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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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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 149 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 76
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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, 2001) of the 76,565,827 shares of voting stock held by
nonaffiliates as of December 31, 2000 was approximately $3,576,389,779, 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, 2000 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, 2000, 76,901,536 shares of common stock
of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 2001
Annual Meeting of Shareowners (the "2001 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
written and oral 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 material and energy costs and foreign
currencies; global and regional economic conditions; supply and demand, volume,
price, cost, 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; cash requirements and uses of available cash;
cost reduction targets; development, production, commercialization, and
acceptance of new products, services, and technologies; acquisitions and
dispositions of certain businesses and assets, and product portfolio changes;
and the planned separation of Eastman's current businesses into two independent
companies by the end of 2001.
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
ITEM PAGE
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PART I
1. Business 4-10
Executive Officers of the Company 11-12
2. Properties 12-13
3. Legal Proceedings 13-14
4. Submission of Matters to a Vote of Security Holders 15
PART II
5. Market for the Registrant's Common Stock and Related Shareowner
Matters 16
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18-32
7A. Quantitative and Qualitative Disclosures About Market Risk 33
8. Financial Statements and Supplementary Data 37-71
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 71
PART III
10. Directors and Executive Officers of the Registrant 72
11. Executive Compensation 72
12. Security Ownership of Certain Beneficial Owners and Management 72
13. Certain Relationships and Related Transactions 72
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 73
SIGNATURES
Signatures 74-75
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PART I
ITEM 1. BUSINESS
CORPORATE PROFILE
Eastman Chemical Company ("Eastman" or the "Company"), a global chemical company
engaged in the manufacture and sale of a broad portfolio of chemicals, plastics,
and fibers, began business in 1920 for the purpose of producing chemicals for
Eastman Kodak Company's ("Kodak's") photographic business. The Company was
incorporated in Delaware in 1993 and became an independent entity as of December
31, 1993, when Kodak spun off its chemicals business. The Company's headquarters
and largest manufacturing site are located in Kingsport, Tennessee.
Eastman is the world's largest supplier of polyethylene terephthalate ("PET")
for beverage bottles and is a leading supplier of ingredients for coatings,
adhesives, specialty polymers, and inks, as well as cellulose acetate fibers.
Eastman has 44 manufacturing sites in 17 countries that supply over 400 major
chemicals, fibers, and plastics products to customers throughout the world. In
2000, the Company had sales revenue of $5.3 billion, operating earnings of $562
million, net earnings of $303 million, and diluted earnings per share of $3.94.
The Company's diverse product lines and operations are managed and reported in
two operating segments--Chemicals and Polymers--as described in the following
sections.
SPIN-OFF AND BUSINESS STRATEGY
As previously reported, the Company has been actively examining alternatives to
diminish the impact of certain products while growing other product lines. The
Company reported on February 5, 2001 that its Board of Directors has authorized
management to pursue a plan that would result in Eastman becoming two
independent public companies. Focusing on the distinctly different business,
operational, and strategic requirements and considerations inherent in Eastman's
current specialty and commodity businesses, the new companies should be able to
concentrate their respective efforts and resources on strategies specific to
each business.
Eastman would separate its businesses into two companies--a specialty chemicals
and plastics company, and a PET plastics and acetate fibers company. The
specialty chemicals and plastics company would include coatings, adhesives,
inks, specialty polymers and plastics, and performance chemicals and
intermediates products, Eastman's digital business investments, including
ShipChem, Inc. ("ShipChem"), and Eastman's investment in Genencor International,
Inc. ("Genencor"). The PET plastics and acetate fibers company would include
Eastman's PET container plastics, acetate fibers, and polyethylene products. On
a pro forma basis, 2000 revenues for the two new companies would have been
approximately $3.5 billion and $2 billion, respectively. These pro forma amounts
include the effect of estimated full year revenues related to McWhorter
Technologies, Inc. and the planned acquisition of certain businesses of Hercules
Incorporated described below, and exclude revenues that would result from sales
between the two new companies.
The new companies are expected to be launched through a spin-off in the form of
a tax-free stock dividend to be effective by the end of the fourth quarter 2001,
subject to a favorable Internal Revenue Service ruling that the distribution of
shares will be tax-free to shareowners, final approval of the transaction by the
Board of Directors, and other customary conditions. Immediately after the
spin-off, Eastman shareowners would own shares in two entities with distinct
characteristics. Eastman has not yet finalized all aspects of the transaction,
but expects the capital structures of the companies to be appropriate for each
company's financial profile and that each company will maintain investment-grade
ratings. Eastman expects to record a one-time charge in connection with the
spin-off.
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While transitioning to the two new companies, Eastman remains focused in 2001 on
achieving targeted financial goals; acquisitions and divestitures of certain
businesses; integration of recently acquired businesses; and continued
development of a customer-centric e-business environment.
ACHIEVEMENT OF TARGETED FINANCIAL GOALS
Eastman remains focused on improving financial performance, as measured by
continued revenue growth and long-term, stable earnings. Management compensation
is closely linked to the achievement of annual financial performance goals, with
focus on earnings from operations and cash flow management.
Relentless cost management is required to achieve the Company's targeted
financial goals. In 1999, labor costs were reduced by approximately $100 million
through voluntary and involuntary employee separations. In 2000, additional
non-labor cost reductions totaling $100 million were implemented and capital
spending was significantly reduced. The goal for total cost reduction has been
increased from $200 million to $300 million by the end of 2001 as the Company
continues its emphasis on cost management and financial performance.
Other strategies to achieve targeted financial goals include the use of
derivative financial instruments to reduce the impact of fluctuations in costs
for major raw materials and energy, foreign currency exchange rates, and
interest rates. In addition, where warranted and accepted by the market, the
Company adjusts selling prices to maintain product margins.
ACQUISITIONS AND DIVESTITURES
In the past few years, the Company has made or announced several changes in its
product portfolio related to growing its coatings, adhesives, specialty
polymers, and inks product line. In 2000, Eastman acquired McWhorter
Technologies, Inc., ("McWhorter") and Chemicke Zavody Sokolov ("Sokolov"), and
in 1999, acquired Lawter International, Inc. ("Lawter"). The McWhorter, Sokolov,
and Lawter acquisitions strengthened the Company's position in specialty resins
and colorants, waterborne polymer products, acrylic acid, acrylic esters, and
specialty products for the inks and coatings market. Earlier additions to the
coatings, adhesives, specialty polymers, and inks business included the
acquisition of a European manufacturer of specialty polymers and a North
American textile chemicals business in February 1999 and September 1998,
respectively.
As previously reported, the Company has entered into a letter of intent with
Hercules Incorporated ("Hercules") to acquire Hercules' hydrocarbon resins and
select portions of its rosins resins businesses. These businesses generated
approximately $300 million in sales revenue in 1999. Subject to the negotiation
of customary agreements, approval by the boards of directors of both companies,
and regulatory approvals, the transaction is expected to be completed early in
second quarter 2001.
The Company continues to pursue the previously announced plan to divest or
otherwise restructure a major portion of its fine chemicals business.
Currently, a number of options are under consideration, some of which could
result in a charge to earnings in the first half of 2001. The charge would
relate to potential loss on sale of assets for a number of sites or other
restructuring costs related to fine chemical product lines not divested.
INTEGRATION OF RECENT ACQUISITIONS
Integration of recent acquisitions into Eastman's processes is a top priority in
2001. The Company has made significant progress in meeting cost synergy targets
in such areas as the supply chain, information technology, operations support,
and indirect materials. As the Company integrates its recent acquisitions into
its technology platform, SAP R3 4.6B web enabled version ("SAP R3"), further
value should be realized. This work should be substantially complete by year-end
2001. Efforts are currently underway to realize additional synergies in
marketing, sales, technology, and manufacturing in addition to cost synergies.
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E-BUSINESS
Eastman made significant progress in 2000 towards digitizing its businesses and
establishing the Company as a leader in e-commerce. Eastman offers customers a
faster, more efficient way to do business through e-commerce. As an integral
part of Eastman's strategy, the Company is aggressively building the
capabilities needed to serve its customers in the digital economy by
implementation of SAP R3, investments in technology beneficial to the chemical
industry, and venture launches.
SAP R3 provides additional electronic transaction capability that supports both
the www.eastman.com storefront as well as system-to-system links between Eastman
and its customers and suppliers. As part of its business strategy to make it
easier to do business with Eastman, the Company met its e-business goal to have
15 online system-to-system connections that link the Company with its customers
and suppliers. Working with several major suppliers, approximately 15% of
Eastman's procurement needs were digitally processed during 2000.
Eastman has made a number of minority investments in digital technology
businesses that the Company believes have potential to significantly impact the
way business is conducted in the chemical industry. Through 2000, Eastman's
investments in technology companies totaled approximately $60 million, with the
total amount invested expected to reach $90-$120 million by the end of 2001.
Eastman participated in the launch in 2000 and early 2001 of three
Internet-based companies, ShipChem, PaintandCoatings.com, and Asia BizNet.com.
ShipChem, a logistics provider for the chemical industry, is now serving
Eastman's bulk truck shipments and is expected to support the remainder of the
Company's logistics requirements by the end of 2001. In 2001, ShipChem will
pursue other target customers including middle market chemicals and plastics
companies. PaintandCoatings.com, jointly owned with VerticalNet, is a single
source for suppliers to the paint and coatings industry enabling them to
advertise, introduce, and sell products. Asia BizNet, a joint venture with
Borich Investment Limited, a wholly owned subsidiary of Henderson China Holdings
Limited, is focused on driving the growth of e-business in chemical and
chemical-related industries in the Greater China region.
OPERATING SEGMENTS
The Company's products and operations are managed and reported in two operating
segments--Chemicals and Polymers. As previously described, Eastman plans to
separate into two independent public companies by the end of 2001. The planned
spin-off and related management changes have resulted in certain specialty
plastics products, primarily copolyesters, moving between segments, effective in
2001. The Chemicals and Polymers segments will be restated to reflect these
changes effective with the second quarter 2001. See Note 18 to the Consolidated
Financial Statements for financial and other additional information concerning
the Company's operating segments and principal products, including principal
markets, methods of distribution and competitive conditions.
CHEMICALS SEGMENT
The Chemicals segment accounted for 47% of total Company revenues in 2000.
Included in this segment are coatings, adhesives, specialty polymers, and inks,
which accounted for 47% of 2000 Chemicals segment revenue; performance chemicals
and intermediates, which accounted for 41% of 2000 Chemicals segment revenue;
and fine chemicals, which represented 12% of 2000 Chemicals segment revenue.
PRINCIPAL PRODUCTS Chemicals, adhesives, inks, and specialty
polymers, including raw materials and
intermediates such as solvents, alcohols,
glycols, and resins; additives for fibers;
food and beverage ingredients; performance
chemicals; oxo chemicals; basic acetyls;
plasticizers; photographic and home care
products; agricultural chemicals;
pharmaceutical intermediates
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PRINCIPAL MARKETS Household products,
infrastructure/construction, medical,
agricultural, transportation, building,
food, textile, packaging, coatings,
adhesives, inks, pharmaceutical,
agrochemical, photographic/imaging, consumer
and industrial
PRIMARY COMPETITORS AlliedSignal, Amoco, ARCO, BASF, BP, Bayer,
Cambrex, Celanese, Celanese Ltd., Clariant,
DSM, Daicel, Dow, Dow Contract Manufacturing
Services, Exxon/Mobil, Hercules, Huntsman,
International Paper Co., Lonza, Nutrinova,
Oxychem, Rhodia, Rhodia-ChiRex, S. C.
Johnson, Shell
STRENGTHS Global manufacturing presence, dedication to
customer service and technical assistance
Broad product line; durable, high quality,
innovative, environmentally-responsible
products which meet customer fitness-for-use
requirements for performance and quality
As previously described, Eastman is pursuing a plan to separate its business
into two companies by the end of 2001. The specialty chemicals and plastics
company would include coatings, adhesives, inks, specialty polymers and
plastics, and performance chemicals and intermediates products, Eastman's
digital business investments, including ShipChem, and Eastman's investment in
Genencor. As a separate company, this entity would be a world leader in
specialty chemicals and plastics with a strong focus on providing customer
solutions, growth through increased management focus, and the execution of
appropriate strategies. As part of this entity, market transparency and value
recognition for high technology and services businesses are expected to be
enhanced.
POLYMERS SEGMENT
The Polymers segment accounted for 53% of total Company revenues in 2000.
Included in the Polymers segment are specialty plastics which accounted for 40%
of 2000 Polymers segment revenue, container plastics representing 38% of 2000
Polymers segment revenue, and fibers which accounted for 22% of 2000 Polymers
segment revenue.
PRINCIPAL PRODUCTS Container plastics including polyester
plastics such as EASTAPAK polymers;
specialty plastics including SPECTAR
copolyester, cellulosic plastics, EASTMAN
HIFOR, and MXSTEN specialty polyethylene
products; fibers including acetate tow and
acetate yarn
PRINCIPAL MARKETS Rigid and flexible plastic packaging,
cigarette filters, building, household
products, medical, personal care/consumer,
electronic, appliance, heavy gage sheeting
PRIMARY COMPETITORS Acordis, Akzo Nobel, AtoHaas, BASF, Bayer,
Celanese Acetate LLC, Chevron, Daicel, Dow,
DuPont, Equistar, Exxon/Mobil, GE, Geon,
ICI, KoSa, Mitsubishi, Nan Ya, Phillips,
Rhodia, Shell, Teijin, Wellman
STRENGTHS Market leadership, global manufacturing
presence, customer service and technical
assistance, highly integrated manufacturing
facilities
Broad product line; high quality,
performance-priced, innovative products
which offer superior strength, chemical
resistance, and clarity
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As a result of the planned separation of Eastman's business into two companies,
the PET plastics and acetate fibers company would include Eastman's PET
container plastics, acetate fibers, and polyethylene products. Building on
Eastman's world-leading PET business which is the largest, most global, most
vertically integrated, with the broadest product offering, the new PET plastics
and acetate fibers company would be a world market and cost position leader in
PET plastics. Additionally, the new entity would include the highly integrated
fibers business, another world-leading business characterized by stable cash
flows and excellent customer relationships. Eastman's polyethylene business,
including low density polyethylene which is well positioned in the extrusion
coating industry and linear low density polyethylene manufactured with the
Company's proprietary MXSTEN and EASTMAN HIFOR technology, would also become
part of the PET plastics and acetate fibers company.
GENENCOR INTERNATIONAL, INC.
Eastman owns 25 million common shares, or approximately 40% of the shares
outstanding of Genencor, and preferred shares having a liquidating value,
including accrued dividends, of approximately $76 million. Genencor is engaged
in the discovery, development, manufacture, and marketing of biotechnology
products for the industrial chemicals, agricultural, and health care markets.
Genencor's common stock is registered under the Securities Exchange Act of 1934
and is listed on the NASDAQ National Market System under the symbol GCOR.
RAW MATERIALS AND ENERGY
The Company purchases a substantial portion of its key raw materials and energy
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 or energy if its operations are shut down. The cost of raw
materials and energy is generally based on market price, although derivative
financial instruments have been utilized to mitigate the impact of short-term
market price fluctuations. Key raw materials and energy purchased include
paraxylene, ethylene glycol, purified terephthalic acid ("PTA"), propane and
ethane, cellulose, methanol, coal, natural gas, and electricity. The Company has
multiple suppliers for most key raw materials and energy and uses quality
management principles, such as the establishment of long-term relationships with
suppliers and ongoing performance assessment and benchmarking, as part of the
supplier selection process.
CAPITAL EXPENDITURES
The completion of several significant capital investment projects in the late
1990s and the Company's strategy of growth through strategic acquisitions
resulted in reduced capital expenditures in 2000. Capital expenditures for 2000
declined to $226 million, down significantly from the $292 million and $500
million spent in 1999 and 1998, respectively. In 2001, the Company estimates
that capital expenditures will be slightly above $300 million, subject to
adjustment after assessment of recent acquisitions. Efficiency of capital
utilization is a key initiative of the Company and, where appropriate, the
Company uses alliances, joint ventures, acquisitions of existing businesses, and
tolling arrangements to expand available capacity using less capital.
EMPLOYEES
The Company employs approximately 14,600 men and women worldwide. Approximately
5% of the total worldwide labor force (and a minimal number in the United
States) is represented by labor unions.
CUSTOMERS
Eastman has an extensive customer base and, while it is not dependent on any one
customer, loss of certain top customers could adversely affect the Company until
such business is replaced. The Company has approximately 8,000 customers
worldwide and the top 100 customers account for approximately 60% of the
Company's business.
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RESEARCH AND DEVELOPMENT
The Company directs its research and development programs toward four
objectives:
- Developing new product lines and markets through applications
research;
- Developing new products and processes that are compatible with
the Company's commitment to Responsible Care(R) (see
"Environmental" section);
- Lowering manufacturing costs through process improvement; and
- Continually enhancing product quality by improvement in
manufacturing technology and processes.
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, improved intermediates and polyester
manufacturing expertise, and a significant expansion in coatings technologies.
The Company has also developed improved wastewater treatment and PET recycling
methods and a faster, lower-cost route to production of EpB oxirane, an
intermediate used in other chemical products. The Company has commercialized a
group of new, higher-value polyolefins with increased tear strength and impact
performance, and actively supports the licensing of several patented
technologies.
For 2000, 1999, and 1998, research and development expenditures totaled $149
million, $187 million, and $185 million, respectively. Expenditures for 2001 are
expected to be approximately $175 million.
INTELLECTUAL PROPERTY
The Company's intellectual property portfolio constitutes a valuable corporate
asset. The Company continually protects its intellectual property world-wide
through patents, trademarks, copyrights, and trade secrets. The Company also
licenses technology owned by other parties which complements the Company's
strategic business objectives. These patents and licenses expire at various
times over the next several years.
The Company currently owns 1,165 active United States patents and 1,384 active
foreign patents. In 2000, the Company was granted 110 United States patents. The
Company also owns 2,409 active worldwide trademarks, which include such valuable
marks as Tenite(R), Eastapak(R), Estron(R), Tenox(R), Eastar(R), Mxsten(R),
Spectar(R), Texanol(R), Eastman Hifor(TM), and Thermx(R).
The primary purpose for obtaining patents is to protect innovations that provide
the Company with a significant competitive advantage. The Company also derives
significant value from its intellectual property by actively licensing and
selling patents and know-how worldwide and by donating patents to educational
institutions.
While these patents, trademarks, licenses, and trade secrets are considered
important, the Company does not consider its business as a whole to be
materially dependent upon any one particular patent, patent license, trademark,
copyright, or trade secret.
SEASONALITY
Seasonality is not a significant factor overall for the Company. However, demand
in the Chemicals segment is typically higher in the second and third quarters
due to increased building and construction activity and weaker during the winter
months because of reduced demand for coatings products. The Polymers segment
typically experiences stronger demand for EASTAPAK polymers for container
plastics during the second quarter due to higher summertime consumption of
beverages, whereas demand for soft-drink containers typically weakens during the
first and third quarters.
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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.
Eastman has seen the opportunities afforded by e-commerce and in 1999 became an
industry leader by offering e-commerce capability to its customers in the United
States and Canada. Through its World Wide Web site, www.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 has also successfully implemented the use of auction
technology to sell products through online auctions. In order to make it easier
to do business with the Company, Eastman's goal for 2000 was to establish 10 to
15 online system-to-system connections to link the Company with its trading
partners. At year-end 2000, a total of 15 suppliers and customers were accepting
and placing orders digitally through system-to-system connections.
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. During 2000, the Company outsourced its bulk truck shipments to
ShipChem, the Company's logistics venture, and expects to transfer the remainder
of its logistics needs to ShipChem during 2001. ShipChem, a newly formed digital
global logistics provider for the chemical industry, is expected to provide
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
environmentally responsible products 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.
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 improvements 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.
Other matters pertaining to health, safety, and the environment are discussed in
Legal Proceedings, Management's Discussion and Analysis of Financial Condition
and Results of Operations, and Note 20 to the Consolidated Financial Statements.
BACKLOG
On February 1, 2001, the Company's backlog of firm orders was approximately $400
million, representing approximately four weeks' sales. The Company adjusts its
inventory policy to control the backlog of products depending on customers'
needs. In areas where the Company is the single source of supply, or competitive
forces or customers' needs dictate, the Company may carry additional inventory
to reduce backlog. Backlog is also affected by utilization of 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 62, 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 from 1989 through 1993, when the Company became an
independent business upon the spin-off by Kodak of its chemicals business. In
connection with the previously reported plan to separate Eastman into two
independent public companies through a spin-off, Mr. Deavenport will continue to
serve as Chairman and Chief Executive Officer of Eastman Chemical Company and
will direct the transition until January 1, 2002, when he will retire.
J. Brian Ferguson, age 46, is President, Chemicals 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, was
named President, Eastman Chemical Asia Pacific in 1998, and became President,
Polymers Group in 1999. He assumed his current position in February 2001 in
connection with the planned separation of Eastman into two independent
companies, and would become Chief Executive Officer of the new specialty
chemicals and plastics company upon completion of the spin-off at the end of
2001.
Allan R. Rothwell, age 53, is President, Polymers 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 became President, Chemicals
Group in 1999. He assumed his current position in February 2001 in connection
with the planned separation of Eastman into two independent public companies,
and would become Chief Executive Officer of the new PET plastics and acetate
fibers company upon completion of the spin-off at the end of 2001.
Dr. James L. Chitwood, age 57, 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 was Senior Vice
President from 1996 to 1999 with responsibility for operations outside North
America. He also served as Vice President of Kodak from 1984 through 1993. Dr.
Chitwood is a member of the four-person executive management team that will
oversee the spin-off transition during 2001.
James P. Rogers, age 49, 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. Mr. Rogers is a member of
the four-person executive management team that will oversee the spin-off
transition during 2001.
Betty W. DeVinney, age 56, 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 48, is Vice President, General Counsel and Secretary of the
Company. 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
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her appointment as Vice President, Associate General Counsel and Secretary in
1997. She assumed her current position in 2000. Ms. Lee is a member of the
four-person executive management team that will oversee the spin-off transition
during 2001.
Roger K. Mowen, Jr., age 55, is Vice President, Global Customer Services Group
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 59, 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 56, 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.
Mark W. Joslin, age 41, is Vice President and Controller of the Company. 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. He assumed his current
position in 2000.
ITEM 2. PROPERTIES
PROPERTIES
The Company operates 44 manufacturing sites in 17 countries. Eastman's plants
are generally well maintained, in good operating condition, and 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.
Chemicals segment manufacturing facilities in the United States are located in
Batesville, Arkansas; Carpentersville, Illinois; Columbus, Georgia; Ennis,
Texas; Forest Park, Georgia; Kingsport, Tennessee; LaVergne, Tennessee;
Longview, Texas; Lynwood, California; Moundville, Alabama; Philadelphia,
Pennsylvania; Pleasant Prairie, Wisconsin; Portland, Oregon; Roebuck, South
Carolina; and South Holland, Illinois. International sites are located in Kallo,
Belgium; Rexdale, Ontario, Canada; Sokolov, Czech Republic; Vantaa, Finland;
Lyon, France; Dusseldorf and Hamburg, Germany; Waterford, Ireland; Cola Di
Lazise and Sant' Albano, Italy; Kuantan, Malaysia; Dazhou, Funing, Hong Kong,
Tanggu, and Tiajin, People's Republic of China; Jurong Island, Singapore;
Molndal, Sweden; Bury, United Kingdom; and Llangefni, Wales.
Polymers segment manufacturing facilities in the United States are located in
Columbia, South Carolina; Kingsport, Tennessee; and Longview, Texas. Outside the
United States, manufacturing facilities are located in Zarate, Argentina;
Toronto, Ontario, Canada; Cosoleacaque, Mexico; San Roque, Spain; Rotterdam, The
Netherlands; and Workington and Hartlepool, United Kingdom.
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The Company has a 50% interest in Primester, a joint venture that manufactures
cellulose esters at its Kingsport, Tennessee plant. The production of cellulose
esters is an intermediate step in the manufacture of acetate tow and other
cellulose-based products. The Company also has a 50% interest in a new
manufacturing facility in Nanjing, People's Republic of China. This joint
venture will produce EASTOTAC hydrocarbon tackifying resins for
pressure-sensitive adhesives, caulks, and sealants. EASTOTAC hydrocarbon resins
are also used to produce hot melt adhesives for packaging applications in
addition to glue sticks, tapes, labels, and other adhesive applications.
The Company has distribution facilities at all of its plant sites. In addition,
the Company owns or leases over 120 stand-alone distribution facilities in the
United States and 17 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.
A summary of properties, classified by type, is contained in Note 3 to the
Consolidated Financial Statements.
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 the sorbates litigation 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-one 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 lawsuit, 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. Seven of the lawsuits are pending in California state
court in a consolidated action and allege state antitrust and consumer
protection violations on behalf of classes of indirect
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purchasers of sorbates; six of the lawsuits are pending in the United States
District Court for the Northern District of California in a consolidated action
and allege federal antitrust violations on behalf of classes of direct
purchasers of sorbates; two lawsuits 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; two lawsuits were filed in Wisconsin State Court under various state
antitrust laws on behalf of a class of indirect purchasers of sorbates in those
states; one lawsuit was filed in Kansas State Court under Kansas antitrust laws
on behalf of a class of indirect purchasers of sorbates in that state; one
lawsuit was filed in New Mexico State Court 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 and pursuant to common law causes of action on behalf of a class of direct
and indirect purchasers of sorbates in Canada; and one lawsuit 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. The Company has reached settlements in the direct and indirect
purchaser class actions pending in California. The California direct purchaser
settlement has received final court approval; the California indirect purchaser
settlement has yet to be finally approved by the court. One of the two indirect
purchaser actions in Tennessee has been preliminarily approved by the trial
court in Davidson County, Tennessee, and appellate review of that court's action
is presently underway. The Company has also reached preliminary settlements that
would resolve the Wisconsin and New Mexico indirect purchaser actions; however,
these settlements require further court approval. Each of the remaining class
actions is in the preliminary discovery stage, with no class having been
certified to date.
The Company has also been included as a defendant in two separate lawsuits
concerning sorbates currently pending in the United States District Court for
the Northern District of California, one filed on behalf of Dean Foods 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 elected to opt out of the final class action settlement
of the federal direct purchaser cases in California and are pursuing their
claims individually.
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. The
ultimate outcome of these matters cannot presently be determined, however, 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.
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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 2000.
- ---------------
Responsible Care(R) is a registered service mark of the chemical industry.
Eastapak(R), Eastar(R), Eastotac(R), EpB(R), Estron(R), Mxsten(R), Spectar(R),
Tenite(R), Tenox(R), Texanol(R), and Thermx(R) are registered trademarks of
Eastman Chemical Company. Eastman Hifor(TM) is a trademark 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 2000 and 1999.
CASH DIVIDENDS
HIGH LOW DECLARED
2000
1st Quarter 50-9/16 34-3/16 $ .44
2nd Quarter 54-1/8 45-5/16 .44
3rd Quarter 49-13/16 36-9/16 .44
4th Quarter 51 35-11/16 .44
1999
1st Quarter 48-3/16 40-5/8 $ .44
2nd Quarter 59-13/16 41-1/16 .44
3rd Quarter 53-9/16 39-3/16 .44
4th Quarter 48-7/16 36-11/16 .44
- --------------------------------
As of December 31, 2000, there were 76,901,536 shares of the Company's common
stock issued and outstanding, which shares were held by 66,176 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 2001, and expects to continue the $0.44 quarterly dividend
until the separation into two independent companies previously discussed.
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 2000
in transactions not registered under the Securities Act of 1933. For information
concerning issuance of shares and option grants in 2000 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 2000 1999 1998 1997 1996
amounts)
SUMMARY OF OPERATING DATA
Sales $5,292 $4,590 $4,481 $4,678 $4,782
Operating earnings 562 202 434 506 663
Earnings from operations
before income taxes 452 72 360 446 607
Net earnings 303 48 249 286 380
Basic earnings per share 3.95 .61 3.15 3.66 4.84
Diluted earnings per share 3.94 .61 3.13 3.63 4.79
STATEMENT OF FINANCIAL POSITION DATA
Current assets $1,523 $1,489 $1,398 $1,490 $1,345
Properties at cost 9,039 8,820 8,594 8,104 7,530
Accumulated depreciation 5,114 4,870 4,560 4,223 4,010
Total assets 6,550 6,303 5,850 5,778 5,266
Current liabilities 1,258 1,608 959 954 787
Long-term borrowings 1,914 1,506 1,649 1,714 1,523
Total liabilities 4,738 4,544 3,916 4,025 3,627
Total shareowners' equity 1,812 1,759 1,934 1,753 1,639
Dividends declared per share 1.76 1.76 1.76 1.76 1.72
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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
SUMMARY OF CONSOLIDATED RESULTS
2000 COMPARED WITH 1999
Record sales revenue of $5.3 billion and substantially higher net earnings in
2000 reflected improving market conditions for polyethylene terephthalate
("PET"), growth through acquisitions, and an ongoing emphasis on lower cost
structure. Significant factors that impacted 2000 included the improving supply
and demand balance for PET accompanied by the Company's firm stand on pricing
for container plastics; revenue and volume growth through acquisitions of
businesses in the coatings, adhesives, specialty polymers, and inks product
lines; lower cost structure resulting from employee separations that occurred
late in 1999 and additional non-labor cost reductions implemented in 2000; and
overall higher selling prices that were driven by increased raw materials costs.
Acquisitions contributed approximately $360 million to the increase in sales
revenue in 2000. Sales volume for the year without acquisitions, however, was
down slightly reflecting a slowing of economic demand during the last half of
2000, the Company's firm pricing stand for container plastics products, and the
discontinuation of certain products.
Costs for major raw materials and energy were significantly higher in 2000, even
with the Company's feedstock and energy cost hedging program. Results for 2000
and 1999 were impacted by certain nonrecurring items described below. The
Company's 2000 net earnings reflected returns of 17% on equity and 10% on
capital compared with returns of 3% on equity and 4% on capital in 1999. Diluted
earnings per share for 2000 were $3.94 compared with $0.61 in 1999.
For a discussion of 1999 versus 1998 consolidated results, see page 23.
(Dollars in millions) 2000 1999 CHANGE 1998
SALES $5,292 $4,590 15% $4,481
Sales were significantly higher in both the Chemicals and Polymers segments,
driven by substantially higher selling prices for container plastics, strongly
higher selling prices for performance chemicals and intermediates, and
significant sales volume growth in coatings, adhesives, specialty polymers, and
inks, mainly attributable to acquisitions. Sales volume increased 7% including
acquisitions, but without acquisitions declined 1%. The lack of volume growth
without acquisitions resulted from a slowing of economic demand in the second
half of 2000, the Company's firm stand on pricing for container plastics, and
the discontinuation of certain products. Overall, foreign currency exchange had
a slight negative impact on sales, although the impact in Europe was more
significant due to the strength of the U.S. dollar against the euro. The
negative impact of the euro on sales revenue was mitigated by the Company's
currency hedging program.
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(Dollars in millions) 2000 1999 CHANGE 1998
GROSS PROFIT $ 1,066 $ 822 30% $ 935
As a percentage of sales 20.1% 17.9% 20.9%
Gross profit improved substantially as a result of higher selling prices that
were driven by increased raw materials costs, the Company's lower cost structure
resulting from voluntary and involuntary employee separations that occurred late
in 1999, and additional cost reductions implemented in 2000. Significantly
higher costs for major raw materials and energy negatively impacted gross
profit, even with the Company's hedging of certain feedstock and energy costs.
For the year, raw material and energy costs were up approximately $380 million.
Lower pension expense in 2000 and 1999 resulted from mid-1999 amendments to the
Company's defined benefit plan.
Gross profit for 2000 was negatively impacted $12 million by previously
disclosed charges related to exiting the sorbates manufacturing site at
Chocolate Bayou, Texas, and the shutdown of facilities in Rochester, New York,
partially offset by a gain on the sale of assets. Gross profit for 1999 was
negatively impacted $39 million by previously disclosed 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 gain recognized from the reimbursement of previously expensed pension costs
related to Holston Defense Corporation.
(Dollars in millions) 2000 1999 CHANGE 1998
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 346 $ 355 (3)% $316
As a percentage of sales 6.5% 7.7% 7.1%
Benefits derived from a lower cost structure resulted in significantly lower
selling and general administrative expenses, even with the addition of costs for
acquired companies and costs related to ShipChem, the Company's logistics
venture launch.
(Dollars in millions) 2000 1999 CHANGE 1998
RESEARCH AND DEVELOPMENT COSTS $ 149 $ 187 (20)% $ 185
As a percentage of sales 2.8% 4.1% 4.1%
Research and development costs were significantly lower during 2000 due to lower
cost structure, although costs from acquired companies partially offset this
decrease.
(Dollars in millions) 2000 1999 CHANGE 1998
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH
AND DEVELOPMENT $ 9 $ 25 (64)% $ --
A nonrecurring pre-tax charge of approximately $9 million for the write-off of
in-process research and development related to the McWhorter Technologies, Inc.
("McWhorter") acquisition was recorded in 2000. Similarly, in 1999, the Company
recorded a nonrecurring pre-tax charge of approximately $25 million for the
write-off of in-process research and development related to the Lawter
International, Inc. ("Lawter") acquisition.
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(Dollars in millions) 2000 1999 CHANGE 1998
GROSS INTEREST COSTS $148 $139 $127
LESS CAPITALIZED INTEREST 6 13 31
---- ---- ----
INTEREST EXPENSE 142 126 13% 96
INTEREST INCOME 7 5 5
---- ---- ----
NET INTEREST EXPENSE $135 $121 12% $ 91
==== ==== ====
Higher interest expense in 2000 reflects decreased capitalized interest
resulting from the completion of certain capital expansion projects during 1999,
higher average commercial paper borrowings due to acquisitions, and higher
interest rates on commercial paper borrowings in 2000 compared to 1999.
(Dollars in millions) 2000 1999 CHANGE 1998
OTHER (INCOME) CHARGES, NET $ 13 $ 9 44% $ (17)
GAIN RECOGNIZED ON INITIAL PUBLIC OFFERING
OF GENENCOR (38) -- N/A --
Other income and charges include royalty income, gains and losses on sales of
assets and investments, results for investments accounted for under the equity
method, foreign exchange transactions, fees paid related to the securitization
of receivables, and other items. Other charges, net, increased in 2000 due to
higher litigation costs and higher fees related to securitized receivables,
offset partially by higher income from equity investments. Losses related to
foreign exchange transactions declined in 2000. As previously reported, in 2000,
the Company recorded a pre-tax gain of approximately $38 million resulting from
the initial public offering of common shares of Genencor International, Inc.
("Genencor").
EARNINGS
(Dollars in millions, except per share amounts) 2000 1999 CHANGE 1998
Operating earnings $ 562 $ 202 178% $ 434
Net earnings 303 48 531 249
Earnings per share
- --Basic 3.95 .61 548 3.15
- --Diluted 3.94 .61 546 3.13
SUMMARY BY OPERATING SEGMENT
Effective with the first quarter 2000, the Company managed its products and
reported its operations in two operating segments--Chemicals and Polymers.
Through 1999, the Company managed its products and reported 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.
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CHEMICALS SEGMENT
(Dollars in millions) 2000 1999 CHANGE 1998
Sales $2,506 $2,106 19% $1,980
Operating earnings 232 132 76 252
2000 COMPARED WITH 1999
Sharply higher sales revenue for the Chemicals segment reflected higher sales
volumes attributable to acquisitions in the coatings, adhesives, specialty
polymers, and inks product lines, and overall higher selling prices that were
driven by increased raw materials costs. Excluding the effect of certain
discontinued products and volume attributable to acquisitions, sales volume for
the Chemicals segment was flat.
Sales revenue for performance chemicals and intermediates increased due to
significantly higher selling prices, driven by higher raw materials costs.
Revenues for fine chemicals declined, partially due to lower volume associated
with previously announced discontinuation of certain products. Overall, foreign
currency exchange had a slight negative impact on Chemicals segment revenues.
For the Chemicals segment overall, lower cost structure and increased selling
prices, driven by raw materials cost increases, resulted in substantially
increased operating earnings for 2000 compared to 1999. For coatings, adhesives,
specialty polymers, and inks, however, lower costs did not offset the reduction
in margins as raw materials costs increased more than selling prices. Operating
earnings in fine chemicals improved as the turnaround plan continued to be on
target. Performance chemicals and intermediates operating earnings increased for
2000 compared to 1999, aided by Eastman's lower cost structure and dependence on
coal rather than oil or natural gas for its acetyl-based products. Chemicals
segment operating earnings were positively affected by decreased pension expense
in 2000 and 1999.
Operating earnings for the Chemicals segment for 2000 were negatively impacted
by previously reported pre-tax charges of approximately $13 million related to
the shutdown of facilities in Chocolate Bayou, Texas and Rochester, New York,
and $9 million for the write-off of in-process research and development related
to the McWhorter acquisition. Operating earnings for 1999 were negatively
impacted by previously reported items netting to a pre-tax charge of $64 million
related to employee separations and pension settlement, write-off of in-process
research and development related to the Lawter acquisition, phase out of
operations in Chocolate Bayou, Texas and Rochester, New York, write-off of a
discontinued capital project, an increase in the reserve for sorbates civil
litigation, and the reimbursement of previously expensed pension costs related
to Holston Defense Corporation.
The Company continues to pursue the previously announced plan to divest or
otherwise restructure a major portion of its fine chemicals business.
Currently, a number of options are under consideration, some of which could
result in a charge to earnings in the first half of 2001. The charge would
relate to potential loss on sale of assets for a number of sites or other
restructuring costs related to fine chemical product lines not divested.
POLYMERS SEGMENT
(Dollars in millions) 2000 1999 CHANGE 1998
Sales $2,786 $2,484 12% $2,501
Operating earnings 330 70 371 182
2000 COMPARED WITH 1999
Selling prices for container plastics were substantially higher for 2000, driven
by increased raw materials costs and an improved supply and demand balance for
PET. Although sales volumes for EASTAPAK polymers used in
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container plastics were level in 2000 compared with 1999 due to the Company's
firm stand on selling prices and a maturing carbonated soft drink market in
North America, volume was up slightly in the fourth quarter 2000 due to strong
European demand. Moderately higher selling prices and sales volumes for
non-polyethylene specialty plastics also contributed to higher sales revenues.
Despite slightly higher sales volumes for fibers, sales revenue declined
primarily due to lower selling prices. Overall, foreign currency exchange had a
slight negative impact on Polymers segment revenues.
Operating earnings for the Polymers segment were sharply higher for the year
primarily due to the Company's lower cost structure and substantially higher
selling prices for EASTAPAK polymers. Operating earnings were also positively
impacted by moderately higher selling prices overall for specialty plastics.
Operating earnings for the non-polyethylene portion of specialty plastics were
higher, but margins on polyethylene products were pressured by higher raw
materials costs and lower selling prices that resulted from slowing demand.
Fibers operating earnings increased considerably for the year due to lower cost
structure. Polymers segment operating earnings were positively affected by
decreased pension expense in 2000 and 1999, and in 2000, by a gain on the sale
of certain assets.
Operating earnings for 1999 were negatively impacted by previously reported
pre-tax charges totaling $53 million related to employee separations and pension
settlement, a discontinued capital project, write-off of technology which was
determined to have no future value, and a loss recognized on an investment.
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-K. For additional information concerning the Company's
operating segments, see Note 18 to the Consolidated Financial Statements.
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
(Dollars in millions) 2000 1999 CHANGE 1998
United States and Canada $3,229 $2,869 13% $2,933
Europe, Middle East, and Africa 1,062 849 25 752
Asia Pacific 547 486 13 429
Latin America 454 386 18 367
------ ------ ------
Total $5,292 $4,590 $4,481
====== ====== ======
2000 COMPARED WITH 1999
Sales in the United States for 2000 were $3.0 billion, up 13% from 1999 sales of
$2.7 billion. The improvement was primarily attributable to significantly higher
selling prices, mainly for EASTAPAK polymers, and higher sales volumes resulting
from acquisitions.
Sales outside the United States in 2000 were $2.3 billion, up 18% from 1999
sales of $1.9 billion due to substantially higher selling prices for EASTAPAK
polymers and higher sales volume resulting from acquisitions. Sales outside the
United States in 2000 were 43% of total sales compared with 42% in 1999. In
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Europe, substantially higher selling prices for EASTAPAK polymers and additional
volumes from acquisitions contributed to a significant increase in sales for
2000, although a strong U.S. dollar against the euro resulted in a significantly
unfavorable currency exchange effect for that region. Increased volumes for
fibers and slightly higher selling prices for performance chemicals and
intermediates and EASTAPAK polymers resulted in moderately higher sales in Asia
Pacific in 2000. The increase in sales for Latin America is primarily
attributable to substantially higher selling prices for EASTAPAK polymers.
With a substantial portion of 2000 sales to customers outside the United States,
Eastman is subject to the risks associated with operating in international
markets. To mitigate its exchange rate risks, the Company frequently seeks to
negotiate payment terms in U.S. dollars. In addition, where it deems such
actions advisable, the Company engages in foreign currency hedging transactions
and requires letters of credit and prepayment for shipments where its assessment
of individual customer and country risks indicates their use is appropriate. In
2000, a strong U.S. dollar against the euro resulted in a significantly
unfavorable currency exchange effect. See Note 12 to Consolidated Financial
Statements and Part II--Item 7A--"Quantitative and Qualitative Disclosures About
Market Risk."
SUMMARY OF CONSOLIDATED RESULTS
1999 COMPARED WITH 1998
Earnings declined significantly in 1999 compared to 1998 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 both segments and were
substantially higher outside the United States, lower selling prices coupled
with higher costs for major raw materials 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 the Lawter acquisition. 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 increase in the reserve for civil litigation related to sorbates and
other 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 $20 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.
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
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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.
SALES
Sales volumes for 1999 increased 11% overall from 1998 mainly due to improvement
in worldwide demand for PET, the acquisition of Lawter, the completion and
startup of a new oxo plant in Singapore, and strong demand for specialty
plastics. 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.
SALES BY REGION
Sales in the United States for 1999 were $2.7 billion, down 4% from 1998 sales
of $2.8 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 $1.9 billion, up 12%
from 1998 sales of $1.7 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.
A strong U.S. dollar against foreign currencies resulted in an overall slightly
unfavorable currency exchange effect, primarily in Europe and Latin America.
CHEMICALS SEGMENT
Sales for the Chemicals segment increased moderately in 1999 compared to 1998 as
higher sales volume, mainly attributable to the Lawter acquisition and coatings,
adhesives, specialty plastics, and inks products, was partially offset by lower
selling prices and product mix. Performance chemicals sales volumes were
moderately higher but the impact on revenues was more than offset by lower
selling prices. Fine chemicals sales volume was slightly higher, but lower
selling prices and a shift in product mix resulted in lower sales revenue.
Operating earnings for individual product lines and the segment overall declined
significantly in 1999 as a result of lower selling prices, higher raw materials
costs, particularly for propane, and several nonrecurring items described below.
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In 1999, Chemicals segment results were impacted by nonrecurring items totaling
$64 million and included 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 the Lawter acquisition, 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. Chemicals segment operating
earnings were positively affected by decreased pension expense. As a result of
the adoption of SOP 98-1 in 1999, certain internal-use software costs were
capitalized which otherwise would have been expensed.
Operating earnings for 1998 were impacted by nonrecurring charges totaling $47
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.
POLYMERS SEGMENT
Continued strong worldwide demand for PET resulted in significantly higher sales
volumes for EASTAPAK polymers in 1999 compared to 1998. Although selling prices
for container plastics for the year overall were lower than 1998, prices
increased during the latter half of 1999. Revenues for specialty plastics
increased due to moderately higher volume and slightly higher selling prices.
Lower selling prices and lower sales volume resulted in a decline in revenue for
fibers.
Operating earnings in 1999 were negatively impacted by higher costs for raw
materials, particularly for propane, and nonrecurring charges totaling $53
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 in 1999. As a result of the adoption of SOP 98-1 in 1999, certain
internal-use software costs were capitalized which otherwise would have been
expensed.
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
CASH FLOW
(Dollars in millions) 2000 1999 1998
Net cash provided by (used in)
Operating activities $ 831 $ 744 $ 731
Investing activities (465) (715) (545)
Financing activities (451) 128 (186)
----- ----- -----
Net change in cash and cash equivalents $ (85) $ 157 $ --
===== ===== =====
Cash and cash equivalents at end of period $ 101 $ 186 $ 29
===== ===== =====
Cash provided by operating activities was significantly higher in 2000
reflecting the Company's higher net earnings. Cash provided by operating
activities in 2000 and 1999 also reflects cash provided by a continuous sale of
accounts receivable program and, in 2000, reflects proceeds from the settlement
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of strategic foreign currency hedging transactions. 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 2000 reflects the McWhorter and Sokolov acquisitions, in 1999
reflects the Lawter acquisition and the acquisition of a North American textile
chemicals business, and in 1998 reflects the acquisition of a German
manufacturer of specialty polymers. Cash used in financing activities in 2000
reflects significant repayment of debt acquired from McWhorter, Lawter, and
Sokolov and repayment of other, primarily short-term, borrowings. 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 year-end 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. Also
reflected in cash flows from financing activities is the payment of dividends in
all years presented and common stock repurchases in 2000 and 1999.
Available cash will be used to fund dividends, maintain a strong balance sheet,
and repurchase shares, weighed against debt repayment.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 2001, the Company estimates that depreciation will be approximately $375
million and that capital expenditures will be slightly above $300 million,
subject to adjustment after assessment of recent acquisitions. Long-term
commitments related to planned capital expenditures are not material. The
Company had various purchase commitments at the end of 2000 for materials,
supplies, and energy incident to the ordinary conduct of business. These
commitments, over a period of several years, approximate $1.4 billion. Eastman
has other long-term commitments relating to a joint venture agreement as
described in Note 4 to Consolidated Financial Statements.
LIQUIDITY
On July 13, 2000, Eastman replaced the then-existing $800 million revolving
credit facility that was to expire in December 2000 with a new $800 million
revolving credit facility (the "Credit Facility"). On December 8, 2000, Eastman
entered into a short-term $150 million credit agreement (the "Credit
Agreement"). Although the Company does not have any amounts outstanding under
the Credit Facility or the Credit Agreement, any such borrowings would be
subject to interest at varying spreads above quoted market rates, principally
LIBOR. The Credit Facility and the Credit Agreement require facility fees on the
total commitment that vary based on Eastman's credit rating. The rate for such
fees was .125% as of December 31, 2000. The Credit Facility and the Credit
Agreement contain a number of covenants and events of default, including the
maintenance of certain financial ratios. Eastman was in compliance with all such
covenants during 2000.
Eastman utilizes commercial paper, generally with maturities of 90 days or less,
to meet its liquidity needs. Because the Credit Facility that provides liquidity
support for the commercial paper expires in July 2005, the commercial paper
borrowings at December 31, 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 December 31, 2000, the Company's commercial
paper outstanding balance was $400 million at an effective interest rate of
7.12%. 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.
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Proceeds of $130 million from the settlement in 2000 of strategic foreign
currency hedging transactions were used for general corporate purposes. For
additional information concerning the settlement, see Note 12 to the
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 December 31, 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. For additional information
concerning this agreement, see Note 13 to the Consolidated Financial Statements.
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 subsequently repaid. This transaction
was funded with available cash and commercial paper borrowings.
As of February 21, 2000, the Company acquired 76% 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 December 31, 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 2000, the Company repaid $125 million of Lawter notes, $21 million of
debt assumed in the Sokolov acquisition, and $141 million of debt assumed in the
McWhorter acquisition. Additional indebtedness of $208 million, primarily in the
form of short-term notes payable, was incurred during 2000 for general operating
purposes, and approximately $184 million of such borrowings were repaid during
2000. Interest rates for these notes range from 6.33% to 7.40%.
The Company is currently authorized to repurchase up to $400 million of its
common stock. During 2000, 1,575,000 shares of common stock at a total cost of
approximately $57 million, or an average price of approximately $36 per share,
were repurchased under this authorization. A total of 2,669,800 shares of common
stock at a cost of approximately $107 million, or an average price of
approximately $40 per share, has 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 funding
dividends, maintaining a strong balance sheet, and debt repayment.
As previously reported, the Company has entered into a letter of intent with
Hercules Incorporated to acquire Hercules' hydrocarbon resins and select
portions of its rosins resins businesses. Subject to the negotiation of
customary agreements, approval by the boards of directors of both companies, and
regulatory approvals, the transaction is expected to be completed early in
second quarter, 2001.
The Company continues to pursue the previously announced plan to divest or
otherwise restructure a major portion of its fine chemicals business. Currently,
a number of options are under consideration, some of which could result in a
charge to earnings in the first half of 2001. The charge would relate to
potential loss on sale of assets for a number of sites or other restructuring
costs related to fine chemical product lines not divested.
The Company anticipates that no contribution to its defined benefit pension plan
will be required for 2001.
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
The Company declared cash dividends of $0.44 per share in the fourth quarter of
2000 and 1999 and $1.76 per share in 2000 and 1999.
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 $195 million, $220 million, and $190 million in 2000, 1999, and
1998, 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
derivative financial instruments 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 mid-1999
through year-end 2000 costs, which the Company was not able to fully hedge or
recapture in its pricing structure.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") 133, as amended in June 2000 by
SFAS 138, "Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. This standard requires that
an entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value, resulting in an offsetting
adjustment to income or other comprehensive income, depending on effectiveness
of the hedge. SFAS 133, as amended by SFAS 138, was effective for the Company
beginning January 1, 2001. Certain instruments historically utilized by the
Company to hedge foreign currency exposures and raw materials and energy
purchases are required to be marked to market each period under this standard.
The adoption of SFAS 133, as amended by SFAS 138, has not had a material impact
on the results of operations. Instruments with a fair value of approximately $30
million, previously not required to be recorded and primarily pertaining to the
Company's raw materials and energy cost hedging program, were recognized as
miscellaneous receivables in the Consolidated
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Statement of Financial Position on January 1, 2001. In addition, previously
deferred gains of approximately $70 million from the settlement of currency
options were reclassified from other current liabilities. These amounts resulted
in an after-tax credit to other comprehensive income of approximately $62
million on January 1, 2001. See Note 12 to the Consolidated Financial Statements
for additional information.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140,
which replaces SFAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", addresses certain issues not
previously addressed in SFAS 125. SFAS 140 is effective for transfers and
servicing occurring after March 31, 2001 and, for certain provisions, fiscal
years ending after December 15, 2000.
OUTLOOK
For the first quarter and year 2001, the Company:
- - 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 energy prices is
expected to negatively impact worldwide economic growth;
- - Expects annual worldwide PET volume growth of 10% and expects the supply
and demand balance for PET for container plastics to improve. The Company
expects its container plastics volume growth to be in line with worldwide
industry demand and expects margins for container plastics to improve;
- - Anticipates that higher energy and raw materials costs and their impact on
global economic conditions will likely negatively affect overall demand,
and accordingly, negatively affect early 2001 results;
- - Expects the cost of raw materials will increase over the fourth quarter
2000 and anticipates that announced price increases effective in the first
quarter 2001 and continuing cost reductions will offset some, but not all,
raw materials cost increases net of hedging activities;
- - Expects to eliminate additional labor and non-labor costs during 2001,
raising the total cost reduction goal from $200 million at year-end
2000 to $300 million by year-end 2001;
- - Expects that costs for upgrading Eastman's enterprise resource planning
software system from SAP R2 to SAP R3 will taper off during 2001 as
implementation is planned to be essentially completed in all regions by
year-end 2001;
- - Expects to further integrate recent acquisitions into the Company's
processes and SAP R3 during 2001;
- - Expects to recognize costs throughout 2001 related to ShipChem as it
builds capability to add new customers;
- - Expects to complete the acquisition of Hercules' hydrocarbon resins
and select portions of its rosins resins businesses early in second
quarter 2001, subject to negotiation of customary agreements, approval
by the boards of directors of both companies, and regulatory approvals;
- - Expects to divest or otherwise restructure a major portion of its fine
chemicals business and that such divestiture or restructuring could result
in a charge to earnings related to potential loss on sale of assets for a
number of sites or other restructuring costs related to fine chemical
product lines not divested;
- - Anticipates that its capital expenditures for 2001 will be slightly
over $300 million, although the final amount for 2001 will be
determined after an assessment of recent acquisitions;
- - Anticipates available cash will be used to fund dividends, maintain a
strong balance sheet, and repurchase shares, weighed against debt
repayment.
Based upon the expectations described above, as of January 25, 2001 (the date of
its fourth quarter 2000 sales and earnings press release) the Company
anticipated that the first quarter 2001 earnings per share would be
approximately $0.20 per share less than the fourth quarter 2000.
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By the end of the fourth quarter 2001, the Company expects to become two
independent public companies, a specialty chemicals and plastics company, and a
PET plastics and acetate fibers company, through a spin-off in the form of a
tax-free stock dividend. Although many issues are pending in connection with the
planned spin-off, the Company:
- - Expects to record a one-time charge;
- - Expects to continue the $0.44 quarterly dividend until the spin-off;
- - Expects that, immediately after the spin-off, Eastman shareowners will
own shares in both of the new entities;
- - Expects that Eastman's Chairman of the Board and Chief Executive
Officer, Mr. Earnest W. Deavenport, Jr., will retire January 1, 2002,
and that Eastman's remaining leadership and Board of Directors will be
divided between the two new companies.
Beyond 2001, the Company:
- - Expects the separation of the specialty chemicals and plastics company from
the PET plastics and acetate fibers company will allow the two companies to
concentrate their respective efforts and resources on specific strategies
to create shareowner value, providing shareowners with ownership interests
in two highly focused entities;
- - Believes that the specialty chemicals and plastics company will be a
world leader in the specialty chemicals and plastics industry, with a
strong focus on providing customer solutions; that this company will
experience accelerated growth through increased management focus and
execution of appropriate strategies; and that market transparency and
value recognition for technology and service businesses that will
become part of this company, such as ShipChem and Genencor, will be
enhanced;
- - Believes that the PET plastics and acetate fibers company will be a world
market and cost position leader in PET plastics and acetate fibers, and
that consistently strong cash flows and the integrated polyethylene
business will allow this company to remain financially strong throughout
business cycles;
- - Expects that the Board of Directors for each new company will determine its
own company's dividend policy, but anticipates that the initial combined
dividend of the two new companies will be equal to Eastman's current
dividend;
- - Anticipates the capital structure of each new company will be appropriate
for the company's financial profile and that each company will maintain
investment-grade ratings.
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 written and oral 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 material and energy costs and foreign currencies; global and
regional economic conditions; supply and demand, volume, price, cost, 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; cash requirements and uses of available cash; cost reduction targets;
development, production, commercialization, and acceptance of new products,
services, and technologies; acquisitions and dispositions of certain businesses
and assets, and product portfolio changes; and the planned separation of
Eastman's current businesses into two independent companies by the end of 2001.
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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 announced that it will separate into two independent
companies by the end of the fourth quarter, 2001 through a spin-off in the
form of a tax-free stock dividend. The separation of Eastman's business
into two companies--the specialty chemicals and plastics company, and the
PET plastics and acetate fibers company--is expected to allow the two
companies to concentrate their respective efforts and resources on
strategies specific to each business, providing shareowners with ownership
interests in two highly focused entities. There can be no assurance that
any or all of such goals or expectations will be realized.
- - 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,
including the satisfactory negotiation of the transaction documents and the
fulfillment of all closing conditions to the transactions. Additionally,
after completion of the transactions 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.
- - During 2001, the Company will be integrating recent acquisitions into the
Company's processes and SAP R3 to enable cost-saving and synergy
opportunities. There can be no assurance that such cost-saving and synergy
opportunities will be realized or that the integration efforts will be
completed as planned.
- - 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.
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- - 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 and EpB are registered trademarks of Eastman Chemical Company.
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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 to fund its business operations and
capital requirements. Currently, these borrowings are predominately U.S. dollar
denominated. The nature and amount of the Company's long-term and short-term
debt may vary as a result of future business requirements, market conditions,
and other factors.
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 two 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 is exposed to fluctuations in market prices for certain of its major
raw materials. To mitigate short-term fluctuations in market prices for certain
commodities, principally propane, ethane, and natural gas, the Company enters
into forwards and options contracts.
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, foreign currency exchange rates, and/or
commodity prices. 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 $86 million and an additional $9 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 $8
million and an additional $0.5 million 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. The market risk associated with feedstock options and
natural gas swaps assuming an instantaneous parallel shift in the underlying
commodity price of 10% is approximately $9 million and an additional $0.8
million for each one percentage point move in closing prices thereafter.
33
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM PAGE
Management's responsibility for financial statements 35
Report of independent accountants 36
Consolidated statements of earnings, comprehensive income, and retained earnings 37
Consolidated statements of financial position 38
Consolidated statements of cash flows 39-40
Notes to consolidated financial statements 41-71
34
35
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 37 through 71. Eastman has
prepared these consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America, 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 of America. 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 25, 2001
35
36
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 34 present
fairly, in all material respects, the financial position of Eastman
Chemical Company and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of
America. 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 of America, 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
Atlanta, Georgia
January 25, 2001, except as to Note 23, for which the date is
February 5, 2001
36
37
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE
INCOME, AND RETAINED EARNINGS
(Dollars in millions, except per share amounts)
2000 1999 1998
Sales $ 5,292 $ 4,590 $ 4,481
Cost of sales 4,226 3,768 3,546
------- ------- -------
Gross profit 1,066 822 935
Selling and general administrative expenses 346 355 316
Research and development costs 149 187 185
Write-off of acquired in-process research and development 9 25 --
Employee separations and pension settlement/curtailment -- 53 --
------- ------- -------
Operating earnings 562 202 434
Interest expense, net 135 121 91
Gain recognized on initial public offering of equity investment (38) -- --
Other (income) charges, net 13 9 (17)
------- ------- -------
Earnings before income taxes 452 72 360
Provision for income taxes 149 24 111
------- ------- -------
Net earnings $ 303 $ 48 $ 249
======= ======= =======
Basic earnings per share $ 3.95 $ .61 $ 3.15
======= ======= =======
Diluted earnings per share $ 3.94 $ .61 $ 3.13
======= ======= =======
COMPREHENSIVE INCOME
Net earnings $ 303 $ 48 $ 249
Other comprehensive income (loss) (63) (36) 19
------- ------- -------
Comprehensive income $ 240 $ 12 $ 268
======= ======= =======
RETAINED EARNINGS
Retained earnings at beginning of year $ 2,098 $ 2,188 $ 2,078
Net earnings 303 48 249
Cash dividends declared (135) (138) (139)
------- ------- -------
Retained earnings at end of year $ 2,266 $ 2,098 $ 2,188
======= ======= =======
The accompanying notes are an integral part of these financial statements.
37
38
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions)
DECEMBER 31,
2000 1999
ASSETS
Current assets
Cash and cash equivalents $ 101 $ 186
Trade receivables, net of allowance of $16 and $13 650 572
Miscellaneous receivables 87 59
Inventories 580 485
Other current assets 105 187
------- -------
Total current assets 1,523 1,489
------- -------
Properties
Properties and equipment at cost 9,039 8,820
Less: Accumulated depreciation 5,114 4,870
------- -------
Net properties 3,925 3,950
------- -------
Goodwill, net of accumulated amortization of $28 and $14 335 271
Other intangibles, net of accumulated amortization of $20 and $6 277 175
Other noncurrent assets 490 418
------- -------
Total assets $ 6,550 $ 6,303
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 1,152 $ 1,009
Borrowings due within one year 106 599
------- -------
Total current liabilities 1,258 1,608
Long-term borrowings 1,914 1,506
Deferred income tax credits 607 485
Postemployment obligations 829 789
Other long-term liabilities 130 156
------- -------
Total liabilities 4,738 4,544
------- -------
Commitments and contingencies
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued - 84,739,902 and 84,512,004) 1 1
Paid-in capital 100 95
Retained earnings 2,266 2,098
Other comprehensive loss (117) (54)
------- -------
2,250 2,140
Less: Treasury stock at cost (7,996,790 and 6,421,790 shares) 438 381
------- -------
Total shareowners' equity 1,812 1,759
------- -------
Total liabilities and shareowners' equity $ 6,550 $ 6,303
======= =======
The accompanying notes are an integral part of these financial statements.
38
39
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
2000 1999 1998
Cash flows from operating activities
Net earnings $ 303 $ 48 $ 249
----- ----- -----
Adjustments to reconcile net earnings to net cash provided
by operating activities, net of effect of acquisitions
Depreciation and amortization 418 383 351
Gain recognized on initial public offering of
equity investment (38) -- --
Write-off of impaired assets -- 54 33
Write-off of acquired in-process research and
development 9 25 --
Provision (benefit) for deferred income taxes 64 (18) 66
(Increase) decrease in receivables (1) 163 19
(Increase) decrease in inventories (43) 63 19
Increase (decrease) in employee benefit liabilities
and incentive pay 28 (69) 57
Increase (decrease) in liabilities excluding
borrowings, employee benefit liabilities, and
incentive pay 9 115 (35)
Other items, net 82 (20) (28)
----- ----- -----
Total adjustments 528 696 482
----- ----- -----
Net cash provided by operating activities 831 744 731
----- ----- -----
Cash flows from investing activities
Additions to properties and equipment (226) (292) (500)
Acquisitions, net of cash acquired (261) (381) (32)
Additions to capitalized software (21) (24) --
Other investments (30) -- --
Capital advances to suppliers -- (21) (21)
Proceeds from sales of investments 12 -- --
Proceeds from sales of fixed assets 61 -- --
Other items -- 3 8
----- ----- -----
Net cash used in investing activities (465) (715) (545)
----- ----- -----
39
40
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in millions)
2000 1999 1998
Cash flows from financing activities
Proceeds from borrowings 208 348 (66)
Repayment of borrowings (471) (34) --
Dividends paid to shareowners (135) (138) (138)
Treasury stock purchases (57) (51) --
Other items 4 3 18
----- ----- -----
Net cash provided by (used in) financing activities (451) 128 (186)
----- ----- -----
Net change in cash and cash equivalents (85) 157 --
Cash and cash equivalents at beginning of year 186 29 29
----- ----- -----
Cash and cash equivalents at end of year $ 101 $ 186 $ 29
===== ===== =====
The accompanying notes are an integral part of these financial statements.
40
41
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 accounting principles generally accepted in the United States of
America 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
In 2000, the Company implemented Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements" which specifies the
criteria that must be met before revenue is realized or realizable and
earned. In accordance with SAB 101, the Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the price to the customer is fixed or
determinable, and collectibility is reasonably assured. Appropriate
accruals for discounts, volume incentives, and other allowances are
recorded as reductions in sales. The implementation of SAB 101 did not
have a material impact on sales, operating earnings, or net earnings
for 2000 or prior years.
SHIPPING AND HANDLING FEES AND COSTS
Shipping and handling fees related to sales transactions are billed to
customers and are recorded as sales revenue. Shipping and handling
costs incurred are recorded in cost of sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits, and readily
marketable securities with original maturities of three months or less.
ACCOUNTS RECEIVABLE SALES
Under a planned continuous sale program agreement entered into in 1999,
the Company sells to a third party undivided interests in certain
domestic accounts receivable. Undivided interests in designated
41
42
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable pools are sold to the purchaser with recourse limited to the
receivables purchased. The Company's retained interests in the
designated receivable pools are measured at fair value, based on
expected future cash flows, using management's best estimates of
returns and credit losses commensurate with the risks involved. The
Company's retained interests in receivables sold are recorded as trade
receivables in the Consolidated Financial Statements. 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 Financial Statements.
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
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 exposures to fluctuations in foreign currency, raw
materials and energy costs, and interest rates. Such instruments are
42
43
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
used to mitigate the risk that changes in exchange rates or raw
materials and energy costs will adversely affect the eventual dollar
cash flows resulting from the hedged 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 2 years and
denominated in foreign currencies (principally the British pound,
French franc, German mark, Italian lira, Canadian dollar, euro, and the
Japanese yen). To mitigate short-term fluctuations in market prices for
propane and natural gas (major raw materials and energy used in the
manufacturing process), the Company enters into forwards and options
contracts. From time to time, the Company also utilizes interest rate
derivative instruments, primarily swaps, to hedge the Company's
exposure to movements in interest rates.
The Company's forwards and options contracts are accounted for as
hedges because the derivative instruments are designated and effective
as hedges and reduce the Company's exposure to identified risks. Gains
and losses resulting from effective hedges of existing 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 currency option 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.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") 133, as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." The adoption of SFAS 133, as amended by SFAS 138, has not
had a material impact on the results of operations. Instruments with a
fair value of approximately $30 million, previously not required to be
recorded and primarily pertaining to the Company's raw materials and
energy cost hedging program, were recognized as miscellaneous
receivables in the Consolidated Statement of Financial Position on
January 1, 2001. In addition, previously deferred gains of
approximately $70 million from the settlement of currency options were
reclassified from other current liabilities. These amounts resulted in
an after-tax credit to other comprehensive income of approximately $62
million on January 1, 2001.
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 and accounted for by the
cost method, 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
43
44
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
Certain costs, including internal payroll costs, incurred in connection
with the development or acquisition of software for internal use are
capitalized. Capitalized software costs are 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.
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 gains or losses 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 1999 and 1998 amounts to conform
to the 2000 presentation.
2. INVENTORIES
DECEMBER 31,
(Dollars in millions) 2000 1999
At FIFO or average cost (approximates current cost)
Finished goods $ 482 $ 404
Work in process 125 128
Raw materials and supplies 248 210
----- -----
Total inventories 855 742
Reduction to LIFO value (275) (257)
----- -----
Total inventories at LIFO value $ 580 $ 485
===== =====
Inventories valued on the LIFO method were approximately 70% of total
inventories in each of the periods.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
(Dollars in millions) 2000 1999
Balance at beginning of year $ 8,820 $ 8,594
Additions
Capital expenditures 226 292
Acquisitions 253 101
Deductions (260) (167)
------- -------
Balance at end of year $ 9,039 $ 8,820
======= =======
Properties
Land $ 64 $ 61
Buildings and building equipment 846 884
Machinery and equipment 7,985 7,685
Construction in progress 144 190
------- -------
Balance at end of year $ 9,039 $ 8,820
======= =======
45
46
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED DEPRECIATION
(Dollars in millions) 2000 1999
Balance at beginning of year $ 4,870 $ 4,560
Provision for depreciation 382 368
Deductions (138) (58)
------- -------
Balance at end of year $ 5,114 $ 4,870
======= =======
Construction-period interest of $340 million and $336 million, reduced
by accumulated depreciation of $171 million and $157 million, is
included in cost of properties at December 31, 2000 and 1999,
respectively.
Depreciation expense was $382 million, $368 million, and $351 million
for 2000, 1999, and 1998, respectively.
4. EQUITY INVESTMENTS AND OTHER NONCURRENT ASSETS AND LIABILITIES
Eastman owns 25 million shares, or approximately 40%, of the
outstanding common shares of Genencor International, Inc., ("Genencor")
a company engaged in the discovery, development, manufacture, and
marketing of biotechnology products for the industrial chemicals,
agricultural, and health care markets. Prior to its initial public
offering in July, 2000, Genencor was a joint venture in which the
Company owned a 50% interest. This investment is accounted for under
the equity method and is included in other noncurrent assets. At
December 31, 2000 and 1999, Eastman's investment in Genencor was $209
million and $157 million, respectively.
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 by 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, 2000 and 1999, 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 December 31, 2000 and 1999. 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 $128 million and
$112 million at December 31, 2000 and 1999, respectively.
46
47
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PAYABLES AND OTHER CURRENT LIABILITIES
DECEMBER 31,
(Dollars in millions) 2000 1999
Trade creditors $ 526 $ 373
Accrued payrolls, vacation, and variable-incentive compensation 201 143
Accrued taxes 95 112
Deferred gain on currency options 72 --
Accrued restructuring charge 7 65
Other 251 316
------ ------
Total $1,152 $1,009
====== ======
6. BORROWINGS
DECEMBER 31,
(Dollars in millions) 2000 1999
SHORT-TERM BORROWINGS
Commercial paper $ -- $ 398
Notes payable 101 125
Other 5 76
------ ------
Total short-term borrowings 106 599
------ ------
LONG-TERM BORROWINGS
6 3/8% notes due 2004 500 500
7 1/4% debentures due 2024 497 496
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 296 297
Commercial paper 400 --
Other 21 13
------ ------
Total long-term borrowings 1,914 1,506
------ ------
Total borrowings $2,020 $2,105
====== ======
Eastman has access to an $800 million revolving credit facility (the
"Credit Facility") expiring in July 2005, and to a short-term $150
million credit agreement (the "Credit Agreement") expiring in June
2001. Although the Company does not have any amounts outstanding under
the Credit Facility or the Credit Agreement, any such borrowings would
be subject to interest at varying spreads above quoted market rates,
principally LIBOR. The Credit Facility and the Credit Agreement require
facility fees on the total commitment that vary based on Eastman's
credit rating. The annual rate for such fees was 0.125% in 2000, and,
for the Credit Facility, was 0.085% in 1999. The Credit Facility and
the Credit Agreement contain 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.
47
48
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2000 are
classified as long-term borrowings as the Company has the ability to
refinance such borrowings long term. As of December 31, 2000 and
December 31, 1999, the effective interest rates for the Company's
commercial paper borrowings were 7.12% and 6.30%, respectively.
7. SHAREOWNERS' EQUITY
(Dollars in millions) 2000 1999 1998
Common stock at par value $ 1 $ 1 $ 1
------------ ------------ ------------
Paid-in capital
Balance at beginning of year 95 94 77
Additions 5 1 17
------------ ------------ ------------
Balance at end of year 100 95 94
------------ ------------ ------------
Retained earnings 2,266 2,098 2,188
------------ ------------ ------------
Accumulated other comprehensive income (loss)
Balance at beginning of year (54) (18) (37)
Change in cumulative translation adjustment (66) (46) 24
Change in unfunded minimum pension liability 4 7 (5)
Change in unrecognized gain or loss on investment (1) 3 --
------------ ------------ ------------
Balance at end of year (117) (54) (18)
------------ ------------ ------------
Treasury stock at cost (438) (381) (331)
------------ ------------ ------------
Total $ 1,812 $ 1,759 $ 1,934
============ ============ ============
Shares of common stock issued(1)
Balance at beginning of year 84,512,004 84,432,114 84,144,672
Issued for employee compensation and
benefit plans 227,898 79,890 287,442
------------ ------------ ------------
Balance at end of year 84,739,902 84,512,004 84,432,114
============ ============ ============
(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 2000, 1999, and
1998.
48
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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 1,575,000 shares of Eastman common stock at a
cost of approximately $57 million, or an average price of approximately
$36 per share, in 2000; 1,094,800 shares at a cost of approximately $50
million, or an average price of approximately $46 per share, in 1999;
and no shares in 1998. 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, 2000, December 31, 1999, and
December 31, 1998.
For 2000, 1999, and 1998, respectively, the weighted average number of
common shares outstanding used to compute basic earnings per share was
76.8 million, 78.2 million, and 78.9 million and for diluted earnings
per share was 77.0 million, 78.4 million, and 79.5 million, reflecting
the effect of dilutive options outstanding. Excluded were options to
purchase 3,899,076 shares of common stock at a range of prices from
$45.34 to $74.25; 2,331,341 shares of common stock at a range of prices
from $48.44 to $74.25; and 994,503 shares of common stock at a range of
prices from $56.88 to $74.25, outstanding at the end of 2000, 1999, and
1998, 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, 2000 and December 31, 1999,
respectively, 149,240 shares and 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 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, 2000, 1999, and
1998.
49
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. IMPAIRMENT OF ASSETS
In 1999, the Company recorded pre-tax charges to earnings of $10
million 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 Chemicals segment.
In first quarter 1999, the Company announced a phase-out of operations
at Distillation Products Industries in Rochester, New York. In 1999,
the Company recorded pre-tax charges to earnings of $9 million for
costs associated with employee termination benefits and the write-down
of plant and equipment used at the site. In 2000, the Company recorded
an additional pre-tax charge of $5 million for costs associated with
exiting this site. It is expected that property and equipment used at
this site will be disposed of during 2001. These charges were recorded
in Cost of Sales for the Chemicals segment.
During the fourth quarter 1999, the Company decided to discontinue
production at its sorbates facilities in Chocolate Bayou, Texas. The
projected economic performance and cash flows for this product line
were determined to be insufficient for remaining in this business. In
1999, the Company recorded a pre-tax charge to earnings of $17 million
for the write-down of plant and equipment used at the site. In 2000,
the Company recorded additional pre-tax charges of $8 million for costs
associated with exiting this business. It is expected that property and
equipment used at this site will be disposed of during 2001. These
charges were recorded in Cost of Sales for the Chemicals segment.
In the fourth quarter 1999, the Company recorded pre-tax charges to
earnings of $16 million 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 Polymers segment.
In the fourth quarter 1998, the Company recorded a pre-tax charge to
earnings of $20 million for the write-down of property, plant and
equipment used in the production of CHDA, a product sold in the
Chemicals 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 Chemicals segment.
The Company also recorded in the fourth quarter 1998 a pre-tax charge
to earnings of $12 million 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 Chemicals segment.
9. 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
50
51
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 were recorded at their fair values. Goodwill of
approximately $87 million, which represents the excess of cost over the
estimated fair value of net tangible assets acquired, and other
intangible assets of approximately $103 million for technology and
trademarks, customer lists, and workforce are being amortized on a
straight-line basis over 11-40 years. Acquired in-process research and
development of approximately $9 million was written off after
completion of purchase accounting. Assuming this transaction had been
made at January 1, 2000 and 1999, the consolidated proforma results for
2000 and 1999 would not be materially different from reported results.
CHEMICKE ZAVODY SOKOLOV
As of February 21, 2000, the Company acquired 76% 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 was 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 2000 and 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.
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 of approximately $253 million,
which represents the excess of cost over the estimated fair value of
net tangible assets acquired, and other intangible assets of
approximately $202 million for technology and trademarks, in-process
research and development, customer lists, and workforce, are being
amortized on a straight-line basis over 5-40 years. Acquired in-process
research and development of approximately $25 million was written off
during 1999 after completion of purchase accounting. Assuming this
transaction had been made at January 1, 1999, the consolidated proforma
results for 1999 would not be materially different from reported
results.
51
52
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 and shares of
restricted stock 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. The maximum number of shares of common
stock that shall be available for grant of awards under the Director
Plan during its term is 60,000.
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.
52
53
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) 2000 1999 1998
Net earnings As reported $ 303 $ 48 $ 249
Pro forma $ 294 $ 45 $ 248
Basic earnings per share As reported $3.95 $ .61 $3.15
Pro forma $3.83 $ .58 $3.14
Diluted earnings per share As reported $3.94 $ .61 $3.13
Pro forma $3.82 $ .57 $3.12
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
2000, 1999, and 1998, respectively, include: average expected
volatility of 26.98%, 25.48%, and 20.87%; average expected dividend
yield of 3.84%, 4.05%, and 3.07%; and average risk-free interest rates
of 6.19%, 5.74%, and 5.48%. 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:
2000 1999 1998
----------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------------- ---------------------- ----------------------
Outstanding at beginning of year 4,784,957 $ 50 3,865,101 $ 51 3,716,208 $ 50
Granted 1,263,051 45 1,019,977 47 479,446 57
Exercised 202,691 35 81,504 39 316,360 42
Forfeited or canceled 43,969 60 18,617 57 14,193 64
----------------------- ---------------------- ---------------------
Outstanding at end of year 5,801,348 $ 50 4,784,957 $ 50 3,865,101 $ 51
========= ========= =========
Options exercisable at year-end 3,967,571 3,400,079 3,267,275
========= ========= =========
Weighted-average fair value of
options granted during the year $ 11.06 $ 9.82 $ 12.40
Available for grant at end of year 6,927,075 7,503,969 8,439,445
========= ========= =========
53
54
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/00 LIFE PRICE AT 12/31/00 PRICE
-------- ----------- ----------- --------- ----------- ---------
$31-$40 253,881 5.9 Years $ 37 163,511 $ 37
42 19,500 8.8 42 9,750 42
43-44 1,428,891 3.1 43 1,416,312 43
45-47 1,774,064 7.6 46 370,663 46
48-63 1,775,694 5.5 56 1,458,017 56
64-74 549,318 8.2 65 549,318 65
--------- ---------
$31-$74 5,801,348 5.8 $ 50 3,967,571 $ 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 annual contributions for substantially all U.S.
employees equal to 5% of eligible compensation to the ESOP, or for
employees who have five or more prior ESOP contributions, to either the
Eastman Stock Fund or other investment funds within the Eastman
Investment Plan. Through early 2001, the Company sponsored, for its
international employees, an employee stock ownership plan which was
substantially similar to the ESOP. In March 2001, shares in the
international employee stock ownership plan will be distributed to
participants in the plan. Allocated shares in the ESOP totaled
3,075,739, 3,249,519, and 2,626,880 as of December 31, 2000, 1999, and
1998, respectively. Dividends on shares held by the EIP/ESOP are
charged to retained earnings. All shares held by the EIP/ESOP are
treated as outstanding in computing earnings per share.
Charges for contributions to the EIP/ESOP were $34 million, $37
million, and $36 million for 2000, 1999, and 1998, respectively.
Charges related to 1998 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.
Charges under the EPP were $55 million, $3 million, and $30 million in
2000, 1999, and 1998, respectively.
54
55
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL PERFORMANCE PLAN
Through 2000, Eastman's managers and executive officers participated in
an Annual Performance Plan (the "APP"), which placed a portion of
annual cash compensation at risk based upon Company performance as
measured by specified annual goals. Charges under the APP for 2000,
1999, and 1998 were $3 million, $13 million, and $8 million,
respectively.
UNIT PERFORMANCE PLAN
Beginning in 2000, Eastman managers and executive officers began
participating 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. In 2000, the portion of a
participant's targeted pay at risk under the APP and the UPP was equal
to the portion of the targeted pay that was formerly at risk under the
APP prior to the inception of the UPP. Charges under the UPP for 2000
were $7 million.
Beginning in 2001, all Eastman managers and executive officers will
participate in the UPP and not the APP. Accordingly, the portion of
each participant's total pay that was formerly at risk under the APP
will instead be at risk under the UPP.
11. INCOME TAXES
Components of earnings before income taxes and the provision for U.S.
and other income taxes follow:
(Dollars in millions) 2000 1999 1998
Earnings (loss) before income taxes
United States $414 $ 185 $ 463
Outside the United States 39 (113) (103)
---- ----- -----
Total $453 $ 72 $ 360
==== ===== =====
Provision (benefit) for income taxes
United States
Current $ 69 $ 31 $ 35
Deferred 60 (14) 64
Non-United States
Current 9 10 6
Deferred 1 (3) (3)
State and other
Current 4 1 4
Deferred 6 (1) 5
---- ----- -----
Total $149 $ 24 $ 111
==== ===== =====
55
56
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) 2000 1999 1998
Amount computed using the statutory rate $ 158 $ 25 $ 126
State income taxes 6 -- 6
Foreign rate variance 1 7 (3)
Foreign sales corporation benefit (11) (7) (24)
ESOP dividend payout (2) (1) (1)
Other (3) -- 7
----- ---- -----
Provision for income taxes $ 149 $ 24 $ 111
===== ==== =====
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) 2000 1999
Deferred tax assets
Postemployment obligations $299 $285
Payroll and related items 47 40
Deferred revenue 13 15
Miscellaneous reserves 31 51
Preproduction and start-up costs 8 10
Other 45 55
---- ----
Total $443 $456
==== ====
Deferred tax liabilities
Depreciation $824 $775
Inventories 6 5
Purchase accounting adjustments 103 68
Other 62 28
---- ----
Total $995 $876
==== ====
Unremitted earnings of subsidiaries outside the United States totaling
$156 million at December 31, 2000, 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 $67 million and $81 million are
included in current liabilities at December 31, 2000 and 1999,
respectively.
56
57
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------- ---------------------
RECORDED FAIR RECORDED FAIR
(Dollars in millions) AMOUNT VALUE AMOUNT VALUE
Long-term borrowings $1,914 $1,816 $1,506 $1,424
Foreign exchange contracts 2 6 28 87
Commodity derivative contracts -- 30 -- 1
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
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. Eastman
had currency options with maturities of not more than two years to
exchange various foreign currencies for U.S. dollars in the aggregate
notional amount of $44 million and $639 million at December 31, 2000
and 1999, respectively. The net unrealized gain deferred on such
options was $3 million and $59 million as of December 31, 2000 and
1999, 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.
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. In
October 2000, euro currency options with a notional amount of $208
million were effectively settled resulting in cash proceeds of $24
million. Of these amounts, approximately $53 million, net of premium
amortization, was recognized in earnings during 2000. The balance,
deferred until the underlying hedged transactions are realized, is
recorded in other current liabilities in the Consolidated Statements of
Financial Position. The remaining deferred gain will be recognized over
a period ending fourth quarter 2001.
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.
57
58
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMODITY DERIVATIVE CONTRACTS
The Company utilized commodity derivatives to hedge a portion of its
anticipated purchases of propane and natural gas used in the
manufacturing process. The Company estimates fair value of its
commodity derivative contracts based on quotes from market makers of
these instruments. The fair value represents the amount the Company
would expect to receive or pay to terminate the agreements at the
reporting dates.
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.
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,
2001 $ 62
2002 53
2003 45
2004 33
2005 30
2006 and beyond 77
-----
Total minimum payments required $ 300
=====
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 approximately $83 million
in 2000, 1999, and 1998.
OTHER COMMITMENTS
The Company had various purchase commitments at the end of 2000 for
materials, supplies, and energy incident to the ordinary conduct of
business. These commitments, over a period of several years,
approximate $1.4 billion. Eastman has other long-term commitments
relating to joint venture agreements as described in Note 4 to
Consolidated Financial Statements.
58
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES 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
sold to the third party totaled $200 million and $150 million at
December 31, 2000 and December 31, 1999, respectively. 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 totaled approximately $12 million and $4 million in 2000
and 1999, respectively. Average monthly proceeds from collections
reinvested in the continuous sale program were approximately $235
million and $225 million in 2000 and 1999, respectively.
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, was amended. Employees' accrued
pension benefits earned prior to January 1, 2000 are calculated based
on previous plan provisions using the employee's age, years of service,
and final average compensation as defined in the plans. The amended
defined benefit pension plan uses a pension equity formula based on
age, years of service, and final average compensation to calculate an
employee's retirement 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 2000 and
1999, 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) 2000 1999
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 877 $ 1,511
Service cost 29 41
Interest cost 68 87
Plan amendments -- (241)
Actuarial loss (gain) 47 (54)
Curtailments/settlements -- (429)
Benefits paid (101) (38)
------- -------
Benefit obligation, end of year $ 920 $ 877
======= =======
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 911 $ 990
Actual return on plan assets 47 232
Company contributions -- 145
Acquisitions/divestitures/other receipts 5 --
Benefits paid (94) (456)
------ ------
Fair value of plan assets, end of year $ 869 $ 911
====== ======
Benefit obligation in excess of (less than) plan assets $ 51 $ (34)
Unrecognized actuarial (gain) loss (43) 7
Unrecognized prior service cost 128 140
Unrecognized net transition asset 8 12
------ ------
Net amount recognized, end of year $ 144 $ 125
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ 144 $ 125
Additional minimum liability 16 23
Accumulated other comprehensive income (loss) (16) (23)
------ ------
Net amount recognized, end of year $ 144 $ 125
====== ======
Eastman's worldwide net pension cost was $75 million, $58 million, and
$93 million in 2000, 1999, and 1998, respectively.
A summary of the components of net periodic benefit cost recognized for
Eastman's U.S. defined benefit pension plans follows:
SUMMARY OF BENEFIT COSTS
(Dollars in millions) 2000 1999 1998
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 29 $ 42 $ 47
Interest cost 68 86 93
Expected return on assets (64) (78) (73)
Amortization of:
Transition asset (4) (6) (4)
Prior service cost (12) (5) 5
Actuarial loss 7 14 19
---- ---- ----
Net periodic benefit cost $ 24 $ 53 $ 87
==== ==== ====
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 7.75% 8.15% 6.75%
Expected return on plan assets 9.50% 9.50% 9.50%
Rate of compensation increase 4.25% 4.50% 3.75%
In 1999, the Company recorded a pretax gain of $12 million 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.
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.
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, 2000 and 1999:
SUMMARY BALANCE SHEET
(Dollars in millions) 2000 1999
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 587 $ 617
Service cost 5 7
Interest cost 48 43
Plan participants' contributions -- 1
Actuarial loss (gain) 38 (50)
Benefits paid (33) (31)
------ ------
Benefit obligation, end of year $ 645 $ 587
====== ======
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 2000 1999
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 41 $ 45
Actual return on plan assets 2 --
Company contributions 26 21
Plan participants' contributions -- 1
Benefits paid (32) (26)
------ ------
Fair value of plan assets, end of year $ 37 $ 41
====== ======
Benefit obligations in excess of plan assets $ 608 $ 546
Unrecognized actuarial loss (84) (47)
Unrecognized prior service cost 36 39
------ ------
Net amount recognized, end of year $ 560 $ 538
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ 560 $ 538
------ ------
Net amount recognized, end of year $ 560 $ 538
====== ======
A 1% increase in health care cost trend would increase the 2000 service
and interest costs by $2 million, and the 2000 benefit obligation by
$32 million. A 1% decrease in health care cost trend would decrease the
2000 service and interest costs by $2 million, and the 2000 benefit
obligation by $28 million.
The net periodic postretirement benefit cost follows:
SUMMARY OF BENEFIT COSTS
(Dollars in millions) 2000 1999 1998
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 4 $ 7 $ 8
Interest cost 48 42 39
Expected return on assets (2) (2) (2)
Amortization of:
Prior service cost (3) (3) (4)
Actuarial loss 1 2 1
---- ---- ----
Net periodic benefit cost $ 48 $ 46 $ 42
==== ==== ====
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 7.75% 8.15% 6.75%
Expected return on plan assets 9.50% 9.00% 9.00%
Rate of compensation increase 4.25% 4.50% 3.75%
Health care cost trend
Initial 7.00% 7.00% 7.00%
Decreasing to ultimate trend of 5.00% 5.25% 4.75%
in year 2006 2005 2004
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.
16. EMPLOYEE SEPARATIONS
In the fourth quarter 1999, the Company accrued costs associated with
employee terminations which resulted from voluntary and involuntary
employee separations that 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 $58 million was paid during 2000.
As of December 31, 2000, a balance of $7 million remains to be paid and
is included in other current liabilities in the Consolidated Statements
of Financial Position.
17. 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. During the fourth quarter 1999, the DOA reimbursed
approximately $20 million of previously expensed pension costs. This
reimbursement was credited to earnings in the fourth quarter 1999.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SEGMENT INFORMATION
The Company's products and operations are managed and reported in two
operating segments--Chemicals and Polymers. Through 1999, the Company's
products and operations were managed and reported in three operating
segments--Specialty and Performance, Core Plastics, and Chemical
Intermediates. Prior year amounts have been reclassified to conform to
the 2000 presentation.
The Chemicals segment includes coatings, adhesives, specialty polymers,
and inks; performance chemicals and intermediates; and fine chemicals.
Targeted markets for this segment are diverse and include household
products, infrastructure/construction, medical, agricultural,
transportation, building, food, textile, packaging, coatings,
adhesives, inks, pharmaceutical, agrochemical, photographic/imaging,
and consumer and industrial. Competitive factors for this segment
include performance, appearance, price, reliability of supply,
integrated manufacturing capability, durability, aesthetics, quality,
customer service, technical competence, and environmental
responsibility.
Coatings, adhesives, specialty polymers, and inks are sold primarily to
North American industrial concerns. 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. This segment's industrial
intermediate chemicals are produced based on the Company's oxo
chemistry technology and chemicals-from-coal technology and are sold to
customers 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. The
principal markets for Eastman's fine chemicals are largely U.S.
photographic, agricultural, and pharmaceutical companies.
The Polymers segment includes the Company's major plastics products,
EASTAPAK polymers and TENITE polyethylene, and fiber products. The
container and general film products share similar physical
characteristics and compete primarily based on price and integrated
manufacturing capabilities. Additional competitive factors for this
segment include quality, value, aesthetics, durability, customer
service, clarity, resistance/toughness, flexibility, and chemical
resistance. Targeted markets for this segment include rigid and
flexible plastic packaging, cigarette filters, building, household
products, medical, personal care/consumer, electronic, appliance, and
heavy gage sheeting.
Specialty plastics are sold to selected niche markets primarily in
North America for value-added end uses. 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. Acetate tow is sold primarily in North
America, Europe, and Latin America to the tobacco industry for use in
cigarette filters.
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.
As previously described, Eastman plans to separate into two independent
public companies by the end of 2001. The planned spin-off and related
management changes have resulted in certain specialty plastics
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
products, primarily copolyesters, moving between segments. Beginning
with the second quarter 2001, the Chemicals and Polymers segments will
be restated to reflect these changes. Also as previously described, the
Company continues to pursue the previously announced plan to divest or
otherwise restructure a major portion of its fine chemicals business.
Currently, a number of options are under consideration, some of which
could result in a charge to earnings in the first half of 2001. The
charge would relate to potential loss on sale of assets for a number of
sites or other restructuring costs related to fine chemical product
lines not divested.
(Dollars in millions) 2000 1999 1998
SALES
Chemicals $2,506 $2,106 $1,980
Polymers 2,786 2,484 2,501
------ ------ ------
Consolidated Eastman total $5,292 $4,590 $4,481
====== ====== ======
OPERATING EARNINGS(1)
Chemicals $ 232 $ 132 $ 252
Polymers 326 70 182
------ ------ ------
Consolidated Eastman total $ 558 $ 202 $ 434
====== ====== ======
ASSETS
Chemicals $3,260 $2,938 $2,333
Polymers 3,290 3,365 3,517
------ ------ ------
Consolidated Eastman total $6,550 $6,303 $5,850
====== ====== ======
DEPRECIATION EXPENSE
Chemicals $ 162 $ 139 $ 124
Polymers 220 229 227
------ ------ ------
Consolidated Eastman total $ 382 $ 368 $ 351
====== ====== ======
CAPITAL EXPENDITURES
Chemicals $ 114 $ 156 $ 255
Polymers 112 136 245
------ ------ ------
Consolidated Eastman total $ 226 $ 292 $ 500
====== ====== ======
(1) Operating earnings for 2000 include the effect of nonrecurring charges
for the write-off of in-process research and development related to the
McWhorter acquisition; charges related to phase-out of operations at
Chocolate Bayou, Texas, and Distillation Products Industries in
Rochester, New York; and certain litigation costs. These charges are
reflected in the Chemicals segment.
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 Lawter acquisition; 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: Chemicals, $64 million and
Polymers, $53 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: Chemicals, $47 million and Polymers, $4 million.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 2000 1999 1998
GEOGRAPHIC INFORMATION
REVENUES
United States $3,016 $2,662 $2,764
All foreign countries 2,276 1,928 1,717
------ ------ ------
Total $5,292 $4,590 $4,481
====== ====== ======
LONG-LIVED ASSETS, NET
United States $3,009 $3,036 $3,088
All foreign countries 916 914 946
------ ------ ------
Total $3,925 $3,950 $4,034
====== ====== ======
Revenues are attributed to countries based on customer location. No
individual foreign country is material with respect to revenues or
long-lived assets.
19. SUPPLEMENTAL CASH FLOW INFORMATION
(Dollars in millions) 2000 1999 1998
Cash paid for interest and income taxes is as follows:
Interest (net of amounts capitalized) $ 156 $ 127 $ 107
Income taxes 90 (4) 80
Details of acquisitions are as follows:
Fair value of assets acquired $ 635 $ 662 $ 42
Liabilities assumed 374 281 10
------ ------ ------
Net cash paid for acquisitions 261 381 32
Cash acquired in acquisitions 4 41 7
------ ------ ------
Cash paid for acquisitions $ 265 $ 422 $ 39
====== ====== ======
Cash flows from operating activities include gains from equity
investments of $15 million, $10 million, and $12 million for 2000,
1999, and 1998, 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.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1998, the Company issued 536,188 shares of its common stock
with a market value of $35 million to its Employee Stock Ownership Plan
as partial settlement of the Company's Eastman Performance Plan payout.
This noncash transaction is not reflected in the Consolidated
Statements of Cash Flows.
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 potentially responsible party
("PRP") by the U.S. Environmental Protection Agency under the
Comprehensive Environmental Response, Compensation and Liability Act,
which potentially subjects PRPs to joint and several liability for such
cleanup costs. In addition, the Company will be required to incur costs
for environmental remediation and closure/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 $195 million, $220 million, and $190
million in 2000, 1999, and 1998, 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
the sorbates litigation 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
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-one 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
lawsuit, 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. Seven of the lawsuits are pending in California state court
in a consolidated action and allege state antitrust and consumer
protection violations on behalf of classes of indirect purchasers of
sorbates; six of the lawsuits are pending in the United States District
Court for the Northern District of California in a consolidated action
and allege federal antitrust violations on behalf of classes of direct
purchasers of sorbates; two lawsuits 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; two lawsuits were filed in
Wisconsin State Court under various state antitrust laws on behalf of a
class of indirect purchasers of sorbates in those states; one lawsuit
was filed in Kansas State Court under Kansas antitrust laws on behalf
of a class of indirect purchasers of sorbates in that state; one
lawsuit was filed in New Mexico State Court 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 and pursuant to common law causes of
action on behalf of a class of direct and indirect purchasers of
sorbates in Canada; and one lawsuit 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. The Company has reached
settlements in the direct and indirect purchaser class actions pending
in California. The California direct purchaser settlement has received
final court approval; the California indirect purchaser settlement has
yet to be finally approved by the court. One of the two indirect
purchaser actions in Tennessee has been preliminarily approved by the
trial court in Davidson County, Tennessee, and appellate review of that
court's action is presently underway. The Company has also reached
preliminary settlements that would resolve the Wisconsin and New Mexico
indirect purchaser actions; however, these settlements require further
court approval. Each of the remaining class actions is in the
preliminary discovery stage, with no class having been certified to
date.
The Company has also been included as a defendant in two separate
lawsuits concerning sorbates currently pending in the United States
District Court for the Northern District of California, one filed on
behalf of Dean Foods 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 elected to opt out of the final class action
settlement of the federal direct purchaser cases in California and are
pursuing their claims individually.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The
ultimate outcome of these matters cannot presently be determined, however, 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.
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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)
2000(1) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
Sales $ 1,217 $ 1,316 $ 1,387 $ 1,372
Gross profit 250 290 291 235
Operating earnings 132 173 154 103
Earnings before income taxes 102 128 145 78
Provision for income taxes 34 42 48 26
Net earnings 68 86 97 52
Basic earnings per share(3) .88 1.12 1.27 .68
Diluted earnings per share(3) .88 1.12 1.27 .68
1999(2) 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)
(1) Second quarter 2000 includes nonrecurring charges related to
phase-out of operations at Chocolate Bayou, Texas, and
Distillation Products Industries in Rochester, New York, and
certain litigation costs. Third quarter 2000 includes a
nonrecurring gain related to the initial public offering of
shares of Genencor International, Inc., and additional
nonrecurring charges related to phase-out of operations at
Chocolate Bayou, Texas, and the write-off of in-process
research and development related to the McWhorter acquisition.
(2) 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 in-process research
and development related to the Lawter acquisition; 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.
(3) Each quarter is calculated as a discrete period; the sum of
the four quarters may not equal the calculated full-year
amount.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. SUBSEQUENT EVENTS
CREATION OF TWO INDEPENDENT COMPANIES THROUGH SPIN-OFF
The Company reported on February 5, 2001 that its Board of Directors
has authorized management to pursue a plan that would result in Eastman
becoming two independent public companies. Under the plan, Eastman
would separate its business into two companies--a specialty chemicals
and plastics company, and a polyethylene terephthalate ("PET") plastics
and acetate fibers company. The specialty chemicals and plastics
company would include coatings, adhesives, inks, specialty polymers,
and plastics, and performance chemicals and intermediates products,
Eastman's digital business investments including ShipChem, Inc.
("ShipChem"), and Eastman's investment in Genencor International, Inc.
("Genencor"). The PET and acetate fibers company would include
Eastman's PET container plastics, acetate fibers, and polyethylene
products.
The new companies are expected to be launched through a spin-off in the
form of a tax-free stock dividend to be effective by the end of the
fourth quarter 2001, subject to a favorable Internal Revenue Service
ruling that the distribution of shares will be tax-free to shareowners,
final approval of the transaction by the Board of Directors, and other
customary conditions. Immediately after the spin-off, Eastman
shareowners would own shares in both companies. Eastman has not yet
finalized all aspects of the transaction, but expects the capital
structures of the companies to be appropriate for each company's
financial profile and that each company will maintain investment-grade
ratings. Eastman expects to record a one-time charge in connection with
the spin-off.
ACQUISITION OF CERTAIN BUSINESSES OF HERCULES INCORPORATED
As previously reported, the Company has entered into a letter of intent
with Hercules Incorporated ("Hercules") to acquire Hercules'
hydrocarbon resins and select portions of its rosins resins businesses.
These businesses generated approximately $300 million in sales revenue
in 1999. Subject to the negotiation of customary agreements, approval
by the boards of directors of both companies, and regulatory approvals,
the transaction is expected to be completed early in second quarter
2001.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the heading "Election of Directors", (except for the material
under the subheading "Board Committees -- Audit Committee -- Audit Committee
Report", which is not incorporated by reference herein) and in Note (13) to the
Summary Compensation Table under the heading "Executive Compensation --
Compensation Tables", in the to be filed definitive 2001 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 to be filed definitive 2001 Proxy Statement is incorporated by reference
herein in response to this Item. In addition, the material under the heading
"Executive Compensation" in the to be filed definitive 2001 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 Owners" in
the to be filed definitive 2001 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.
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73
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 35
Report of independent accountants 36
Consolidated statements of earnings, comprehensive income, and
retained earnings 37
Consolidated statements of financial position 38
Consolidated statements of cash flows 39-40
Notes to consolidated financial statements 41-71
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 76.
(b) Reports on Form 8-K
During the quarter ended December 31, 2000, no reports on Form
8-K were filed.
(c) The Exhibit Index and required Exhibits to this report are included
beginning at page 76.
(d) There are no applicable financial statement schedules required to be
filed as part of this report.
73
74
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 1, 2001
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 1, 2001
- --------------------------------------- Chief Executive Officer
Earnest W. Deavenport, Jr.
PRINCIPAL FINANCIAL OFFICER:
/s/ James P. Rogers Senior Vice President and March 1, 2001
- --------------------------------------- Chief Financial Officer
James P. Rogers
PRINCIPAL ACCOUNTING OFFICER:
/s/ Mark W. Joslin Vice President and March 1, 2001
- --------------------------------------- Controller
Mark W. Joslin
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75
SIGNATURE TITLE DATE
- --------------------------------------- -------------- -------------
DIRECTORS:
/s/ H. Jesse Arnelle Director March 1, 2001
- ---------------------------------------
H. Jesse Arnelle
/s/ Calvin A. Campbell, Jr. Director March 1, 2001
- ---------------------------------------
Calvin A. Campbell, Jr.
/s/ Jerry E. Dempsey Director March 1, 2001
- ---------------------------------------
Jerry E. Dempsey
/s/ John W. Donehower Director March 1, 2001
- ---------------------------------------
John W. Donehower
/s/ Donald W. Griffin Director March 1, 2001
- ---------------------------------------
Donald W. Griffin
/s/ Lee Liu Director March 1, 2001
- ---------------------------------------
Lee Liu
/s/ Marilyn R. Marks Director March 1, 2001
- ---------------------------------------
Marilyn R. Marks
/s/ David W. Raisbeck Director March 1, 2001
- ---------------------------------------
David W. Raisbeck
/s/ John A. White Director March 1, 2001
- ---------------------------------------
John A. White
/s/ Peter Wood Director March 1, 2001
- ---------------------------------------
Peter Wood
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76
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 Bylaws of Eastman Chemical Company, as
amended October 5, 2000 (incorporated herein by reference to
Exhibit 3.02 to Eastman Chemical Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000)
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"))
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77
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"))
*10.01 Eastman Annual Performance Plan, as amended February 1, 2001 81-86
*10.02 Eastman Unit Performance Plan, as amended January 5, 2001 87-93
*10.03 Eastman Performance Plan, as amended February 1, 2001 94-105
*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"))
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78
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------- -----------
*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)
*10.09 Director Deferred Compensation Plan, as amended
(incorporated herein by reference to Exhibit 10.06 to
Eastman Chemical Company's Annual Report on Form 10-K for
the year ended December 31, 1998 (the "1998 10-K")
*10.10 Eastman Executive Deferred Compensation Plan, as amended
February 1, 2001 106-119
*10.11 Form of Executive Severance Agreements (incorporated herein
by reference to Exhibit 10.06 to Eastman Chemical Company's
Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 10-K")
*10.12 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)
*10.13 Eastman Excess Retirement Income Plan, as amended December
6, 2000 120-124
*10.14 Eastman Unfunded Retirement Income Plan, as amended December
6, 2000 125-130
*10.15 Eastman Employee Stock Ownership Excess Plan, as amended
February 1, 2001 131-140
*10.16 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)
78
79
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------- -----------
*10.17 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)
*10.18 Eastman 2000-2002 Long-Term Performance Subplan of 1997
Omnibus Long-Term Compensation Plan (incorporated herein by
reference to Exhibit 10.20 to Eastman Chemical Company's
Annual Report on Form 10-K for the year ended December 31,
1999 (the "1999 10-K"))
*10.19 Form of Award Notice for Stock Options Granted to Managers
under 1997 Omnibus Long-Term Compensation Plan (incorporated
herein by reference to Exhibit 10.21 to the 1999 10-K)
*10.20 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)
*10.21 Form of Award Notice for Price-Vesting Stock Option Granted
to Certain Executive Officers under 1997 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to
Exhibit 10.23 to the 1999 10-K)
*10.22 Form of Indemnification Agreements dated May 5, 2000, between
James L. Chitwood, David M. Pond, and James P. Rogers and
Eastman Chemical for service as directors of Genencor
International, Inc. (incorporated herein by reference to
Exhibit 10.01 to the June 30, 2000 10-Q)
*10.23 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)
10.24 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)
10.25 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)
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80
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------- -----------
10.26 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)
10.27 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)
10.28 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 141
21.01 Subsidiaries of the Company 142-145
23.01 Consent of Independent Accountants 146
99.01 Operating Segment Information (Sales Revenue Change, Volume
Effect and Price Effect) 147
99.02 Acquisition Information (Sales Revenue and Volume Growth
Comparison -- With and Without Acquisitions) 148-149
- ---------------
* Management contract or compensatory plan or arrangement filed pursuant
to Item 601(b)(10)(iii) of Regulation S-K.
80