1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class March 31, 2001
Common Stock, par value $0.01 per share 77,008,700
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
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PAGE 1 OF 62 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 29
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TABLE OF CONTENTS
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ITEM PAGE
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PART I. FINANCIAL INFORMATION
1. Financial Statements 3-13
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14-25
PART II. OTHER INFORMATION
1. Legal Proceedings 26-27
6. Exhibits and Reports on Form 8-K 27
SIGNATURES
Signatures 28
2
3
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE
INCOME, AND RETAINED EARNINGS
(Dollars in millions, except per share amounts)
FIRST QUARTER
2001 2000
Sales $ 1,344 $ 1,217
Cost of sales 1,112 967
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Gross profit 232 250
Selling and general administrative expenses 98 80
Research and development costs 38 38
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Operating earnings 96 132
Interest expense, net 35 32
Other (income) charges, net 6 (2)
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Earnings before income taxes 55 102
Provision for income taxes 18 34
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Net earnings $ 37 $ 68
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Basic earnings per share $ .48 $ .88
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Diluted earnings per share $ .48 $ .88
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COMPREHENSIVE INCOME
Net earnings $ 37 $ 68
Other comprehensive loss (7) (1)
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Comprehensive income $ 30 $ 67
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RETAINED EARNINGS
Retained earnings at beginning of period $ 2,266 $ 2,098
Net earnings 37 68
Cash dividends declared (34) (33)
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Retained earnings at end of period $ 2,269 $ 2,133
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The accompanying notes are an integral part of these financial statements.
3
4
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions)
MARCH 31, DECEMBER 31,
2001 2000
ASSETS
Current assets
Cash and cash equivalents $ 45 $ 101
Trade receivables, net of allowance of $16 695 650
Miscellaneous receivables 88 87
Inventories 644 580
Other current assets 107 105
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Total current assets 1,579 1,523
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Properties
Properties and equipment at cost 9,030 9,039
Less: Accumulated depreciation 5,185 5,114
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Net properties 3,845 3,925
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Goodwill, net of accumulated amortization of $31 and $28 341 345
Other intangibles, net of accumulated amortization of $25 and $20 272 277
Other noncurrent assets 480 480
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Total assets $ 6,517 $ 6,550
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LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 951 $ 1,152
Borrowings due within one year 75 106
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Total current liabilities 1,026 1,258
Long-term borrowings 2,114 1,914
Deferred income taxes 600 607
Postemployment obligations 841 829
Other long-term liabilities 125 130
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Total liabilities 4,706 4,738
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Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued - 84,847,066 and 84,739,902) 1 1
Paid-in capital 103 100
Retained earnings 2,269 2,266
Other comprehensive loss (124) (117)
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2,249 2,250
Less: Treasury stock at cost (7,996,790 shares) 438 438
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Total shareowners' equity 1,811 1,812
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Total liabilities and shareowners' equity $ 6,517 $ 6,550
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The accompanying notes are an integral part of these financial statements.
4
5
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
FIRST QUARTER
2001 2000
Cash flows from operating activities
Net earnings $ 37 $ 68
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Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities, net of effect of acquisitions
Depreciation and amortization 104 96
Provision (benefit) for deferred income taxes (4) 18
Increase in receivables (47) (19)
Increase in inventories (54) (44)
Decrease in employee benefit liabilities and
incentive pay (71) (23)
Increase (decrease) in liabilities excluding borrowings,
employee benefit liabilities and incentive pay (80) 32
Other items, net (9) 14
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Total adjustments (161) 74
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Net cash provided by (used in) operating activities (124) 142
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Cash flows from investing activities
Additions to properties and equipment (55) (34)
Acquisitions, net of cash acquired -- (45)
Additions to capitalized software (8) (4)
Other investments (6) (16)
Proceeds from sales of assets -- 10
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Net cash used in investing activities (69) (89)
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Cash flows from financing activities
Net increase in commercial paper and other short-term borrowings 169 30
Repayment of long-term borrowings -- (127)
Dividends paid to shareowners (34) (34)
Treasury stock purchases -- (57)
Other items 2 1
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Net cash provided by (used in) financing activities 137 (187)
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Net change in cash and cash equivalents (56) (134)
Cash and cash equivalents at beginning of period 101 186
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Cash and cash equivalents at end of period $ 45 $ 52
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The accompanying notes are an integral part of these financial statements.
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6
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared by the Company in accordance and consistent with the
accounting policies stated in the Company's 2000 Annual Report on Form
10-K and should be read in conjunction with the consolidated financial
statements appearing therein. In the opinion of the Company, all
normally recurring adjustments necessary for a fair presentation have
been included in the unaudited interim consolidated financial
statements. The unaudited interim consolidated financial statements are
based in part on estimates made by management.
2. INVENTORIES
MARCH 31, DECEMBER 31,
(Dollars in millions) 2001 2000
At FIFO or average cost (approximates current cost)
Finished goods $ 550 $ 482
Work in process 165 125
Raw materials and supplies 231 248
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Total inventories 946 855
Reduction to LIFO value (302) (275)
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Total inventories at LIFO value $ 644 $ 580
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Inventories valued on the LIFO method were approximately 70% of total
inventories in each of the periods.
3. PAYABLES AND OTHER CURRENT LIABILITIES
MARCH 31, DECEMBER 31,
(Dollars in millions) 2001 2000
Trade creditors $ 477 $ 526
Accrued payrolls, vacation, and variable-incentive compensation 117 201
Accrued taxes 127 95
Deferred gain on currency options -- 68
Other 230 262
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Total $ 951 $1,152
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7
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BORROWINGS
MARCH 31, DECEMBER 31,
(Dollars in millions) 2001 2000
SHORT-TERM BORROWINGS
Notes payable $ 69 $ 101
Other 6 5
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Total short-term borrowings 75 106
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LONG-TERM BORROWINGS
6 3/8% notes due 2004 500 500
7 1/4% debentures due 2024 496 496
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 297 297
Commercial paper 600 400
Other 21 21
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Total long-term borrowings 2,114 1,914
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Total borrowings $2,189 $2,020
====== ======
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. For the Credit Facility, the rate for such fees was
0.125% and 0.085% as of March 31, 2001, and March 31, 2000,
respectively for the Credit Agreement, the rate for such fees was
0.125% as of March 31, 2001. 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.
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 are classified as long-term
borrowings as the Company has the ability to refinance such borrowings
long term. As of March 31, 2001 and March 31, 2000, the effective
interest rates for the Company's commercial paper borrowings were 5.84%
and 6.12%, respectively.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS AND DIVIDENDS PER SHARE
FIRST QUARTER
(In millions) 2001 2000
Shares used for earnings per share calculation:
--Basic 76.7 77.5
--Diluted 77.1 77.6
Certain shares underlying options outstanding during the first quarters
of 2001 and 2000 were excluded from the computation of diluted earnings
per share because the options' exercise prices were greater than the
average market price of the common shares. Excluded were options to
purchase 2,322,784 shares of common stock at a range of prices from
$49.25 to $74.25 and 4,527,246 shares of common stock at a range of
prices from $42.13 to $74.25 outstanding at March 31, 2001 and 2000,
respectively.
In 1999, several key executive officers were awarded performance-based
stock options to further align their compensation with the return to
Eastman's shareowners and to provide additional incentive and
opportunity for reward to individuals in key positions having direct
influence over corporate actions that are expected to impact the market
price of Eastman's stock. Options to purchase a total of 574,000 shares
will become exercisable through October 19, 2001, if both the stock
price and time vesting conditions are met. The options will be
cancelled and forfeited on October 19, 2001 as to any shares for which
the applicable stock price target is not met. At March 31, 2001,
149,240 shares underlying such options were included in diluted
earnings per share calculations as a result of the stock price
conditions for vesting being met.
Additionally, 200,000 shares underlying an option issued to the Chief
Executive Officer in third quarter 1997 were excluded from diluted
earnings per share calculations because the stock price vesting
conditions to exercise had not been met as to any of the shares as of
March 31, 2001.
The Company declared cash dividends of $0.44 per share in the first
quarter 2001 and the first quarter 2000.
6. ACQUISITIONS
MCWHORTER TECHNOLOGIES, INC.
In July 2000, the Company completed its acquisition of McWhorter
Technologies, Inc. ("McWhorter") for approximately $200 million in cash
and the assumption of $155 million in debt. McWhorter manufactures
specialty resins and colorants used in the production of consumer and
industrial coatings and reinforced fiberglass plastics.
8
9
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This transaction, which was funded through available cash and
commercial paper borrowings, was accounted for by the purchase method
of accounting 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 and
other intangible assets of approximately $190 million, which represents
the excess of cost over the fair value of net tangible assets acquired,
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, the consolidated pro
forma results for 2000 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.
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, the consolidated pro
forma results for 2000 would not be materially different from reported
results.
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10
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") 133, as amended by SFAS 138, "Accounting
for Derivative Instruments and Hedging Activities," which requires that
all derivative instruments be reported on the balance sheet at fair
value and establishes criteria for designation and effectiveness of
hedging relationships. Instruments with a fair market value of $33
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.
Previously deferred gains of $68 million from the settlement of
currency options were reclassified from other current liabilities.
These amounts resulted in an after-tax credit of $58 million to other
comprehensive income, a component of shareholders' equity, and an
after-tax gain of $4 million included in net earnings as of January 1,
2001.
At March 31, 2001 the remaining mark-to-market gains and losses from
hedging activities included in other comprehensive income totaled $27
million. This balance is expected to be reclassified into earnings
during 2001. The mark-to-market gains or losses on non-qualifying,
excluded, and ineffective portions of hedges are recognized in cost of
sales or other income and charges immediately. Such amounts did not
have a material impact on earnings during the first quarter 2001.
The Company is exposed to market risk, such as changes in currency
exchange rates, raw material and energy costs, and interest rates. To
manage the volatility relating to these exposures, the Company nets the
exposures on a consolidated basis to take advantage of natural offsets.
For the residual portion, the Company uses various derivative financial
instruments pursuant to the Company's policies for hedging practices.
Such instruments are 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.
Designation is performed on a specific exposure basis to support hedge
accounting. The changes in fair value of these hedging instruments are
offset in part or in whole by corresponding changes in the cash flows
of the underlying exposures being hedged. The Company does not
currently utilize fair value hedges and does not hold or issue
derivative financial instruments for trading purposes.
CURRENCY RATE HEDGING
The Company manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to
movements in foreign currency exchange rates. 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 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). These
contracts are designated cash flow hedges. The mark-to-market gain or
loss on qualifying hedges is included in other comprehensive income to
the extent effective, and reclassified into cost of sales in the period
during which the hedged transaction affects earnings. The
mark-to-market gains or losses on non-qualifying, excluded, and
ineffective portions of hedges are recognized in cost of sales
or other income and charges immediately.
COMMODITY HEDGING
Raw materials and energy sources used by the Company are subject to
price volatility caused by weather, supply conditions, economic
variables, and other unpredictable factors. To mitigate short-term
fluctuations in market prices for propane and natural gas, the Company
enters into forwards and options contracts. These contracts are
designated as cash flow hedges. The mark-to-market gain or loss
10
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on qualifying hedges is included in other comprehensive income to the
extent effective, and reclassified into cost of sales in the period
during which the hedged transaction affects earnings.
OTHER INSTRUMENTS
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. These instruments are typically 100%
effective. As a result, there is no current impact to earnings due to
hedge ineffectiveness. These instruments are recorded on the balance
sheet at fair value, but the impact was not material to the income
statement. No cash flow hedges were discontinued during the quarter
ended March 31, 2001.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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, $58 million was paid during 2000,
and $3 million was paid in first quarter 2001. As of March 31, 2001, a
balance of $4 million remains to be paid and is included in other
current liabilities in the Consolidated Statements of Financial
Position.
9. SEGMENT INFORMATION
The Company's products and operations are managed and reported in two
operating segments--Chemicals and Polymers. As previously announced,
Eastman is pursuing a plan to separate into two independent public
companies by the end of 2001--a specialty chemicals and plastics
company which will be named Eastman Company, and a yet unnamed PET
plastics and acetate fibers company. The Eastman Company would include
coatings, adhesives, and inks; specialty polymers and plastics;
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
EASTAPAK polyethylene terephalate ("PET") polymers for container
plastics; acetate fibers; and polyethylene products. The planned
spin-off and related management changes will result in certain
specialty plastics products, primarily copolyesters and cellulosic
plastics, moving from the Polymers segment to the Chemicals segment,
effective in 2001. The Chemicals and Polymers segments will be restated
to reflect these changes effective with the second quarter 2001.
FIRST QUARTER
(Dollars in millions) 2001 2000
SALES
Chemicals $ 637 $ 556
Polymers 707 661
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Consolidated Eastman total $1,344 $1,217
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OPERATING EARNINGS
Chemicals $ 22 $ 55
Polymers 74 77
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Consolidated Eastman total $ 96 $ 132
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MARCH 31, DECEMBER 31,
2001 2000
ASSETS
Chemicals $3,200 $3,260
Polymers 3,317 3,290
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Consolidated Eastman total $6,517 $6,550
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEGAL MATTERS
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of
business. While the Company is unable to predict the outcome of these
matters, it does not believe, based upon currently available facts,
that the ultimate resolution of any of such pending matters will have a
material adverse effect on the Company's overall financial position or
results of operations. However, adverse developments could negatively
impact earnings in a particular period. For further information
concerning certain pending legal matters, see "Part II. Other
Information Item 1. Legal Proceedings".
11. COMMITMENTS
In 1999, the Company entered into an agreement that allows it to sell
undivided interests in certain domestic trade accounts receivable under
a planned continuous sale program to a third party. Under this
agreement, receivables sold to the third party totaled $200 million at
March 31, 2001 and December 31, 2000. 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 $3 million in each of the first quarters 2001 and 2000.
Average monthly proceeds from collections reinvested in the continuous
sale program were approximately $220 million in each of the first
quarters 2001 and 2000.
12. SUBSEQUENT EVENTS
ACQUISITION OF CERTAIN BUSINESSES OF HERCULES INCORPORATED
On May 1, 2001, the Company announced that it has completed the asset
acquisition of the hydrocarbon resins and select portions of the
rosin-based resins business from Hercules Incorporated ("Hercules") for
approximately $244 million. Hercules facilities acquired are located in
the United States, the Netherlands, England, and Mexico. Additionally,
certain operating assets acquired will be operated under contract with
Hercules at shared facilities in the United States. Revenues from the
acquired businesses as reported by Hercules were approximately $290
million for 2000.
The transaction, which was financed with commercial paper borrowings
and short-term notes payable, will be accounted for as a purchase. The
purchase price will be allocated based on fair values of assets
acquired and liabilities assumed, pending the completion of an
independent appraisal.
13. RECENTLY ISSUED ACCOUNTING STANDARDS
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. The Company does not expect the adoption of SFAS 140 to have
a significant impact on Eastman's consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
2000 Annual Report on Form 10-K and the unaudited interim consolidated financial
statements included elsewhere in this report. All references to earnings per
share contained in this report are diluted earnings per share unless otherwise
noted.
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
Significantly higher sales revenue for the first quarter 2001 reflects sales
volume attributable to acquisitions in the coatings, adhesives, specialty
polymers, and inks product lines and increased selling prices for EASTAPAK
polyethylene terephalate ("PET") polymers. Sales revenue increased 10% including
acquisitions made during the last year and was level excluding acquisitions.
Sales volume increased slightly including acquisitions and declined slightly
excluding acquisitions. The lack of volume growth without acquisitions resulted
from a slowing of economic demand in North America and Asia. Foreign currency
exchange rates had a negative impact on U.S. dollar sales revenues for the first
quarter 2001, particularly the decline in the value of the euro.
Overall for the Company, selling prices increased in line with raw materials and
energy cost increases. Margins improved for EASTAPAK PET polymers for container
plastics as selling prices increased more than raw materials and energy costs.
However, for most other product lines, selling prices increased less than raw
materials and energy costs. The first quarter was positively impacted by an
after-tax gain of $4 million resulting from the mark-to-market of foreign
exchange and commodity hedges outstanding on January 1, 2001 in connection with
the implementation of Statement of Financial Accounting Standard ("SFAS") 133,
as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging
Activities."
Diluted earnings per share for the first quarter 2001 were $0.48 compared with
$0.88 in the first quarter 2000.
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
SALES $1,344 $1,217 10%
Sales volume attributable to acquisitions and increases in selling prices and
volumes for EASTAPAK PET polymers more than offset the impact of decreased
volumes for other product lines resulting from weak economic conditions. Sales
increased in all regions, except for Asia Pacific, driven by higher selling
prices for EASTAPAK PET polymers and volume attributable to acquisitions.
Foreign currency exchange rates had a slightly negative impact on U.S. dollar
sales revenues, particularly in Europe.
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FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
GROSS PROFIT $ 232 $ 250 (7)%
As a percentage of sales 17.3% 20.5%
Significant factors that negatively affected gross profit for the first quarter
included overall lower sales volume (excluding acquisitions), higher
distribution costs, and product mix. Increases for propane, paraxylene, and
natural gas accounted for approximately $75 million of the increase in costs
after the impact of the Company's commodity hedging program, but overall selling
prices increased in line with raw materials costs. Margins improved for EASTAPAK
PET polymers for container plastics as capacity utilization rates increased
globally and selling prices more than offset raw materials and energy cost
increases. Gross profit was positively affected by a pre-tax gain of $7 million
resulting from the mark-to-market of foreign exchange and commodity hedges
outstanding on January 1, 2001 in connection with the implementation of SFAS
133.
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 98 $ 80 23%
As a percentage of sales 7.3% 6.6%
Selling and general administrative expenses for recently acquired businesses,
costs related to ShipChem, and costs associated with the previously announced
planned spin-off were factors which contributed to the increase in selling and
general administrative expenses.
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
RESEARCH AND DEVELOPMENT COSTS $ 38 $ 38 --%
As a percentage of sales 2.8% 3.1%
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
GROSS INTEREST COSTS $ 37 $ 35
LESS CAPITALIZED INTEREST 1 2
---- ----
INTEREST EXPENSE 36 33 9%
INTEREST INCOME 1 1
---- ----
NET INTEREST EXPENSE $ 35 $ 32 9%
==== ====
Higher interest expense in the first quarter 2001 reflects decreased capitalized
interest and higher average commercial paper borrowings.
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FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
OTHER (INCOME) CHARGES, NET $ 6 $ (2) (400)%
Other income and charges include royalty income, gains and losses on asset
sales, results from equity investments, foreign exchange transactions, and other
items. First quarter 2001 results reflect foreign exchange losses, partially
offset by results from equity investments and other items. First quarter 2000
included a non-operating gain from an investment held by Genencor International,
Inc. ("Genencor"), a charge for litigation, and other items.
EARNINGS
FIRST QUARTER
(Dollars in millions, except per share amounts) 2001 2000 CHANGE
Operating earnings $ 96 $132 (27)%
Net earnings 37 68 (46)
Earnings per share
- --Basic .48 .88 (45)
- --Diluted .48 .88 (45)
SUMMARY BY OPERATING SEGMENT
The Company's products and operations are managed and reported in two operating
segments--Chemicals and Polymers. As previously announced, Eastman is pursuing a
plan to separate into two independent public companies by the end of 2001--a
specialty chemicals and plastics company which will be named Eastman Company,
and a yet unnamed PET plastics and acetate fibers company. The Eastman Company
would include coatings, adhesives, and inks; specialty polymers and plastics;
performance chemicals and intermediates products; Eastman's digital business
investments including ShipChem, Inc. ("ShipChem"); and Eastman's investment in
Genencor. The PET plastics and acetate fibers company would include Eastman's
EASTAPAK PET polymers for container plastics; acetate fibers; and polyethylene
products. In preparation for the planned spin-off and related management
changes, certain specialty plastics products, primarily copolyesters and
cellulosic plastics, will be moved from the Polymers segment to the Chemicals
segment, effective in 2001. The Chemicals and Polymers segments will be restated
to reflect these changes effective with the second quarter 2001.
CHEMICALS SEGMENT
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
Sales $637 $556 15%
Operating earnings 22 55 (60)
For the first quarter 2001, sales revenue for the Chemicals segment was sharply
higher mainly due to increased volumes associated with acquisitions and overall
increased selling prices driven by higher raw materials and energy costs.
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Sales revenue for coatings, adhesives, specialty polymers, and inks products
increased sharply in the first quarter 2001 mainly due to substantially higher
sales volumes resulting from acquisitions and moderately higher selling prices
which were driven by higher raw materials and energy costs. For performance
chemicals and intermediates products, sales revenue declined moderately due to
significantly lower volumes for oxo derivative products which were partially
offset by solidly higher selling prices driven by higher raw materials and
energy costs. For fine chemicals, selling prices declined slightly in the first
quarter 2001, and lower sales volumes reflected the discontinuation of certain
product lines prior to 2001.
Operating earnings for the Chemicals segment were substantially lower as selling
price increases were not sufficient to cover higher raw materials and energy
costs. Other factors negatively impacting operating earnings included overall
lower sales volumes (excluding the effect of acquisitions), higher distribution
costs, and product mix.
POLYMERS SEGMENT
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
Sales $707 $661 7%
Operating earnings 74 77 (4)
Sales revenue for the Polymers segment increased moderately as significantly
higher selling prices and volumes for EASTAPAK PET polymers were partially
offset by lower sales volumes for fibers and polyethylene products.
Sales revenue for EASTAPAK PET polymers for container plastics increased
substantially due to both higher selling prices and volumes. Sales revenue for
fibers products declined mainly due to lower volumes resulting from the timing
of sales to Asia. Overall, specialty plastics revenues decreased due to lower
volumes for polyethylene products. However, revenue increased for the
non-polyethylene products in specialty plastics.
Margins for EASTAPAK PET polymers for container plastics improved as capacity
utilization rates increased globally and selling price increases more than
offset raw materials and energy cost increases. However, operating earnings for
the Polymers segment overall were lower as selling price increases for
polyethylene were not sufficient to cover higher raw materials and energy costs.
Operating earnings were also negatively impacted by lower volumes for fibers
products.
(For supplemental analysis of Chemicals and Polymers segment results and the
impact of recent acquisitions on revenue and volume, see Exhibits 99.01 and
99.02 to this Form 10-Q.)
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SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
United States and Canada $796 $747 6%
Europe, Middle East, and Africa 313 235 34
Latin America 120 102 18
Asia Pacific 115 133 (14)
Sales in the United States and Canada for first quarter 2001 were $796 million,
up 6% from 2000 first quarter sales of $747 million. The increase was primarily
attributable to higher volumes resulting from the McWhorter acquisition and
increased selling prices in a number of product lines, including EASTAPAK PET
polymers.
Sales outside the United States and Canada for first quarter 2001 were $548
million, up 17% from 2000 first quarter sales of $470 million due to higher
sales volume and prices, and were 41% of total sales in the first quarter 2001
compared with 39% for the first quarter 2000. Volume growth resulting from
acquisitions substantially increased sales in Europe. Revenues for Europe were
also positively impacted by strong volume growth in EASTAPAK PET polymers and
coatings products for the automotive market, and overall higher selling prices.
Higher sales volumes and selling prices for EASTAPAK PET polymers resulted in
increased sales for Latin America. The timing of fibers sales resulted in lower
sales in Asia Pacific.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
CASH FLOW
FIRST QUARTER
(Dollars in millions) 2001 2000
Net cash provided by (used in)
Operating activities $(124) $ 142
Investing activities (69) (89)
Financing activities 137 (187)
----- -----
Net change in cash and cash equivalents $ (56) $(134)
===== =====
Cash and cash equivalents at end of period $ 45 $ 52
===== =====
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Cash used in operating activities for the first quarter 2001 reflects an
increase in working capital related to a decrease in trade payables, the payment
of certain employee incentive compensation, a build-up of inventories related to
a planned shutdown for plant maintenance, and higher receivables related to the
increase in sales revenue. In first quarter 2000, cash flows from operations
were positively impacted by a deferred gain on currency options settled in that
quarter. Cash used in investing activities reflects higher expenditures for
capital additions in 2001 and the acquisition of Sokolov in first quarter 2000.
Cash provided by financing activities in the first quarter 2001 reflects an
increase in commercial paper and other short-term borrowings for general
operating purposes and, in first quarter 2000, a repayment of borrowings
associated with acquisitions.
Available cash will be used to fund dividends, maintain a strong balance sheet
including the repayment of debt, weighed against share repurchases.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 2001, the Company estimates that depreciation will be about $375 million and
that capital expenditures will be approximately $300 million. Long-term
commitments related to planned capital expenditures are not material. The
Company had various purchase commitments at March 31, 2001, for materials,
supplies, and energy incident to the ordinary conduct of business. These
commitments, over a period of several years, approximate $1.4 billion.
LIQUIDITY
On July 13, 2000, Eastman entered into an $800 million revolving credit facility
(the "Credit Facility"), and 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 on the Credit Facility
was 0.125% and 0.085% as of March 31, 2001, and March 31, 2000, respectively;
the rate for such fees on the Credit Agreement was 0.125% as of March 31, 2001.
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.
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 March 31, 2001, are classified as long-term borrowings as the
Company has the ability to refinance such borrowings long term. As of March 31,
2001, the Company's commercial paper outstanding balance was $600 million at an
effective interest rate of 5.84%. At March 31, 2000, the Company's commercial
paper outstanding balance was $502 million at an effective interest rate of
6.12%.
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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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 March 31, 2001, and
December 31, 2000. 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 11
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.
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. No shares were repurchased during the
first quarter 2001. 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.
On May 1, 2001, the Company announced that it has completed the asset
acquisition of the hydrocarbon resins and select portions of the rosin-based
resins business from Hercules Incorporated ("Hercules") for approximately $244
million. Hercules facilities acquired are located in the United States, the
Netherlands, England, and Mexico. Additionally, certain operating assets
acquired will be operated under contract with Hercules at shared facilities in
the United States. The transaction, which was financed with commercial paper
borrowings and short-term notes payable, will be accounted for as a purchase.
As part of its previously announced business portfolio changes, which included
plans to divest or restructure a portion of its fine chemicals business, Eastman
announced on April 16, 2001, it is restructuring its fine chemicals business and
will retain ownership of its Arkansas facility and will continue operating the
Tennessee portion of this business, while continuing to evaluate options
regarding its facilities in Wales and Hong Kong.
The Company anticipates that no contribution to its defined benefit pension plan
will be required for 2001.
Available 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 first quarter 2001
and the first quarter 2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("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.
The Company does not expect the adoption of SFAS 140 to have a significant
impact on Eastman's consolidated financial statements.
OUTLOOK
For 2001, the Company:
- Expects the global macroeconomic environment and slower Gross
Domestic Product ("GDP") growth will continue to have a
negative effect on the Company's volume growth and earnings;
- Anticipates that raw materials and energy costs will be lower
in the second and third quarters than the first quarter, as
the cost of propane comes down in the marketplace;
- Expects a planned maintenance shutdown in the coal gas
facility in the second quarter will result in lower production
quantities and higher maintenance costs, negatively impacting
unit manufacturing costs in the second quarter;
- Expects that EASTAPAK PET polymer margins will improve due to
increases in selling prices which are expected to exceed raw
materials and energy cost increases. Additionally, the Company
expects that EASTAPAK PET polymer sales volumes will be higher
in the second quarter than the first quarter, although the
increase is expected to be dampened by pre-buying that
occurred at the end of the first quarter and the cooler
weather in April in Europe and North America;
- Expects earnings in the second quarter to be higher than the
first quarter 2001 as a result of announced selling price
increases effective in the second quarter, lower raw materials
and energy costs, and a lower cost structure, including
efficiency gains resulting from the continued digitization of
the Company's business;
- Expects earnings for second and third quarters 2001 to improve
sequentially over the first quarter 2001;
- Expects demand for chemicals to be seasonally up in second
quarter 2001 but down year over year net of acquisitions;
- Expects annual worldwide PET volume growth of 10% and expects
the supply and demand balance for EASTAPAK PET polymers for
container plastics to improve. The Company expects its
EASTAPAK PET polymers for container plastics volume growth to
be in line with worldwide industry demand and margins to
improve in second quarter;
- 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 to continue
during 2001 as implementation is planned to be essentially
completed in all regions by year-end 2001;
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- Expects to further integrate recent acquisitions into the
Company's processes during 2001 and that margins from the
acquired assets will improve during the year as integration
efforts progress;
- Expects to continue to recognize costs throughout 2001 related
to ShipChem as it builds capability to add new customers;
- Expects to restructure its fine chemicals business and that
such 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
approximately $300 million;
- Anticipates available cash will be used to fund dividends,
maintain a strong balance sheet including the repayment of
debt, weighed against share repurchases.
Based upon the expectations described above, as of April 26, 2001 (the date of
its first quarter 2001 sales and earnings press release) the Company anticipated
that the second quarter 2001 earnings per share would be approximately $0.68 per
share.
By the end of the fourth quarter 2001, the Company expects to become two
independent public companies, a specialty chemicals and plastics company which
will be named Eastman Company, and a yet unnamed 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 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
after the spin-off is complete, and that Eastman's other
leadership and Board of Directors will be divided between the
two new companies;
- Expects that upon the completion of the spin-off at the end of
2001, Mr. J. Brian Ferguson, President of Eastman's Chemicals
Group, will become Chief Executive Officer of Eastman Company,
and Mr. Allan R. Rothwell, President of Eastman's Polymers
Group, will become Chief Executive Officer of the new PET
plastics and acetate fibers company.
- Expects Eastman Company to own approximately 70% of Eastman
Chemical Company's plant, property and equipment assets
throughout the world, with the PET plastics and acetate
fibers company expected to own the remaining 30%. The asset
allocation was measured based on net book value of the assets
as of December 31, 2000. A more complete breakdown is filed
as Exhibit 99.03 to this Form 10-Q;
- Expects that the asset allocation will enable each of the new
companies to maximize growth and efficiency, maintain the
value inherent in their current production facilities, provide
flexibility to focus on independent strategies for the future,
and retain the strengths of vertical integration;
- Expects the division of administrative and support services
to follow approximately the 70/30 asset allocation.
Beyond 2001, the Company:
- Expects the separation of Eastman 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 Eastman 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 the technology and
services 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;
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- 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, and their effect on manufacturing and chemical
industries and on Eastman; raw material and energy costs; overall demand for
chemicals, fibers, and plastics; future earnings from recently acquired
businesses and assets; 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. 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--a
specialty chemicals and plastics company which will be named
Eastman Company, and a yet unnamed 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 planned spin-off remains subject to governmental and other
approvals, including shareowner approval, if any, and other
customary conditions. While it is Eastman's expectation that
the Internal Revenue Service ("IRS") will agree that the
spin-off as structured will be tax-free, there can be no
assurance that such determination will be reached by the IRS.
- 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.
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- 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: dilution
of the Company's ownership interest due to subsequent
financings at lower per share prices; declines in the market
value of such investments due to the investee's inability to
obtain additional financing on favorable terms; and declines
in 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, beneficial, or that estimated cost
savings from such activities will be realized.
- In addition to cost reduction initiatives, the Company is
striving to improve margins on its products through price
increases, where warranted and accepted by the market;
however, the Company's earnings could be negatively impacted
should such increases be unrealized, not be sufficient to
cover increased raw materials and energy 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 and energy costs. There can be
no assurance, however, that such measures will result in cost
savings or that all market fluctuation exposure will be
eliminated.
- 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
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and the complexity of the site. Likewise, changes in chemical control
regulations and testing requirements can increase costs or result in
product deselection. Remedial requirements at contaminated sites are
dependent on the nature of the remedy, the outcome of discussions with
regulatory agencies and other potentially responsible parties at
multi-party sites, and the number and financial viability of other
potentially responsible parties.
- - The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of
business. The Company believes amounts reserved are adequate for such
pending matters; however, results of operations could be affected by
significant litigation adverse to the Company.
The foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure, including that
under "Outlook" and "Forward-Looking Statements," and other forward-looking
statements and related disclosures made by the Company in this filing and
elsewhere from time to time, represent management's best judgment as of the date
the information is given. The Company does not undertake responsibility for
updating any of such information, whether as a result of new information, future
events, or otherwise. You are advised, however, to consult any further public
Company disclosures (such as in our filings with the Securities and Exchange
Commission or in Company press releases) on related subjects.
- ----------------------------
EASTAPAK is a registered trademark of Eastman Chemical Company.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of
business. While the Company is unable to predict the outcome of these
matters, it does not believe, based upon currently available facts,
that the ultimate resolution of any of such pending matters, including
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 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
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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. 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., Ralston Purina
Company, McKee Foods Corporation, and Nabisco, Inc; 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in
the Exhibit Index appearing on page 29.
(b) Reports on Form 8-K
On February 5, 2001, the Company filed a report on
Form 8-K concerning its plans to separate into two
independent public companies by the end of 2001--a
specialty chemicals and plastics company, and a PET
plastics and acetate fibers company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastman Chemical Company
Date: May 7, 2001 By: /s/ James P. Rogers
-------------------------------
James P. Rogers
Senior Vice President and
Chief Financial Officer
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29
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------------------- -----------
3.01 Amended and Restated Certificate of Incorporation of Eastman Chemical
Company (incorporated herein by reference to Exhibit 3.01 to Eastman
Chemical Company's Registration Statement on Form S-1, File No. 33-72364,
as amended)
3.02 Amended and Restated Bylaws of Eastman Chemical Company, as amended
October 5, 2000 (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 as amended
February 1, 2001 31-32
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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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.
*10.01 Eastman Chemical Company Benefit Security Trust dated
December 24, 1997, as amended February 1, 2001 33 - 58
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 59
99.01 Operating Segment Information (Sales Revenue Change, Volume Effect and
Price Effect) 60
99.02 Acquisition Information (Sales Revenue and Volume Growth Comparison --
With and Without Acquisitions) 61
99.03 Summary of Plant, Property and Equipment Asset Allocation 62
between Eastman Company and the PET Plastics & Acetate
Fibers Company
- --------------------------------------------------------------------------------
*Management contract or compensatory plan or arrangement filed pursuant to Item
601(b)(10)(iii) of Regulation S-K.
30