1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class September 30, 2000
Common Stock, par value $0.01 per share 76,794,232
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
- -------------------------------------------------------------------------------
PAGE 1 OF 43 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 28
2
TABLE OF CONTENTS
- ---------------------------------------------------------------------------------------------------
ITEM PAGE
- ---------------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
1. Financial Statements 3-12
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13-23
PART II. OTHER INFORMATION
1. Legal Proceedings 24-25
2. Changes in Securities 25
6. Exhibits and Reports on Form 8-K 26
SIGNATURES
Signatures 27
2
3
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE
INCOME, AND RETAINED EARNINGS
(Dollars in millions, except per share amounts)
THIRD QUARTER FIRST NINE MONTHS
2000 1999 2000 1999
EARNINGS
Sales $ 1,387 $ 1,190 $ 3,920 $ 3,335
Cost of sales 1,096 976 3,089 2,701
------- ------- ------- -------
Gross profit 291 214 831 634
Selling and general administrative expenses 90 93 251 252
Research and development costs 38 46 112 140
Write-off of acquired in-process research
and development 9 -- 9 --
------- ------- ------- -------
Operating earnings 154 75 459 242
Interest expense 38 35 105 89
Gain recognized on initial public offering
of equity investment (38) -- (38) --
Other (income) charges, net 9 (9) 17 4
------- ------- ------- -------
Earnings before income taxes 145 49 375 149
Provision for income taxes 48 16 124 49
------- ------- ------- -------
Net earnings $ 97 $ 33 $ 251 $ 100
======= ======= ======= =======
Earnings per share
Basic $ 1.27 $ .42 $ 3.27 $ 1.28
======= ======= ======= =======
Diluted $ 1.27 $ .42 $ 3.26 $ 1.27
======= ======= ======= =======
COMPREHENSIVE INCOME
Net earnings $ 97 $ 33 $ 251 $ 100
Other comprehensive income (loss) (42) 19 (77) (23)
------- ------- ------- -------
Comprehensive income $ 55 $ 52 $ 174 $ 77
======= ======= ======= =======
RETAINED EARNINGS
Retained earnings at beginning of period $ 2,185 $ 2,186 $ 2,098 $ 2,188
Net earnings 97 33 251 100
Cash dividends declared (34) (35) (101) (104)
------- ------- ------- -------
Retained earnings at end of period $ 2,248 $ 2,184 $ 2,248 $ 2,184
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
3
4
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions)
SEPTEMBER 30, DECEMBER 31,
2000 1999
ASSETS
Current assets
Cash and cash equivalents $ 74 $ 186
Trade receivables, net of allowance of $17 and $13 631 558
Miscellaneous receivables 81 73
Inventories 612 485
Other current assets 124 187
------- -------
Total current assets 1,522 1,489
------- -------
Properties
Properties and equipment at cost 8,981 8,820
Less: Accumulated depreciation 5,056 4,870
------- -------
Net properties 3,925 3,950
------- -------
Goodwill, net of accumulated amortization of $23 and $14 347 271
Other intangibles, net of accumulated amortization of $16 and $6 259 175
Other noncurrent assets 514 418
------- -------
Total assets $ 6,567 $ 6,303
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 1,056 $ 1,009
Borrowings due within one year 114 599
------- -------
Total current liabilities 1,170 1,608
Long-term borrowings 2,026 1,506
Deferred income tax credits 609 485
Postemployment obligations 831 789
Other long-term liabilities 153 156
------- -------
Total liabilities 4,789 4,544
------- -------
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued - 84,632,598 and 84,512,004) 1 1
Paid-in capital 98 95
Retained earnings 2,248 2,098
Other comprehensive loss (131) (54)
------- -------
2,216 2,140
Less: Treasury stock at cost (7,996,790 and 6,421,790 shares) 438 381
------- -------
Total shareowners' equity 1,778 1,759
------- -------
Total liabilities and shareowners' equity $ 6,567 $ 6,303
======= =======
The accompanying notes are an integral part of these financial statements.
4
5
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
FIRST NINE MONTHS
2000 1999
Cash flows from operating activities
Net earnings $ 251 $ 100
----- -----
Adjustments to reconcile net earnings to net cash provided
by operating activities, net of effect of acquisitions
Depreciation and amortization 307 282
Gain recognized on initial public offering of equity investment (38) --
Write-off of impaired assets -- 13
Write-off of acquired in-process research and development 9 --
Provision (benefit) for deferred income taxes 58 (20)
Decrease in receivables 20 167
(Increase) decrease in inventories (78) 13
Increase (decrease) in liabilities for employee benefits
and incentive pay 20 (134)
Increase (decrease) in liabilities excluding borrowings and liabilities
for employee benefits and incentive pay (59) 56
Other items, net 73 18
----- -----
Total adjustments 312 395
----- -----
Net cash provided by operating activities 563 495
----- -----
Cash flows from investing activities
Additions to properties and equipment (133) (190)
Acquisitions, net of cash acquired (252) (381)
Capital advances to suppliers -- (21)
Other investments (36) (1)
Proceeds from sales of fixed assets 60 8
Additions to capitalized software (14) (18)
----- -----
Net cash used in investing activities (375) (603)
----- -----
Cash flows from financing activities
Net increase in commercial paper borrowings 113 317
Proceeds from borrowings 107 --
Repayment of borrowings (364) (10)
Dividends paid to shareowners (101) (104)
Treasury stock purchases (57) (51)
Other items 2 2
----- -----
Net cash (used in) provided by financing activities (300) 154
----- -----
Net change in cash and cash equivalents (112) 46
Cash and cash equivalents at beginning of period 186 29
----- -----
Cash and cash equivalents at end of period $ 74 $ 75
===== =====
The accompanying notes are an integral part of these financial statements.
5
6
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared by the Company in accordance and consistent with
the accounting policies stated in the Company's 1999 Annual Report on
Form 10-K and should be read in conjunction with the consolidated
financial statements appearing therein. In the opinion of the Company,
all normally recurring adjustments necessary for a fair presentation
have been included in the unaudited interim consolidated financial
statements. The unaudited interim consolidated financial statements
are based in part on estimates made by management.
The Company has reclassified certain 1999 amounts to conform to the
2000 presentation.
2. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
(Dollars in millions) 2000 1999
At FIFO or average cost (approximates current cost)
Finished goods $ 512 $ 404
Work in process 131 128
Raw materials and supplies 241 210
----- -----
Total inventories 884 742
Reduction to LIFO value (272) (257)
----- -----
Total inventories at LIFO value $ 612 $ 485
===== =====
Inventories valued on the LIFO method were approximately 70% of total
inventories in each of the periods.
3. PAYABLES AND OTHER CURRENT LIABILITIES
SEPTEMBER 30, DECEMBER 31,
(Dollars in millions) 2000 1999
Trade creditors $ 444 $ 373
Accrued payrolls, vacation, and variable-incentive compensation 168 143
Accrued restructuring charge 31 76
Accrued taxes 99 112
Other 314 305
----- -----
Total $1,056 $1,009
===== =====
6
7
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BORROWINGS
SEPTEMBER 30, DECEMBER 31,
(Dollars in millions) 2000 1999
SHORT-TERM BORROWINGS
Commercial paper $ -- $ 398
Notes payable 100 125
Other 14 76
------ ------
Total short-term borrowings $ 114 $ 599
------ ------
LONG-TERM BORROWINGS
6 3/8% notes due 2004 $ 500 $ 500
7 1/4% debentures due 2024 496 496
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 297 297
Commercial paper 511 --
Other 22 13
------ ------
Total long-term borrowings $2,026 $1,506
------ ------
Total borrowings $2,140 $2,105
====== ======
On July 13, 2000, Eastman replaced the then-existing $800 million
revolving credit facility expiring in December 2000 with a new $800
million revolving credit facility (the "Credit Facility"). 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 rate for such fee was
.125% as of September 30, 2000. 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 the third quarter 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
July 2005, the commercial paper borrowings at September 30, 2000 are
classified as long-term borrowings as the Company has the ability to
refinance such borrowings long term. At December 31, 1999, the
Company's commercial paper borrowings were classified as short-term
borrowings because the revolving credit facility then in effect would
have expired in December 2000. As of September 30, 2000 and December
31, 1999 the effective interest rates for the Company's commercial
paper borrowings were 6.72% and 6.30%, respectively.
7
8
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS AND DIVIDENDS PER SHARE
THIRD QUARTER FIRST NINE MONTHS
(In millions) 2000 1999 2000 1999
Shares used for earnings per share
calculation:
Basic 76.6 78.0 76.9 78.2
Diluted 76.7 78.4 77.1 78.6
Certain shares underlying options outstanding during the third quarter
of 2000 and 1999 were excluded from the computation of diluted
earnings per share because the options' exercise prices were greater
than the average market price of the common shares. Excluded from the
third quarter 2000 and 1999 calculations were shares underlying
options to purchase 2,865,204 shares of common stock at a range of
prices from $45.3438 to $73.8125 and 2,139,498 shares of common stock
at a range of prices from $49.6875 to $74.2500 outstanding at
September 30, 2000 and 1999, respectively. Excluded from the year to
date 2000 and 1999 calculations were shares underlying options to
purchase 2,865,204 common shares at a range of prices from $45.3438 to
73.8125 and 2,129,504 common shares at a range of prices from
$50.6250 to $74.2500, 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. Options to purchase a total of
574,000 shares will become exercisable through October 19, 2001, if
both the stock price and time vesting conditions are met. The options
will be cancelled and forfeited on October 19, 2001 as to any shares
for which the applicable stock price target is not met. At September
30, 2000, 149,240 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 vesting
conditions to exercise had not been met as to any of the shares as of
September 30, 2000.
The Company declared cash dividends of $0.44 per share in the third
quarter of 2000 and 1999 and $1.32 per share in the first nine months
of 2000 and 1999.
8
9
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACQUISITIONS
MCWHORTER TECHNOLOGIES, INC.
In July 2000, the Company completed its acquisition of McWhorter
Technologies, Inc. ("McWhorter") for approximately $200 million in
cash and the assumption of $155 million in debt. McWhorter
manufactures specialty resins and colorants used in the production of
consumer and industrial coatings and reinforced fiberglass plastics.
This transaction, which was funded through available cash and
commercial paper borrowings, was accounted for by the purchase method
of accounting and, accordingly, the results of operations of McWhorter
for the period from the acquisition date are included in the
accompanying consolidated financial statements. Assets acquired and
liabilities assumed have been recorded at their fair values. Goodwill
and other intangible assets of approximately $190 million,
representing the excess of cost over the estimated fair value of net
tangible assets acquired, are being amortized on a straight-line basis
over 11-40 years. Assuming this transaction had been made at January
1, 2000 and 1999, the consolidated proforma results for the nine
months ending September 30, 2000, and the year 1999 would not be
materially different from reported results.
CHEMICKE ZAVODY SOKOLOV
As of February 21, 2000, the Company acquired 76 percent of the shares
of Chemicke Zavody Sokolov ("Sokolov"), a manufacturer of waterborne
polymer products, acrylic acid and acrylic esters located in the Czech
Republic. During the second quarter 2000, the Company acquired an
additional 21% of the shares resulting in 97% ownership of Sokolov.
These transactions, for cash consideration totaling approximately $46
million (net of $3 million cash acquired) and the assumption of $21
million of Sokolov debt, were financed with available cash and
commercial paper borrowings. Efforts will continue to accumulate
additional shares as they become available from the remaining minority
shareholders.
The acquisition of Sokolov has been accounted for by the purchase
method of accounting and, accordingly, the results of operations of
Sokolov for the period from February 21, 2000 are included in the
accompanying consolidated financial statements. Assets acquired and
liabilities assumed have been recorded at their fair values. The
minority interest, which is included in other long-term liabilities in
the Consolidated Statements of Financial Position, is not significant.
Assuming this transaction had been made at January 1, 2000 and 1999,
the consolidated proforma results for the nine months ending September
30, 2000, and the year 1999 would not be materially different from
reported results.
LAWTER INTERNATIONAL, INC.
In June 1999, the Company completed its acquisition of Lawter
International, Inc. ("Lawter") for approximately $370 million (net of
$41 million cash acquired) and the assumption of $145 million in debt.
Lawter develops, produces and markets specialty products for the inks
and coatings market.
9
10
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This transaction, which was funded through available cash and
commercial paper borrowings, was 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 of
approximately $455 million, representing the excess of cost over the
estimated fair value of net tangible assets acquired, are being
amortized on a straight-line basis over 5-40 years. Assuming this
transaction had been made at January 1, 1999, the consolidated
proforma results for 1999 would not be materially different from
reported results.
7. SUPPLEMENTAL CASH FLOW INFORMATION
DETAILS OF ACQUISITIONS
(Dollars in millions) 2000 1999
Fair value of assets acquired $626 $572
Liabilities assumed 374 191
---- ----
Net cash paid for acquisitions 252 381
Cash acquired in acquisitions 4 41
---- ----
Cash paid for acquisitions $256 $422
==== ====
8. DERIVATIVE FINANCIAL INSTRUMENTS
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 at December 31, 1999. In
February 2000, currency options denominated in French franc, German
mark, and Italian lira with a notional amount of $545 million were
effectively settled, resulting in cash proceeds of $106 million. Of
this amount, approximately $13 million, net of premium amortization,
was recognized in operating earnings in the third quarter 2000 and a
total of $40 million, net of premium amortization, was recognized in
operating earnings through September 30, 2000. The balance, deferred
until the underlying hedged transactions would have been realized, is
recorded in other liabilities in the Consolidated Statements of
Financial Position. The remaining deferred gain will be recognized
over a period ending fourth quarter 2001.
9. EMPLOYEE SEPARATIONS
In the fourth quarter 1999, the Company accrued costs associated with
employee terminations which resulted 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. Approximately $71 million was accrued in
1999 for termination allowance payments associated with the
separations, of which $6 million was paid in 1999 and $48 million was
paid during the first nine months of 2000. As of September 30, 2000, a
balance of $17 million remains
10
11
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to be paid and is included in other current liabilities in the
Consolidated Statements of Financial Position.
10. INITIAL PUBLIC OFFERING OF GENENCOR INTERNATIONAL, INC., COMMON STOCK
In August 2000, Genencor International Inc. ("Genencor"), a Delaware
corporation which was jointly owned by Eastman and Danisco A/S,
completed an initial public offering of approximately 8 million shares
of its common stock at a price of $18 per share. Although it sold no
shares in the offering, Eastman recorded a nonrecurring gain of $38
million as the offering price of the Genencor shares sold in the
offering exceeded Eastman's cost basis of its Genencor shares. Eastman
owns 25 million common shares, or approximately 40% of the outstanding
common shares after the initial public offering, of Genencor. Genencor
develops genetically based biotechnology products for the health care,
agricultural and industrial chemicals markets.
11. SEGMENT INFORMATION
Effective with the first quarter 2000, the Company reports financial
results in two operating segments--Chemicals and Polymers. Through
1999, the Company managed its operations in three segments--Specialty
and Performance, Core Plastics, and Chemical Intermediates. Prior year
amounts have been reclassified to conform to the 2000 presentation.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 2000 1999
SALES
Chemicals $ 702 $ 556 $1,848 $1,537
Polymers 685 634 2,072 1,798
------ ------ ------ ------
Consolidated Eastman total $1,387 $1,190 $3,920 $3,335
====== ====== ====== ======
OPERATING EARNINGS
Chemicals $ 64 $ 43 $ 184 $ 158
Polymers 90 32 275 84
------ ------ ------ ------
Consolidated Eastman total $ 154 $ 75 $ 459 $ 242
====== ====== ====== ======
SEPTEMBER 30, DECEMBER 31,
2000 1999
ASSETS
Chemicals $3,254 $2,938
Polymers 3,313 3,365
------ ------
Consolidated Eastman total $6,567 $6,303
====== ======
11
12
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LEGAL MATTERS
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 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. For further information
concerning certain pending legal matters, see "Part II. Other
Information Item 1. Legal Proceedings".
13. COMMITMENTS
LETTER OF INTENT TO PURCHASE CERTAIN BUSINESSES OF HERCULES
INCORPORATED
On September 14, 2000, the Company announced it has entered into a
letter of intent to acquire the hydrocarbon resins and select portions
of the rosins resins businesses of Hercules Incorporated ("Hercules").
Under the terms of the letter of intent, Hercules facilities which
will be acquired are located in the United States, the Netherlands,
England, and Mexico. Additionally, operating assets will be acquired
and operated under contract with Hercules at shared facilities in the
United States. Completion of the acquisition, which is not likely
before the end of fourth quarter 2000, is subject to negotiation and
execution of definitive agreements and approval by the boards of
directors of both companies.
OTHER COMMITMENTS
In 1999, the Company entered into an agreement that allows it to sell
undivided interests in certain domestic trade accounts receivable
under a planned continuous sale program to a third party. Under this
agreement, receivables sold to the third party totaled $200 million at
September 30, 2000 and $150 million at December 31, 1999.
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
1999 Annual Report on Form 10-K, the Quarterly Reports on Form 10-Q for the
first and second quarters 2000, and the unaudited interim consolidated
financial statements included elsewhere in this report. All references to
earnings per share contained in this report are diluted earnings per share
unless otherwise noted.
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
Substantially higher revenues for the third quarter and first nine months 2000
reflect significantly higher selling prices in both segments driven by
increases in raw materials costs and improving supply and demand balance for
polyethylene terephalate ("PET"). Volume increases for the third quarter and
first nine months reflect recent acquisitions. The decrease in volume, when
recent acquisitions are excluded, reflects weaker overall demand and a strong
third quarter 1999 when customers were purchasing in advance of announced price
increases. Acquisitions contributed approximately $137 million and $250 million
to revenues in the third quarter and first nine months 2000, respectively.
For the third quarter and first nine months 2000, higher selling prices and
lower cost structure more than offset the impact of higher raw materials costs,
which increased significantly even with the Company's hedging of feedstock
costs. The decline in the value of the euro negatively impacted revenue and
earnings for the third quarter and first nine months 2000. Results for 2000 and
1999 were also impacted by certain nonrecurring items discussed below. Diluted
earnings per share for the third quarter 2000 were $1.27 compared with $0.42 in
1999. For the first nine months 2000, diluted earnings per share were $3.26
versus $1.27 in 1999.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
SALES $1,387 $1,190 17% $3,920 $3,335 18%
Sales for the third quarter and first nine months 2000 were significantly
higher in both segments, driven by substantially higher selling prices for
EASTAPAK polymers, strong price increases for performance chemicals and
intermediates, and volume attributable to acquisitions. Foreign currency
exchange, particularly in Europe, had a negative impact on sales.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
GROSS PROFIT $ 291 $ 214 36% $ 831 $ 634 31%
As a percentage of sales 21.0% 18.0% 21.2% 19.0%
For the third quarter and first nine months 2000, gross profit improved
substantially as a result of higher selling prices net of raw materials costs
increases, lower cost structure and increased capacity utilization.
13
14
Costs for major raw materials such as propane, paraxylene, ethylene glycol, and
natural gas increased significantly even with the Company's hedging of
feedstock costs.
For the third quarter and first nine months 2000, a pre-tax charge of
approximately $4 million associated with exiting the sorbates product line
negatively affected gross profit. Also impacting first nine months 2000 were
previously disclosed second quarter pre-tax items netting to an $8 million
charge related to the shutdown of facilities in Rochester, New York, the
shutdown of the sorbates manufacturing site at Chocolate Bayou, Texas, and the
sale of assets. As previously disclosed, gross profit for first nine months 1999
was negatively impacted by pre-tax charges of approximately $15 million related
to a discontinued capital project and phase out of operations in Rochester, New
York.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
SELLING AND GENERAL
ADMINISTRATIVE EXPENSES $ 90 $ 93 (3)% $251 $252 --%
As a percentage of sales 6.5% 7.8% 6.4% 7.6%
Selling and general administrative expenses declined slightly for the third
quarter 2000 and as a percentage of sales in both periods despite the addition
of costs for acquired companies. Benefits were derived from lower cost
structure in both periods.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
RESEARCH AND
DEVELOPMENT COSTS $ 38 $ 46 (17)% $112 $140 (20)%
As a percentage of sales 2.7% 3.9% 2.9% 4.2%
WRITE-OFF OF ACQUIRED
IN-PROCESS RESEARCH AND
DEVELOPMENT $ 9 $ -- N/A $ 9 $-- N/A
Research and development costs for the third quarter and first nine months 2000
were significantly lower due to lower cost structure. A nonrecurring pre-tax
charge of approximately $9 million for the write-off of in-process research and
development acquired from McWhorter Technologies, Inc. ("McWhorter") was
recorded in the third quarter 2000.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
INTEREST COSTS $38 $37 $108 $100
LESS CAPITALIZED INTEREST -- 2 3 11
--- --- ---- ----
INTEREST EXPENSE $38 $35 9% $105 $ 89 18%
=== === ==== ====
Higher interest expense for the third quarter and first nine months 2000
reflects decreased capitalized interest resulting from the 1999 completion of
certain capital expansion projects, higher average commercial paper borrowings
due to acquisitions, and higher interest rates on commercial paper borrowings in
2000 compared to 1999.
14
15
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
OTHER (INCOME) CHARGES,
NET $ 9 $(9) (200)% $ 17 $ 4 (325)%
GAIN RECOGNIZED ON INITIAL
PUBLIC OFFERING OF
GENENCOR $(38) $-- N/A $(38) $-- N/A
Other income and charges includes interest income and royalty income, gains and
losses on asset sales, results for investments accounted for under the equity
method, foreign exchange transactions, and other items. Third quarter 2000
results primarily reflect foreign exchange losses due to adverse movements in
currencies such as the euro. Third quarter 1999 results reflect a gain
recognized on the sale of assets.
In the third quarter 2000, the Company recorded a pre-tax gain of approximately
$38 million resulting from the initial public offering of shares of Genencor
(see Note 10 to Consolidated Financial Statements).
EARNINGS
(Dollars in millions, except THIRD QUARTER FIRST NINE MONTHS
per share amounts) 2000 1999 CHANGE 2000 1999 CHANGE
Operating earnings $ 154 $ 75 105% $ 459 $ 242 90%
Net earnings 97 33 194 251 100 151
Earnings per share
- --Basic 1.27 .42 202 3.27 1.28 155
- --Diluted 1.27 .42 202 3.26 1.27 157
SUMMARY BY OPERATING SEGMENT
Effective with the first quarter 2000, the Company reports financial results in
two operating segments--Chemicals and Polymers. Through 1999, the Company
managed its operations in three segments--Specialty and Performance, Core
Plastics, and Chemical Intermediates. Prior year amounts have been reclassified
to conform to the 2000 presentation.
CHEMICALS SEGMENT
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
Sales $ 702 $ 556 26% $ 1,848 $ 1,537 20%
Operating earnings 64 43 49 184 158 16
For the third quarter and first nine months 2000, sales revenue for the
Chemicals segment was sharply higher due to increased selling prices, which
were driven by higher raw materials costs, and higher sales volumes
15
16
resulting from acquisitions. The increase in sales volume was partially offset
by the previously announced discontinuance of sorbates, ethanol, and products
manufactured at Distillation Products Industries in Rochester, New York. For the
third quarter and first nine months 2000, sales revenue for performance
chemicals and intermediates increased significantly mainly due to higher selling
prices. Moderately higher selling prices and sales volumes attributable to
acquisitions substantially increased sales revenue in the third quarter and
first nine months 2000 for coatings, adhesives, specialty polymers and inks
products. Selling prices were level for fine chemicals in the third quarter and
first nine months 2000 but lower sales volumes, partially due to discontinued
product lines, negatively impacted sales.
Operating earnings for the Chemicals segment improved substantially for the
third quarter and first nine months 2000 as a result of lower cost structure and
higher selling prices net of raw materials cost increases. Operating earnings
for the third quarter and first nine months 2000 were negatively impacted by a
pre-tax charge of approximately $4 million associated with exiting the sorbates
product line. Operating earnings for first nine months 2000 were also negatively
impacted by previously announced second quarter pre-tax charges of $9 million
related to the shutdown of facilities in Rochester, New York and Chocolate
Bayou, Texas. Operating earnings for first nine months 1999 include
approximately $15 million of previously announced pre-tax charges related to a
discontinued capital project and phase out of operations in Rochester, New York.
As previously announced, the Company plans to divest a major portion of its
fine chemicals business and, as of December 31, 2000, to discontinue production
at its propylene glycol facilities in South Charleston, West Virginia.
POLYMERS SEGMENT
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
Sales $685 $634 8% $2,072 $1,798 15%
Operating earnings 90 32 181 275 84 227
Selling prices for EASTAPAK polymers were substantially higher in the third
quarter and first nine months 2000, driven by an improved supply and demand
balance. Sales volume for EASTAPAK polymers declined moderately compared with a
strong third quarter 1999 and reflected weaker demand due to a maturing
carbonated soft drink market and the Company's holding to previously announced
price increases. For the third quarter 2000, sales volume growth in the
polyester product line, moderately higher selling prices overall for specialty
plastics, and higher volumes for fibers due to temporary problems experienced
by competitors also contributed to higher sales.
Operating earnings for the Polymers segment were sharply higher for the third
quarter and first nine months 2000 as a result of lower cost structure and
substantially higher selling prices for EASTAPAK polymers. Third quarter
operating earnings were also positively impacted by higher sales volume for
fibers and higher earnings for polyesters and cellulosics, while polyethylene
margins declined due to higher raw materials costs. Operating earnings for first
nine months 2000 include a pre-tax gain of $1 million from the sale of certain
assets.
(For supplemental analysis of Chemicals and Polymers segment results and the
impact of recent acquisitions on revenue and volume, see Exhibits 99.01 and
99.02 to this Form 10-Q.)
16
17
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
United States and Canada $853 $733 16% $2,411 $2,104 15%
Europe, Middle East, and
Africa 271 225 20 781 611 28
Asia Pacific 137 125 10 398 348 14
Latin America 126 107 18 330 272 21
Sales in the United States for the third quarter 2000 were $803 million, up 18%
from 1999 third quarter sales of $678 million. For first nine months 2000, sales
revenues in the United States increased 15% to $2.3 billion compared to $2.0
billion in 1999. The improvement in both periods was primarily attributable to
higher sales volumes resulting from acquisitions and significantly higher
selling prices for EASTAPAK polymers.
Sales outside the United States for the third quarter 2000 were $584 million, up
14% from 1999 third quarter sales of $512 million due to higher sales volume
resulting from acquisitions, and substantially higher selling prices for
EASTAPAK polymers. Sales outside the United States were 42% of total sales in
the third quarter 2000 compared with 43% for the third quarter 1999. For first
nine months 2000, sales revenues outside the United States increased 21% to $1.7
billion compared to $1.4 billion in 1999. In Europe, substantially higher
selling prices for EASTAPAK polymers and additional volumes from acquisitions
contributed to a significant increase in sales for the third quarter 2000.
Increased volumes for fibers and slightly higher selling prices for performance
chemicals and intermediates and EASTAPAK polymers resulted in higher sales in
Asia Pacific in the third quarter. Increases in sales for Latin America are
primarily attributable to substantially higher selling prices for EASTAPAK
polymers in the third quarter and first nine months 2000, and moderately higher
sales volumes for EASTAPAK polymers in first nine months 2000.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
CASH FLOW
FIRST NINE MONTHS
(Dollars in millions) 2000 1999
Net cash provided by (used in)
Operating activities $ 563 $ 495
Investing activities (375) (603)
Financing activities (300) 154
----- -----
Net change in cash and cash equivalents $(112) $ 46
===== =====
Cash and cash equivalents at end of period $ 74 $ 75
===== =====
Cash provided by operating activities for first nine months 2000 increased
mainly due to higher net earnings and settlement of strategic foreign currency
hedging transactions (see Note 8 to Consolidated Financial Statements),
partially offset by an increase in working capital primarily resulting from the
impact on inventories of higher raw materials costs in 2000 and inventory
building by customers in late 1999. Cash
17
18
used in investing activities reflects lower expenditures for capital additions,
capital advances to suppliers, and acquisitions, higher proceeds from the sale
of assets and higher expenditures for investments in internet-based businesses.
Cash used in financing activities in first nine months 2000 reflects an increase
in commercial paper and other borrowings, repayment of Lawter International,
Inc. ("Lawter"), McWhorter, Chemicke Zavody Sokolov ("Sokolov") and other debt,
and in both years the payment of dividends and treasury stock purchases. The
Company's current priorities for use of available cash are payment of dividends
and debt reduction and repurchase of shares, weighed against strategic
acquisitions.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 2000, the Company estimates that depreciation will be approximately $370
million and that capital expenditures will be between $200-220 million.
Long-term commitments related to planned capital expenditures are not material.
The Company had various purchase commitments at September 30, 2000 for
materials, supplies, and energy incident to the ordinary conduct of business.
These commitments, over a period of several years, approximate $1.5 billion.
LIQUIDITY
On July 13, 2000, Eastman replaced the then-existing $800 million revolving
credit facility expiring in December 2000 with a new $800 million revolving
credit facility (the "Credit Facility"). 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 rate for such fee was .125%
as of September 30, 2000. 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 the third quarter 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 July 2005, the commercial
paper borrowings at September 30, 2000 are classified as long-term borrowings
as the Company has the ability to refinance such borrowings long term. At
December 31, 1999, the Company's commercial paper borrowings were classified as
short-term borrowings because the revolving credit facility then in effect
would have expired in December 2000. As of September 30, 2000, the Company's
commercial paper outstanding balance was $511 million at an effective interest
rate of 6.72%. At December 31, 1999, the Company's commercial paper outstanding
balance was $398 million at an effective interest rate of 6.30%.
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.
Proceeds of $106 million from the settlement in the first quarter 2000 of
strategic foreign currency hedging transactions were used for general corporate
purposes (see Note 8 to Consolidated Financial Statements).
In 1999, the Company entered into an agreement that allows the Company to sell
undivided interests in certain domestic trade accounts receivable under a
planned continuous sale program to a third party. Under this agreement,
receivables sold to the third party totaled $200 million at September 30, 2000
and $150 million at December 31, 1999. 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.
18
19
In July 2000, the Company completed the acquisition of McWhorter for
approximately $200 million in cash and the assumption of approximately $155
million in debt, of which $141 million was repaid during the third quarter
2000. This transaction was funded with available cash and commercial paper
borrowings.
As of February 21, 2000, the Company acquired 76 percent of the shares of
Sokolov. During the second quarter 2000 the Company acquired an additional 21%
of the shares resulting in 97% ownership of Sokolov as of September 30, 2000.
These transactions, for cash consideration totaling approximately $46 million
(net of $3 million cash acquired) and the assumption of $21 million of Sokolov
debt, which was subsequently repaid, were financed with available cash and
commercial paper borrowings. Efforts will continue to accumulate additional
shares as they become available from the remaining minority shareholders.
During the first nine months 2000, the Company repaid $125 million of Lawter
notes, $21 million of debt assumed in the Sokolov acquisition, $141 million of
debt assumed in the McWhorter acquisition, and $76 million of other short-term
borrowings. These transactions were funded with available cash and commercial
paper borrowings. Additional indebtedness of $100 million in the form of a
short-term note payable was incurred in the second quarter 2000 for general
operating purposes. Interest rates for these notes range from 6.33% to 7.33%.
The Company is currently authorized to repurchase up to $400 million of its
common stock. During the first quarter 2000, 1,575,000 shares of common stock
at a total cost of approximately $57 million were repurchased under this
authorization. No shares of common stock were repurchased during the second or
third quarters 2000. A total of 2,669,800 shares of common stock at a cost of
approximately $107 million have been repurchased under the authorization.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes. Share repurchases
are weighed against alternative uses for available cash, such as debt reduction
and strategic acquisitions.
On September 14, 2000, the Company announced it has entered into a letter of
intent to acquire the hydrocarbon resins and select portions of the rosins
resins businesses of Hercules Incorporated ("Hercules"). The acquisition, the
terms of which are subject to negotiation and execution of definitive
agreements and the approval of the boards of directors of both companies, are
expected be funded with available cash and commercial paper borrowings. On
September 14, 2000, the Company also announced plans to divest a major portion
of its fine chemicals business. It is expected that neither transaction will be
completed prior to the end of the fourth quarter 2000.
The Company anticipates that no contribution to its defined benefit pension
plan will be required for the remainder of 2000.
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
DIVIDENDS
The Company declared cash dividends of $0.44 per share in the third quarter of
2000 and 1999 and $1.32 per share in the first nine months of 2000 and 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and
19
20
Certain 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, which would result in an offsetting adjustment to income or other
comprehensive income, depending on effectiveness of the hedge. SFAS No. 133 is
effective for the Company beginning January 1, 2001. Certain instruments
historically utilized by the Company to hedge foreign currency exposures and raw
materials purchases would be required to be marked to market each period under
SFAS No. 133. However, the Company does not believe the adoption of SFAS No. 133
will have a material impact on the results of operations as the Company intends
to utilize alternative strategies to minimize the impact of SFAS No. 133 for
foreign currency and raw materials related hedges. Gains from the settlement of
currency options currently deferred (see Note 8 to financial statements) will be
reclassified from other current liabilities to other comprehensive income on
January 1, 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the staff's views in applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. The Company does not expect SAB 101 to have
a significant impact on Eastman's consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140,
which replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", addresses certain issues
not previously addressed in SFAS No. 125. SFAS No. 140 is effective for
transfers and servicing occurring after March 31, 2001 and, for certain
provisions, fiscal years ending after December 15, 2000. The Company is
currently evaluating the requirements of SFAS No. 140 and does not anticipate
that it will have a material impact on Eastman's consolidated financial
statements.
E-BUSINESS
A major initiative is Eastman's intent to be a leading e-business company in the
chemical industry and to provide differentiated solutions to customers' business
problems, thus making it easier for customers to do business with Eastman. The
Company plans to have 10-15 system-to-system connections with strategic
customers and suppliers by the end of 2000. These connections, in addition to
eastman.com, auctions, marketplaces, EDI and supplier.com sites, will enable the
Company to execute approximately 15-20% of sales and procurement transactions
electronically by year-end 2000. Additionally, by year-end 2001, the Company
plans to have essentially completed integration of SAP R3 4.6B web enabled
version throughout the organization, although some of the recent acquisitions
will complete conversion to SAP R3 4.6B during 2002. SAP R3 4.6B will provide
additional electronic transaction capability and will support both the
eastman.com storefront as well as integrated direct strategies.
During 2000, the Company has continued its e-business development with the
formation of joint ventures and additional investments in other e-commerce
businesses. The Company has formed a joint venture, ShipChem.com, to address the
high cost and inefficiencies of transporting materials in the chemical industry.
The establishment of ShipChem.com's e-logistics portal provides a foundation
from which manufacturers and distributors can manage their transportation
activities as a single integrated global process. The Company has also formed
PaintandCoatings.com, Inc., a joint venture to create an independent internet
marketplace for the paint and coatings industry.
The Company has made minority equity investments in a number of internet-based
businesses that it believes have potential to significantly impact the way
business is conducted in the chemical industry. These
20
21
investments include Asera, which creates and maintains turnkey extranets with
customized, password-protected content for business customers; ChemConnect, a
company that enables online trading of chemicals and plastics; Commerx, Inc., a
leading Net marketplace developer and provider of e-commerce solutions for
industrial processing markets; e-Chemicals, Inc., a company that provides
internet-enabled solutions for procurement, sales, financial settlement,
transportation and logistics, environmental health and safety, and sales
support for the chemical industry; e-Credit, a company that provides
internet-based financial services; MartQuest, provider of a one-stop eChannel
to enable sellers to easily connect with multiple marketplaces; Moai
Technologies, Inc., a company that provides internet-based, dynamic pricing
software services; The Patent and License Exchange, Inc., a marketplace to
facilitate the identification, valuation and trading of intellectual property;
Sequencia Corporation, a business-to-business portal to store and share product
and manufacturing recipes to be automatically downloaded into process
operations; SESAMi.com, an e-commerce pioneer for the chemical industry in
Asia; Webango, developer of the Webango Network, which will enable Eastman to
initiate and manage long-term value partnerships with its supplier base;
webMethods, Inc., a company that provides a platform which enables companies to
pursue direct integration with trading partners; and Yantra whose PureEcommerce
r2.0 software application is a platform by which marketplaces such as
PaintandCoatings.com and ChemConnect can provide orders and receive full order
transparency to and from suppliers.
OUTLOOK
For the fourth quarter 2000 and early 2001, the Company:
- - Expects volume growth in the fourth quarter 2000 to be similar to the
third quarter 2000 growth year over year.
- - Expects volume growth to slow across end-use markets but to exceed
United States Gross Domestic Product ("GDP") growth levels next year.
However, GDP growth is also expected to slow, as the effect of higher
oil prices is expected to negatively impact worldwide economic growth.
- - Believes that PET will continue to penetrate into other end-use markets
at a level which will support overall annual volume growth of 10% for
PET for container plastics, although volume growth in the PET industry
is slowing due to maturing of the carbonated soft drink market.
- - Anticipates that higher energy costs and their impact on global
economic conditions will likely negatively affect overall demand and
increased raw materials costs and, accordingly, negatively affect
fourth quarter 2000 and early 2001 results.
- - Expects raw materials costs will increase in the fourth quarter 2000
over the third quarter 2000 and that hedging activities in the fourth
quarter will result in diminished cost savings or could even
negatively impact results. However, the Company anticipates that
announced price increases effective October 1, 2000 and continuing cost
reductions, including efficiency gains resulting from the continued
digitization of the Company, will offset some of these raw materials
costs increases.
- - Continues to expect to eliminate $100 million of non-labor costs by
year-end 2000.
- - Expects that upgrading its enterprise resource planning software system
from SAP R2 to SAP R3 4.6B web enabled version will add incremental
cost of approximately $5 million to $8 million per quarter for the
fourth quarter 2000 and the first quarter 2001. The Company expects
these one-time costs to taper off during 2001 as implementation is
planned to be essentially completed in all regions by year-end 2001.
However, some of the recent acquisitions will complete conversion to
SAP R3 4.6B during 2002.
- - As previously announced, plans to divest a major portion of its fine
chemicals business and has entered into a letter of intent to acquire
the hydrocarbon resins and select portions of the rosin resins
businesses
21
22
of Hercules Incorporated. Although the Company is making progress on
both of these portfolio changes, it is not likely that either will be
completed prior to the end of the fourth quarter 2000.
- - Anticipates that its capital expenditures for 2000 will be between
$200-220 million and capital expenditures for 2001 to be slightly over
$300 million, although the final amount for 2001 will be determined
after an assessment of recent acquisitions.
Based upon the expectations described above, the Company anticipated as of
October 19, 2000 (the date of its third quarter sales and earnings press
release) that fourth quarter 2000 earnings per share would be at the lower end
of the then-current range of analysts' estimates of $.70 to $.89 per share.
FORWARD-LOOKING STATEMENTS
The expectations under "Outlook" and certain other statements in this report may
be forward-looking in nature as defined in the Private Securities Litigation
Reform Act of 1995. These statements and other forward-looking statements made
by the Company from time to time relate to such matters as planned capacity
increases and utilization; capital spending; expected depreciation and
amortization; environmental matters; legal proceedings; effects of hedging raw
materials costs and foreign currencies; global and regional economic conditions;
supply and demand, volumes, prices, costs, margins, 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; cash requirements
and uses of available cash; 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. Although the Company utilizes risk management tools,
including hedging, as appropriate, to mitigate market fluctuations in
foreign currencies, any changes in strategy in regard to risk
management tools can also affect revenues, expenses and results, and
there can be no assurance that such measures will result in cost
savings or that all market fluctuation exposure will be eliminated. In
addition, changes in laws, regulations, or other political factors in
any of the countries in which the Company operates could affect
business in that country or region, as well as the Company's results
of operations.
- - The Company has made and may continue to make acquisitions,
divestitures, and investments, and enter into alliances as part of its
growth strategy. The completion of such transactions are subject to
the timely receipt of necessary regulatory and other consents and
approvals needed to complete the transactions, which could be delayed
for a variety of reasons, the satisfactory negotiation of the
transaction documents and the fulfillment of all closing conditions to
the transactions. Additionally, after completion of the transaction,
there can be no assurance that such transactions will be successfully
integrated on a timely and cost-efficient basis or that they will
achieve projected operating earnings targets.
- - The Company has made and may continue to make strategic e-business
investments, including formation of joint ventures and investments in
other e-commerce businesses, in order to build Eastman's E-business
capabilities. There can be no assurance that such investments will
achieve their objectives or that they will be beneficial to the
Company's results of operations.
22
23
- - The Company owns assets in the form of equity in other companies,
including joint ventures, e-commerce investments and Genencor. Such
investments, some of which are minority investments in companies which
are not managed or controlled by the Company, are subject to all of the
risks associated with changes in value of such investments including
the market valuation of those companies whose shares are publicly
traded.
- - The Company has undertaken and will continue to undertake productivity
and cost reduction initiatives and organizational restructurings to
improve performance and generate cost savings. There can be no
assurance that these will be completed as planned or beneficial or
that estimated cost savings from such activities will be realized.
- - In addition to cost reduction initiatives, the Company is striving to
improve margins on its products through price increases, where
warranted and accepted by the market; however, the Company's earnings
could be negatively impacted should such increases be unrealized, not
be sufficient to cover increased raw materials costs, or have a
negative impact on demand and volume.
- - The Company is reliant on certain strategic raw materials for its
operations and utilizes risk management tools, including hedging, as
appropriate, to mitigate short-term market fluctuations in raw
materials costs. There can be no assurance, however, that such
measures will result in cost savings or that all market fluctuation
exposure will be eliminated.
- - 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.
- - The Company's facilities and businesses are subject to complex health,
safety and environmental laws and regulations, which require and will
continue to require significant expenditures to remain in compliance
with such laws and regulations currently and in the future. The
Company's accruals for such costs and associated liabilities are
believed to be adequate, but are subject to changes in estimates on
which the accruals are based. The estimates depend on a number of
factors including those associated with ongoing operations and
remedial requirements. Ongoing operations can be affected by
unanticipated government enforcement action, which in turn is
influenced by the nature of the allegation and the complexity of the
site. Likewise, changes in chemical control regulations and testing
requirements can increase costs or result in product deselection.
Remedial requirements at contaminated sites are dependent on the
nature of the remedy, the outcome of discussions with regulatory
agencies and other potentially responsible parties at multi-party
sites, and the number and financial viability of other potentially
responsible parties.
- - 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, including
that under "Outlook" and "Forward-Looking Statements", and other
forward-looking statements and related disclosures made by the Company in this
filing and elsewhere from time to time, represent management's best judgment as
of the date the information is given. The Company does not undertake
responsibility for updating any of such information, whether as a result of new
information, future events, or otherwise. You are advised, however, to consult
any further public Company disclosures (such as in our filings with the
Securities and Exchange Commission or in Company press releases) on related
subjects.
- ---------
EASTAPAK is a trademark of Eastman Chemical Company.
23
24
PART II. OTHER INFORMATION
ITEM 1. 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 twenty antitrust lawsuits brought subsequent to the Company's plea
agreements as putative class actions on behalf of certain purchasers of
sorbates in the United States and Canada. 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 since been
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 Tennessee state courts 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; 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; one case was filed in the Second Judicial District
Court for the State of New Mexico under New Mexico antitrust laws on behalf of
a class of indirect purchasers of sorbates in that state; one lawsuit was filed
in the Ontario Superior Court of Justice under the federal competition law
24
25
and pursuant to common law causes of action on behalf of a class of direct and
indirect purchasers of sorbates in Canada; and one suit was filed in the Quebec
Superior Court under the federal competition law on behalf of a class of direct
and indirect purchasers of sorbates in the Province of Quebec. The plaintiffs
in most cases seek 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.
In addition, the Company has reached tentative settlements with plaintiffs in
the direct and indirect purchaser class action cases in California, the
Wisconsin action, and in one of the Tennessee cases. The only proposed class
which has been certified is a conditional settlement class relating to the
Company and the other defendants in the federal direct purchaser cases pending
in California.
The Company has also been included as a defendant in two separate lawsuits
concerning sorbates filed in the United States District Court for the Northern
District of Illinois, one filed on behalf of Dean Food Company, Kraft Foods,
Inc. and Ralston Purina Company, and the other filed on behalf of Conopco, Inc.
Both lawsuits allege that the defendants engaged in a conspiracy to fix the
price of sorbates in violation of Section One of the Sherman Act and that the
plaintiffs were direct purchasers of sorbates from the defendants. These
plaintiffs have elected to opt out of the proposed settlement of the federal
direct purchaser cases pending in California. The Dean Food case has been
transferred to the Northern District of California, and a motion to transfer
has been filed in the Conopco case.
The Company intends to continue 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 charges to earnings in the fourth quarter 1998, the fourth quarter
1999, and the first and second quarters of 2000 for estimated costs, including
legal fees, related to the pending sorbates litigation described above. Because
of the early stage of these 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 a three year period, 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 paid the fine in three installments over
a period of one year. Various agencies are continuing to review the information
submitted by the Company.
ITEM 2. CHANGES IN SECURITIES
(c) On July 1, 2000, the Company granted options to purchase an
aggregate of 507 shares of its common stock on or after
January 1, 2001 at an exercise price of $49.3125 per share.
Such options were granted to non-employee directors who
elected under the 1996 Non-Employee Director Stock Option
Plan to receive options in lieu of all or a portion of their
semi-annual cash retainer fee. The Company issued the options
in reliance upon the exemption from registration of Section
4(2) of the Securities Act of 1933.
25
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in the
Exhibit Index appearing on page 28.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 2000.
26
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastman Chemical Company
Date: November 7, 2000 By: /s/ James P. Rogers
----------------------------------------
James P. Rogers
Senior Vice President and
Chief Financial Officer
27
28
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)
3.02 Amended and Restated Bylaws of Eastman Chemical Company, as amended
October 5, 2000 30-39
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)
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"))
28
29
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ---------------- --------------------------------------------------------------------------- -----------------
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)
4.10 $200,000,000 Accounts Receivable Securitization agreement dated April 13,
1999 (amended April 11, 2000), between the Company and Bank One, NA, as
agent. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing
a copy of such agreement, the Company agrees to furnish a copy of such
agreement to the Commission upon request.
4.11 Credit Agreement, dated as of July 13, 2000 (the "Credit Agreement") among
Eastman Chemical Company, the Lenders named therein, and Citibank, N.A. as
Agent (incorporated herein by reference to Exhibit 4.11 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
(the "June 30, 2000 10-Q")
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 40
27.01 Financial Data Schedule for Third Quarter 2000 (for SEC use only)
99.01 Operating Segment Information (Sales Revenue Change, Volume Effect and
Price Effect) 41
99.02 Acquisition Information (Sales Revenue and Volume Growth Comparison --
With and Without Acquisitions) 42-43
29