1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 62-1539359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N. EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes___X____ No_________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class September 30, 1997
Common Stock, par value $0.01 per share 78,406,386
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PAGE 1 OF 23 TOTAL SEQUENTIALLY NUMBER PAGES
EXHIBIT INDEX ON PAGE 16
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TABLE OF CONTENTS
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ITEM PAGE
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PART I. FINANCIAL INFORMATION
1. Financial Statements 3 - 6
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-13
PART II. OTHER INFORMATION
1. Legal Proceedings 14
2. Changes in Securities and Use of Proceeds 14
6. Exhibits and Reports on Form 8-K 14
SIGNATURES
Signatures 15
2
3
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THIRD QUARTER FIRST NINE MONTHS
1997 1996 1997 1996
Sales $ 1,145 $ 1,167 $ 3,524 $ 3,669
Cost of sales 857 873 2,693 2,735
-------- -------- -------- ---------
Gross profit 288 294 831 934
Selling and general administrative expenses 85 78 247 247
Research and development costs 55 47 145 137
-------- -------- -------- ---------
Operating earnings 148 169 439 550
Interest expense, net 26 16 67 51
Other income, net 26 3 31 12
-------- -------- -------- --------
Earnings before income taxes 148 156 403 511
Provision for income taxes 52 60 145 191
-------- -------- -------- ---------
Net earnings $ 96 $ 96 $ 258 $ 320
======== ======== ======== =========
Net earnings per share $ 1.22 $ 1.22 $ 3.28 $ 4.02
======== ======== ======== =========
Retained earnings at beginning of period $ 2,022 $ 1,842 $ 1,929 $ 1,684
Net earnings 96 96 258 320
Cash dividends declared (34) (34) (103) (100)
-------- -------- -------- ---------
Retained earnings at end of period $ 2,084 $ 1,904 $ 2,084 $ 1,904
======== ======== ======== =========
The accompanying notes are an integral part of these financial statements.
3
4
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
ASSETS
Current assets
Cash and cash equivalents $ 36 $ 24
Receivables 795 744
Inventories 519 465
Other current assets 114 112
--------- ---------
Total current assets 1,464 1,345
--------- ---------
Properties
Properties and equipment at cost 7,944 7,530
Less: Accumulated depreciation 4,151 4,010
--------- ---------
Net properties 3,793 3,520
--------- ---------
Other noncurrent assets 441 401
--------- ---------
Total assets $ 5,698 $ 5,266
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables $ 713 $ 708
Other current liabilities 122 79
--------- ---------
Total current liabilities 835 787
Long-term borrowings 1,705 1,523
Deferred income tax credits 353 348
Postemployment obligations 789 722
Other long-term liabilities 237 247
--------- ---------
Total liabilities 3,919 3,627
--------- ---------
Shareowners' equity
Common stock ($0.01 par-350,000,000 shares authorized;
shares issued - 84,097,273 and 83,386,459) 1 1
Paid-in capital 75 37
Retained earnings 2,084 1,929
Cumulative translation adjustment (15) 31
---------- ---------
2,145 1,998
Less: Treasury stock at cost (5,889,311 and 5,766,528 shares) 366 359
--------- ---------
Total shareowners' equity 1,779 1,639
--------- ---------
Total liabilities and shareowners' equity $ 5,698 $ 5,266
========= =========
The accompanying notes are an integral part of these financial statements.
4
5
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN MILLIONS)
FIRST NINE MONTHS
1997 1996
Cash flows from operating activities
Net earnings $ 258 $ 320
--------- ---------
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation 242 232
Provision for deferred income taxes 6 12
(Increase) decrease in receivables (54) 43
(Increase) decrease in inventories (76) 4
Increase (decrease) in incentive pay and
employee benefit liabilities 49 (88)
Increase (decrease) in liabilities excluding borrowings,
incentive pay, and employee benefit liabilities 91 (23)
Other items, net (7) (17)
---------- ----------
Total adjustments 251 163
--------- ---------
Net cash provided by operating activities 509 483
--------- ---------
Cash flows from investing activities
Additions to properties and equipment (567) (516)
Acquisitions and investments in joint ventures - (21)
Proceeds from sales of assets 19 36
Capital advances to suppliers (22) (33)
Other items (2) 2
---------- ---------
Net cash used in investing activities (572) (532)
---------- ---------
Cash flows from financing activities
Net increase (decrease) in commercial paper borrowings (113) 257
Proceeds from long-term borrowings 295 -
Dividends paid to shareowners (104) (100)
Treasury stock purchases (8) (157)
Other items 5 10
--------- ---------
Net cash provided by financing activities 75 10
--------- ---------
Net change in cash and cash equivalents 12 (39)
Cash and cash equivalents at beginning of period 24 100
--------- ---------
Cash and cash equivalents at end of period $ 36 $ 61
========= =========
The accompanying notes are an integral part of these financial statements.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared by the Company in accordance and consistent with the
accounting policies stated in the Company's 1996 Annual Report on Form 10-K
and should be read in conjunction with the consolidated financial
statements appearing therein. In the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation have been included in the interim consolidated
financial statements. The interim consolidated financial statements are
based in part on approximations and have not been audited by independent
accountants.
2. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
(Dollars in millions) 1997 1996
At FIFO or average cost (approximates current cost):
Finished goods $ 434 $ 426
Work in process 133 133
Raw materials and supplies 208 214
--------- ---------
Total inventories at FIFO or average cost 775 773
--------- ---------
Reduction to LIFO value (256) (308)
--------- ---------
Total inventories at LIFO value $ 519 $ 465
========= =========
Inventories valued on the LIFO method are approximately 75% of total
inventories in each of the periods.
3. DIVIDENDS THIRD QUARTER FIRST NINE MONTHS
1997 1996 1997 1996
Cash dividends declared per share $ .44 $ .44 $ 1.32 $ 1.28
4. SUPPLEMENTAL CASH FLOW INFORMATION
In March 1997 the Company issued 611,962 shares of its common stock with a
market value of $34 million to its Employee Stock Ownership Plan as partial
settlement of the Company's Eastman Performance Plan payout. This noncash
transaction is not reflected in the consolidated statement of cash flow.
5. OTHER INCOME
In September 1997 the Company received monetary damages awarded in a patent
infringement lawsuit against Goodyear Tire and Rubber Co. The effect of
this award is included in the Company's 1997 third quarter financial
results as other income, which also includes gains from the Company's
equity investments and currency hedging activities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
1996 Annual Report on Form 10-K, the Forms 10-Q for the quarters ended March 31,
1997, and June 30, 1997, and the unaudited interim consolidated financial
statements included elsewhere in this report.
RESULTS OF OPERATIONS
For third quarter, the effect of overall lower selling prices and higher net
interest expense was offset by favorable raw material costs, a gain from damages
awarded for patent infringement, and overall higher unit volumes, although
acetate tow volume was down significantly. A stronger US dollar produced an
unfavorable effect on sales denominated in currencies other than US dollars, but
the earnings impact was partially offset by gains realized on currency hedging
transactions. The Company's net earnings for the first nine months produced an
annualized return on equity of 20%.
EARNINGS
(Dollars in millions, except THIRD QUARTER FIRST NINE MONTHS
per share amounts) 1997 1996 CHANGE 1997 1996 CHANGE
Operating earnings $ 148 $ 169 (12)% $ 439 $ 550 (20)%
Net earnings 96 96 - 258 320 (19)
Net earnings per share 1.22 1.22 - 3.28 4.02 (18)
THIRD QUARTER FIRST NINE MONTHS
1997 1996 CHANGE 1997 1996 CHANGE
CHANGES IN EARNINGS PER SHARE
Net earnings per share $ 1.22 $ 1.22 $ - $ 3.28 $ 4.02 $ (.74)
====== =======
Operations
Selling price $ (.32) $ (2.11)
Volume and mix .08 .23
Raw materials, supplies, and
energy costs .10 1.02
Variable-incentive pay .01 .32
Other (.02) (.32)
------ -------
Change from operations (.15) (.86)
Other
Interest expense, net (.07) (.12)
Other income/charges .17 .14
Effective tax rate change .05 .06
Fewer shares outstanding - .04
------ -------
Total change $ - $ (.74)
====== =======
The principal factors contributing to first nine months 1997 earnings decline
were significantly lower selling prices for EASTAPAK polyethylene terephthalate
("PET") and significantly lower demand for acetate tow, both reflecting excess
industry capacity, and in the case of acetate tow, customer inventory
reductions. Increased distribution costs, particularly relating to sales outside
the United States, negatively impacted operating earnings. Favorable costs for
paraxylene, purified terephthalic acid ("PTA") and other raw materials and
energy were partially offset by higher propane feedstock costs. Moderate
increases in overall unit volumes and gains in labor productivity positively
impacted earnings. Preproduction costs had a moderately negative effect on
earnings and were slightly less than those incurred during 1996. A gain from
damages awarded for patent infringement positively impacted net earnings. The
Company estimates that the negative effect on net earnings from foreign currency
fluctuations, net of hedging transactions, was approximately $5 million for the
current quarter and $19 million for first nine months.
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8
SUMMARY BY INDUSTRY SEGMENT
SPECIALTY AND PERFORMANCE SEGMENT
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
Sales $ 645 $ 674 (4)% $ 1,989 $ 2,023 (2)%
Operating earnings 116 139 (17) 364 397 (8)
The decrease in Specialty and Performance segment sales for third quarter and
first nine months was attributable to overall lower selling prices and
unfavorable currency exchange rates, partially offset by unit volume gains for
specialty plastics, fine chemicals, coatings, inks and resins. Performance
chemicals results for third quarter and first nine months reflected lower unit
volumes due to divestiture of several product lines in 1996. Demand for acetate
tow for third quarter and first nine months declined due to new industry
capacity and customer reductions in inventories, mainly in China. The primary
factors affecting operating earnings for third quarter and first nine months
were significantly lower volumes for acetate tow, overall lower selling prices,
and unfavorable currency effects.
CORE PLASTICS SEGMENT
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
Sales $ 325 $ 311 5% $ 994 $ 1,107 (10)%
Operating earnings (losses) (10) (14) 29 (35) 34 -
Volumes for container plastics showed moderate improvement in third quarter and
significant improvement in first nine months primarily as a result of new
capacities in Spain and Mexico. Selling prices for container plastics were down
slightly during third quarter due to currency exchange rates and were
significantly below nine months l996 due to industry overcapacity. Volumes for
flexible plastics improved moderately for third quarter as a result of strong
demand and availability of ethylene supply following completion of a new
ethylene pipeline. Selling prices for flexible plastics declined slightly
compared with third quarter last year but for nine months were significantly
higher than 1996. Operating earnings for the quarter improved due to increased
sales volumes and capacity utilization in new plants, partially offset by
unfavorable currency effects. For first nine months operating earnings declined
primarily due to substantially lower selling prices for PET and unfavorable
currency effects, partially offset by improved unit volumes.
CHEMICAL INTERMEDIATES SEGMENT
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
Sales $ 175 $ 182 (4)% $ 541 $ 539 -%
Operating earnings 42 44 (5) 110 119 (8)
For third quarter decreased sales in the Chemical Intermediates segment were
attributable to an overall decline in units sold. Slightly higher selling prices
were offset by unfavorable currency exchange rates. Compared to last year, sales
for first nine months were relatively unchanged, with volume improvements offset
by overall lower selling prices and currency exchange rates, which also
negatively impacted operating earnings.
(For supplemental analysis of Specialty and Performance, Core Plastics, and
Chemical Intermediates segment results, see Exhibit 99.01 to this Form 10-Q.)
8
9
Summary by Customer Location
SALES BY REGION
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
United States and Canada $ 763 $ 777 (2)% $ 2,310 $ 2,448 (6)%
Europe, Middle East, and Africa 187 171 9 581 578 1
Asia Pacific 119 145 (18) 390 417 (6)
Latin America 76 74 3 243 226 8
Sales in the United States for third quarter 1997 were $718 million, down 2%
from 1996 third quarter sales of $731 million. For first nine months 1997, sales
in the United States were $2.18 billion compared with $2.294 billion in 1996.
Decreased sales were attributable to lower selling prices, primarily for
EASTAPAK PET.
Sales outside the United States for third quarter 1997 were down 2% from 1996
and were 37% of total sales for third quarter both years. The decline in sales
in Asia Pacific was primarily attributable to decreased acetate tow sales
resulting from excess worldwide acetate tow capacity and customer reduction in
inventories, mainly in China. EASTAPAK PET volume in Europe increased
significantly during third quarter due to new capacity in Spain. For first nine
months 1997, sales outside the United States were $1.344 billion compared with
$1.375 billion in 1996, primarily decreasing as a result of overall lower
selling prices, significantly lower acetate tow volumes, and unfavorable
currency exchange rates experienced mainly in Europe.
SUMMARY OF CONSOLIDATED RESULTS
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
SALES $ 1,145 $ 1,167 (2)% $ 3,524 $ 3,669 (4)%
Sales declined in third quarter and first nine months primarily due to overall
lower selling prices, unfavorable currency effects and lower volumes for certain
product lines as previously discussed.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
GROSS PROFIT $ 288 $ 294 (2)% $ 831 $ 934 (11)%
As a percentage of sales 25.2% 25.2% 23.6% 25.5%
The gross profit decline for first nine months was principally attributed to
lower selling prices and increased distribution costs, partially offset by
overall lower purchased raw material costs.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
SELLING AND GENERAL
ADMINISTRATIVE EXPENSES $ 85 $ 78 9% $ 247 $ 247 -%
As a percentage of sales 7.4% 6.7% 7.0% 6.7%
The increase in selling and general administrative expenses for third quarter
resulted from timing of expenditures and higher compensation costs, partially
offset by a reduction in labor hours.
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THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
RESEARCH AND
DEVELOPMENT COSTS $ 55 $ 47 17% $ 145 $ 137 6%
As a percentage of sales 4.8% 4.0% 4.1% 3.7%
Increased research and development costs for third quarter resulted from timing
of expenditures.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
INTEREST COSTS $ 31 $ 25 $ 91 $ 70
LESS CAPITALIZED INTEREST 5 9 24 19
-------- --------- --------- ---------
NET INTEREST EXPENSE $ 26 $ 16 63% $ 67 $ 51 31%
======== ========= ========= =========
For first nine months interest costs increased due to an increase in borrowings
and higher overall effective interest rates. The reduction in capitalized
interest from third quarter last year reflected completion of EASTAPAK PET
manufacturing facilities in Spain. The increase in capitalized interest for nine
months was directly related to the major capital investment program currently
underway within the Company.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
OTHER INCOME, NET $ 26 $ 3 >100% $ 31 $ 12 >100%
In third quarter and first nine months the Company recognized favorable results
from equity investments and foreign currency effects and realized a gain from an
award of damages for patent infringement. In 1996 the Company recognized a gain
from the sale of the Company's food emulsifier business. Both years include
royalty and interest income.
THIRD QUARTER FIRST NINE MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
PROVISION FOR INCOME TAXES $ 52 $ 60 (13)% $ 145 $ 191 (24)%
Effective tax rate 35% 38% 36% 37%
The reduction in the effective tax rate for third quarter and first nine months
resulted primarily from increased tax benefits attributable to export sales and
the recognition of tax benefits attributable to foreign operations.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
FINANCIAL INDICATORS 1997 1996
For the first nine months
Ratio of earnings to fixed charges 4.6x 7.0x
At the period ended September 30 and December 31
Current ratio 1.8x 1.7x
Percent of long-term borrowings to total capital 49% 48%
Percent of floating-rate borrowings to total borrowings 12% 21%
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CASH FLOW FIRST NINE MONTHS
(Dollars in millions) 1997 1996
Net cash provided by (used in)
Operating activities $ 509 $ 483
Investing activities (572) (532)
Financing activities 75 10
------- -------
Net change in cash and cash equivalents $ 12 $ (39)
======= =======
Cash and cash equivalents at end of period $ 36 $ 61
======= =======
Cash provided by operations increased primarily as a result of lower
variable-incentive compensation payments in 1997 as compared to 1996. The
increase in cash used in investing activities is consistent with the Company's
global expansion activities and primarily reflects capital expenditure
increases. Cash provided by financing activities reflects proceeds received from
a $300 million issuance of 7.60% debentures due February 1, 2027, which were
used to repay commercial paper borrowings outstanding at that time. An
additional factor affecting cash flows from financing activities was the
decrease in treasury stock purchases in 1997.
CAPITAL EXPENDITURES
Eastman anticipates that total capital expenditures in 1997 will be
approximately $850 million, primarily for previously announced expansions in
worldwide manufacturing capacity. Depreciation expense is expected to be
approximately $330 million in 1997.
LIQUIDITY
Eastman has access to an $800 million revolving credit facility ("Credit
Facility") expiring in December 2000. Although the Company does not have any
amounts outstanding under the Credit Facility, any such borrowings would be
subject to interest at varying spreads above quoted market rates, principally
LIBOR. The Credit Facility also requires a facility fee on the total commitment
that varies based on Eastman's credit rating. The annual rate for such fee was
0.075% as of September 30, 1997. The Credit Facility contains a number of
covenants and events of default, including the maintenance of certain financial
ratios. Eastman was in compliance with all such covenants for all periods.
Eastman utilizes commercial paper, generally with maturities of 90 days or less,
to meet its liquidity needs. 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 September
30, 1997, the Company's commercial paper outstanding balance was $189 million at
an effective interest rate of 5.7%.
In February 1996 the Company announced plans to repurchase up to $400 million of
additional Eastman common shares. In 1996 the Company repurchased $161 million
of Eastman common stock under the announced repurchase program, and during first
quarter 1997 acquired an additional 140,801 shares at a cost of $8 million.
There were no share repurchases during the second and third quarter. Given the
Company's capital expenditure program for 1997, Eastman does not expect to make
any significant additional share repurchases during fourth quarter 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 the Company's foreseeable cash flow
requirements.
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DIVIDENDS THIRD QUARTER FIRST NINE MONTHS
1997 1996 1997 1996
Cash dividends declared per share $ .44 $ .44 $ 1.32 $ 1.28
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share," which is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Pro forma disclosures
of earnings per share calculated in accordance with the new standard follow:
THIRD QUARTER FIRST NINE MONTHS
1997 1996 1997 1996
Pro Forma Basic EPS $ 1.23 $ 1.23 $ 3.31 $ 4.06
Pro Forma Diluted EPS 1.22 1.22 3.28 4.02
In January 1997 the Securities and Exchange Commission issued its Release on
Derivative and Market Risk Disclosures. The Release requires enhanced disclosure
of accounting policies for derivatives as well as quantitative and qualitative
disclosures about market risk inherent in derivatives and other financial
instruments outside the financial statements. The Company plans to comply with
the provisions of this Release which become effective for the Company's year-end
1997 financial reporting.
In June 1997 the FASB issued two new Statements: SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 requires all items recognized
as components of other comprehensive income be reported in the financial
statements. SFAS No. 131 requires enterprises to report selected information
about operating segments and related disclosures about products and services,
geographic areas, and major customers. The Company believes that its current
reporting complies with the requirements of SFAS No. 131 and will provide
additional reporting as required by SFAS No. 130. Both of these new standards
become effective for fiscal years beginning after December 15, 1997.
OUTLOOK
Looking forward to the rest of 1997, demand is good for many Specialty and
Performance segment products, but previously expected volume improvements for
fibers appear unlikely due to excess industry capacity and customer inventory
reductions. Within the Core Plastics segment, demand for flexible plastics is
expected to remain strong, but selling prices are expected to be impacted by
additional industry ethylene capacity. PET selling prices are expected to
increase slightly during the fourth quarter. Chemical Intermediates segment
revenues are expected to remain flat to marginally higher compared with last
year, driven by slightly higher volumes and mostly stable prices.
In 1998 the Company expects good demand and strong volume growth for products in
the Core Plastics and Chemical Intermediates segments as a result of new
applications and new production capacity. However, PET as well as ethylene and
propylene derivatives such as oxo chemicals and polyethylene may face price and
margin pressure as a result of additional industry capacity. Within the
Specialty and Performance segment, revenue growth is expected in the high single
digit range. Significant SPECTAR copolymer volume growth is expected due to
strong demand and added production capacity in Malaysia. Fine chemicals products
are expected to continue to benefit from strong relationships with
pharmaceutical companies. Volume growth is expected for the coatings line,
driven by good demand for auto coatings and architectural coatings. Acetate tow
volume is expected to stabilize as new industry capacity is absorbed and
customer inventory reductions are completed. Within the Core Plastics segment,
demand for EASTAPAK PET is expected to increase as new applications are
developed. Recently introduced polyethylene performance polymers, MXSTEN and
TENITE HIFOR, are expected to provide more profitable and less cyclical niche
markets as they gain market acceptance.
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The Company is prepared to take the necessary steps through its capital spending
program and its Advantaged Cost 2000 initiative to maintain the financial
flexibility necessary to realize its full potential to create value. The 1997
and 1998 targets for the Company's Advantaged Cost 2000 initiative are $100
million in labor and material productivity gains in each year. The Company
anticipates targeted gains will be achieved. In 1998 the Company expects a 20% -
30% reduction in capital spending and depreciation expense of approximately $350
million.
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, unit volume sold, price, margin, sales and earnings
expectations and strategies 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 and those mentioned in the context of the
specific statements: 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; capacity additions within the
ethylene industry worldwide; realization of recent PET price increases;
stabilization of acetate tow demand and volume; relatively stable prices for and
availability of key purchased raw materials; good market reception of new
polyethylene products; availability of announced manufacturing capacity
increases; 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.
- ------------------------------------
EASTAPAK, SPECTAR, MXSTEN, TENITE and HIFOR are trademarks of Eastman Chemical
Company.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1997 the Company received notice from the Tennessee Department
of Environment and Conservation ("TDEC") alleging that the manner in
which hazardous waste was fed into certain boilers at the Tennessee
Eastman facility in Kingsport, Tennessee violated provisions of the
Tennessee Hazardous Waste Management Act. Based upon subsequent
communications with the TDEC and the U.S. Environmental Protection
Agency, the Company believes that these agencies may be contemplating
enforcement proceedings which, if commenced, could result in monetary
sanctions in excess of the $100,000 threshold of Regulation S-K, Item
103, Instruction 5c under the Securities Exchange Act of 1934 for
reporting such contemplated proceedings in this Report.
The Company's operations are parties to or targets of lawsuits,
claims, investigations, and proceedings, including product liability,
personal injury, patent, commercial, contract, environmental, health
and safety and employment matters, which are being handled and
defended in the ordinary course of business. While the Company is
unable to predict the outcome of these matters, it does not believe,
based upon currently available facts, that the ultimate resolution of
any of such pending matters, including the TDEC allegations described
in the preceding paragraph, will have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
(c) On July 1, 1997, the Company granted options to purchase an
aggregate of 989 shares of its common stock on or after January 1,
1998 at an exercise price of $63.25 per share. Such options were
granted to non-employee directors who elected under the 1996
Non-Employee Director Stock Option Plan to receive options in lieu of
all or a portion of their semi-annual cash retainer fee. The Company
issued the options in reliance upon the exemption from registration of
Section 4(2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in the Exhibit
Index appearing on page 16.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastman Chemical Company
Date: October 27, 1997 By: /s/ H. Virgil Stephens
----------------------
H. Virgil Stephens
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
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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)
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)
4.01 Form of Eastman Chemical Company Common Stock certificate
(incorporated herein by reference to Exhibit 3.02 to Eastman
Chemical Company's Annual Report on Form 10-K for the year ended
December 31, 1993)
4.02 Stockholder Protection Rights Agreement dated as of December
13, 1993, between Eastman Chemical Company and First Chicago
Trust Company of New York, as Rights Agent (incorporated herein
by reference to Exhibit 4.4 to Eastman Chemical Company's
Registration Statement on Form S-8 relating to the Eastman
Investment Plan, File No. 33-73810)
4.03 Indenture, dated as of January 10, 1994, between Eastman
Chemical Company and The Bank of New York, as Trustee
(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 (incorporated
herein by reference to Exhibit 4.08 to Eastman Chemical Company's
Annual Report on Form 10-K for the year ended December 31, 1996
(the "1996 10-K")
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EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
4.09 Officer's Certificate pursant to Sections 201 and 301 of
the Indenture related to 7.60% Debentures due February 1,
2027 (incorporated herein by reference to Exhibit 4.09 to
the 1996 10-K)
4.10 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)
10.01 Award Notice for Price-Vesting Stock Option Granted to CEO
under 1997 Omnibus Long-Term Compensation Plan 18
11.01 Statement re Computation of Earnings Per Common Share 21
12.01 Statement re Computation of Ratios of Earnings to Fixed 22
Charges
27.01 Financial Data Schedule (for SEC use only)
99.01 Supplemental Business Segment Information 23
17