500 $ 749
====== ====== ======
GEOGRAPHIC INFORMATION
REVENUES
United States $2,662 $2,764 $2,875
All foreign countries 1,928 1,717 1,803
------ ------ ------
Total $4,590 $4,481 $4,678
====== ====== ======
LONG-LIVED ASSETS, NET
United States $3,036 $3,088 $3,117
All foreign countries 914 946 764
------ ------ ------
Total $3,950 $4,034 $3,881
====== ====== ======
Revenues are attributed to countries based on customer location. No
individual foreign country is material with respect to revenues or
long-lived assets.
18. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
(Dollars in millions) 1999 1998 1997
Interest (net of amounts capitalized) $ 127 $ 107 $ 88
Income taxes (4) 80 131
Details of acquisitions are as follows:
(Dollars in millions) 1999 1998 1997
Fair value of assets acquired $ 662 $ 42 $ --
Liabilities assumed 281 10 --
------ ------- ------
Net cash paid for acquisitions $ 381 $ 32 $ --
Cash acquired in acquisitions 41 7 --
------ ------- ------
Cash paid for acquisitions $ 422 $ 39 $ --
====== ======= ======
64
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash flows from operating activities include gains from equity
investments of $10 million, $12 million, and $11 million for 1999,
1998, and 1997, respectively. Derivative financial instruments and
related gains and losses are included in cash flows from operating
activities. The effect on cash of foreign currency transactions and
exchange rate changes for all years presented was insignificant.
In March 1998 and 1997, the Company issued 536,188 and 611,962 shares
of its common stock with a market value of $35 million and $34 million
to its Employee Stock Ownership Plan as partial settlement of the
Company's Eastman Performance Plan payout. These noncash transactions
are not reflected in the Consolidated Statements of Cash Flows.
19. HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly-owned subsidiary of
the Company, managed, as its primary business, the government-owned
Holston Army Ammunition Plant in Kingsport, Tennessee (the "Facility")
under a series of contracts with the Department of Army (the "DOA")
from 1949 until expiration of the Contract (the "Contract") on December
31, 1998. The DOA awarded a contract to manage the Facility to a third
party commencing January 1, 1999.
The Contract provided for payment of a management fee to Holston and
reimbursement by the DOA of allowable costs incurred for the operation
of the Facility. Holston's operating results were historically
insignificant to the Company's consolidated sales and earnings.
Pension and other postretirement benefits were provided to Holston's
employees under the terms of Holston's employee benefit plans. In prior
reporting periods, the Company has recognized, in accordance with
generally accepted accounting principles, a charge to earnings of
approximately $75 million for pension and other postretirement benefit
obligations related to Holston's management of the Facility under the
Contract. During the fourth quarter 1999, the DOA reimbursed previously
expensed pension costs of approximately $20 million. This reimbursement
was credited to earnings in the fourth quarter. The Company expects the
DOA will also reimburse previously expensed postretirement benefit
costs. Such reimbursement will be credited to earnings at the time of
receipt. The reimbursement may or may not occur in a single payment. In
addition to the above, the Company previously recognized a receivable
of $48 million from the DOA for pension obligations and termination
costs related to expiration of the Contract, of which approximately $47
million had been collected at December 31, 1999.
Holston terminated its pension plan in a standard termination as of
January 1, 1999. In order to terminate the pension plan in a standard
termination, the assets of the plan had to be sufficient to provide all
benefit liabilities with respect to each participant. The Company
advanced approximately $56 million and the DOA reimbursed approximately
$56 million for pension funding through December 31, 1999.
Additionally, through December 31, 1999, the Company advanced
approximately $12 million for other termination costs, of which the DOA
has reimbursed approximately $11 million.
As previously reported, the Company is negotiating with the DOA the
settlement of certain postretirement benefit obligations. The Company's
potential obligation for these postretirement benefits, if any, in
excess of the negotiated amount will be recognized as a liability at
such time that it is probable and reasonably estimable that projected
benefit obligations exceed assets provided by the DOA. The Company
expects that the DOA will reimburse the Company for all costs
associated with operation of the Facility and expiration of the
Contract.
65
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although the DOA's position with respect to similar contracts is that
it has no legal liability for unfunded postretirement benefit costs,
other than pension obligations, and the DOA may disagree with the
specific amount of other postretirement obligations, it is the opinion
of the Company, based on the Contract terms, applicable law, and legal
and equitable precedents, that substantially all of the other
postretirement benefit costs will be paid by the DOA or recovered from
the government in related proceedings, and that the amounts, if any,
not paid or recovered, or the advancement of funds by the Company
pending such reimbursement or recovery, should not have a material
adverse effect on the consolidated financial position or results of
operations of the Company.
20. ENVIRONMENTAL MATTERS
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 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/postclosure under the federal Resource Conservation and
Recovery Act. Because of expected sharing of costs, the availability of
legal defenses, and the Company's preliminary assessment of actions
that may be required, the Company does not believe its liability for
these environmental matters, individually or in the aggregate, will be
material to Eastman's consolidated financial position, results of
operations, or competitive position.
The Company's environmental protection and improvement cash
expenditures were approximately $220 million, $190 million, and $220
million in 1999, 1998, and 1997, respectively, including investments in
construction, operations, and development.
21. LEGAL MATTERS
GENERAL
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of
business. While the Company is unable to predict the outcome of these
matters, it does not believe, based upon currently available facts,
that the ultimate resolution of any of such pending matters, including
those described in the following paragraphs, will have a material
adverse effect on the Company's overall financial position or results
of operations. However, adverse developments could negatively impact
earnings in a particular period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, the Company entered into
a voluntary plea agreement with the U. S. Department of Justice and
agreed to pay an $11 million fine to resolve a charge brought against
the Company for violation of Section One of the Sherman Act. Under the
agreement, the Company entered a plea of guilty to one count of
price-fixing for sorbates, a class of food preservatives, from January
1995 through June 1997. The plea agreement was approved by the United
States District Court for the Northern District of California on
October 21, 1998. The Company recognized the entire fine in third
quarter 1998 and is paying the fine in installments over a period of
five years. On October 26, 1999, the Company pleaded guilty in a
Federal Court of Canada to a violation of the Competition Act of Canada
and was fined $780,000 (Canadian). The plea admitted that the same
conduct that was the subject of the September 30, 1998, plea in the
United States had occurred with respect to sorbates sold in Canada, and
prohibited repetition of the conduct and provides for future
monitoring. The fine has been paid and was recognized as a charge
against earnings in the fourth quarter 1999.
66
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company, along with other companies, is currently a
defendant in seventeen antitrust lawsuits brought subsequent to the
Company's plea agreement as putative class actions on behalf of certain
purchasers of sorbates. In each case, the plaintiffs allege that the
defendants engaged in a conspiracy to fix the price of sorbates and
that the class members paid more for sorbates than they would have paid
absent the defendants' conspiracy. Six of the suits (five of which have
been or are in the process of being consolidated) were filed in
Superior Courts for the State of California under various state
antitrust and consumer protection laws on behalf of classes of indirect
purchasers of sorbates; six of the proceedings (which have subsequently
been consolidated or found to be related cases) were filed in the
United States District Court for the Northern District of California
under federal antitrust laws on behalf of classes of direct purchasers
of sorbates; two cases were filed in Circuit Courts for the State of
Tennessee under the antitrust and consumer protection laws of various
states, including Tennessee, on behalf of classes of indirect
purchasers of sorbates in those states; one case was filed in the
United States District Court for the Southern District of New York (and
has been transferred to the Northern District of California) under
federal antitrust laws on behalf of a class of direct purchasers of
sorbates; one action was filed in the Circuit Court for the State of
Wisconsin under various state antitrust laws on behalf of a class of
indirect purchasers of sorbates in those states; and one action was
filed in the District Court for the State of Kansas under Kansas
antitrust laws on behalf of a class of indirect purchasers of sorbates
in that state. The plaintiffs in most cases seek treble damages of
unspecified amounts, attorneys' fees and costs, and other unspecified
relief; in addition, certain of the actions claim restitution,
injunction against alleged illegal conduct, and other equitable relief.
Each proceeding is in preliminary pretrial motion and discovery stage,
and none of the proposed classes has been certified.
The Company intends vigorously to defend these actions unless they can
be settled on terms acceptable to the parties. These matters could
result in the Company being subject to monetary damages and expenses.
The Company recognized a charge to earnings in the fourth quarter of
1998 and a charge to earnings in the fourth quarter 1999 for the
estimated costs, including legal fees, related to the pending sorbates
litigation described above. Because of the early stage of these
putative class action lawsuits, however, the ultimate outcome of these
matters cannot presently be determined, and they may result in greater
or lesser liability than that currently provided for in the Company's
financial statements.
ENVIRONMENTAL MATTER
As previously reported, in May 1997, the Company received notice from
the Tennessee Department of Environment and Conservation ("TDEC")
alleging that the manner in which hazardous waste was fed into certain
boilers at the Tennessee Operations facility in Kingsport, Tennessee
violated provisions of the Tennessee Hazardous Waste Management Act.
The Company had voluntarily disclosed this matter to TDEC in December
1996. Over the course of the last two years, the Company has provided
extensive information relating to this matter to TDEC, the U.S.
Environmental Protection Agency ("EPA"), and the U.S. Department of
Justice. On September 7, 1999, the Company and EPA entered into a
Consent Agreement and Consent Order whereby the Company agreed to pay a
civil penalty of $2.75 million to EPA for an alleged violation
concerning monitoring and recordkeeping. The Company recognized the
fine in 1999 and is paying the fine in three installments over a period
of one year. Various agencies are continuing to review the information
submitted by the Company.
67
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(Dollars in millions, except per share amounts)
1999(1) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
Sales $1,023 $1,122 $1,190 $ 1,255
Gross profit 194 225 215 188
Operating earnings (loss) 71 96 75 (40)
Earnings before income taxes 37 64 49 (78)
Provision for income taxes 12 21 17 (26)
Net earnings (loss) 25 43 32 (52)
Basic earnings (loss) per share(3) .32 .55 .42 (.67)
Diluted earnings (loss) per share(3) .31 .54 .42 (.67)
1998(2) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
Sales $1,148 $1,165 $1,131 $ 1,037
Gross profit 254 297 261 123
Operating earnings (loss) 133 164 141 (4)
Earnings before income taxes 114 149 123 (26)
Provision for income taxes 40 52 43 (24)
Net earnings (loss) 74 97 80 (2)
Basic earnings (loss) per share(3) .95 1.22 1.01 (.02)
Diluted earnings (loss) per share(3) .94 1.21 1.00 (.02)
(1) First quarter 1999 includes charges related to a discontinued
capital project and phase-out of operations at Distillation Products
Industries in Rochester, New York. Third quarter 1999 includes a
nonrecurring gain from the sale of assets. Fourth quarter 1999
includes the effect of a charge for employee separations; a charge
for the write-off of acquired in-process research and development
related to Lawter; charges related to certain discontinued capital
projects, underperforming assets, and phase-out of operations at
certain sites, including the Company's sorbates manufacturing
facilities in Chocolate Bayou, Texas; and other items; partially
offset by a gain recognized on the reimbursement of previously
expensed pension costs and a gain from pension settlement.
(2) Third quarter 1998 includes a charge for a fine related to violation
of the Sherman Act. Fourth quarter 1998 includes charges related to
certain underperforming assets, discontinued projects, a power
outage at the Kingsport, Tennessee, manufacturing site, and other
items, partially offset by the effect of a lower tax rate resulting
from a tax settlement which favorably affected net earnings.
(3) Each quarter is calculated as a discrete period; the sum of the four
quarters may not equal the calculated full-year amount.
68
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the heading "Election of Directors" in the 2000 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 on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The material under the headings "Election of Directors -- Director Compensation"
in the 2000 Proxy Statement is incorporated by reference herein in response to
this Item. In addition, the material under the heading "Executive Compensation"
in the 2000 Proxy Statement is incorporated by reference herein in response to
this Item, except for the material under the subheadings " -- Compensation and
Management Development Committee Report on Executive Compensation" and
" -- Performance Graph," which are not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The material under the headings "Stock Ownership of Directors and Executive
Officers--Common Stock" and "Stock Ownership of Certain Beneficial Owner" in
the 2000 Proxy Statement is incorporated by reference herein in response to this
Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no transactions or relationships since the beginning of the last
completed fiscal year required to be reported in response to this Item.
69
70
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE
(a) 1. Consolidated financial statements:
Management's responsibility for financial statements 37
Report of independent accountants 38
Consolidated statements of earnings, comprehensive income, and
retained earnings 39
Consolidated statements of financial position 40
Consolidated statements of cash flows 41
Notes to consolidated financial statements 42-68
2. Financial statement schedules
All schedules have been omitted because they are not
applicable or because the required information is shown in
the financial statements or notes thereto.
3. Exhibits filed as part of this report are listed in the
Exhibit Index appearing on page 73.
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, no reports on Form
8-K were filed.
(c) The Exhibit Index and required Exhibits to this report are
included beginning at page 73.
(d) There are no applicable financial statement schedules required
to be filed as part of this report.
70
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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/ Earnest W. Deavenport, Jr.
-------------------------------------------------
Earnest W. Deavenport, Jr.
Chairman of the Board and Chief Executive Officer
Date: March 3, 2000
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 date indicated.
SIGNATURE TITLE DATE
- --------------------------------- ------------------------- --------------
PRINCIPAL EXECUTIVE OFFICER:
/s/ Earnest W. Deavenport, Jr. Chairman of the Board and March 3, 2000
- --------------------------------- Chief Executive Officer
Earnest W. Deavenport, Jr.
PRINCIPAL FINANCIAL OFFICER:
/s/ James P. Rogers Senior Vice President and March 3, 2000
- --------------------------------- Chief Financial Officer
James P. Rogers
PRINCIPAL ACCOUNTING OFFICER:
/s/ Mark W. Joslin Vice President and March 3, 2000
- --------------------------------- Controller
Mark W. Joslin
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SIGNATURE TITLE DATE
- --------------------------------- -------- -------------
DIRECTORS:
/s/ H. Jesse Arnelle Director March 3, 2000
- ---------------------------------
H. Jesse Arnelle
/s/ Calvin A. Campbell, Jr. Director March 3, 2000
- ---------------------------------
Calvin A. Campbell, Jr.
/s/ Jerry E. Dempsey Director March 3, 2000
- ---------------------------------
Jerry E. Dempsey
/s/ John W. Donehower Director March 3, 2000
- ---------------------------------
John W. Donehower
/s/ Donald W. Griffin Director March 3, 2000
- ---------------------------------
Donald W. Griffin
/s/ Lee Liu Director March 3, 2000
- ---------------------------------
Lee Liu
/s/ Marilyn R. Marks Director March 3, 2000
- ---------------------------------
Marilyn R. Marks
/s/ John A. White Director March 3, 2000
- ---------------------------------
John A. White
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73
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------- ------------
3.01 Amended and Restated Certificate of Incorporation of Eastman
Chemical Company (incorporated herein by reference to
Exhibit 3.01 to Eastman Chemical Company's Registration
Statement on Form S-1, File No. 33-72364, as amended (the
"S-1"))
3.02 Amended and Restated By-laws of Eastman Chemical Company, as
amended February 4, 1999 (incorporated herein by reference
to Exhibit 3.02 to Eastman Chemical Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (the "1998
10-K"))
4.01 Form of Eastman Chemical Company Common Stock certificate
(incorporated herein by reference to Exhibit 3.02 to Eastman
Chemical Company's Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 10-K"))
4.02 Stockholder Protection Rights Agreement dated as of December
13, 1993, between Eastman Chemical Company and First Chicago
Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 4.4 to Eastman Chemical
Company's Registration Statement on Form S-8 relating to the
Eastman Investment Plan, File No. 33-73810)
4.03 Indenture, dated as of January 10, 1994, between Eastman
Chemical Company and The Bank of New York, as Trustee (the
"Indenture") (incorporated herein by reference to Exhibit
4(a) to Eastman Chemical Company's current report on Form
8-K dated January 10, 1994 (the "8-K"))
4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by
reference to Exhibit 4(c) to the 8-K)
4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K)
4.06 Officers' Certificate pursuant to Sections 201 and 301 of
the Indenture (incorporated herein by reference to Exhibit
4(a) to Eastman Chemical Company's Current Report on Form
8-K dated June 8, 1994 (the "June 8-K"))
4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by
reference to Exhibit 4(b) to the June 8-K)
4.08 Form of 7.60% Debentures due February 1, 2027 (incorporated herein by
reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 10-K"))
4.09 Officer's Certificate pursuant to Sections 201 and 301 of
the Indenture related to 7.60% Debentures due February 1,
2027 (incorporated herein by reference to Exhibit 4.09 to
the 1996 10-K)
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74
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------- ------------
4.10 Credit Agreement, dated as of December 19, 1995 (the "Credit
Agreement") among Eastman Chemical Company, the Lenders
named therein, and The Chase Manhattan Bank, as Agent
(incorporated herein by reference to Exhibit 4.08 to Eastman
Chemical Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (the "1995 10-K"))
4.11 $150,000,000 Accounts Receivable Securitization agreement
dated April 13, 1999, between the Company and Bank One, NA,
as agent. Pursuant to Item 601(b)(4)(iii) of Regulation S-K,
in lieu of filing a copy of such agreement, the Company
agrees to furnish a copy of such agreement to the Commission
upon request.
*10.01 Eastman Annual Performance Plan, as amended 77-83
*10.02 Eastman Unit Performance Plan 84-88
*10.03 Eastman Performance Plan, as amended 89-100
*10.04 1994 Director Long-Term Compensation Plan, as amended
(incorporated herein by reference to Exhibit 10.02 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995)
*10.05 1999 Director Long-Term Compensation Plan (incorporated
herein by reference to Appendix A to Eastman Chemical
Company's definitive 1999 Annual Meeting Proxy Statement
filed pursuant to Regulation 14A)
*10.06 1994 Omnibus Long-Term Compensation Plan (incorporated
herein by reference to Exhibit 10.03 to Eastman Chemical
Company's Registration Statement on Form 10, originally
filed on November 26, 1993 (the "Form 10"))
*10.07 1997 Omnibus Long-Term Compensation Plan, as amended
(incorporated herein by reference to Exhibit 10.02 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 (the "June 30, 1999 10-Q"))
*10.08 1996 Non-Employee Director Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.02 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 (the "September 30,
1996 10-Q"))
*10.09 Director Deferred Compensation Plan, as amended (incorporated herein
by reference to Exhibit 10.06 to the 1998 10-K)
*10.10 Eastman Executive Deferred Compensation Plan, as amended 101-112
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75
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- -------------------------------------------------------------------------- ------------
*10.11 Form of Executive Severance Agreements (incorporated herein by reference
to Exhibit 10.06 to the 1995 10-K)
*10.12 Employment Agreement between Eastman Chemical Company and Harold L.
Henderson (incorporated herein by reference to Exhibit 10.08 to the 1996
10-K)
*10.13 Employment Agreement between Eastman Chemical Company and James P. Rogers
(incorporated herein by reference to Exhibit 10.02 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999)
*10.14 Eastman Excess Retirement Income Plan (incorporated herein by reference
to Exhibit 10.10 to the Form 10)
*10.15 Eastman Unfunded Retirement Income Plan (incorporated herein by reference
to Exhibit 10.11 to the Form 10)
*10.16 Eastman Employee Stock Ownership Excess Plan, as amended
(incorporated herein by reference to Exhibit 10.01 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999)
*10.17 Eastman 1997-1999 Long-Term Performance Subplan of 1994
Omnibus Long-Term Compensation Plan (incorporated herein by
reference to Exhibit 10.15 to the 1996 10-K)
*10.18 Eastman 1998-2000 Long-Term Performance Subplan of 1997
Omnibus Long-Term Compensation Plan (incorporated herein by
reference to Exhibit 10.04 to Eastman Chemical Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998)
*10.19 Eastman 1999-2001 Long-Term Performance Subplan of 1997
Omnibus Long-Term Compensation Plan (incorporated herein by
reference to Exhibit 10.03 to the June 30, 1999 10-Q)
*10.20 Eastman 2000-2002 Long-Term Performance Subplan of 1997 Omnibus Long-Term
Compensation Plan 113-121
*10.21 Form of Award Notice for Stock Options Granted to Managers under 1997
Omnibus Long-Term Compensation Plan 122-123
*10.22 Award Notice for Price-Vesting Stock Option Granted to CEO
under 1997 Omnibus Long-Term Compensation Plan (incorporated
herein by reference to Exhibit 10.01 to Eastman Chemical
Company's Form 10-Q for the quarter ended September 30,
1997)
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76
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------- ------------
*10.23 Form of Award Notice for Price-Vesting Stock Option Granted to Certain 124-128
Executive Officers under 1997 Omnibus Long-Term Compensation Plan
*10.24 Eastman Chemical Company Benefit Security Trust dated
December 24, 1997 (incorporated herein by reference to
Exhibit 10.18 to Eastman Chemical Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
10.25 Contribution Agreement, dated as of December 9, 1993,
between Eastman Kodak Company and Eastman Chemical Company
(incorporated herein by reference to Exhibit 10.07 to the
S-1)
10.26 General Assignment, Assumption and Agreement Regarding
Litigation, Claims and Other Liabilities, dated as of
December 31, 1993, between Eastman Kodak Company and Eastman
Chemical Company (incorporated herein by reference to
Exhibit 10.08 to the S-1)
10.27 Tax Sharing and Indemnification Agreement, dated as of
December 31, 1993, between Eastman Kodak Company and Eastman
Chemical Company (incorporated herein by reference to
Exhibit 10.09 to the S-1)
10.28 Intellectual Property Agreement Non-Imaging, dated as of December 31,
1993, between Eastman Kodak Company and Eastman Chemical Company
(incorporated herein by reference to Exhibit 10.12 to the S-1)
10.29 Imaging Chemicals License Agreement, dated as of December
31, 1993, between Eastman Kodak Company and Eastman Chemical
Company (incorporated herein by reference to Exhibit 10.13
to the S-1)
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 129
21.01 Subsidiaries of the Company 130-132
23.01 Consent of Independent Accountants 133
27.01 Financial Data Schedule (for SEC use only)
- ----------------
*Management contract or compensatory plan or arrangement filed pursuant to Item
601(b)(10)(iii) of Regulation S-K.
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