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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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 62-1539359
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
100 N. EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share New York Stock Exchange
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
Securities registered pursuant to Section 12(g) of the Act: None
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PAGE 1 OF 124 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 59
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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) of the voting stock held by nonaffiliates was approximately
$4,235,260,008 as of January 31, 1997, using beneficial ownership rules adopted
pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude stock
that may be beneficially owned by directors, executive officers, or 10%
shareowners, some of whom might not be held to be affiliates upon judicial
determination. At January 31, 1997, 77,862,162 shares of Common Stock of the
registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 1997
Annual Meeting of Shareowners (the "1997 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
Forward-looking statements appear throughout this report. These statements
relate to planned capacity increases and capital spending; supply and demand,
volume, price, margin, and earnings expectations for individual products,
businesses, and segments as well as for the whole of Eastman Chemical Company;
cost reduction targets; and development, production, commercialization, and
acceptance of new products and technologies. These plans and expectations are
based upon certain underlying assumptions, including those mentioned within the
text of this report. 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 are unrealized.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business 4 - 14
Executive Officers of the Company 15
2. Properties 16
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security Holders 17
PART II
5. Market for the Registrant's Common Stock and Related Shareowner Matters 18
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 20 - 27
8. Financial Statements and Supplementary Data 28 - 53
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 54
PART III
10. Directors and Executive Officers of the Registrant 55
11. Executive Compensation 55
12. Security Ownership of Certain Beneficial Owners and Management 55
13. Certain Relationships and Related Transactions 55
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 56
SIGNATURES
Signatures 57 - 58
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PART I
ITEM 1. BUSINESS
GENERAL
Eastman Chemical Company ("Eastman" or the "Company") is a leading international
chemical company with a broad portfolio of plastic, chemical, and fiber
products. The Company manufactures and sells polyester plastics such as
polyethylene terephthalate ("PET"), a plastic widely used in soft drink
containers; coatings and paint raw materials; industrial and fine chemicals; and
acetate tow. The Company believes it has a competitive advantage in several
product areas due to its high level of manufacturing integration, the use of
state of the art process technologies and its operating efficiencies due to its
large-scale plants. In 1996 the Company had sales of $4.78 billion, operating
earnings of $663 million, and net earnings of $380 million, or $4.80 per share.
Eastman owns and operates substantially all of the worldwide chemical business
previously operated by Eastman Kodak Company ("Kodak") through its Eastman
Chemical Company division. Effective midnight December 31, 1993, Kodak
contributed such worldwide chemical business to the Company, which was
incorporated for that purpose on July 29, 1993. All of the outstanding shares of
Eastman common stock were distributed to Kodak shareowners (the "spin-off"),
resulting in Eastman becoming an independent, publicly held company. References
herein to "Eastman" or the "Company" include, where appropriate, the historical
operations of substantially all of Kodak's worldwide chemical business before
the spin-off. The Company's consolidated financial statements also include,
where appropriate, pro forma financial disclosures reflecting the spin-off.
The Company began business in 1920 for the purpose of producing chemicals for
Kodak's photographic business. Today, the Company is one of the largest chemical
producers in the United States and a leader in the application of several
manufacturing technologies. The Company pioneered the application of coal
gasification technology for the production of chemicals (also referred to as
"chemicals from coal technology") and currently operates one of the largest coal
gasification facilities in the United States, thereby reducing the Company's
dependence on petrochemicals in the manufacture of acetate tow, certain
plastics, and other chemicals. The Company is also a leader in the manufacture
of oxo chemicals that are used in the production of numerous coatings and resin
intermediates, the manufacture of fine chemicals used in photographic and other
custom chemicals, and the application of advanced environmental waste management
practices for chemical manufacturing operations. The Company is a world leader
in developing end-use applications for and recycling of a wide variety of
polyester plastics, including PET and other flexible packaging materials.
The Company categorizes its business into three segments, Specialty and
Performance, Core Plastics, and Chemical Intermediates. See Part II--Item
8--Financial Statements and Supplementary Data--Note 14 to the consolidated
financial statements. The Specialty and Performance segment includes plastic,
chemical, and fiber products primarily sold in diverse markets to customers that
base their buying decisions principally on a product's performance attributes.
The Core Plastics segment includes the Company's two major plastics products,
EASTAPAK PET polyester packaging plastic and TENITE polyethylene, as well as
cellulose acetate and polyesters. These container and packaging products share
similar physical characteristics and compete based on price and integrated
manufacturing capabilities. The Chemical Intermediates segment contains
industrial intermediate chemical products that are sold to customers operating
in mature markets in which multiple sources of supply exist. Propriety products
and low-cost manufacturing positions are the foundation of the Chemical
Intermediates segment. Eastman's strategy is to manage the mix between Specialty
and Performance, Core Plastics, and Chemical Intermediates products to fully
utilize its plants and obtain optimum profitability. The Company has the
capability to produce a wide range of products within its manufacturing plant
capacities and change product mix depending on customer demand and the Company's
strategy.
The Company's industry segment presentation for 1996 was revised. The
Performance segment was renamed Specialty and Performance, the Industrial
segment was renamed Chemical Intermediates, and the new Core Plastics segment,
which includes container plastics and flexible plastics products, was
established. Previously, container plastics were in the Performance segment, and
flexible plastics were in
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the Industrial segment. Prior periods have been restated to conform to the 1996
presentation. The following table summarizes the Company's recent financial
performance and identifiable assets by industry segment.
SEGMENT FINANCIAL SUMMARY
(Dollars in millions)
1996 1995 1994
SALES
Specialty and Performance $ 2,657 $ 2,647 $ 2,364
Core Plastics 1,409 1,685 1,390
Chemical Intermediates 716 708 575
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Total $ 4,782 $ 5,040 $ 4,329
========= ========= =========
OPERATING EARNINGS
Specialty and Performance $ 519 $ 433 $ 350
Core Plastics (1) 347 199
Chemical Intermediates 145 184 87
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Total $ 663 $ 964 $ 636
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ASSETS
Specialty and Performance $ 2,887 $ 2,776 $ 2,508
Core Plastics 1,854 1,598 1,449
Chemical Intermediates 525 498 438
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Total $ 5,266 $ 4,872 $ 4,395
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BUSINESS STRATEGY
Eastman's business strategy is to achieve consistent, profitable growth as a
highly integrated, international supplier of a diversified portfolio of
plastics, chemicals, and fibers. Specifically, the Company's strategic intent is
"To Be The World's Preferred Chemical Company." The following are the key
elements the Company is employing to achieve this strategy:
Proprietary Products and Core Competencies
The Company has developed its broad chemical product line through the
application of three major areas of technical strength referred to by the
Company as technology core competencies: polymer technology, organic chemistry
technology, and cellulose technology. The polymer core competence includes
polyester, polyolefin, and other polymer technologies, and forms the technical
basis of the Company's polyester and polyethylene product lines. The organic
chemistry core competence includes coal gasification for chemicals, oxo
chemistry, and complex organic chemistry technologies, and forms the basis of
the Company's fine chemical and intermediate chemical product lines. The
cellulose core competence includes cellulose conversion to acetate fibers and
plastic manufacturing technologies, and forms the basis of the Company's acetate
fibers and cellulose plastic product lines. The Company has developed or
acquired proprietary technologies and know-how with respect to each of these
core competencies.
The Company's ongoing product development strategy is to build on existing
technology core competencies and develop new technology core competencies.
During the last five years, the Company has successfully added significant new
products and product enhancements, which now represent approximately 23% of
current sales.
Manufacturing Integration and Scale
The Company's strategy is to continue to use integration of its manufacturing
plants to develop a competitive advantage. This integration provides the Company
with cost efficient and flexible manufacturing operations. The Company's major
manufacturing plants are highly integrated. Intermediate chemicals produced at
one plant are frequently distributed between plants to produce other plastics
and chemicals. Starting with a limited number of basic raw materials, primarily
coal, ethane and propane,
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cellulose, ethylene glycol, paraxylene and other basic chemicals, the Company
uses its integrated manufacturing capabilities to produce more than 400 major
products.
Through its development of highly integrated manufacturing, Eastman has the
capability to safely and efficiently operate large-scale chemical plants,
including one of the world's largest integrated chemical plants in Kingsport,
Tennessee. The Company's development efforts include the continual improvement
of these operations to achieve capacity increases and other earnings enhancement
projects with relatively low capital expenditures.
Quality Management
Quality Management is a fundamental set of operating and management principles
that are an extension of the philosophy of the Company's founder, George
Eastman. During the last thirteen years, the Company has further developed these
principles into its current Quality Policy. This policy states the Company's
goal to be the leader in quality and value of products and services, by focusing
on customers, process control, continual improvement, and innovation. The
Company's highly integrated manufacturing operations support the Company's total
quality policy by providing Company-wide internal control of intermediate raw
material processes. The Company's success in fostering this total quality policy
is evidenced by the U.S. Commerce Department's selection of the Company as the
recipient of the 1993 Malcolm Baldrige National Quality Award in the large
manufacturing category.
The Company has eleven quality system registrations to the international quality
standard, ISO 9000. Nine of these are in the United States and two are in the
United Kingdom. Approximately three-fourths of 1996 sales were from products
manufactured in ISO 9000 registered quality systems.
Expansion in International Markets
Customers outside the United States accounted for 37% of the Company's sales in
1996, while 9% of its products, measured by sales revenue, were manufactured
outside the United States. The Company has enjoyed growth in worldwide sales
over the past five years and achieved satisfactory returns primarily due to its
efficient large-scale plants in the United States. The Company also has
facilities in Hartlepool and Workington, England, for the manufacture of
polyester, used to produce film, bottles, and other packaging. The Workington
site also produces acetate tow. In addition, the Company's operations include a
polyester manufacturing facility in Toronto, Canada; polyethylene terephthalate
("PET") plants in Cosoleacaque, Veracruz, Mexico; and facilities in the United
Kingdom and Hong Kong for the manufacture of fine chemicals.
The Company is increasing its international manufacturing presence by targeting
a higher percentage of its annual capital expenditures for markets outside the
United States. The Company will complete a PET plant in San Roque, Spain in
early 1997 and has announced plans to build PET plants in the Netherlands and
Argentina, with operational dates of 1998. The Company also plans to build an
additional plant in the Netherlands to produce purified terephthalic acid
("PTA"), a key raw material for the production of PET, with an operational date
of 1998. By late 1997, the Company plans to double production capacity for
general-purpose fine chemicals at the Peboc Division of Eastman Chemical (UK)
Ltd. in Llangefni, Wales. Eastman is building a wholly owned manufacturing
facility in the Asia Pacific region--a 30,000-metric-ton copolyesters plant to
be located in Kuantan, Malaysia, expected to be in operation in early 1998. In
mid 1997, the Company plans to begin construction of a new oxo chemicals
manufacturing complex in Singapore, with production expected in early 1999. The
Company is studying the feasibility of forming a joint venture in the People's
Republic of China; consideration is being given to building two plants in
Nanjing, China, one to produce hydrocarbon tackifying resins and the other to
manufacture sorbates.
The Company has increased its international sales and distribution
infrastructure during the past seven years to position it for worldwide sales
growth. In particular, from 1990 through 1996, the Company increased personnel
outside the United States from approximately 500 to 1,500 employees. During the
same time period, the number of Company sales offices outside the United States
increased from 25 to 36 in a total of 32 countries. For financial information
about foreign and domestic operations and export sales, see Part II--Item
8--Financial Statements and Supplementary Data--Note 14 to the consolidated
financial statements.
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The Company's current and future business expansions in international markets
are dependent on projected regional economic conditions. Generally, the Company
uses its international marketing organizations to sell into international
markets. After achieving sufficient sales levels and developing an understanding
of the markets and earnings potential, the Company may invest in manufacturing
capacity appropriate to serve the region, taking into account the projected
future business conditions in the region. See Part II--Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations--Summary by Customer Location" for a discussion of certain risks
to which the Company is subject as a result of its operating in international
markets.
Strategic Market Orientation
The Company's organization is aligned to focus on strategic markets. The Company
believes that its market focus helps sustain earnings during economic downturns
and allows it to focus on growth.
Employee Ownership and Incentives
The Company believes that employee stock ownership will be a significant factor
in achieving its goal of consistent, profitable growth. The Eastman Employee
Stock Ownership Plan ("ESOP") is intended to foster employee ownership
throughout the Company, and stock ownership guidelines have been established for
the Company's directors and approximately 550 key Company managers. All Eastman
employees have placed at risk approximately 5% of their overall pay under the
Eastman Performance Plan, an annual incentive plan that rewards employees based
on the Company's achieved return on capital in relation to its cost of capital.
A certain portion of the incentive pay (approximately 5% of eligible employees'
annual pay in 1996, 5% in 1995, and 4% in 1994) has been committed to the
purchase of Eastman common stock under the ESOP. An additional portion of
management compensation is tied to Company performance under the Eastman Annual
Performance Plan. For further information concerning the Company's ESOP and
incentive pay plans, see Part II--Item 8--Financial Statements and Supplementary
Data--Note 8 to the consolidated financial statements and Part III--Item 11--
Executive Compensation.
INDUSTRY SEGMENTS
SPECIALTY AND PERFORMANCE SEGMENT
The key product groupings and primary markets in the Specialty and Performance
segment are summarized as follows:
Product Groupings Primary Markets
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Fibers Filters
Fabrics
Coatings, inks, and resins Coatings, inks and paints
Fine chemicals Photographic chemicals and custom chemicals
Performance chemicals Additives for fibers and plastics, semi-conductors
Adhesives and sealants
Food and beverages
Nutrition, cosmetics, construction
Textiles
Specialty plastics Medical, electronics, recreation, consumer durables
Plastic packaging
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Fibers
The Company is one of the world's largest suppliers of cellulose acetate tow, a
product developed by the Company in the 1950's that is used by our customers
primarily in the manufacture of cigarette filters. With approximately 400
million pounds of annual capacity at its plants in Kingsport, Tennessee, and
Workington, England, the Company accounts for approximately one-third of the
annual worldwide production of acetate tow, and sells to all major markets
throughout the world. The two primary raw materials used in the manufacture of
acetate tow are cellulose (from wood pulp) and acetic anhydride, and the Company
has developed the world's only commercial coal gasification facility to produce
the latter. This facility reduces the Company's dependency on petrochemicals
otherwise required for the manufacture of acetate tow.
Competition for sales of acetate tow is based on price, product quality, and
reliability of supply. The Company believes that it enjoys a low-cost position
for raw materials as a result of its coal gasification technology, efficient
integrated manufacturing processes, and overall size.
Growth in the acetate tow market is directly related to the level of filtered
cigarette consumption, which continues to increase worldwide despite declining
levels of cigarette consumption in North America. Historically, worldwide
industry sales volume growth has averaged between 2% - 3% per year. From 1985
through 1991, however, worldwide industry sales volume grew an average of 4% -
5%, primarily as a result of increased demand and purchases for inventory in the
Peoples Republic of China. During the years 1991 through 1993, a drawdown of
inventory stockpiles in China plus reduced demand in Eastern Europe contributed
to a decline in industry sales which, combined with the addition of
approximately 100 million pounds per year of new industry capacity, led to
industry overcapacity. This in turn contributed to declines in worldwide Company
sales of acetate tow and related operating earnings. In 1994, 1995, and 1996,
worldwide growth in the market for acetate tow, led primarily by sales to the
Asia Pacific region, resulted in higher levels of capacity utilization for both
the Company and the industry. The Company expects worldwide demand for acetate
tow to grow at approximately 2% - 3% per year over the long term, led primarily
by growth in Asia Pacific and Eastern European regions.
Acetate yarn is produced by the Company for the textile industry. Product price,
quality, and service are the primary factors influencing customer-purchasing
decisions. This product line utilizes the Company's basic cellulose technology
core competence along with its large cellulose acetate manufacturing position to
compete effectively. The market for acetate yarn has experienced little growth
during the last eight years. The Company has focused its efforts on improving
its operating efficiencies to maintain its product quality and cost position.
Fibers products accounted for approximately 32% of 1996 Specialty and
Performance segment sales.
Coatings, inks, and resins
The Company supplies a wide variety of coatings, inks, and resins, including
solvents, alcohols, glycols, and resins. All of the Company's coatings, inks,
and resins are currently produced in the United States with approximately 63% of
1996 sales being in the United States and the remainder worldwide. Most of the
products in this area are olefin or cellulose derivatives and utilize the
Company's proprietary oxo chemistry technology or chemicals from coal
technology. Coatings, inks, and resins include mixed cellulose esters, of which
the Company is the world's only manufacturer. Suppliers of coatings, inks, and
resins compete based on price, breadth of product line, reliability of supply,
and customer service. The Company believes it has a competitive advantage due to
the efficiency of its proprietary oxo chemistry technology and chemicals from
coal technology, the breadth of its product line, and its system of
distribution. Coatings, inks, and resins accounted for approximately 23% of 1996
Specialty and Performance segment sales.
Management anticipates limited future sales growth of traditional organic
solvent products due to environmental factors. The Company is developing
replacement products that are responsive to the environmental factors; these
products include raw materials for waterborne, powder, and high solid coatings.
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Fine chemicals
Fine chemicals produced by Eastman are used in the manufacture of a wide variety
of products such as photographic products, home care products, and custom
chemicals. The Company is a leading producer of custom chemicals used in the
manufacture of pharmaceuticals and agricultural chemicals, and of other products
synthesized to customer specifications. Technical competence and efficiency are
major competitive elements in the fine chemicals industry. The Company believes
it has a competitive advantage because of its competency in complex multi-step
organic chemistry and the breadth of services offered in custom manufacturing
(i.e., regulatory compliance and process design and optimization). Kodak is the
largest customer for the Company's fine chemicals. During 1996, fine chemicals
accounted for approximately 15% of Specialty and Performance segment sales.
Performance chemicals
Eastman produces a variety of additives for fibers and plastics, raw materials
for adhesives and sealants, food and beverage ingredients, and other performance
products. Fiber and plastic additives are used to impart specialized processing
and performance characteristics to polymers used in the production of a range of
fibers and plastics products. The Company produces raw materials for adhesives
that are used in hot-melt and pressure-sensitive applications. Eastman is a
manufacturer of natural and synthetic food grade antioxidants that are used to
enhance the stability and extend the shelf life of many products containing oils
and fats. Eastman is the only U.S. producer of sorbates that are used as food
and cosmetic preservatives because of their antimicrobial action. The Company
also manufactures many other performance products for use in nutrition,
cosmetic, textile and construction applications.
The Company believes it has a competitive advantage in many of the markets in
which these performance products are sold. For instance, many proprietary
products, with highly recognized trade names, deliver to customers high quality
and unique performance attributes. Competitors and competitive conditions vary
depending on the market segment. During 1996, performance chemicals accounted
for approximately 13% of Specialty and Performance segment sales.
Specialty plastics
Specialty plastics are produced by the Company for value-added end uses, such as
toothbrushes, eyeglass frames, medical devices, electrical connectors, tools,
appliance housings, food and medical packaging, heavy-gauge sheeting, and
fabricated boxes. The plastics supplied for these end uses include polyethylene,
polyester/copolyesters, cellulosics, and alloys of two or more plastics combined
to provide specific performance characteristics. The Company's strategy for
these products is to identify and serve selected niche markets that offer the
potential for attractive returns. Suppliers of specialty plastics products
compete based on price, product performance, reliability of supply, product
differentiation, and customer service. The Company believes it has a competitive
advantage due to its product performance, its systems of marketing and
distribution, and efficiency of its specialized copolyester chemistry and
cellulose technology. Specialty plastics accounted for approximately 17% of 1996
Specialty and Performance segment sales.
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CORE PLASTICS SEGMENT
The key product groupings and the primary markets in the Core Plastics segment
are summarized as follows:
Product Groupings Primary Markets
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Container plastics Soft drink containers
Flexible plastics Packaging
Container plastics
The Company is the world's leading supplier of polyester plastics, including
PET, for packaging applications, with the majority of its sales concentrated in
North America, Europe, and Latin America. The market for polyester plastics has
experienced significant growth in recent years due to the substitution of these
plastics for other packaging materials used in soft drink, food, and water
containers. Container plastics products accounted for approximately 65% of 1996
Core Plastics segment sales.
PET for containers, such as soft drink bottles, is the largest end use for
polyester plastics. Use of PET has grown because it is cost effective and
compares favorably with glass, aluminum, and other packaging materials based on
its light weight, durability, and clarity. In addition, PET is currently the
most widely recycled plastic packaging material. Industry estimates indicate
that PET consumption grew worldwide from 2.3 billion pounds per year in 1989 to
approximately 6.3 billion pounds per year in 1995, an average annual increase of
approximately 16% for the years 1989 through 1993 and 20% in 1994 and 1995. From
1989 to 1995, the Company's volume of PET sales also rose at approximately the
same rates. The container plastics industry operated at essentially full
capacity, and demand grew substantially in 1995, and to a lesser extent in 1996,
primarily due to weak sales in a soft European economy. To meet expected growth
in the PET market, Eastman intends to significantly increase its annual
worldwide PET manufacturing capacity by the year 2000 to 3.5 billion pounds by
constructing new plants and through process improvements in existing plants.
Capacity additions within the PET industry worldwide over the next 1-2 years are
expected to result in continued pressure on PET selling prices.
Competition for the large volume PET market is based largely on price.
Management believes that the Company's large scale operations, vertical
integration, and manufacturing expertise provide it with a competitive advantage
by allowing the Company to position itself as a price-competitive, consistently
reliable source of supply across a broad product line. In addition, the Company
has developed proprietary polyester polymers that enable it to respond to
specific customer design and performance requirements, and is a leader in the
manufacture of recycled-content PET. Environmental concerns have led to
increased demand for the use of recycled plastic materials, and the Company was
one of the first producers to obtain Food and Drug Administration clearance to
use recycled-content PET in polyesters sold to food and beverage container
manufacturers.
Flexible plastics
The Company manufactures a variety of plastics including polyethylene, cellulose
acetate, and polyesters for applications such as film, extrusion coating,
fibers, industrial strapping, and injection molding. The polyethylene product
line includes low density, linear low density, and medium/high density polymers.
The markets for these products are characterized generally as large volume with
a large number of customers and suppliers. The Company competes based on its
integrated manufacturing capabilities and, in some of these market areas, on the
basis of unique product characteristics. Several of the Company's competitors
are larger, with some having a higher degree of vertical integration. As a
result of the Company's position in this overall market, the strategy is to
focus on selected markets based on the Company's ability to produce high quality
performance polymers. Flexible plastics accounted for approximately 35% of 1996
Core Plastics segment sales.
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CHEMICAL INTERMEDIATES SEGMENT
The key product grouping and the primary markets in the Chemical Intermediates
segment are summarized as follows:
Product Groupings Primary Markets
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Industrial intermediates Industrial additives
Agricultural chemicals
Pharmaceuticals
Vinyl compounding
Wood and metal coatings
Artificial sweeteners
Industrial Intermediates
Industrial intermediate chemicals are produced based on the Company's oxo
chemistry technology and chemicals from coal technology. These products include
basic acetyl, oxo chemicals, and plasticizers, and are marketed to customers
producing esters, polymers, industrial additives, agricultural chemicals,
industrial intermediates, monomers and polymers, medical delivery equipment, and
pharmaceuticals. In 1996 approximately 77% of these products were sold in the
United States with the remainder sold internationally. Volume growth rates of
these chemicals tend to follow the growth in the world economy.
Competition in the market for industrial intermediate chemicals is based on
price, customer relationships, and reliability of supply. The Company's
large-scale integrated manufacturing provides the Company with a low-cost
position in several of these products. In addition, the Company is able to
provide its customers with a reliable source of supply through an extensive
distribution network.
RAW MATERIALS
The Company purchases substantially all of its key raw materials under long-term
contracts, generally of three to five years of initial duration with renewal
provisions. Most of those agreements do not require the Company to buy materials
if its operations are shut down or if the Company's demand is otherwise reduced.
Key raw materials purchased include cellulose, ethylene glycol, paraxylene,
coal, ethane, and propane. The Company has multiple suppliers for most key raw
materials and uses quality management principles, such as the establishment of
long-term relationships with suppliers and ongoing performance assessment and
benchmarking, as part of the total supplier selection process.
CAPITAL EXPENDITURES
Total capital expenditures were $789 million in 1996, $446 million in 1995, and
$281 million in 1994. Eastman anticipates that total capital expenditures in
1997 will be approximately $850 million. Historically, approximately 50% of the
capital expenditures have been used to improve existing plant operations and 50%
have been used to provide new capacity. Efficiency of capital utilization is a
key initiative of the Company. The Company uses alliances and joint ventures,
where appropriate, to provide additional capital expansion.
During 1996, 1995, and 1994, the Company made capital expenditures of $51
million, $39 million, and $32 million, respectively, related to environmental
improvements. The Company estimates that such capital expenditures will be
approximately $50 million and $90 million for 1997 and 1998, respectively.
Future expenditures will be dependent in part upon implementation of government
environmental regulations.
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DISPOSITIONS
As previously reported, in November 1994 Eastman sold its polypropylene
business, realizing net cash, after taxes, in excess of $100 million. The
purchaser acquired the physical assets of Eastman's polypropylene plants--two
Unipol process plants located at Texas Eastman Division in Longview, Texas. In
February 1995 Eastman sold its Kingsport, Tennessee compounded polypropylene
product line. In addition, the Company ceased production of natural source
vitamin E in 1995 and of pigmented inks in 1996, and sold the food-grade
distilled monoglycerides, powder coatings, and adhesives businesses in 1996. The
effect of these divestitures and product discontinuances on financial position
or results of operations has not been, and is not expected to be, material.
EMPLOYEE RELATIONS
The Company employs approximately 17,500 men and women worldwide. None of the
employees in the United States and approximately 2% of the total worldwide labor
force are represented by labor unions. The Company believes that its employee
relations are excellent.
CUSTOMER RELATIONS
Eastman has an extensive customer base and is not dependent on any one customer
or group of customers. The Company has approximately 8,000 customers worldwide
and the top 100 customers account for less than 60% of the Company's business.
Eastman's largest customer is Kodak, which accounted for approximately 6% of
total sales in 1996.
The Company has received numerous preferred-supplier awards and is the sole
supplier to several major customers. The Company strives to be the preferred
supplier to customers in the markets it serves.
COMPETITION
The Company's competitive environment varies among markets. Some of the
Company's competitors are larger in size and capital base than the Company.
Major competitors of the Company in its key markets are summarized as follows:
Key Market Major Competitors
- ---------------------------- -----------------------------------------------------------
Fibers Courtaulds, Daicel, Hoechst Celanese, Mitsubishi, Novaceta,
Rhone-Poulenc, Teijin
Coatings, inks, and resins BASF, Exxon, Hoechst Celanese, S. C. Johnson, Lonza,
Oxychem, Shell, Union Carbide
Fine chemicals DSM, LaPorte, Lonza
Performance chemicals AlliedSignal, Arco, Daicel, Dow, Exxon, Hercules, Hoechst
Celanese, Hoechst Fine Chemicals, Rexene, Rhone-Poulenc,
UOP
Specialty plastics BASF, Bayer, Dow, DuPont, GE, Hoechst Celanese, Phillips,
Akzo Nobel, AtoHaas, ICI, Geon, Shell
Container plastics Hoechst, ICI, Shell, Wellman, Nan Ya
Flexible plastics Chevron, Dow, Exxon, Hoechst Celanese, ICI, Mobil,
Quantum, Shell, Union Carbide
Industrial intermediates BASF, BP, Dow, Exxon, Hoechst Celanese, Rhone-Poulenc,
Union Carbide
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RESEARCH AND DEVELOPMENT
The Company directs its research and development programs toward four
objectives: 1) continually improving product quality by improvement in
manufacturing technology and processes; 2) lowering manufacturing costs through
process improvement; 3) conducting exploratory research to develop new product
lines and markets; and 4) developing new products and processes that are
compatible with the Company's commitment to RESPONSIBLE CARE (see
"Environmental" below).
Major achievements in research and development during the last several years
include the chemicals from coal technology, enhancements of the oxo chemistry
technology, and polyester application development and manufacturing technology.
The Company has developed wastewater treatment technology and technology to
improve PET recycling. In addition, Eastman has developed technology that
provides a faster, lower-cost route to production of EpB oxirane, a building
block chemical used in many other chemicals.
The Company's research and development expenditures during the past five years
have averaged approximately 4% of sales annually. The Company's research and
development expenditures for 1996, 1995, and 1994 were $184 million, $176
million, and $167 million, respectively. Expenditures for 1997 are anticipated
to be comparable to those for 1996. The Company has its major research center in
Kingsport, Tennessee, and currently employs approximately 375 scientists with
doctoral degrees throughout its research and development program.
PATENTS AND TRADEMARKS
The Company owns or licenses a large number of U.S. and non-U.S. patents that
relate to a wide variety of products and processes. The Company's patents expire
at various times during the next several years. The Company expects to be
granted about 100 new patents per year as a result of research and development
projects. The Company also maintains trademarks on major product segments. While
these patents, licenses, and trademarks are considered important, the Company
does not consider its business as a whole to be materially dependent upon any
one particular patent, patent license, or trademark.
SEASONALITY
Seasonality is not a significant factor for the Company, although the Specialty
and Performance segment experiences seasonal effects during the winter months
because of reduced demand for paint products, and the Core Plastics segment
experiences reduced demand for soft-drink containers during the first and fourth
quarters.
MARKETING AND DISTRIBUTION
The Company markets products through a worldwide sales organization with 36
sales offices outside the United States in 32 countries. In 1996, approximately
80% of sales were direct and 20% were through other channels. Products are
shipped to customers directly from the Company's plants as well as from
distribution centers, with the method of shipment generally determined by the
customer.
ENVIRONMENTAL
Eastman is committed to improving the environment, a commitment evidenced in
both the Company's products and manufacturing operations. The Company is
actively engaged in the ongoing development and enhancement of products that are
environmentally responsible, such as waterborne products and recyclable
plastics, and is an active participant in RESPONSIBLE CARE, a chemical industry
initiative that focuses on improving performance in areas including community
awareness and emergency response, pollution prevention, process safety,
distribution, employee health and safety, and product stewardship.
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Health, safety, and environmental considerations are a priority in the Company's
planning for all existing and new products and processes. The Health, Safety &
Environmental and Public Policy Committee of Eastman's Board of Directors
reviews the Company's policies and practices concerning health, safety, and the
environment, and its processes for complying with related laws and regulations,
and monitors significant related matters. The Company's policy is to operate its
plants and facilities in a manner that protects the environment and the health
and safety of its employees and the public. The Company has made and intends to
continue to make expenditures for environmental protection and improvement in a
timely manner consistent with the foregoing policies and with the technology
available. In some cases, applicable environmental regulations, such as those
adopted under the federal Clean Air Act and the Resource Conservation and
Recovery Act, and related actions of regulatory agencies determine the timing
and amount of environmental costs incurred by the Company.
The Company's commitment to environmental stewardship has earned favorable
recognition. In 1996 Eastman received Energy Efficiency Awards from the Chemical
Manufacturers Association. Also in 1996, Tennessee Eastman Division's wastewater
treatment facility received the Operational Excellence Award from the
Kentucky-Tennessee Water Environment Association and the national George F.
Burke, Jr. Award from the Water Environment Association for operation safety.
During 1995 Eastman received environmental awards from the Chemical
Manufacturers Association, the Kentucky-Tennessee Water Environment Association,
the League of Women Voters of the Texas Education Fund, and the Tennessee
Association of Business. In 1992 Texas Eastman Division was awarded an
Administrator's Award by the U.S. Environmental Protection Agency. The U.S.
Department of Labor commended the Company in 1992 for being the first company in
the nation to develop and implement a registered Environmental Operations
Specialist Apprenticeship Program to train operating personnel in monitoring
fugitive emissions. Industry Week magazine named the Kingsport, Tennessee plant
one of the 10 best plants in the nation in 1991 based on criteria that included
energy conservation and pollution prevention.
Certain of the Company's 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 relating to environmental remediation and
closure/postclosure 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 reasonably estimable.
The Company's environmental protection and improvement cash expenditures were
$173 million in 1996, $151 million in 1995, and $145 million in 1994, including
investments in construction, operations, and development. The Company does not
expect future environmental capital expenditures arising from requirements of
recently promulgated environmental laws and regulations to materially increase
the Company's planned level of capital expenditures for environmental control
facilities.
BACKLOG
During 1996, the Company's backlog of firm orders averaged between $200 million
and $400 million, representing two to four weeks' sales. The Company adjusts its
inventory policy to control the backlog of products dependent on customers'
needs. In areas where the Company is the single source of supply, or competitive
forces or customers' needs dictate, the Company may carry additional inventory
to reduce backlog. Backlog is also affected by utilization of a given product
manufacturing capacity.
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EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the Company's executive officers is provided below.
Earnest W. Deavenport, Jr., age 58, 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. He also served as Group Vice President of
Kodak from 1989 through 1993.
R. Wiley Bourne, Jr., age 59, is Vice Chairman of the Board and Executive Vice
President of the Company, responsible for all business organizations. He joined
the Company in 1959 and was named Executive Vice President in 1989. Mr. Bourne
also served as a Vice President of Kodak from 1986 through 1993.
Dr. James L. Chitwood, age 54, is Senior Vice President of the Company,
responsible for operations outside North America. Dr. Chitwood joined the
Company in 1968. He was named Senior Vice President of the Company in 1989 and
Group Vice President, Specialty Business Group in 1991. Dr. Chitwood was
appointed Senior Vice President with responsibility for Company business
organizations in October 1994 and changed to his current area of responsibility
in 1996. He also served as a Vice President of Kodak from 1984 through 1993.
Harold L. Henderson, age 61, joined the Company in 1997 as Senior Vice
President, Secretary, and General Counsel. Mr. Henderson served previously as
chief legal officer of The Firestone Tire & Rubber Company from 1980 to 1985 and
of RJR Nabisco, Inc. from 1985 to 1989. He was a consultant, commercial real
estate developer, and private investor from 1989 through 1996.
Tom O. Nethery, age 58, is Senior Vice President of the Company, responsible for
functional organizations. Mr. Nethery joined the Company in 1960. In 1989, Mr.
Nethery was named Senior Vice President, Manufacturing of the Company. He was
named Group Vice President, Industrial Business Group in 1991 and was appointed
to his current position in October 1994. Mr. Nethery also served as a Vice
President of Kodak from 1989 through 1993.
H. Virgil Stephens, age 60, is Senior Vice President and Chief Financial Officer
of the Company. Mr. Stephens joined the Company in 1979. In 1988, Mr. Stephens
was named Vice President, Financial and Information Services, became Vice
President and Chief Financial Officer in 1993, and was appointed to his current
position in 1996.
Darryl K. Williams, age 54, is Senior Vice President of the Company, responsible
for technology. Mr. Williams joined the company in 1965. He was appointed
president of Eastman Chemical Japan Ltd. in 1992, was named vice president, Asia
Pacific regional support services in 1993, was appointed vice president, Asia
Pacific Sales in 1994, and was named to his current position in 1996.
William G. Adams, age 62, is Vice President, Human Resources and Communications
and Public Affairs of the Company. Mr. Adams joined the Company in 1958. He was
named to his current position in 1986.
Lynda W. Popwell, age 52, is Vice President, Health, Safety, and Environment and
Quality of the Company. Ms. Popwell joined the Company in 1969. In 1990, she was
appointed Superintendent, Polymer Chemicals Division, Carolina Eastman Division.
Ms. Popwell was named Superintendent, Acid Division, Tennessee Eastman Division,
in 1993, was appointed Vice President, Tennessee Eastman Division in 1994, and
was appointed to her current position in 1995.
B. Fielding Rolston, age 55, is Vice President, Customer Service and Materials
Management of the Company. Mr. Rolston joined the Company in 1964. In 1987, Mr.
Rolston was appointed to his current position.
Jimmy E. Tackett, age 59, is Vice President, Corporate Development and Strategy
of the Company. Mr. Tackett joined the Company in 1963. In 1989, Mr. Tackett was
appointed to his current position.
Thomas W. Wilson, age 55, is Vice President and Comptroller of the Company. Mr.
Wilson joined the Company in 1964. In 1986, Mr. Wilson was named Comptroller of
Texas Eastman Division and was appointed Comptroller and Treasurer, Eastman
Chemical Company, in 1993. He assumed his current position in 1997.
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ITEM 2. PROPERTIES
PROPERTIES
A summary of the Company's principal manufacturing sites and the key products
produced at each site is shown in the table below. Eastman's plants generally
are well maintained, are in good operating condition, and are suitable and
adequate for their use. Utilization of these facilities may vary with product
mix, and economic, seasonal, and other business conditions, but none of the
principal plants are substantially idle.
The Company's plants, including approved expansions, generally have sufficient
capacity for existing needs and expected near-term growth.
Location Unit Key Products
- --------------------- -------------------------------- ---------------------------------
Batesville, AR Arkansas Eastman Fine Chemicals
Columbia, SC Carolina Eastman Polyester Polymers
Cosoleacaque, Mexico Eastman Chemical Industrial Polyester Polymers
De Mexico
Hartlepool, England Eastman Chemical Ectona, Ltd. Polyester Polymers
Kingsport, TN Tennessee Eastman Acetate Tow
Coatings and Paint Raw Materials
Polyester Polymers
Fine Chemicals
Llangefni, Wales Eastman Chemical (UK) Limited Fine Chemicals
Longview, TX Texas Eastman Oxo Chemicals
Plastics
Rochester, NY Distillation Products Division Monoglycerides and Antioxidants
Roebuck, SC ABCO Industries, Inc. Waterborne Polymers
San Roque, Spain Eastman Chemical Espana, S.A. Polyester Polymers
Toronto, Ontario, Canada Eastman Chemical Canada, Inc. Polyester Polymers
Workington, England Eastman Chemical Ectona, Ltd. Acetate Tow
Polyester Polymers
The Company has entered into a joint venture with Rhone-Poulenc, called
Primester, which manufactures cellulose ester at its Kingsport, Tennessee plant.
The production of cellulose ester is an intermediate step in the manufacture of
acetate tow and other cellulose-based products.
The Company has distribution facilities at all of its plant sites. In addition,
the Company conducts manufacturing operations at 3 other sites and operates 89
stand-alone distribution facilities in 18 countries. Corporate headquarters is
in Kingsport, Tennessee. The Company's regional headquarters are in Miami,
Florida; The Hague, Netherlands; and Singapore. Technical service is provided to
the Company's customers from technical service centers in Kingsport, Tennessee;
Kirkby, England; Osaka, Japan; and Singapore. Customer service centers are
located in Kingsport, Tennessee; Rotterdam, Netherlands; and Singapore.
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ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, patent,
commercial, environmental, and health and safety matters, which are being
handled and defended in the ordinary course of business. No such pending matters
are expected to have a material adverse effect on the Company's financial
condition or results of operations.
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 1996.
- ------------------------
RESPONSIBLE CARE is a registered service mark of the Chemical Manufacturers
Association. EASTAPAK AND TENITE are trademarks of Eastman Chemical Company.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREOWNER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "EMN." The following table presents the high and low sales
prices of the Common Stock on the NYSE and the cash dividends per share declared
by the Company's Board of Directors for each quarterly period of 1995 and 1996.
CASH DIVIDENDS
HIGH LOW DECLARED
1995
1st Quarter 56 1/8 48 1/2 $ .40
2nd Quarter 61 52 1/2 .40
3rd Quarter 69 1/2 59 1/8 .42
4th Quarter 68 3/8 58 3/4 .42
1996
1st Quarter 76 1/4 60 1/8 $ .42
2nd Quarter 69 1/4 59 3/4 .42
3rd Quarter 62 3/8 50 3/4 .44
4th Quarter 58 1/2 52 .44
- ----------
As of January 31, 1997 there were 77,862,162 shares of the Company's Common
Stock issued and outstanding, which shares were held by approximately 94,266
shareowners of record. These shares include 202,575 shares held by the Company's
charitable foundation. The Company has declared a cash dividend of $.44 per
share during the first quarter of 1997, and currently anticipates continuing to
pay quarterly cash dividends. Quarterly dividends on Common Stock, if declared
by the Company's Board of Directors, are usually paid on or about the first
business day of the month following the end of each quarter. The payment of
dividends is a business decision to be made by the Board of Directors from time
to time based on the Company's earnings, financial position and prospects, and
such other considerations as the Board considers relevant. Accordingly, the
Company's dividend policy may change at any time.
The Company did not sell any equity securities during 1996 in transactions not
registered under the Securities Act of 1933. For information concerning issuance
of shares and option grants in 1996 under compensation and benefit plans and to
the Company's charitable foundation, see Part II--Item 8--Financial Statements
and Supplementary Data -- Notes 7 and 8 to consolidated financial statements.
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ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993 1992
SUMMARY OF OPERATING DATA (1)
Sales $ 4,782 $ 5,040 $ 4,329 $ 3,903 $ 3,811
Operating earnings 663 964 636 451 505
Earnings from continuing operations
before income taxes and cumulative
effect of changes in accounting principle 607 899 550 439 483
Earnings from continuing operations 380 559 336 267 301
Discontinued operations, net of taxes - - - (20) (9)
Cumulative effect of changes
in accounting principle, net of taxes - - - (456) 79
Net earnings (loss) 380 559 336 (209) 371
Earnings per share from continuing
operations (2) 4.80 6.78 4.05 2.46 2.85
Net earnings per share 4.80 6.78 4.05 - -
STATEMENT OF FINANCIAL POSITION DATA (1)
Current assets $ 1,345 $ 1,487 $ 1,248 $ 1,057 $ 1,007
Properties at cost 7,530 6,791 6,389 6,390 6,170
Accumulated depreciation 4,010 3,742 3,483 3,331 3,127
Total assets 5,266 4,872 4,395 4,341 4,200
Current liabilities 787 873 793 462 443
Long-term borrowings 1,523 1,217 1,195 1,801 1
Total liabilities 3,627 3,344 3,100 3,280 1,267
Total shareowners' equity 1,639 1,528 1,295 1,061 2,933
Dividends declared per common share 1.72 1.64 1.60 - -
- ------------
(1) The summary of operating data for the years 1992 and 1993 and the statement
of financial position data for 1992 present the historical combined results
of the Company as the wholly owned worldwide chemical business of Kodak
before the spin-off at midnight December 31, 1993 as if it had operated as
an independent stand-alone entity.
(2) Earnings per share from continuing operations for the years 1992 and 1993
are presented on a pro forma basis. Historical earnings per share data for
periods before the spin-off is not presented because the Company was not a
publicly held company before the spin-off and such data is not meaningful
because of the significant change in capitalization as a result of the
spin-off. Pro forma earnings from continuing operations were $204 million
and $236 million for the years 1993 and 1992, respectively.
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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.
MAJOR FACTORS AFFECTING EARNINGS
1996 COMPARED WITH 1995
Significantly lower selling prices for the Company's core plastics
Overall increased sales volumes
Preproduction and start-up costs for new production facilities
Lower raw material costs
Lower variable-incentive compensation
RESULTS OF OPERATIONS
EARNINGS
(Dollars in millions, except per share amounts) 1996 1995 CHANGE 1994
Operating earnings $ 663 $ 964 (31)% $ 636
Net earnings 380 559 (32) 336
Net earnings per share 4.80 6.78 (29) 4.05
CHANGES IN EARNINGS PER SHARE 1996 1995 CHANGE
Net earnings per share $ 4.80 $ 6.78 $ (1.98)
Operations
Selling price $ (2.57)
Volume and mix .24
Raw materials, supplies, and energy costs .48
Variable-incentive pay .67
Preproduction and start-up costs (.42)
Other (.66)
-------
Change from operations (2.26)
Other
Interest expense, net .09
Other income/charges (.02)
Effective tax rate change .02
Fewer shares outstanding .19
-------
Total change $ (1.98)
=======
1996 COMPARED WITH 1995
While Eastman's results for 1996 reflect overall decreases compared with 1995, a
year in which the Company reported record sales and earnings, the Company's 1996
net earnings still reflect a solid return on equity of 24% and strong earnings
from the Specialty and Performance segment. The factors contributing to the 1996
earnings decline were lower selling prices for the Company's core plastics,
polyethylene terephthalate ("PET") and polyethylene, preproduction and start-up
costs at new PET plants, and higher labor rates. Currency fluctuations had a
minor negative effect on earnings in 1996. Positive impacts on overall earnings
include higher overall sales volumes, lower variable-incentive compensation, and
lower costs for paraxylene, certain other raw materials, and energy, partially
offset by higher propane costs. In addition, fewer shares outstanding favorably
affected earnings per share.
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SUMMARY BY INDUSTRY SEGMENT
The Company's industry segment presentation for 1996 was revised. The
Performance segment was renamed Specialty and Performance, the Industrial
segment was renamed Chemical Intermediates, and the new Core Plastics segment,
which includes container plastics and flexible plastics products, was
established. Previously, container plastics were in the Performance segment, and
flexible plastics were in the Industrial segment. The new Core Plastics segment
includes the Company's two major plastics products, EASTAPAK PET polyester
packaging plastic and TENITE polyethylene. Prior periods have been restated to
conform to the 1996 presentation.
(For supplemental analysis of Specialty and Performance, Core Plastics, and
Chemical Intermediates segment results and for restated business segment
quarterly sales and earnings information, see Exhibits 99.01 and 99.02,
respectively, to this Form 10-K).
SPECIALTY AND PERFORMANCE SEGMENT
(Dollars in millions) 1996 1995 CHANGE 1994
Sales $ 2,657 $ 2,647 -% $ 2,364
Operating earnings 519 433 20 350
1996 COMPARED WITH 1995
Despite overall level sales, the Specialty and Performance segment operating
earnings increased primarily as a result of lower operating costs reflecting
overall lower raw material costs, divestiture and discontinuance of certain
businesses and product lines, favorable product mix changes, and lower
variable-incentive compensation. Improved pricing, particularly for acetate tow
and acetate yarn, also contributed to the increase in earnings. Sales of
coatings, inks, and resins products increased because of higher volumes,
partially offset by decreased prices. Fibers sales increased primarily because
of price increases at the beginning of 1996 and slight volume gains. Fine
chemicals products sales were down primarily because of lower volumes. Specialty
plastics products sales were essentially level with 1995, with volume increases
offset by price decreases. Sales of performance chemicals products decreased
because of lower volumes, partially offset by higher prices, and as a result of
the divestiture and discontinuance of certain businesses and product lines in
late 1995 and early 1996.
CORE PLASTICS SEGMENT
(Dollars in millions) 1996 1995 CHANGE 1994
Sales $ 1,409 $ 1,685 (16)% $ 1,390
Operating earnings (loss) (1) 347 - 199
1996 COMPARED WITH 1995
The sales decrease in the Core Plastics segment was attributed primarily to
lower EASTAPAK PET selling prices, partially offset by increased volumes.
Decreased operating earnings were attributed primarily to lower EASTAPAK PET and
polyethylene selling prices. Other factors contributing to the overall decrease
in segment operating earnings were increased preproduction and start-up costs
for new PET manufacturing facilities and increased propane costs, which impacted
primarily polyethylene and to a lesser extent PET.
CHEMICAL INTERMEDIATES SEGMENT
(Dollars in millions) 1996 1995 CHANGE 1994
Sales $ 716 $ 708 1% $ 575
Operating earnings 145 184 (21) 87
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1996 COMPARED WITH 1995
Increased sales in the Chemical Intermediates segment were attributed primarily
to higher volumes, partially offset by lower selling prices for industrial
intermediates. Decreased operating earnings were attributed primarily to lower
selling prices for certain industrial intermediates products, particularly
n-butyraldehyde products and their derivatives, and higher propane feedstock
costs.
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
(Dollars in millions) 1996 1995 CHANGE 1994
United States and Canada $3,183 $3,390 (6)% $3,049
Europe, Middle East, and Africa 745 825 (10) 640
Asia Pacific 548 557 (2) 437
Latin America 306 268 14 203
------ ------ ------
Total $4,782 $5,040 $4,329
====== ====== ======
1996 COMPARED WITH 1995
Sales in the United States for 1996 were $2.99 billion, down 6% from 1995 sales
of $3.168 billion. Decreased sales were attributed to lower selling prices,
partially offset by modest volume gains.
Sales outside the United States in 1996 were down 4% from 1995 and were 37% of
total sales, same as 1995. Decreased sales in Europe, Middle East, and Africa
were primarily attributed to lower EASTAPAK PET selling prices, partially offset
by higher volumes. Increased sales in Latin America resulted primarily from
higher EASTAPAK PET volumes, partially offset by lower selling prices.
With a substantial portion of 1996 sales to customers outside the United States
and 9% of its products (as measured by sales revenue) manufactured 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. As a result, 85% of
total 1996 sales were U.S. dollar-based. 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.
Consequently, credit and currency losses experienced on international
transactions have not been significant. See Item 8--Financial Statements and
Supplementary Data--Note 10 to the consolidated financial statements.
SUMMARY OF CONSOLIDATED RESULTS
(Dollars in millions) 1996 1995 CHANGE 1994
SALES $ 4,782 $ 5,040 (5)% $ 4,329
Sales in 1996 decreased 7% because of lower selling prices, offset 2% because of
volume gains.
(Dollars in millions) 1996 1995 CHANGE 1994
GROSS PROFIT $ 1,179 $ 1,504 (22)% $ 1,113
As a percentage of sales 24.7% 29.8% 25.7%
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Gross profit decline was principally attributable to lower selling prices,
higher labor rates, and increased preproduction and start-up costs, partially
offset by lower variable-incentive compensation, lower purchased raw material
costs, and increased volumes.
(Dollars in millions) 1996 1995 CHANGE 1994
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 332 $ 364 (9)% $ 310
As a percentage of sales 6.9% 7.2% 7.2%
The decrease in selling and general administrative expenses was attributable to
developmental costs incurred in 1995 for the installation of a global integrated
business information system that were not incurred in 1996. The Company invested
significant resources in this new information system to better position itself
for continued worldwide growth. Another factor affecting the decreased selling
and general administrative expenses was decreased variable-incentive
compensation costs.
(Dollars in millions) 1996 1995 CHANGE 1994
RESEARCH AND DEVELOPMENT COSTS $ 184 $ 176 5% $ 167
As a percentage of sales 3.8% 3.5% 3.9%
Research and development costs increased because of an increase in research and
development activities and overall labor rates, partially offset by lower
variable-incentive costs.
(Dollars in millions) 1996 1995 CHANGE 1994
GROSS INTEREST EXPENSE $ 95 $ 88 $ 98
LESS CAPITALIZED INTEREST 28 9 11
------- ------- -------
NET INTEREST EXPENSE $ 67 $ 79 (15)% $ 87
======= ======= =======
Interest expense increased because of higher commercial paper borrowings, offset
by capitalized interest related to increased capital projects under
construction.
(Dollars in millions) 1996 1995 CHANGE 1994
OTHER INCOME, NET $ 11 $ 14 (21)% $ 1
Other income and charges include interest income, royalty income, gains and
losses on asset sales, results from equity investments, foreign exchange
transactions, and other items.
(Dollars in millions) 1996 1995 CHANGE 1994
PROVISION FOR INCOME TAXES $ 227 $ 340 (33)% $ 214
Effective tax rate 37.4% 37.8% 38.9%
1995 COMPARED WITH 1994
Eastman posted sales in 1995 of $5.04 billion, up 16% compared with 1994. Sales
increased 11% because of higher selling prices, 3% because of volume gains, and
2% because of the favorable effect of fluctuations in currency exchange rates.
The Company had net earnings of $559 million in 1995, compared with $336 million
for 1994 -- a 66% increase. The increased earnings were attributable to higher
selling prices and slightly higher volumes, partially offset by higher purchased
raw material costs. Currency fluctuations had a minor favorable effect on
earnings in 1995 and 1994. In November 1994 Eastman sold its polypropylene
business, realizing net cash, after taxes, in excess of $100 million. Eastman's
revenues from the polypropylene business, included primarily with flexible
plastics products, were approximately $160 million in 1994.
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24
The Specialty and Performance segment reported sales of $2.647 billion for 1995,
up 12% from 1994. The increase was attributed to higher sales prices and higher
sales volumes. Sales of coatings, inks, and resins products increased because of
solid price increases. Fibers products experienced significant volume increases
and improved prices. Fine chemicals products reported substantial volume gains,
partially offset by slight decreases in selling prices. Excluding the effects of
the polypropylene business exit in 1994, specialty plastics products reported
higher volumes and increased prices in 1995. Specialty and Performance segment
operating earnings for 1995 were $433 million, compared with $350 million in
1994. The 24% increase was attributable to higher selling prices and volume
gains, partially offset by higher raw material and labor costs.
The Core Plastics segment reported sales of $1.685 billion for 1995, up 21% from
1994. PET contributed significantly to the increased segment sales, with
substantially higher selling prices and good volume increases. Excluding the
effects of the polypropylene business exit, volumes for flexible plastics
products, primarily polyethylene, were moderately higher in 1995. Core Plastics
segment operating earnings for 1995 were $347 million, compared with $199
million in 1994. The 74% increase was primarily attributable to PET and
polyethylene higher selling prices, partially offset by higher raw material and
labor costs.
The Chemical Intermediates segment reported sales of $708 million for 1995, up
23% from 1994. The substantial increase in sales was attributable to higher
selling prices and modest volume gains of industrial intermediates. Selling
prices were higher because of strong demand. Chemical Intermediates segment
operating earnings for 1995 were $184 million, up 111% from 1994. Sharp
increases in operating earnings were attributable primarily to higher selling
prices, partially offset by higher raw material and labor costs. Strengthened
demand for chemicals that resulted in high capacity utilization was a
significant factor in the 1995 gain.
Eastman reported increased 1995 sales to customers in each reported region.
Sales in the United States in 1995 were $3.168 billion, up 10% compared with
1994 sales of $2.867 billion. Increased sales were primarily attributable to
higher selling prices. Sales to customers outside the United States in 1995 were
up 28% compared with 1994 and were 37% of total sales, compared with 34% in
1994.
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
FINANCIAL INDICATORS 1996 1995 1994
Ratio of earnings to fixed charges 6.1x 9.7x 6.3x
Current ratio (1) 1.7x 1.7x 1.5x
Percent of long-term borrowings to total capital (1) 48% 44% 48%
Percent of floating-rate borrowings to total borrowings (1) 21% 2% -
- ------------
(1) At end of year.
KEY CASH FLOW ELEMENTS
(Dollars in millions) 1996 1995 1994
Cash provided by operations $ 746 $ 838 $ 824
Capital expenditures 789 446 281
Dividends paid 134 133 99
Net increase in commercial paper borrowings 273 22 -
Debt reduction excluding commercial paper - 2 605
Treasury stock purchases 161 200 -
Cash provided by operations for 1996 decreased primarily as a result of lower
earnings, partially offset by reductions in inventory and receivables. Cash
provided by operations for 1995 increased primarily as a result of higher
earnings, partially offset by changes in certain liabilities.
24
25
The increase in cash used in investing activities in 1996 is consistent with the
Company's global expansion activities and primarily reflects capital expenditure
increases. Cash used in investing activities in 1995 increased because of higher
capital expenditures, acquisitions, and investments in joint ventures.
The cash used in financing activities in 1996 reflects dividends and share
repurchases, offset by commercial paper borrowings. The cash used in financing
activities in 1995 was primarily attributed to share repurchases and dividends.
In 1994 the Company had a $605 million reduction in long-term borrowings.
CAPITAL EXPENDITURES
Eastman's commitment for capital expenditures at December 31, 1996, was
approximately $740 million, consisting primarily of planned expenditures for
previously announced expansions of production capacity. Approximately 80% of the
$740 million is expected to be disbursed in 1997. Eastman anticipates that total
capital expenditures in 1997 will be approximately $850 million. Depreciation
expense is expected to be approximately $330 million in 1997.
Construction is currently under way for a copolyester plastics plant in Kuantan,
Malaysia, with production expected by early 1998. The Company has begun
construction of an isophthalic acid ("IPA") plant in Tennessee, with production
expected in 1998. A letter of intent was signed by the Company to study the
feasibility of forming a joint venture in the People's Republic of China;
consideration is being given to building two plants in Nanjing, China, one to
produce hydrocarbon tackifying resins and the other to manufacture sorbates.
Eastman has announced a planned increase in polyethylene naphthalate ("PEN")
capacity in Kingsport, Tennessee, expected on-line in early 1997. By late 1997
Eastman plans to double production capacity for general-purpose fine chemicals
at the Peboc Division of Eastman Chemical (UK) Ltd. in Llangefni, Wales. Eastman
purchased the assets of ABCO Industries, Ltd., a waterborne polymers
manufacturer in South Carolina, in December 1996. This acquisition did not have
a material effect on financial position or results of operations.
To meet expected growth in the PET market, Eastman intends to significantly
increase its annual worldwide PET manufacturing capacity by the year 2000 to 3.5
billion pounds by constructing new plants and improving processes in existing
plants. Eastman's capacity in place by the end of 1997 is expected to be 2.5
billion pounds, with an additional 0.5 billion pounds by the end of 1998.
Capacity additions within the PET industry worldwide over the next 1-2 years are
expected to result in continued pressure on PET selling prices.
Eastman completed construction of an epoxybutene (EpB oxirane) derivatives plant
at its Longview, Texas, location in December 1996. In order to enhance
production of oxo chemicals, the Company plans to expand its Longview, Texas,
oxo aldehydes and derivatives plants and construct a new oxo chemicals
manufacturing complex in Singapore, with production expected to begin in early
1999.
LIQUIDITY
In December 1995 the Company replaced a previously existing variable rate credit
agreement with a new 5-year $800 million revolving credit facility (the "Credit
Facility"). Although the Company does not have any amounts outstanding under the
Credit Facility, any such borrowings would be subject to interest at varying
spreads above quoted market rates, principally LIBOR. The Credit Facility also
requires a facility fee on the total commitment that varies based on Eastman's
credit rating. The annual rate for such fee was 0.075% as of December 31, 1996.
The Credit Facility contains a number of covenants and events of default,
including the maintenance of certain financial ratios. Eastman was in compliance
with all such covenants for all periods.
In 1994 Eastman issued $1.2 billion of long-term debt securities and repaid
existing borrowings under the preexisting credit agreement. The issuances
included $500 million of 6 3/8% notes due 2004, $500 million of 7 1/4%
debentures due 2024, and $200 million of 7 5/8% debentures due 2024. The 7 5/8%
debentures may be redeemed June 15, 2006, at the option of their registered
holders, at 100% of the principal amount plus accrued interest to that date.
25
26
Eastman utilizes commercial paper, generally with maturities of 90 days or less,
to meet its liquidity needs. The Company's commercial paper, supported by the
Credit Facility, is classified as long-term borrowings because the Company has
the ability and intent to refinance such borrowings long-term. As of December
31, 1996, the Company's commercial paper outstanding balance was $295 million,
at an effective interest rate of 5.59%. At December 31, 1995, a total of $22
million of commercial paper was outstanding, at a 6% effective interest rate.
In early 1997 the Company issued $300 million of 7.60% debentures due February
1, 2027, and used the proceeds to repay outstanding commercial paper borrowings.
In 1995 the Company repurchased $200 million of Eastman common stock. In
February 1996 the Company announced plans to repurchase up to $400 million of
additional common stock, and at December 31, 1996, had acquired an additional
2,486,300 shares at a cost of $161 million under the repurchase program
announced in 1996. Given the Company's capital expenditure program for 1997,
Eastman does not expect to make any significant share repurchases in 1997.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes.
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
DIVIDENDS 1996 1995 1994
Cash dividends declared per share $ 1.72 $ 1.64 $ 1.60
ENVIRONMENTAL
Eastman is committed to improving the environment, a commitment evidenced in
both the Company's products and manufacturing operations. The Company is
actively engaged in the ongoing development and enhancement of products that are
environmentally responsible, such as waterborne products and recyclable
plastics, and is an active participant in RESPONSIBLE CARE, 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.
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.
Eastman's environmental protection and improvement cash expenditures were $173
million in 1996, $151 million in 1995, and $145 million in 1994, 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.
However, changes in raw material prices, particularly petroleum derivatives,
could have a significant impact on costs, which the Company may or may not be
able to reflect fully in its pricing structure.
26
27
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1996 the AICPA issued SoP 96-1, "Accounting for Environmental Remediation
Costs," which provides guidance in the determination of environmental
remediation liabilities. It is effective for fiscal years beginning after
December 15, 1996. Eastman does not expect compliance with SoP 96-1 to have a
material effect on its financial position or results of operations.
OUTLOOK
Looking forward to 1997, the Company expects continued good demand for its
products. In comparison with 1996, the Company also expects to realize modest
volume growth driven by significant volume growth for EASTAPAK PET due to
increasing demand and additional available capacity. In addition, the Company
expects incremental capacity gains for fibers and various chemicals to
contribute to volume growth. The Company expects EASTAPAK PET selling prices to
remain under pressure in 1997 due to growth in capacity over the next 1-2 years
in the worldwide PET industry, but improvement in PET margins above fourth
quarter 1996 levels. For the rest of its businesses, the Company expects overall
stable margins when compared with 1996 as a result of stable to slightly lower
selling prices and stable to slightly lower costs for key purchased raw
materials. The Company is also targeting $100 million in labor and material
productivity gains in 1997 as a result of its Advantaged Cost 2000 initiative to
eliminate $500 million from Eastman's cost structure by the year 2000.
The above-stated expectations, other forward-looking statements in this report,
and other statements of the Company relating to matters such as cost reduction
targets; planned capacity increases and capital spending; expected depreciation;
and supply and demand, volume, price, margin, and earnings expectations for
individual products, businesses, and segments, as well as for the whole of the
Company, are based upon certain underlying assumptions. These 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
and are subject to risks and uncertainties inherent in projecting future
conditions and results.
The forward-looking statements in this Management's Discussion and Analysis are
based upon the following assumptions: relatively stable business conditions in
North America, improving business conditions in Europe, and continued growth in
Latin America and Asia Pacific, supporting continued good overall demand for the
Company's products; continued demand growth worldwide for PET; continued
capacity additions within the PET industry worldwide; availability of scheduled
Eastman capacity increases; stable to slightly lower pricing for Eastman
products; overall stable to slightly lower purchase costs for key Eastman raw
materials; and labor and material productivity gains sufficient to meet targeted
cost structure reductions. Actual results could differ materially from current
expectations if one or more of these assumptions prove to be inaccurate or are
unrealized.
- ------------------------------------
RESPONSIBLE CARE is a registered service mark of the Chemical Manufacturers
Association. EASTAPAK AND TENITE are trademarks of Eastman Chemical Company.
27
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM PAGE
Management's responsibility for financial statements 29
Report of independent accountants 30
Consolidated statements of earnings and retained earnings 31
Consolidated statements of financial position 32
Consolidated statements of cash flows 33
Notes to consolidated financial statements 34 - 53
28
29
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 31 through 53. Eastman has
prepared these consolidated financial statements in accordance with
generally accepted accounting principles, 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 Price
Waterhouse LLP, independent accountants, who were responsible for
conducting their audits in accordance with generally accepted auditing
standards. 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 Price Waterhouse 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/ H. Virgil Stephens
------------------------------ ---------------------------
Earnest W. Deavenport, Jr. H. Virgil Stephens
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
January 21, 1997
29
30
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 56 present
fairly, in all material respects, the financial position of Eastman
Chemical Company and subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. 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
generally accepted auditing standards 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.
/s/ Price Waterhouse LLP
------------------------
PRICE WATERHOUSE LLP
New York, New York
January 21, 1997
30
31
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
Sales $ 4,782 $ 5,040 $ 4,329
Cost of sales 3,603 3,536 3,216
--------- --------- ---------
Gross profit 1,179 1,504 1,113
Selling and general administrative expenses 332 364 310
Research and development costs 184 176 167
--------- --------- ---------
Operating earnings 663 964 636
Interest expense, net 67 79 87
Other income, net 11 14 1
--------- --------- ---------
Earnings before income taxes 607 899 550
Provision for income taxes 227 340 214
--------- --------- ---------
Net earnings $ 380 $ 559 $ 336
========= ========= =========
Net earnings per share $ 4.80 $ 6.78 $ 4.05
========= ========= =========
Retained earnings at beginning of year $ 1,684 $ 1,258 $ 1,055
Net earnings 380 559 336
Cash dividends declared (135) (133) (133)
---------- --------- ---------
Retained earnings at end of year $ 1,929 $ 1,684 $ 1,258
========= ========= =========
The accompanying notes are an integral part of these financial statements.
31
32
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN MILLIONS)
DECEMBER 31,
1996 1995
ASSETS
Current assets
Cash and cash equivalents $ 24 $ 100
Receivables 744 802
Inventories 465 467
Other current assets 112 118
--------- ---------
Total current assets 1,345 1,487
--------- ---------
Properties
Properties and equipment at cost 7,530 6,791
Less: Accumulated depreciation 4,010 3,742
--------- ---------
Net properties 3,520 3,049
--------- ---------
Other noncurrent assets 401 336
--------- ---------
Total assets $ 5,266 $ 4,872
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables $ 708 $ 771
Other current liabilities 79 102
--------- ---------
Total current liabilities 787 873
Long-term borrowings 1,523 1,217
Deferred income tax credits 348 348
Postemployment obligations 722 690
Other long-term liabilities 247 216
--------- ---------
Total liabilities 3,627 3,344
--------- ---------
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares authorized;
shares issued - 83,386,459 and 83,250,683) 1 1
Paid-in capital 37 30
Retained earnings 1,929 1,684
Cumulative translation adjustment 31 13
--------- ---------
1,998 1,728
Less: Treasury stock at cost (5,766,528 and 3,308,200 shares) 359 200
--------- ---------
Total shareowners' equity 1,639 1,528
--------- ---------
Total liabilities and shareowners' equity $ 5,266 $ 4,872
========= =========
The accompanying notes are an integral part of these financial statements.
32
33
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
1996 1995 1994
Cash flows from operating activities
Net earnings $ 380 $ 559 $ 336
--------- --------- ---------
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 314 308 329
Provision (benefit) for deferred income taxes 8 (11) (8)
(Increase) decrease in receivables 66 (90) (159)
(Increase) decrease in inventories 10 (108) (60)
Increase (decrease) in incentive pay and
employee benefit liabilities (69) 179 153
Increase in liabilities excluding borrowings,
incentive pay, and employee benefit liabilities 31 18 203
Other items, net 6 (17) 30
--------- --------- ---------
Total adjustments 366 279 488
--------- --------- ---------
Net cash provided by operating activities 746 838 824
--------- --------- ---------
Cash flows from investing activities
Additions to properties and equipment (789) (446) (281)
Acquisitions and investments in joint ventures (26) (56) -
Proceeds from sales of assets 43 9 132
Capital advances to suppliers (37) (39) (35)
Other items - 8 -
--------- --------- ---------
Net cash used in investing activities (809) (524) (184)
--------- --------- ---------
Cash flows from financing activities
Proceeds from borrowings - - 1,202
Net increase in commercial paper borrowings 273 22 -
Repayment of borrowings - (2) (1,807)
Dividends paid to shareowners (134) (133) (99)
Treasury stock purchases (161) (200) -
Other items 9 9 13
--------- --------- ---------
Net cash used in financing activities (13) (304) (691)
--------- --------- ---------
Net change in cash and cash equivalents (76) 10 (51)
Cash and cash equivalents at beginning of year 100 90 141
--------- --------- ---------
Cash and cash equivalents at end of year $ 24 $ 100 $ 90
========= ========= =========
The accompanying notes are an integral part of these financial statements.
33
34
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of Eastman Chemical Company and
subsidiaries ("Eastman" or the "Company") are prepared in conformity with
generally accepted accounting principles and of necessity include some
amounts that are based upon management estimates and judgments. Future
actual results could differ from such current estimates. The consolidated
financial statements include assets, liabilities, revenues, and expenses
of all wholly owned subsidiaries. Eastman accounts for 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 U.S. dollar
is used to report operations in highly inflationary economies and certain
other locations. The effects of translating those operations that use the
local currency as the functional currency are included as a separate
component of shareowners' equity. The effects of remeasuring those
operations where the U.S. dollar is used as the functional currency and
all transaction gains and losses are reflected in current earnings.
REVENUE RECOGNITION
Sales are recognized when products are shipped and the earnings process
is complete. Appropriate accruals for discounts, volume rebates and other
allowances are recorded as reductions in sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits, and readily
marketable securities with original maturities of 3 months or less.
INVENTORIES
Inventories are valued at cost, which is not in excess of market. The
Company determines the cost of most raw materials, work in process, and
finished goods inventories 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.
34
35
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRED ASSETS
The Company reviews the carrying values of long-lived assets and
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of any impairment would include a comparison of discounted
estimated future operating cash flows to the net carrying value of the
related assets.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its foreign currency exposures. The purpose of the
Company's foreign currency hedging activities is to protect the Company
from the risk that changes in exchange rates will adversely affect the
eventual dollar cash flows resulting from such transactions. The Company
enters into forward exchange contracts to hedge certain firm commitments
denominated in foreign currencies and currency options to hedge probable
anticipated but not yet committed export sales and purchase transactions
expected within no more than 5 years and denominated in foreign
currencies (principally the German mark, French franc, and Japanese yen).
The Company's forward and option contracts are accounted for as hedges
because the derivative instruments are designated and effective as hedges
and reduce the Company's exposure to foreign currency risks. Gains and
losses resulting from effective hedges of existing assets, liabilities,
firm commitments, or anticipated transactions are deferred and recognized
when the offsetting gains and losses are recognized on the related hedged
items and are reported as a component of operating earnings. Deferred
premiums and the related obligation for payment are generally included in
other noncurrent assets and liabilities, respectively, and are paid in
the period in which the options are exercised or expire and forward
exchange contracts mature.
INVESTMENTS
The Company includes in other noncurrent assets its investments in joint
ventures, which are managed as integral parts of the Company's operations
and accounted for on the equity basis. Eastman carries certain
investments at negative values, based on its intention to fund its share
of deficits in such investments, and includes such negative carrying
values in other long-term liabilities. The Company includes its share of
earnings and losses of such joint ventures in other income and charges.
EARNINGS PER SHARE
Eastman calculates earnings per share based on the weighted average
number of common shares outstanding and common share equivalents that
represent the dilutive effect of 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.
35
36
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPENSATED ABSENCES
The Company accrues compensated absences and related benefits as current
charges to earnings.
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.
RECLASSIFICATIONS
The Company has reclassified certain 1995 and 1994 amounts to conform to
the 1996 presentation.
2. INVENTORIES
DECEMBER 31,
(Dollars in millions) 1996 1995
At FIFO or average cost (approximates current cost)
Finished goods $ 426 $ 461
Work in process 133 127
Raw materials and supplies 214 199
--------- ---------
Total inventories at FIFO or average cost 773 787
Reduction to LIFO value (308) (320)
---------- ---------
Total inventories at LIFO value $ 465 $ 467
========= =========
Inventories valued on the LIFO method are approximately 80% of total
inventories in 1996 and 1995.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
(Dollars in millions) 1996 1995 1994
Balance at beginning of year $ 6,791 $ 6,389 $ 6,390
Additions 796 464 281
Deductions (57) (62) (282)
---------- --------- ---------
Balance at end of year $ 7,530 $ 6,791 $ 6,389
========= ========= =========
Properties at end of year
Land $ 41 $ 36 $ 32
Buildings and building equipment 640 600 588
Machinery and equipment 6,315 5,819 5,647
Construction in progress 534 336 122
--------- --------- ---------
Total $ 7,530 $ 6,791 $ 6,389
========= ========= =========
36
37
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED DEPRECIATION
(Dollars in millions) 1996 1995 1994
Balance at beginning of year $ 3,742 $ 3,483 $ 3,331
Provision for depreciation 314 308 329
Deductions (46) (49) (177)
---------- --------- ---------
Balance at end of year $ 4,010 $ 3,742 $ 3,483
========= ========= =========
Construction-period interest of $257 million, $229 million, and $220
million, reduced by accumulated depreciation of $111 million, $97
million, and $84 million, is included in cost of properties at December
31, 1996, 1995, and 1994, respectively.
4. EQUITY INVESTMENTS AND OTHER NONCURRENT ASSETS AND LIABILITIES
Eastman has a 50% interest in Genencor International, a joint venture
engaged in developing, manufacturing, and marketing industrial enzymes
and other fine and specialty chemicals, accounted for under the equity
method and included in other noncurrent assets. At December 31, 1996 and
1995, Eastman's equity in the joint venture was $138 million and $119
million, respectively. The Company guarantees a portion of the joint
venture's third-party borrowings that is not considered material to
Eastman. Management believes, based on current facts and circumstances
and the joint venture's financial position, that the likelihood of a
payment pursuant to such guarantee is remote.
Eastman has a 50% interest in and serves as the operating partner in
Primester, a joint venture formed in 1991 to construct and operate a
production facility, accounted for under the equity method. The Company
guarantees a portion of the principal amount of the joint venture's
third-party borrowings; however, management believes, based on current
facts and circumstances and the structure of the venture, that the
likelihood of a payment pursuant to such guarantee is remote. At December
31, 1996 and 1995, Eastman had a negative investment in the joint venture
of $44 million and $41 million, respectively, 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 will pay a total of
$239 million to the supplier through 1999 ($175 million of which has been
paid through December 31, 1996). 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 $64 million and $48 million at December 31, 1996 and
1995, respectively.
37
38
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PAYABLES
DECEMBER 31,
(Dollars in millions) 1996 1995
Trade creditors $ 312 $ 291
Accrued payrolls and vacation 101 93
Accrued variable-incentive compensation 137 239
Other 158 148
--------- ---------
Total $ 708 $ 771
========= =========
6. LONG-TERM BORROWINGS
DECEMBER 31,
(Dollars in millions) 1996 1995
6 3/8% notes due 2004 $ 499 $ 499
7 1/4% debentures due 2024 495 495
7 5/8% debentures due 2024 200 200
Commercial paper and other 329 23
--------- ---------
Total $ 1,523 $ 1,217
========= =========
In December 1995 the Company replaced a previously existing variable rate
credit agreement with a new 5-year $800 million revolving credit facility
(the "Credit Facility"). Although the Company does not have any amounts
outstanding under the Credit Facility, any such borrowings would be
subject to interest at varying spreads above quoted market rates,
principally LIBOR. The Credit Facility also requires a facility fee on the
total commitment that varies based on Eastman's credit rating. The annual
rate for such fee was 0.075% as of December 31, 1996. The Credit Facility
contains a number of covenants and events of default, including the
maintenance of certain financial ratios. Eastman was in compliance with
all such covenants for all periods.
In 1994 Eastman issued $1.2 billion of long-term debt securities and
repaid existing borrowings under the preexisting credit agreement. The
issuances included $500 million of 6 3/8% notes due 2004, $500 million of
7 1/4% debentures due 2024, and $200 million of 7 5/8% debentures due
2024. The 7 5/8% debentures may be redeemed June 15, 2006, at the option
of their registered holders, at 100% of the principal amount plus accrued
interest to that date.
Eastman utilizes commercial paper, generally with maturities of 90 days or
less, to meet its liquidity needs. The Company's commercial paper,
supported by the Credit Facility, is classified as long-term borrowings
because the Company has the ability and intent to refinance such
borrowings long-term. As of December 31, 1996, the Company's commercial
paper outstanding balance was $295 million, at an effective interest rate
of 5.59%. At December 31, 1995, a total of $22 million of commercial paper
was outstanding, at a 6% effective interest rate.
In early 1997 the Company issued $300 million of 7.60% debentures due
February 1, 2027, and used the proceeds to repay outstanding commercial
paper borrowings.
38
39
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREOWNERS' EQUITY
(Dollars in millions) 1996 1995 1994
Common stock at par value $ 1 $ 1 $ 1
------------- ------------- --------------
Paid-in capital
Balance at beginning of year 30 22 -
Additions 7 8 22
------------- ------------- --------------
Balance at end of year 37 30 22
------------- ------------- --------------
Retained earnings 1,929 1,684 1,258
------------- ------------- --------------
Cumulative translation adjustment
Balance at beginning of year 13 14 5
Currency translation adjustments 18 (1) 9
------------- ------------- --------------
Balance at end of year 31 13 14
------------- ------------- --------------
Treasury stock at cost (359) (200) -
------------- ------------- --------------
Total $ 1,639 $ 1,528 $ 1,295
============= ============= ==============
Shares of common stock issued
Balance at beginning of year 83,250,683 83,067,368 82,626,942
Issued for employee compensation
and benefit plans 135,776 183,315 440,426
------------- ------------- --------------
Balance at end of year 83,386,459 83,250,683 83,067,368
============= ============= ==============
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.
Eastman has issued no shares of preferred stock. The Company declared
dividends of $1.72 per share in 1996, $1.64 per share in 1995, and $1.60
per share in 1994.
The increase in paid-in capital in 1994 was primarily due to an issue of
Eastman shares in connection with transfers of amounts from a preexisting
Kodak employee stock ownership plan (see Note 8). The additions to
paid-in capital in 1995 and 1996 are the result of exercises of stock
options by employees.
In 1995 the Company repurchased 3,308,200 shares of Eastman common stock
at a cost of $200 million. In February 1996 the Company announced plans
to repurchase up to $400 million of additional common stock. At December
31, 1996, the Company had acquired an additional 2,486,300 shares at a
cost of $161 million under the program announced in 1996. Given the
Company's capital expenditure program for 1997, Eastman does not expect
to make any significant share repurchases in 1997. Repurchased common
shares may be used to meet common stock requirements for benefit plans
and other corporate purposes. In 1996 approximately $2 million of
treasury stock (27,972 shares) was reissued. The Company's charitable
foundation holds 202,575 shares of Eastman common stock.
39
40
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK OPTION AND COMPENSATION PLANS
OMNIBUS PLAN
Eastman's 1994 Omnibus Long-Term Compensation Plan (the "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. The Omnibus Plan provides that
options can be granted through December 31, 1998, 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 have been at option prices equal to the fair market
value on the date of grant. Options generally become exercisable 50% one
year after grant and 100% after two years and expire up to ten years after
grant. There is a maximum of 6 million shares of common stock available
for grant during the term of the Omnibus Plan, of which 2 million are
reserved for issuance to Eastman employees who had received awards prior
to January 1, 1994, under Kodak plans.
DIRECTOR LONG-TERM COMPENSATION PLAN
Eastman's 1994 Director Long-Term Compensation Plan (the "Director Plan")
provides for grants of nonqualified stock options and restricted shares to
nonemployee members of the Board of Directors upon the first day of the
directors' initial term of service. The Director Plan provides that
options can be granted through December 31, 1998, for the purchase of
Eastman common stock at an option price not less than the stock's fair
market value on the date of the grant. The options vest in 50% increments
on the first two anniversaries of the grant date.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
Eastman's 1996 Nonemployee Director Stock Option Plan provides for grants
of nonqualified stock options to nonemployee members of the Board of
Directors in lieu of all or a portion of each member's annual retainer.
The Nonemployee Director Stock Option Plan provides that options may be
granted for the purchase of Eastman common stock at an option price not
less than the stock's fair market value on the date of grant. The options
become exercisable 6 months after the grant date. The maximum number of
shares of Eastman common stock available for grant under the plan is
150,000.
STOCK OPTION BALANCES AND ACTIVITY
The Company has adopted SFAS 123, "Accounting for Stock-Based
Compensation," and in accordance with the provisions thereof, the Company
continues to apply intrinsic value accounting for its plans. If the
Company had elected to recognize compensation expense based upon the fair
value at the grant dates for awards under these plans consistent with the
methodology prescribed by SFAS 123, the Company's net earnings and net
earnings per share would be reduced to the unaudited pro forma amounts
indicated below.
(Dollars in millions, except for per share amounts) 1996 1995
Net earnings As reported $ 380 $ 559
Pro forma $ 375 $ 558
Net earnings per share As reported $ 4.80 $ 6.78
Pro forma $ 4.74 $ 6.77
40
41
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1996
and 1995, respectively, include: average expected volatility of 25.23%
and 26.07%; average expected dividend yield of 2.56% and 2.83%; and
average risk-free interest rates of 5.76% and 6.37%. An expected option
term of 6 years for both periods was developed based on historical grant
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 Eastman stock has been traded for a period less than the baseline
expected term assumption, monthly volatility factors for five peer
companies were calculated. For valuation purposes, an average volatility
factor based on the calendar-year quarter in which the options were
granted was utilized.
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:
1996 1995 1994
------------------------ ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- ------- -------------- ------- --------------
Outstanding at beginning
of year 2,850,532 $ 45 2,492,745 $ 41 709,508 $ 36
Granted 542,591 55 566,679 62 1,842,659 43
Exercised 176,686 40 208,892 40 28,522 34
Forfeited or canceled - - - - 30,900 43
--------- ----- ---------- ------ ---------- -------
Outstanding at end
of year 3,216,437 $ 47 2,850,532 $ 45 2,492,745 $ 41
========= ========= =========
Options exercisable at
year-end 2,461,995 1,406,400 577,041
========= ========= =======
Weighted-average fair
value of options granted
during the year $14.66 $17.60 Not applicable
Available for grant at end
of year 2,384,543 2,915,741 3,482,412
========= ========= =========
41
42
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
--------------- ----------- ----------------- ---------------- ----------- ----------------
$31-$40 409,086 4.2 years $34 409,086 $34
43-44 1,762,446 7.1 43 1,762,446 43
48-63 482,129 9.4 53 16,987 57
64-74 562,776 8.4 65 273,476 65
--------- ---------
$31-$74 3,216,437 7.3 $47 2,461,995 $44
========= =========
EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a defined contribution employee stock ownership plan
(the "ESOP"), which is a qualified plan under Section 401(a) of the
Internal Revenue Code. Eastman anticipates that it will direct a portion
of the compensation of all U.S. employees to the ESOP. The Company also
sponsors an employee stock ownership plan, which is substantially similar
to the ESOP, for its international employees. In October 1994 Kodak
transferred to the ESOP certain amounts held for Eastman employees in a
preexisting Kodak employee stock ownership plan. The Company used the
proceeds from the transfer to buy outstanding Eastman shares and 394,800
previously unissued Eastman shares. Allocated shares in the ESOP totaled
1,887,003, 1,488,436, and 998,853 as of December 31, 1996, 1995, and
1994, respectively.
Compensation expense is measured based on the fair value of the shares
contributed to or committed to be contributed to the ESOP. The shares are
allocated to participant accounts and held by the ESOP until distributed
to the employees at a future date, such as on the date of termination or
retirement. Dividends on shares held by the ESOP are charged to retained
earnings. All shares held by the ESOP are treated as outstanding in
computing earnings per share.
EASTMAN PERFORMANCE PLAN
The Eastman Performance Plan (the "EPP") provides a lump-sum payment to
plan participants based on the Company's financial performance. Certain
portions of such payments, which are approved annually by Eastman's Board
of Directors, are directed to the Company's ESOP. Charges under the EPP
were $131 million, $229 million, and $118 million for 1996, 1995, and
1994, respectively. Of these amounts, $36 million, $35 million, and $27
million were directed to the Company's ESOP.
ANNUAL PERFORMANCE PLAN
Eastman's managers and executive officers participate in an Annual
Performance Plan (the "APP"), which places a portion of annual cash
compensation at risk based upon Company performance as measured by
specified annual goals. Charges under the APP for 1996, 1995, and 1994
were $6 million, $10 million, and $12 million, respectively.
42
43
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
Components of earnings before income taxes and the provision for U.S.
and other income taxes follow:
(Dollars in millions) 1996 1995 1994
Earnings (loss) before income taxes
United States $ 679 $ 825 $ 526
Outside the United States (72) 74 24
--------- --------- ---------
Total $ 607 $ 899 $ 550
========= ========= =========
Provision (benefit) for income taxes
United States
Current $ 190 $ 291 $ 183
Deferred 19 (12) (13)
Non-United States
Current 4 30 13
Deferred (12) 2 6
State and other
Current 25 30 26
Deferred 1 (1) (1)
--------- --------- ---------
Total $ 227 $ 340 $ 214
========= ========= =========
Differences between the provision for income taxes and income taxes
computed using the U.S. federal statutory income tax rate follow:
(Dollars in millions) 1996 1995 1994
Amount computed using the statutory rate $ 212 $ 315 $ 193
State income taxes 17 19 15
Foreign rate variance 13 3 5
Foreign sales corporation benefit (14) (14) (6)
Other (1) 17 7
--------- --------- ---------
Provision for income taxes $ 227 $ 340 $ 214
========= ========= =========
43
44
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of deferred tax assets and liabilities follow:
DECEMBER 31,
(Dollars in millions) 1996 1995
Deferred tax assets
Postemployment obligations $ 263 $ 255
Payroll and related items 49 46
Inventories 13 20
Deferred revenue 21 23
Miscellaneous reserves 33 30
Preproduction and start-up costs 18 -
Other 17 12
--------- ---------
Total $ 414 $ 386
========= =========
Deferred tax liabilities
Depreciation $ 677 $ 642
Other 25 24
--------- ---------
Total $ 702 $ 666
========= =========
Unremitted earnings of subsidiaries outside the United States totaling
$18 million at December 31, 1996, 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 taxes payable totaling $34 million and $51 million are included
in other current liabilities at December 31, 1996 and 1995, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
DECEMBER 31, 1996 DECEMBER 31, 1995
RECORDED FAIR RECORDED FAIR
(Dollars in millions) AMOUNT VALUE AMOUNT VALUE
Long-term borrowings $ 1,523 $ 1,515 $ 1,217 $ 1,297
Foreign exchange contracts 74 63 55 32
Eastman uses the following methods and assumptions in estimating its
fair-value disclosures for financial instruments:
Long-term borrowings
The Company has based the fair value for the 6 3/8% notes and 7 1/4% and
7 5/8% debentures on current interest rates for comparable securities.
The Company's floating-rate borrowings approximate fair value.
44
45
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign exchange contracts
The Company estimates the fair value of its foreign exchange contracts
based on dealer-quoted market prices of comparable instruments.
Other financial instruments
Because of the nature of all other financial instruments, recorded
amounts approximate fair value. In the judgment of management, exposure
to third-party guarantees is remote and the potential earnings impact
pursuant to such guarantees is insignificant.
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
Eastman purchased currency options with maturities of not more than 5
years and short-term forward exchange contracts to exchange various
foreign currencies for U.S. dollars in the aggregate notional amount of
$1.536 billion and $1.085 billion at December 31, 1996 and 1995,
respectively. The net unrealized loss deferred on such options and
forwards as of December 31, 1996 and 1995, was not significant. Those
amounts, based on dealer-quoted prices, represent the estimated loss that
would have been recognized had those hedges been liquidated at estimated
market value on the last day of each year presented.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts but anticipates no such
nonperformance. The Company minimizes such risk exposure by limiting the
counterparties to major international banks and financial institutions.
Concentrations of credit risk with respect to trade accounts receivable
are generally diversified because of the large number of entities
constituting the Company's customer base and their dispersion across many
different industries and geographies.
11. COMMITMENTS
LEASE COMMITMENTS
Eastman leases facilities, principally property and 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,
1997 $ 58
1998 40
1999 24
2000 13
2001 12
2002 and beyond 76
-------
Total minimum payments required $ 223
=======
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.
45
46
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RENTAL EXPENSE
(Dollars in millions) 1996 1995 1994
Gross rentals $ 54 $ 47 $ 37
Deduct: Sublease income 2 12 18
--------- --------- ---------
Total $ 52 $ 35 $ 19
========= ========= =========
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
As of December 31, 1996, the Company had entered into commitments for
capital expenditures of approximately $740 million, of which
approximately 80% is expected to be disbursed in 1997. Eastman has other
long-term commitments relating to purchases of product and joint venture
agreements as described in Note 4.
12. RETIREMENT PLANS
Eastman maintains defined benefit plans that provide eligible employees
with retirement benefits calculated based on years of service and
generally on the employees' final average compensation as defined in the
plans. Benefits are paid to employees by insurance companies or from
trust funds. Plan contributions 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. Total pension funds and accruals for non-U.S. plans less
pension prepayments and deferred charges exceed the actuarially computed
value of vested benefits under such plans as of the beginning of 1996 and
1995.
Eastman participated in Kodak's U.S. defined benefit pension plans
covering substantially all U.S. employees prior to the spin-off. In
connection with the spin-off, Eastman assumed the share of Kodak's U.S.
defined benefit pension plan obligations relating primarily to active
employees as of the date of the spin-off, while Kodak retained
responsibility for pension obligations of substantially all retired U.S.
employees.
The components of net periodic pension cost for Eastman's U.S. defined
benefit pension plans follow:
(Dollars in millions) 1996 1995 1994
Service cost $ 49 $ 35 $ 40
Interest cost 92 76 67
Loss (return) on plan assets (175) (116) 15
Net amortization 87 39 (90)
--------- --------- ---------
Total U.S. pension cost $ 53 $ 34 $ 32
========= ========= =========
Eastman's worldwide net pension cost was $57 million in 1996 and $38
million in both 1995 and 1994.
46
47
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The status of the Company's U.S. defined benefit pension plans follows:
DECEMBER 31,
(Dollars in millions) 1996 1995
Vested benefit obligation $ 1,029 $ 841
========= =========
Accumulated benefit obligation $ 1,119 $ 895
========= =========
Projected benefit obligation $ 1,410 $ 1,206
Market value of assets 1,210 931
--------- ---------
Projected benefits in excess of plan assets 200 275
Unrecognized net loss (70) (153)
Unrecognized net transition asset 57 66
Unrecognized prior service cost (30) (33)
---------- ---------
Accrued pension cost $ 157 $ 155
========= =========
The plans' assets are principally listed stocks. Kodak's defined benefit
pension plan trust currently holds a significant portion of all such
assets, which will be distributed to Eastman's pension plan trusts when
certain calculations are completed, likely in 1997.
The assumptions used to develop the projected benefit obligation for the
Company's U.S. pension plans follow:
DECEMBER 31,
1996 1995
Discount rate 7.75% 7.25%
Salary increase rate 4.00% 4.00%
Long-term rate of return on plan assets 9.50% 9.50%
13. OTHER POSTEMPLOYMENT COSTS
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.
Eastman and Kodak agreed that Kodak would retain the postretirement
health and life insurance benefit obligations of substantially all U.S.
retirees at the date of the spin-off. As a result, Eastman has no
liability recorded for expected postretirement health and life insurance
benefit costs for substantially all of its employees who retired through
year-end 1993 while Eastman was a wholly owned business of Kodak.
47
48
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the status of the Company's U.S. plans at
December 31, 1996 and 1995:
DECEMBER 31, 1996
HEALTH LIFE
(Dollars in millions) CARE INSURANCE TOTAL
Accumulated postretirement benefit obligation
Retirees $ 87 $ 15 $ 102
Fully eligible active plan participants 93 - 93
Other active plan participants 198 113 311
--------- -------- --------
Total accumulated postretirement benefit
obligation 378 128 506
Plan assets at fair value 20 5 25
--------- -------- --------
Accumulated postretirement benefit obligation
in excess of plan assets $ 358 $ 123 481
========= ========
Unrecognized net loss 6
--------
Accrued postretirement benefit cost $ 475
========
DECEMBER 31, 1995
HEALTH LIFE
(Dollars in millions) CARE INSURANCE TOTAL
Accumulated postretirement benefit obligation
Retirees $ 58 $ 17 $ 75
Fully eligible active plan participants 80 - 80
Other active plan participants 202 99 301
--------- -------- --------
Total accumulated postretirement benefit
obligation 340 116 456
Plan assets at fair value 14 3 17
--------- -------- --------
Accumulated postretirement benefit obligation
in excess of plan assets $ 326 $ 113 439
========= ========
Unrecognized net gain 8
--------
Accrued postretirement benefit cost $ 447
========
48
49
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net periodic postretirement benefit cost follows:
HEALTH LIFE
(Dollars in millions) CARE INSURANCE TOTAL
1996
Service cost $ 7 $ 5 $ 12
Interest cost 25 9 34
Return on plan assets (1) - (1)
---------- -------- ---------
Net periodic postretirement benefit cost $ 31 $ 14 $ 45
========= ======== ========
1995
Service cost $ 8 $ 3 $ 11
Interest cost 27 8 35
Return on plan assets (1) - (1)
--------- -------- --------
Net periodic postretirement benefit cost $ 34 $ 11 $ 45
========= ======== ========
1994
Service cost $ 10 $ 4 $ 14
Interest cost 26 8 34
Net amortization 1 1 2
--------- -------- --------
Net periodic postretirement benefit cost $ 37 $ 13 $ 50
========= ======== ========
To estimate the Company's postretirement benefit cost, health care costs
were assumed to increase 8.25% for 1997, with the rate of increase
declining to 5.25% by 2002 and thereafter. The discount rate and salary
increase rate were assumed to be 7.75% and 4.00% at December 31, 1996,
7.25% and 4.00% at December 31, 1995, and 8.75% and 5.00% at December 31,
1994. If the health care cost trend rates were increased by 1 percentage
point, the Company's accumulated postretirement health care benefit
obligation as of December 31, 1996, would increase by $80 million, while
the net periodic postretirement health care benefit cost would increase
by $9 million.
A few of Eastman's non-U.S. operations have supplemental health benefit
plans for certain retirees, the cost of which is not significant to the
Company.
49
50
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION
INDUSTRY SEGMENTS
Eastman is an international chemical company that manufactures and sells
a broad range of products. The Company categorizes its business into
three segments: Specialty and Performance, Core Plastics, and Chemical
Intermediates.
The Specialty and Performance segment contains products that are sold to
customers that base their buying decisions principally on product
performance attributes. The major products in this segment include
specialty plastics, coatings and paint raw materials, fine chemicals,
performance chemicals, and fibers. Targeted markets for this segment are
diverse and include medical, electronics, recreation, consumer durables,
photographic chemicals, additives for fibers and plastics, adhesives,
sealants, food and beverages, nutrition, cosmetics, textiles,
construction, coatings, inks, paints, filters, and specialty plastic
applications. Competitive factors for this segment include price,
reliability of supply, customer service, and technical competence.
Coatings and paint raw materials are sold primarily to North American
industrial concerns. The principal markets for Eastman's fine chemicals
are largely U.S. photographic, agricultural, and pharmaceutical
companies. Acetate tow is sold worldwide to the tobacco industry for use
in cigarette filters.
The Core Plastics segment includes the Company's two major plastics
products, EASTAPAK PET polyester packaging plastic and TENITE
polyethylene, as well as cellulose acetate and polyesters. These
container and packaging products share similar physical characteristics
and compete based on price and integrated manufacturing capabilities.
Polyester plastics are sold to soft-drink and other packaging
manufacturers principally in North America, Europe, and Latin America.
Polyethylene is sold generally to North American industries.
The Chemical Intermediates segment contains industrial intermediate
chemicals that are produced based on the Company's oxo chemistry
technology and chemicals-from-coal technology and are sold to customers
operating in mature markets in which multiple sources of supply exist.
They are sold generally in large volume mostly to North American
industries. These products are targeted at markets for industrial
additives, agricultural chemicals, esters, pharmaceuticals, and vinyl
compounding. Competitive factors include price, reliability of supply,
and integrated manufacturing capability. Favorable cost position,
proprietary products, and improving standards of living worldwide are key
value drivers for this segment.
The Company's business segment presentation was revised in 1996 from its
previous two-segment approach. The Company believes that the new
segmentation will provide more useful information for decision-making and
for understanding the Company's financial results. The products within
each segment have generally similar characteristics, the markets share
similar economic characteristics, and customers have similar buying
criteria. Prior periods have been restated to conform to the 1996
presentation.
50
51
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 1996 1995 1994
SALES
Specialty and Performance $ 2,657 $ 2,647 $ 2,364
Core Plastics 1,409 1,685 1,390
Chemical Intermediates 716 708 575
--------- --------- ---------
Total sales $ 4,782 $ 5,040 $ 4,329
========= ========= =========
OPERATING EARNINGS (LOSS)
Specialty and Performance $ 519 $ 433 $ 350
Core Plastics (1) 347 199
Chemical Intermediates 145 184 87
--------- --------- ---------
Total operating earnings $ 663 $ 964 $ 636
========= ========= =========
ASSETS
Specialty and Performance $ 2,887 $ 2,776 $ 2,508
Core Plastics 1,854 1,598 1,449
Chemical Intermediates 525 498 438
--------- --------- ---------
Total assets $ 5,266 $ 4,872 $ 4,395
========= ========= =========
DEPRECIATION EXPENSE
Specialty and Performance $ 174 $ 178 $ 189
Core Plastics 109 96 108
Chemical Intermediates 31 34 32
--------- --------- ---------
Total depreciation expense $ 314 $ 308 $ 329
========= ========= =========
CAPITAL EXPENDITURES
Specialty and Performance $ 302 $ 176 $ 174
Core Plastics 388 215 82
Chemical Intermediates 99 55 25
--------- --------- ---------
Total capital expenditures $ 789 $ 446 $ 281
========= ========= =========
GEOGRAPHIC SEGMENTS
Sales are reported in the geographic area where they originate. Transfers
among geographic areas are made on a basis intended to reflect the market
value of the products, recognizing prevailing market prices and
distributor discounts. Export sales to unaffiliated customers from the
United States were $687 million in 1996, $698 million in 1995, and $526
million in 1994.
(Dollars in millions) United States Europe Other Areas Eliminations Consolidated
1996
Sales $ 3,674 $ 735 $ 373 $ 4,782
Transfers among geographic areas 785 27 55 $ (867) -
--------- -------- --------- ---------- ---------
Total sales $ 4,459 $ 762 $ 428 $ (867) $ 4,782
========= ======== ========= ========== =========
Operating earnings (losses) $ 717 $ (36) $ (31) $ 13 $ 663
========= ========= ========== ========= =========
Assets at end of year $ 5,076 $ 582 $ 424 $ (816) $ 5,266
========= ======== ========= ========== =========
51
52
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) United States Europe Other Areas Eliminations Consolidated
1995
Sales $ 3,864 $ 806 $ 370 $ 5,040
Transfers among geographic areas 806 50 17 $ (873) -
--------- -------- --------- --------- ---------
Total sales $ 4,670 $ 856 $ 387 $ (873) $ 5,040
========= ======== ========= ========= =========
Operating earnings $ 881 $ 47 $ 25 $ 11 $ 964
========= ======== ========= ========= =========
Assets at end of year $ 4,569 $ 508 $ 324 $ (529) $ 4,872
========= ======== ========= ========= =========
1994
Sales $ 3,393 $ 629 $ 307 $ 4,329
Transfers among geographic areas 572 23 7 $ (602) -
--------- -------- --------- --------- ---------
Total sales $ 3,965 $ 652 $ 314 $ (602) $ 4,329
========= ======== ========= ========= =========
Operating earnings $ 594 $ 20 $ 14 $ 8 $ 636
========= ======== ========= ========= =========
Assets at end of year $ 4,216 $ 456 $ 169 $ (446) $ 4,395
========= ======== ========= ========= =========
15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
(Dollars in millions) 1996 1995 1994
Interest (net of amounts capitalized) $ 79 $ 91 $ 55
Income taxes 236 364 165
Cash flows from operating activities include losses from equity
investments of $3 million, $6 million, and $11 million for 1996, 1995,
and 1994, respectively. Derivative financial instruments and related
gains and losses are included in cash flows from operating activities.
The effect of foreign currency transactions and exchange rate changes for
all years presented was insignificant. The $100 million net cash received
from the divestiture of the Company's polypropylene business in 1994 is
included in cash flows from sales of properties. The consolidated
statements of cash flows do not separately reflect certain Eastman assets
acquired and liabilities assumed through noncash transactions.
16. 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
52
53
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $173 million in 1996, $151 million in 1995, and $145 million in
1994, including investments in construction, operations, and development.
17. LEGAL MATTERS
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, patent,
commercial, environmental, and health and safety matters, which are being
handled and defended in the ordinary course of business. No such pending
matters are expected to have a material adverse effect on the Company's
financial condition or results of operations.
18. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(Dollars in millions, except per share amounts)
1996 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
Sales $ 1,261 $ 1,241 $ 1,167 $ 1,113
Operating earnings 191 190 169 113
Earnings before income taxes 178 177 156 96
Provision for income taxes 66 65 60 36
Net earnings 112 112 96 60
Net earnings per share (1) 1.39 1.41 1.22 .77
1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
Sales $ 1,232 $ 1,321 $ 1,266 $ 1,221
Operating earnings 228 265 260 211
Earnings before income taxes 213 255 239 192
Provision for income taxes 81 97 91 71
Net earnings 132 158 148 121
Net earnings per share (1) 1.58 1.90 1.81 1.50
-----------
(1) Each quarter is calculated as a discrete period; the sum of the four
quarters may not equal the calculated full-year amount.
53
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
54
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the heading "Election of Directors -- General" in the 1997
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 -- Compensation of
Directors" in the 1997 Proxy Statement is incorporated by reference herein in
response to this Item. In addition, the material under the heading "Executive
Compensation and Benefits" in the 1997 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 1997 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.
55
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated financial statements:
Page
Management's responsibility for financial statements 29
Report of independent accountants 30
Consolidated statements of earnings and retained earnings 31
Consolidated statements of financial position 32
Consolidated statements of cash flows 33
Notes to consolidated financial statements 34 - 53
2. Financial statement schedules
EX-27 Financial Data Schedule (for SEC use only).
3. Exhibits filed as part of this report are listed in the Exhibit
Index appearing on page 59.
(b) Reports on Form 8-K
During the quarter ended December 31, 1996, no reports on Form 8-K
were filed.
(c) The Exhibit Index and required Exhibits to this report are included
beginning at page 59.
(d) There are no applicable financial statement schedules required to be
filed as part of this report.
56
57
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 12, 1997
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 March 12, 1997
- ------------------------------ Board and Chief
Earnest W. Deavenport, Jr. Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ H. Virgil Stephens Senior Vice President and March 12, 1997
- ---------------------- Chief Financial Officer
H. Virgil Stephens
PRINCIPAL ACCOUNTING OFFICER:
/s/ Thomas W. Wilson Vice President and March 12, 1997
- -------------------- Comptroller
Thomas W. Wilson
57
58
SIGNATURE TITLE DATE
--------- ----- ----
DIRECTORS:
/s/ R. Wiley Bourne, Jr. Vice Chairman March 12, 1997
- --------------------------- of the Board
R. Wiley Bourne, Jr. and Executive
Vice President
/s/ H. Jesse Arnelle Director March 12, 1997
- ---------------------------
H. Jesse Arnelle
/s/ Dexter F. Baker Director March 12, 1997
- ---------------------------
Dexter F. Baker
/s/ Calvin A. Campbell, Jr. Director March 12 , 1997
- ---------------------------
Calvin A. Campbell, Jr.
- --------------------------- Director
Michael von Clemm
/s/ Lee Liu Director March 12, 1997
- ---------------------------
Lee Liu
/s/ Marilyn R. Marks Director March 12, 1997
- ---------------------------
Marilyn R. Marks
/s/ Gerald B. Mitchell Director March 12, 1997
- ---------------------------
Gerald B. Mitchell
/s/ John A. White Director March 12, 1997
- ---------------------------
John A. White
58
59
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
3.01 Amended and Restated Certificate of Incorporation
of Eastman Chemical Company (incorporated herein by
reference to Exhibit 3.01 to Eastman Chemical Company's
Registration Statement on Form S-1, File No. 33-72364, as
amended (the "S-1"))
3.02 Amended and Restated By-laws of Eastman Chemical Company, as
amended October 1, 1994 (incorporated by reference to Exhibit
3.02 to Eastman Chemical Company's Annual Report on Form 10-K
for the year ended December 31, 1994 (the "1994 10-K"))
4.01 Form of Eastman Chemical Company Common Stock certificate
(incorporated herein by reference to Exhibit 3.02 to Eastman
Chemical Company's Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 10-K"))
4.02 Stockholder Protection Rights Agreement dated as of December
13, 1993, between Eastman Chemical Company and First Chicago
Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 4.4 to Eastman Chemical
Company's Registration Statement on Form S-8 relating to the
Eastman Investment Plan, File No. 33-73810)
4.03 Indenture, dated as of January 10, 1994, between Eastman
Chemical Company and The Bank of New York, as Trustee (the
"Indenture") (incorporated herein by reference to Exhibit 4(a)
to Eastman Chemical Company's current report on Form 8-K dated
January 10, 1994 (the "8-K"))
4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated
herein by reference to Exhibit 4(c) to the 8-K)
4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated
herein by reference to Exhibit 4(d) to the 8-K)
4.06 Officers' Certificate pursuant to Sections 201 and 301 of the
Indenture (incorporated herein by reference to Exhibit 4(a) to
Eastman Chemical Company's Current Report on Form 8-K dated
June 8, 1994 (the "June 8-K"))
4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated
herein by reference to Exhibit 4(b) to the June 8-K)
4.08 Form of 7.60% Debenture due February 1, 2027 63
59
60
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
4.09 Officer's Certificate pursuant to Sections 201 and 301 of 68
the Indenture related to 7.60% Debentures due February 1,
2027
4.10 Credit Agreement, dated as of December 19, 1995 (the "Credit
Agreement") among Eastman Chemical Company, the Lenders named
therein, and The Chase Manhattan Bank, as Agent (incorporated
herein by reference to Exhibit 4.08 to Eastman Chemical
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K"))
*10.01 Eastman Annual Performance Plan, as amended 70
*10.02 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)
*10.03 1994 Omnibus Long-Term Compensation Plan (incorporated herein
by reference to Exhibit 10.03 to Eastman Chemical Company's Registration
Statment on Form 10, orginally filed on November 26, 1993 (the "Form 10")
*10.04 1996 Non-Employee Director Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.02 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (the
"September 30, 1996 10-Q"))
*10.05 Director Deferred Compensation Plan, as amended 76
*10.06 Executive Deferred Compensation Plan, as amended 84
*10.07 Form of Executive Severance Agreements (incorporated herein
by reference to Exhibit 10.06 to the 1995 10-K)
*10.08 Employment Agreement between Eastman Chemical Company and 94
Harold L. Henderson
*10.09 Eastman Excess Retirement Income Plan (incorporated herein by
reference to Exhibit 10.10 to the Form 10)
*10.10 Eastman Unfunded Retirement Income Plan (incorporated herein
by reference to Exhibit 10.11 to the Form 10)
*10.11 Eastman Employee Stock Ownership Plan Excess Plan 104
60
61
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
*10.12 Eastman 1994-1996 Long-Term Performance Subplan (as amended)
of 1994 Omnibus Long-Term Compensation Plan (incorporated
herein by reference to Exhibit 10.04 to the September 30, 1996
10-Q)
*10.13 Eastman 1995-1997 Long-Term Performance Subplan (as amended)
of 1994 Omnibus Long-Term Compensation Plan (incorporated by
reference to Exhibit 10.05 to the September 30, 1996 10-Q)
*10.14 Eastman 1996-1998 Long-Term Performance Subplan (as amended)
of 1994 Omnibus Long-Term Compensation Plan (incorporated by
reference to Exhibit 10.06 to the September 30, 1996 10-Q)
*10.15 Eastman 1997-1999 Long-Term Performance Subplan of 111
1994 Omnibus Long-Term Compensation Plan
10.16 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)
10.17 General Assignment, Assumption and Agreement Regarding
Litigation, Claims and Other Liabilities, dated as of December
31, 1993, between Eastman Kodak Company and Eastman Chemical
Company (incorporated herein by reference to Exhibit 10.08 to
the S-1)
10.18 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)
10.19 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)
10.20 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)
11.01 Statement re Computation of Earnings Per Common Share 118
12.01 Statement re Computation of Ratios of Earnings to Fixed 119
charges
61
62
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
21.01 Subsidiaries of the Company 120
23.01 Consent of Independent Accountants 122
27.01 Financial Data Schedule (for SEC use only)
99.01 Supplemental Business Segment Information 123
99.02 Restated Business Segment Information 124
- ------------------------------
* Management contract or compensatory plan or arrangement filed pursuant to
Item 601(b)(10)(iii) of Regulation S-K.
62