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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
For the fiscal year ended December 31, 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
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 112 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 65
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes___X____ No________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value (based upon the closing price on the New York Stock
Exchange on January 30, 1998) of the voting stock held by nonaffiliates was
approximately $4,654,265,390 as of January 31, 1998, 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, 1998, 78,445,546 shares of Common
Stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 1998
Annual Meeting of Shareowners (the "1998 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; expected tax rates
and depreciation; environmental matters; the year 2000 issue; legal proceedings;
the Asian financial crisis; supply and demand, volume, price, margin, and sales
and earnings expectations and strategies 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 20-30
8. Financial Statements and Supplementary Data 31-59
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 60
PART III
10. Directors and Executive Officers of the Registrant 61
11. Executive Compensation 61
12. Security Ownership of Certain Beneficial Owners and Management 61
13. Certain Relationships and Related Transactions 61
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 62
SIGNATURES
Signatures 63-64
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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 beverage and food
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 1997 the Company had sales of $4.68 billion, operating
earnings of $506 million, net earnings of $286 million, and basic earnings per
share of $3.66.
The Company began business in 1920 for the purpose of producing chemicals for
Eastman Kodak Company's ("Kodak") photographic business. As of December 31,
1993, the Company became an independent entity when Eastman Kodak Company spun
off its chemical 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 15 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 major plastics products,
EASTAPAK polymers polyester packaging plastic, TENITE, EASTACOAT, MXSTEN and
TENITE HIFOR polyethylenes, as well as cellulose esters 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. Proprietary 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.
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The following table summarizes the Company's recent financial performance and
identifiable assets by industry segment.
SEGMENT FINANCIAL SUMMARY
(Dollars in millions)
1997 1996 1995
SALES
Specialty and Performance $ 2,607 $ 2,657 $ 2,647
Core Plastics 1,338 1,409 1,685
Chemical Intermediates 733 716 708
------- ------- -------
Total $ 4,678 $ 4,782 $ 5,040
======= ======= =======
OPERATING EARNINGS (LOSS)
Specialty and Performance $ 416(1) $ 519 $ 433
Core Plastics (56)(1) (1) 347
Chemical Intermediates 146(1) 145 184
------- ------- -------
Total $ 506 $ 663 $ 964
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ASSETS
Specialty and Performance $ 3,019 $ 2,887 $ 2,776
Core Plastics 2,188 1,854 1,598
Chemical Intermediates 571 525 498
------- ------- -------
Total $ 5,778 $ 5,266 $ 4,872
======= ======= =======
(1) Operating earnings for 1997 reflect the effect of a $62 million ($40 million
after tax) charge for partial settlement/curtailment of pension and other
postemployment benefit liabilities. This charge was allocated to segments as
follows: Specialty and Performance, $34 million; Core Plastics, $18 million; and
Chemical Intermediates, $10 million. See Note 14 to Consolidated Financial
Statements.
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 employs 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.
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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, 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 fourteen 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 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 12 quality system registrations to the international quality
standard, ISO 9000. Ten of these are in North America and two are in the United
Kingdom. Approximately three-fourths of 1997 sales were from products
manufactured in ISO 9000 registered quality systems.
Expansion in International Markets
Approximately 41% of the Company's customers representing 39% of the Company's
sales were outside the United States in 1997. This growth in worldwide sales
over the past few years and achievement of satisfactory returns is primarily due
to its efficient large-scale plants in the United States and increasing
expansion of manufacturing facilities in strategic global locations. The Company
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; EASTAPAK polymers plants in
Cosoleacaque, Veracruz, Mexico and San Roque, Spain; 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 is building EASTAPAK polymers plants in the
Netherlands and Argentina, with operational dates of 1998. Construction is also
underway on an additional plant in the Netherlands to produce purified
terephthalic acid ("PTA"), a key raw material for the production of EASTAPAK
polymers, with an operational date of 1998. A newly constructed facility located
in Kuantan, Malaysia, will produce 30,000 metric tons of copolyester when it
becomes operational in 1998. In addition, the Company has begun construction of
a new oxo chemicals manufacturing complex in Singapore, with production expected
in early 1999, and is studying the feasibility of forming a joint venture in
Nanjing, People's Republic of China, to produce hydrocarbon tackifying resins.
The Company has increased its international sales and distribution
infrastructure during the past several years to position it for worldwide sales
growth. In particular, from 1990 through 1997, the Company increased personnel
outside the United States from approximately 500 to nearly 1,800 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
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countries. For financial information about foreign and domestic operations and
export sales, see Part II--Item 8--Financial Statements and Supplementary
Data--Note 15 to Consolidated Financial Statements.
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 600 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 1997, 1996, and 1995) has been made in the form of a contribution
by the Company 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 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 and Fabrics
Coatings, inks, and resins Coatings, inks and paints
Fine chemicals Photographic and custom chemicals
Pharmaceutical and agricultural intermediates
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 30% of the annual
worldwide production of acetate tow, and sells to all major cigarette producers
throughout the world. The two primary raw materials used in the manufacture of
acetate tow are cellulose (from wood pulp) and acetic anhydride. 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. In 1995 and
1996 worldwide growth in the market for acetate tow, led primarily by sales to
China, resulted in higher levels of capacity utilization for both the Company
and the industry. During 1997, industry capacity utilization declined somewhat
due to new domestic production facilities beginning operation in China,
resulting in lower sales of and lower operating earnings for acetate tow. The
Company expects very modest growth in worldwide demand for acetate tow over the
long term.
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 essentially no
growth during recent years, and, in fact, declined somewhat during 1997. The
Company has focused its efforts on improving its operating efficiencies to
maintain its product quality and cost position.
Fibers products accounted for approximately 28% of 1997 Specialty and
Performance segment sales.
Coatings, inks, and resins
The Company supplies a wide variety of raw materials and intermediate products
to the coatings, inks, and resins markets, including solvents, alcohols,
glycols, and resins. All of the Company's coatings, inks, and resins products
are currently produced in the United States with a majority of 1997 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. Products include
mixed cellulose esters, of which the Company is the world's only manufacturer.
Competitive suppliers of products into the coatings, inks, and resins markets
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.
Products sold in these markets accounted for approximately 26% of 1997 Specialty
and Performance segment sales.
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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 19% of 1997
Specialty and Performance segment sales.
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). During 1997,
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. 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 1997, performance chemicals accounted for approximately 12% of
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, food and water containers
Flexible plastics Packaging
Photographic
Fibers
Container plastics
The Company is the world's leading supplier of polyester plastics, including
EASTAPAK polymers (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. Industry estimates indicate that PET consumption
grew worldwide from 2.3 billion pounds per year in 1989 to approximately 8.9
billion pounds per year in 1997. Capital expansion projects currently underway
in the Netherlands and Argentina will add approximately 600 million pounds of
additional PET capacity by the end of 1998. Overcapacity worldwide continues to
pressure PET selling prices.
Competition for the large volume PET market is based largely on price and
service. 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. Container plastics products accounted for
approximately 62% of 1997 Core Plastics segment sales.
Flexible plastics
The Company manufactures a variety of plastics including polyethylene, cellulose
esters, and polyesters for applications such as film, extrusion coating, fibers,
tape, industrial strapping, and injection molding. The polyethylene product line
includes low density, linear low density, and medium/high density polymers. The
markets for these polyethylene 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 the overall polyethylene
market, the strategy is to focus on selected markets based on the Company's
ability to produce high quality performance polymers. In addition to
polyethylenes, the Company's strong core competency in cellulose esters and
polyesters allows it to offer a wide range of differentiated high performance
polymers in selected fiber and film markets. Flexible plastics accounted for
approximately 38% of 1997 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 1997 approximately 76% 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 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,
purified terephthalic acid ("PTA"), 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 $749 million in 1997, $789 million in 1996, and
$446 million in 1995. Eastman anticipates that total capital expenditures in
1998 will be between $550 and $600 million. 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 1997, 1996, and 1995, the Company made capital expenditures of $70
million, $51 million, and $39 million, respectively, related to environmental
improvements. The Company estimates that such capital expenditures will be
approximately $49 million and $86 million for 1998 and 1999, respectively.
Future expenditures will be dependent in part upon implementation of government
environmental regulations.
DISPOSITIONS
As previously reported, 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 and its polyols business in 1997. The effect of these
divestitures and product discontinuances on financial position and results of
operations has not been, and is not expected to be, material.
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EMPLOYEE RELATIONS
The Company employs approximately 16,100 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, while it is not dependent on any one
customer or group of customers, loss of certain top customers could adversely
affect the Company until such business is replaced. The Company has
approximately 5,300 customers worldwide and the top 100 customers account for
approximately 60% of the Company's business. Eastman's largest customer is
Kodak, which accounted for approximately 5% of total sales in 1997.
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
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Fibers Courtaulds, Daicel, Celanese, Mitsubishi, Novaceta,
Rhone-Poulenc, Teijin
Coatings, inks, and resins BASF, Exxon, Celanese, S. C. Johnson, Lonza,
Oxychem, Shell, Union Carbide
Fine chemicals DSM, LaPorte, Lonza
Performance chemicals AlliedSignal, ARCO, Clariant, Daicel, Dow, Exxon, Hercules,
Nutrinova, Rexene, Rhone-Poulenc, UOP
Specialty plastics BASF, Bayer, Dow, DuPont, GE, Hoechst A.G., Phillips, Akzo Nobel,
AtoHaas, ICI, Geon, Shell
Container plastics Hoechst Celanese, DuPont, Shell, Wellman, Nan Ya
Flexible plastics Chevron, Dow, Exxon, Hoechst Celanese, Mobil, Quantum, Shell,
Union Carbide
Industrial intermediates BASF, BP, Dow, Exxon, Celanese Ltd., Rhone-Poulenc, Union Carbide
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" section on next page).
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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. 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. In addition, the Company has commercialized a group of
new, higher-value polyolefins with increased tear strength and impact
performance--MXSTEN and TENITE HIFOR.
The Company's research and development expenditures during the past five years
have averaged approximately 4% of sales annually with 1997, 1996, and 1995
expenditures totaling $191 million, $184 million, and $176 million,
respectively. Expenditures for 1998 are anticipated to be within the 1996-1997
range.
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. Company patents expire at
various times during the next several years. The Company also owns or licenses
trademarks in the U.S. and in foreign countries 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 some 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 third quarters.
MARKETING AND DISTRIBUTION
The Company markets products through a worldwide sales organization with 36
sales offices outside the United States in 32 countries. A majority of sales are
direct; however, some sales are made through indirect selling 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
The Company is actively engaged in the ongoing development and enhancement of
products that are environmentally responsible, such as waterborne products and
recyclable plastics. In addition, the Company 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.
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.
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The Company's commitment to environmental stewardship has earned favorable
recognition. In late 1997, Eastman was recognized by the Chemical Manufacturers
Association for its 1996 energy efficiency efforts. 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.
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 can be reasonably estimated.
The Company's environmental protection and improvement cash expenditures were
approximately $220 million, $175 million, and $150 million in 1997, 1996, and
1995, respectively, including investments in construction, operations, and
development. The Company does not expect future environmental capital
expenditures arising from requirements of recently promulgated environmental
laws and regulations to materially increase the Company's planned level of
capital expenditures for environmental control facilities.
BACKLOG
During 1997, 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 59, is Chairman of the Board and Chief Executive
Officer of the Company. He joined the Company in 1960. Mr. Deavenport was named
President of the Company in 1989 and also served as Group Vice President of
Kodak from 1989 through 1993.
R. Wiley Bourne, Jr., age 60, is Vice Chairman of the Board and Executive Vice
President of the Company, responsible for all business organizations. He joined
the Company in 1959, was named Executive Vice President in 1989, and 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, 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 assumed his current responsibilities in 1996.
He also served as a Vice President of Kodak from 1984 through 1993.
Harold L. Henderson, age 62, joined the Company in 1997 as Senior Vice President
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 59, is Senior Vice President of the Company, responsible for
functional organizations. Mr. Nethery joined the Company in 1960 and was named
Senior Vice President, Manufacturing of the Company in 1989. 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. Mr. Stephens has announced his retirement effective April 1,
1998.
Darryl K. Williams, age 55, is Senior Vice President, Technology and Quality, of
the Company. 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 Senior Vice President, Technology in 1996. He
assumed his current position in 1998.
Betty W. DeVinney, age 53, is Vice President, Communications and Public Affairs.
Mrs. DeVinney joined the Company in 1973. In 1991, she became Manager,
Employment, was named Manager, Community Relations in 1995 and was appointed
Manager, Corporate Relations in 1997. She assumed her current position in 1998.
Patrick R. Kinsey, age 52, is Vice President and Comptroller of the Company. Mr.
Kinsey joined the Company in 1967, was named Director, Internal Auditing in 1993
and became Director, Corporate Financial Reporting in 1996. He assumed his
current position in 1998.
B. Fielding Rolston, age 56, is Vice President, Human Resources and Health,
Safety, Environment, and Security of the Company. Mr. Rolston joined the Company
in 1964 and was appointed Vice President, Customer Service and Materials
Management of the Company in 1987. He assumed his current position in 1998.
Allan R. Rothwell, age 50, assumed his current position as Vice President,
Corporate Development and Strategy in 1997. In addition to his current
responsibilities, Mr. Rothwell will assume the position of Senior Vice President
and Chief Financial Officer on April 1, 1998, upon the retirement of Mr.
Stephens. Mr. Rothwell joined the Company in 1969 and was appointed Business
Director, Industrial Intermediates in 1993. In 1994, he became Vice President
and General Manager, Container Plastics.
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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 de Mexico Polyester Polymers
Hartlepool, England Eastman Chemical Ectona, Ltd. Polyester Polymers
Hong Kong Eastman Chemical Hong Kong, Ltd. Fine Chemicals
Kingsport, TN Tennessee Eastman Acetate Tow
Coatings and Paint Raw Materials
Polyester Polymers
Fine Chemicals
Kuantan, Malaysia* Eastman Chemical Malaysia SDN BHD Copolyester Plastics
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
Textile Chemicals
Rotterdam, Netherlands* Eastman Chemical Netherlands B.V. Polyester Polymers
San Roque, Spain Eastman Chemical Espana, S.A. Polyester Polymers
Singapore* Eastman Chemical Singapore Pte. Ltd. Oxo Chemicals
Toronto, Ontario, Canada Eastman Chemical Canada, Inc. Polyester Polymers
Workington, England Eastman Chemical Ectona, Ltd. Acetate Tow
Polyester Polymers
Zarate, Argentina* Eastman Chemical Argentina S.A. Polyester Polymers
*Under construction
The Company has a 50% interest in Primester, a joint venture 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 also has a 50% interest in Genencor International, a joint venture
which develops, manufactures and markets industrial enzymes and other fine and
specialty chemicals at numerous international locations.
The Company has distribution facilities at all of its plant sites. In addition,
the Company conducts manufacturing operations at three other sites and operates
81 stand-alone distribution facilities in 18 countries. Corporate headquarters
are in Kingsport, Tennessee. The Company's regional headquarters are in Coral
Gables, Florida; The Hague, Netherlands; Singapore; and Kingsport, Tennessee.
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; Coral Gables, Florida; and Singapore.
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ITEM 3. LEGAL PROCEEDINGS
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 5.C. 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, antitrust, health and safety, and
employment matters, which are being handled and defended in the ordinary course
of business. While the Company is unable to predict the outcome of these
matters, it does not believe, based upon currently available facts, that the
ultimate resolution of any of such pending matters, including the TDEC
allegations described in the preceding paragraph, will have a material adverse
effect on the Company's financial position, 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 1997.
- --------------------------------------
RESPONSIBLE CARE is a registered service mark of the chemical industry.
EASTAPAK, TENITE, EASTACOAT, MXSTEN, SPECTAR, and TENITE HIFOR 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 1996 and 1997.
CASH DIVIDENDS
HIGH LOW DECLARED
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
1997
1st Quarter 57 53 1/2 $ .44
2nd Quarter 64 1/2 50 3/4 .44
3rd Quarter 64 57 3/8 .44
4th Quarter 65 3/8 56 1/4 .44
- ----------
As of January 31, 1998 there were 78,445,546 shares of the Company's Common
Stock issued and outstanding, which shares were held by approximately 86,700
shareowners of record. These shares include 184,557 shares held by the Company's
charitable foundation. The Company has declared a cash dividend of $0.44 per
share during the first quarter of 1998, 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 the fourth quarter of 1997
in transactions not registered under the Securities Act of 1933. For information
concerning issuance of shares, a warrant to purchase shares, a warrant to
purchase shares, and option grants in 1997 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) 1997(1) 1996 1995 1994 1993(2)
SUMMARY OF OPERATING DATA
Sales $ 4,678 $ 4,782 $ 5,040 $ 4,329 $ 3,903
Operating earnings 506 663 964 636 451
Earnings from continuing operations
before income taxes and cumulative
effect of changes in accounting principle 446 607 899 550 439
Earnings from continuing operations 286 380 559 336 267
Discontinued operations, net of taxes - - - - (20)
Cumulative effect of changes
in accounting principle, net of taxes - - - - (456)
Net earnings (loss) 286 380 559 336 (209)
Basic earnings per share(3) 3.66 4.84 6.84 4.06 2.47
Diluted earnings per share(3) 3.63 4.79 6.78 4.04 2.46
STATEMENT OF FINANCIAL POSITION DATA
Current assets $ 1,490 $ 1,345 $ 1,487 $ 1,248 $ 1,057
Properties at cost 8,104 7,530 6,791 6,389 6,390
Accumulated depreciation 4,223 4,010 3,742 3,483 3,331
Total assets 5,778 5,266 4,872 4,395 4,341
Current liabilities 954 787 873 793 462
Long-term borrowings 1,714 1,523 1,217 1,195 1,801
Total liabilities 4,025 3,627 3,344 3,100 3,280
Total shareowners' equity 1,753 1,639 1,528 1,295 1,061
Dividends declared per common share 1.76 1.72 1.64 1.60 -
- ------------
(1) Operating data for 1997 includes the effect of a $62 million ($40 million
after tax) charge for partial settlement/curtailment of pension and other
postemployment benefit liabilities. See Note 14 to Consolidated Financial
Statements.
(2) The summary of operating data for 1993 presents 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. Earnings per share for 1993 are presented on a
pro forma basis and are based on pro forma earnings from continuing operations
of $204 million. Historical earnings per share data for 1993 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.
(3) Earnings per share for prior years have been restated to conform to
requirements of the new accounting standard effective for periods ending after
December 15, 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's consolidated
financial statements included elsewhere in this report. All references to
earnings per share contained in this report are basic earnings per share unless
otherwise noted.
MAJOR FACTORS AFFECTING EARNINGS
1997 COMPARED WITH 1996
Lower selling prices for the Company's core plastics
Overall increased sales volumes
Lower purchased raw materials costs
Lower variable-incentive compensation
Charge resulting from partial settlement/curtailment of
pension and other postemployment benefit liabilities
RESULTS OF OPERATIONS
EARNINGS
(Dollars in millions, except per share amounts) 1997 1996 CHANGE 1995
Operating earnings $ 506 $ 663 (24)% $ 964
Net earnings 286 380 (25) 559
Earnings per share (1)
--Basic 3.66 4.84 (24) 6.84
--Diluted 3.63 4.79 (24) 6.78
(1) Earnings per share for prior years have been restated to conform to
requirements of the new accounting standard effective for periods ending after
December 15, 1997.
CHANGES IN EARNINGS PER SHARE 1997 1996 CHANGE
Earnings per share $3.66 $4.84 $ (1.18)
=======
Operations
Selling price $ (2.18)
Volume and mix .20
Raw materials, energy, and supplies 1.14
Variable-incentive pay .37
Early retirement charge (1) (.51)
Other (.27)
-------
Change from operations (1.25)
Other
Interest expense, net (.16)
Other income/charges .12
Effective tax rate change .09
Fewer shares outstanding .02
-------
Total change $(1.18)
======
(1) Charge resulting from partial settlement/curtailment of pension and other
postemployment benefit liabilities. See Note 14 to Consolidated Financial
Statements.
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1997 COMPARED WITH 1996
The Company's 1997 net earnings reflect returns of 17% on equity and 10% on
capital. Sales volumes improved 6% overall due to good demand and new capacity.
However, earnings reflect the significant negative impact of lower EASTAPAK
polymers prices which resulted from excess industry capacity, and substantially
lower acetate tow volume caused by excess industry capacity and customer
inventory reductions, mainly in China. Lower costs were experienced for major
raw materials including paraxylene, purified terephthalic acid ("PTA"), and
propane feedstock. Productivity gains realized from the Company's Advantaged
Cost 2000 program and a gain from damages awarded for patent infringement
positively impacted net earnings. Operating earnings for 1997 reflect a $62
million ($40 million after tax) charge for partial settlement/curtailment of
pension and other postemployment benefit liabilities arising from the retirement
of approximately 1,700 employees. The large number of retirements was not the
result of special payments or incentives. Preproduction costs related to
start-up of new manufacturing facilities had a moderately negative effect on
earnings. The Company's financial results were not materially affected by the
Asian financial crisis in 1997.
SUMMARY BY INDUSTRY SEGMENT
SPECIALTY AND PERFORMANCE SEGMENT
(Dollars in millions) 1997 1996 CHANGE 1995
Sales $ 2,607 $ 2,657 (2)% $ 2,647
Operating earnings 416(1) 519 (20) 433
(1) Specialty and Performance segment operating earnings for 1997 reflect an
allocation of $34 million of the $62 million charge for partial
settlement/curtailment of pension and other postemployment benefit liabilities.
See Note 14 to Consolidated Financial Statements.
1997 COMPARED WITH 1996
The effect of strong volume improvement for specialty plastics and moderately
higher volume for fine chemicals, coatings, inks, and resins products was offset
by overall lower selling prices, a shift in the mix of products sold, and
declines in unit volumes for performance chemicals and fibers. Improved volumes
for plastic esters were driven by good demand for auto coatings, particularly in
developing international regions. Increased sales volumes for specialty
plastics, including TENITE cellulosics and SPECTAR copolymer, reflected new
customer applications and regional growth. Performance chemicals results
reflected lower unit volumes due to divestiture of several product lines in
1996. Demand for acetate tow declined due to new industry capacity and customer
reductions in inventories, mainly in China. The primary factors affecting
operating earnings were significantly lower volumes for acetate tow, overall
lower selling prices, unfavorable foreign currency effects, and the effect of
the early retirement charge, partially offset by lower raw materials costs,
lower variable-incentive pay, and productivity gains.
CORE PLASTICS SEGMENT
(Dollars in millions) 1997 1996 CHANGE 1995
Sales $ 1,338 $ 1,409 (5)% $1,685
Operating earnings (loss) (56) (1) (1) - 347
(1) Core Plastics segment operating loss for 1997 reflects an allocation of $18
million of the $62 million charge for partial settlement/curtailment of pension
and other postemployment benefit liabilities. See Note 14 to Consolidated
Financial Statements.
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1997 COMPARED WITH 1996
The decline in container plastics selling prices, which began in 1996 as a
result of industry overcapacity, moderated somewhat by the end of 1997 as prices
showed some recovery and stabilization. Volumes for container plastics showed
significant improvement, primarily as a result of new capacities in Spain and
Mexico and continued strong demand. Lower volumes for flexible plastics
reflected limited availability of ethylene supply prior to the midyear
completion of a new ethylene pipeline. Improved selling prices for flexible
plastics resulted from strong market demand. Operating earnings declined
primarily due to substantially lower selling prices for EASTAPAK polymers,
start-up costs for new manufacturing sites, unfavorable currency effects, and
the effect of the early retirement charge, partially offset by improved selling
prices for flexible plastics, an increase in overall unit volumes, lower raw
materials costs, lower variable-incentive pay, and productivity improvements.
CHEMICAL INTERMEDIATES SEGMENT
(Dollars in millions) 1997 1996 CHANGE 1995
Sales $ 733 $ 716 2% $ 708
Operating earnings 146(1) 145 1 184
(1) Chemical Intermediates segment operating earnings for 1997 reflect an
allocation of $10 million of the $62 million charge for partial
settlement/curtailment of pension and other postemployment benefit liabilities.
See Note 14 to Consolidated Financial Statements.
1997 COMPARED WITH 1996
Sales in the Chemical Intermediates segment were slightly higher than 1996, with
increased sales volume partially offset by overall lower selling prices and
unfavorable currency exchange rates. Operating earnings reflect lower raw
materials costs and lower variable-incentive pay, offset partially by overall
lower selling prices, unfavorable currency exchange rates, and the effect of the
early retirement charge.
(For supplemental analysis of Specialty and Performance, Core Plastics, and
Chemical Intermediates segment results, see Exhibit 99.01 to this Form 10-K).
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
(Dollars in millions) 1997 1996 CHANGE 1995
United States and Canada $ 3,051 $ 3,183 (4)% $ 3,390
Europe, Middle East, and Africa 780 745 5 825
Asia Pacific 506 548 (8) 557
Latin America 341 306 11 268
------- ------- -------
Total $ 4,678 $4,782 $ 5,040
======= ====== =======
1997 COMPARED WITH 1996
Sales in the United States for 1997 were $2.875 billion, down 4% from 1996 sales
of $2.990 billion. Decreased sales were attributable to lower selling prices,
primarily for EASTAPAK polymers.
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Sales outside the United States in 1997 were relatively unchanged from 1996 and
were 39% of total sales compared to 37% of total sales in 1996. Higher sales
volume driven by new capacities in Mexico and Spain was mostly offset by
unfavorable currency effects and overall lower selling prices. Decreased sales
in Asia Pacific reflect a decline in sales of acetate tow.
With a substantial portion of 1997 sales to customers outside the United States
and approximately 10% of its products 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. 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.
Foreign currency hedging transactions mitigated the impact of foreign currency
transaction and remeasurement losses. However, the change in exchange rates when
compared to 1996 negatively impacted net earnings by approximately $35 million.
See Note 10 to Consolidated Financial Statements and Market Risk discussion.
SUMMARY OF CONSOLIDATED RESULTS
(Dollars in millions) 1997 1996 CHANGE 1995
SALES $4,678 $4,782 (2)% $5,040
Sales volume in 1997 improved 6% overall, but generally lower selling prices, a
shift in mix of products sold, and unfavorable currency effects resulted in
sales declining 2%.
(Dollars in millions) 1997 1996 CHANGE 1995
GROSS PROFIT $1,096 $1,179 (7)% $1,504
As a percentage of sales 23.4% 24.7% 29.8%
Gross profit decline was principally attributable to lower selling prices,
partially offset by overall lower purchased raw materials costs, lower
variable-incentive compensation, and productivity gains.
(Dollars in millions) 1997 1996 CHANGE 1995
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 337 $ 332 2% $ 364
As a percentage of sales 7.2% 6.9% 7.2%
Selling and general administrative expenses were up slightly in 1997 due to a
variety of general business activities relating to new business formations and
globalization strategies, increased advertising and outside professional
services, and higher compensation costs, partially offset by a reduction in
labor hours and lower variable-incentive costs.
(Dollars in millions) 1997 1996 CHANGE 1995
RESEARCH AND DEVELOPMENT COSTS $ 191 $ 184 4% $ 176
As a percentage of sales 4.1% 3.8% 3.5%
Increased research and development costs resulted from increased level of
activity, partially offset by lower variable-incentive costs.
(Dollars in millions) 1997 1996 CHANGE 1995
INTEREST COSTS $ 128 $ 95 $ 88
LESS CAPITALIZED INTEREST 41 28 9
------- ------- -------
NET INTEREST EXPENSE $ 87 $ 67 30% $ 79
======= ======= =======
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Interest costs increased due to an increase in borrowings and higher overall
effective interest rates. The increase in capitalized interest was directly
related to the major capital investment program which peaked in 1997.
(Dollars in millions) 1997 1996 CHANGE 1995
OTHER INCOME, NET $ 27 $ 11 >100% $ 14
In 1997 the Company recognized increased income from Genencor International, a
joint venture that develops, manufactures, and markets industrial enzymes and
other fine and specialty chemicals. Also in 1997 the Company 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. All years
include royalty and interest income, the effect of foreign currency transactions
and translation, and income (loss) from joint ventures and equity investments.
(Dollars in millions) 1997 1996 CHANGE 1995
PROVISION FOR INCOME TAXES $ 160 $ 227 (30)% $ 340
Effective tax rate 35.8% 37.4% 37.8%
The reduction in effective tax rate for 1997 resulted primarily from increased
tax benefits attributable to export sales and the recognition of tax benefits
attributable to foreign operations.
1996 COMPARED WITH 1995
Eastman posted sales in 1996 of $4.782 billion, down 5% compared with 1995.
Sales decreased 7% because of lower selling prices, offset 2% because of volume
gains. The Company had net earnings of $380 million in 1996, compared with $559
million for 1995 -- a 32% decrease. The factors contributing to the earnings
decline were lower selling prices for the Company's core plastics, EASTAPAK
polymers and polyethylene, preproduction and start-up costs at new EASTAPAK
polymers plants, and higher labor rates. Currency fluctuations had a minor
negative effect on earnings in 1996. Positive impacts on overall earnings
included 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.
The Specialty and Performance segment reported sales of $2.657 billion for 1996,
essentially level with 1995. The operating earnings for 1996 were $519 million,
up 20% from 1995. This increase was primarily a result of lower operating costs
reflecting overall lower raw materials 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.
The Core Plastics segment reported sales of $1.409 billion for 1996, down 16%
from 1995. The sales decrease in the Core Plastics segment was attributed
primarily to lower EASTAPAK polymers selling prices, partially offset by
increased volumes. The segment operating loss of $1 million was attributed
primarily to lower EASTAPAK polymers and polyethylene selling prices. Other
factors contributing to the overall decrease in segment operating earnings were
increased preproduction and start-up costs for new EASTAPAK polymers
manufacturing facilities and increased propane costs, which impacted primarily
polyethylene and to a lesser extent EASTAPAK polymers.
24
25
The Chemical Intermediates segment reported sales of $716 million for 1996, up
1% from 1995. The slight increase in sales was attributed primarily to higher
volumes, partially offset by lower selling prices for certain industrial
intermediates. Chemical Intermediates segment operating earnings for 1996 were
$145 million, down 21% from 1995. 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.
Sales in the United States in 1996 were $2.990 billion, down 6% compared with
1995 sales of $3.168 billion. Decreased sales were attributed to lower selling
prices, partially offset by modest volume gains. Sales to customers outside the
United States in 1996 were down 4% compared with 1995 and were 37% of total
sales, same as 1995. Decreased sales in Europe, Middle East, and Africa were
primarily attributed to lower EASTAPAK polymers selling prices, partially offset
by higher volumes. Increased sales in Latin America resulted primarily from
higher EASTAPAK polymers volumes, partially offset by lower selling prices.
25
26
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
FINANCIAL INDICATORS 1997 1996 1995
Ratio of earnings to fixed charges 3.7x 6.1x 9.7x
Current ratio (1) 1.6x 1.7x 1.7x
Percent of long-term borrowings to total capital (1) 49% 48% 44%
Percent of floating-rate borrowings to total borrowings (1) 12% 21% 2%
- -------------
(1) At end of year.
CASH FLOW
(Dollars in millions) 1997 1996 1995
Net cash provided by (used in)
Operating activities $ 698 $ 746 $ 838
Investing activities (745) (809) (524)
Financing activities 52 (13) (304)
-------- -------- -------
Net change in cash and cash equivalents $ 5 $ (76) $ 10
======== ======== =======
Cash and cash equivalents at end of period $ 29 $ 24 $ 100
======== ======== =======
Cash provided by operations has declined over the periods presented mainly due
to lower net earnings reflecting business conditions previously discussed. Cash
used in investing activities peaked in 1996 due to significant global expansion
activities underway at that time. Cash related to financing activities reflects
significant treasury stock purchases in 1995 and 1996, proceeds received in 1997
from a $300 million issuance of 7.60% debentures due February 1, 2027, and the
payment of dividends in all years presented. For additional analysis, see also
the Consolidated Statements of Cash Flows.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
Eastman anticipates total capital expenditures in 1998 will be between $550
million and $600 million and depreciation expense is expected to be
approximately $350 million. Long-term commitments related to capital
expenditures are not material. The Company had various purchase commitments at
the end of 1997 for materials, supplies, and energy incident to the ordinary
conduct of business. These commitments total approximately $800 million. Eastman
has other long-term commitments relating to joint venture agreements as
described in Note 4 to Consolidated Financial Statements.
LIQUIDITY
Eastman has access to an $800 million revolving credit facility (the "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% in 1997, 1996, and 1995. 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 December
31, 1997, the Company's commercial paper outstanding balance was $213 million,
at interest rates ranging between 6.10% and 6.90%. At December 31, 1996, a total
of $295 million of commercial paper was outstanding, at interest rates ranging
between 5.50% and 6.15%. In 1997 Eastman issued $300 million of 7.60% debentures
due February 1, 2027, and used the proceeds to repay commercial paper borrowings
outstanding at that time.
26
27
In 1995 the Company repurchased 3,308,200 shares of 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. In 1996 the Company acquired 2,486,300
shares at a cost of $161 million under the announced repurchase program, and
during the first quarter 1997 acquired an additional 140,801 shares at a cost of
$8 million. There were no share repurchases during the remainder of the year.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes.
The partial settlement/curtailment of pension and other postemployment benefit
liabilities which occurred in 1997 will result in funding which the Company
plans to make in 1998.
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
DIVIDENDS 1997 1996 1995
Cash dividends declared per share $ 1.76 $ 1.72 $ 1.64
ENVIRONMENTAL
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
approximately $220 million in 1997, $175 million in 1996, and $150 million in
1995, 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 materials 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.
MARKET RISK
The Company is exposed to changes in financial market conditions in the normal
course of its business due to its use of certain financial instruments as well
as transacting in various foreign currencies and funding of foreign operations.
To mitigate the Company's exposure to these market risks, Eastman has
established policies, procedures, and internal processes governing its
management of financial market risks and the use of financial instruments to
manage its exposure to such risks.
The Company is exposed to changes in interest rates primarily as a result of its
borrowing activities, which include short-term commercial paper and long-term
borrowings used to maintain liquidity and fund its business operations. The
Company continues to utilize U.S. dollar-denominated commercial paper to fund
seasonal working capital requirements. The nature and amount of the Company's
long-term and short-term debt may vary as a result of future business
requirements, market conditions, and other factors.
27
28
The Company's operating cash flows denominated in foreign currencies are exposed
to changes in foreign exchange rates. The Company continually evaluates its
foreign currency exposure based on current market conditions and the locations
in which the Company conducts business. In order to mitigate the effect of
foreign currency risk, the Company enters into forward exchange contracts to
hedge certain firm commitments denominated in foreign currencies and currency
options to hedge probable anticipated but not yet committed export sales and
purchase transactions expected within no more than 5 years and denominated in
foreign currencies. The gains and losses on these contracts offset changes in
the value of related exposures. It is the Company's policy to enter into foreign
currency transactions only to the extent considered necessary to meet its
objectives as stated above. The Company does not enter into foreign currency
transactions for speculative purposes.
The Company determines its market risk utilizing sensitivity analysis, which
measures the potential losses in fair value resulting from one or more selected
hypothetical changes in interest rates and/or foreign currency exchange rates.
The market risk associated with the fair value of interest-rate-sensitive
instruments assuming an instantaneous parallel shift in interest rates of 10% is
approximately $100 million and an additional $10 million for each one percentage
point change in interest rates thereafter. This exposure is primarily related to
long-term debt with fixed interest rates. The market risk associated with
foreign currency-sensitive instruments utilizing a modified Black-Scholes option
pricing model and a 10% adverse move in the U.S. dollar relative to each foreign
currency hedged by the Company is approximately $70 million and an additional $6
million for a one percentage point change in foreign currency exchange rates.
Further adverse movements in foreign currencies would create losses in fair
value; however, such losses would not be linear to that disclosed above. This
exposure, which is primarily related to foreign currency options purchased by
the Company to manage fluctuations in foreign currencies, is limited to the
dollar value of option premiums payable by the Company for the related financial
instruments. Furthermore, since the Company utilizes currency-sensitive
derivative instruments for hedging anticipated foreign currency transactions, a
loss in fair value for those instruments is generally offset by increases in the
value of the underlying anticipated transactions.
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs written using two digits
rather than four to define the applicable year. Without corrective action,
programs with time-sensitive software could potentially recognize a date ending
in "00" as the year 1900 rather than the year 2000, causing many computer
applications to fail or create erroneous results.
Assessment and remediation of the Company's business computer systems,
manufacturing control systems, and other embedded-chip devices for compliance
with the year 2000 is underway or in some cases completed. As a result of
modifications or upgrades planned or already completed, the Company believes
that the year 2000 issue will not pose significant problems for the Company's
business, operations, or operating systems. The Company expects that any
additional modifications or upgrades of software or hardware required for year
2000 compatibility will be accomplished using existing resources and will not
have a material impact on the Company's financial position or results of
operations in future periods.
The Company has identified and is contacting customers, suppliers, and other
critical business partners to determine if entities with which the Company
transacts business have an effective plan in place to address the year 2000
issue. Contingency plans will be developed as needed.
HOLSTON DEFENSE CORPORATION
Holston Defense Corporation, a wholly owned subsidiary of the Company, has
managed the government-owned Holston Army Ammunition Plant in Kingsport,
Tennessee since 1942 under contract with the Department of Army. The current
contract expires December 31, 1998. Holston Defense Corporation has been
notified that it is not a participant in the bidding process for the contract
period beginning after December 31, 1998. In the event that Holston Defense
Corporation's management of the ammunition plant is terminated, payments to
Holston Defense Corporation's employees, additional funding of pension and other
postretirement benefits, and other termination costs could result. The Company
expects that substantially all of these costs and payments would be ultimately
reimbursed by the Department of Army, although delays in reimbursement may
require the Company to advance funds to pay such costs. Any unreimbursable
amounts charged to future earnings should not have a material adverse effect on
the Company, although earnings in a particular quarter could be negatively
impacted. See Note 17 to Consolidated Financial Statements.
28
29
RECENTLY ISSUED ACCOUNTING STANDARDS
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 to 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 will provide additional
reporting as required by the new standards beginning in 1998. The Company
believes that no significant changes to current segment reporting will be
required by the new standard.
OUTLOOK
In 1998 the Company expects higher sales compared to 1997, driven by good demand
and strong volume growth for products in all three segments as a result of new
applications and new production capacity. However, EASTAPAK polymers and
ethylene and propylene derivatives such as oxo chemicals and polyethylene may
face price and margin pressure as a result of additional industry capacity.
Significant SPECTAR copolymer volume growth is expected due to strong demand and
added production capacity in Malaysia. 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, but price and
margin pressure will result from the new capacities. Modest growth in sales
revenue is expected for fine chemicals based on increased volumes of
pharmaceutical and agrochemical intermediates and the impact of new
Epoxybutene-based derivatives. Strong revenue growth is expected for performance
chemicals due to new capacities for EASTOTAC resins and EASTOBRITE optical
brighteners. Within the Core Plastics segment, demand for EASTAPAK polymers is
expected to continue to grow as new applications are developed. Increased
revenues and operating earnings are expected for container plastics products,
driven by additional available capacity, reduced costs, and stable pricing.
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. Within the Chemical Intermediates segment, a recently
completed U.S. oxo plant expansion is expected to produce continued volume
gains. The Company does not expect to have significant credit or business
exposure relating to the Asian financial crisis.
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 1998
target for the Company's Advantaged Cost 2000 initiative is $100 million in
labor and material productivity gains. In 1998 the Company expects a 20%
reduction in capital spending, and depreciation expense is expected to be
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; the year 2000 issue;
the Asian financial crisis; expected tax rates and depreciation; and supply and
demand, unit volume, price, margin, and 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 economic business conditions in North
America, improving business conditions in Europe, and continued growth in Latin
America, supporting continued good overall demand for the Company's products; no
significant impact on results of operations due to the Asian financial crisis;
no significant decline in overall selling prices, except for fibers; continued
demand growth worldwide for EASTAPAK polymers; continued capacity additions
within the PET industry worldwide; capacity additions within the ethylene
industry worldwide; realization of recent
29
30
EASTAPAK polymers 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 TENITE HIFOR are trademarks of Eastman
Chemical Company.
30
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM PAGE
Management's responsibility for financial statements 32
Report of independent accountants 33
Consolidated statements of earnings and retained earnings 34
Consolidated statements of financial position 35
Consolidated statements of cash flows 36
Notes to consolidated financial statements 37-59
31
32
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 34 through 59. 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 27, 1998
32
33
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 62 present fairly, in all material
respects, the financial position of Eastman Chemical Company and subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, 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 27, 1998
33
34
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
Sales $ 4,678 $ 4,782 $ 5,040
Cost of sales 3,582 3,603 3,536
------- ------- -------
Gross profit 1,096 1,179 1,504
Selling and general administrative expenses 337 332 364
Research and development costs 191 184 176
Early retirement charge 62 -- --
------- ------- -------
Operating earnings 506 663 964
Interest expense, net 87 67 79
Other income, net 27 11 14
------- ------- -------
Earnings before income taxes 446 607 899
Provision for income taxes 160 227 340
------- ------- -------
Net earnings $ 286 $ 380 $ 559
======= ======= =======
Basic earnings per share $ 3.66 $ 4.84 $ 6.84
======= ======= =======
Diluted earnings per share $ 3.63 $ 4.79 $ 6.78
======= ======= =======
Retained earnings at beginning of year $ 1,929 $ 1,684 $ 1,258
Net earnings 286 380 559
Cash dividends declared (137) (135) (133)
------- ------- -------
Retained earnings at end of year $ 2,078 $ 1,929 $ 1,684
======= ======= =======
The accompanying notes are an integral part of these financial statements.
34
35
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN MILLIONS)
DECEMBER 31,
1997 1996
ASSETS
Current assets
Cash and cash equivalents $ 29 $ 24
Receivables 793 744
Inventories 511 465
Other current assets 157 112
--------- ---------
Total current assets 1,490 1,345
--------- ---------
Properties
Properties and equipment at cost 8,104 7,530
Less: Accumulated depreciation 4,223 4,010
--------- ---------
Net properties 3,881 3,520
--------- ---------
Other noncurrent assets 407 401
--------- ---------
Total assets $ 5,778 $ 5,266
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 954 $ 787
-------- --------
Total current liabilities 954 787
Long-term borrowings 1,714 1,523
Deferred income tax credits 397 348
Postemployment obligations 724 722
Other long-term liabilities 236 247
--------- ---------
Total liabilities 4,025 3,627
--------- ---------
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares authorized;
shares issued -- 84,144,672 and 83,386,459) 1 1
Paid-in capital 77 37
Retained earnings 2,078 1,929
Other (37) 31
---------- ---------
2,119 1,998
Less: Treasury stock at cost (5,889,311 and 5,766,528 shares) 366 359
--------- ---------
Total shareowners' equity 1,753 1,639
--------- ---------
Total liabilities and shareowners' equity $ 5,778 $ 5,266
========= =========
The accompanying notes are an integral part of these financial statements.
35
36
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
1997 1996 1995
Cash flows from operating activities
Net earnings $ 286 $ 380 $ 559
--------- --------- ---------
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 327 314 308
Provision (benefit) for deferred income taxes 7 8 (11)
(Increase) decrease in receivables (53) 66 (90)
(Increase) decrease in inventories (65) 10 (108)
Increase (decrease) in employee benefit liabilities
and incentive pay 134 (69) 179
Increase in liabilities excluding borrowings,
employee benefit liabilities, and incentive pay 60 31 18
Other items, net 2 6 (17)
--------- --------- ----------
Total adjustments 412 366 279
--------- --------- ---------
Net cash provided by operating activities 698 746 838
--------- --------- ---------
Cash flows from investing activities
Additions to properties and equipment (749) (789) (446)
Acquisitions and investments in joint ventures - (26) (56)
Proceeds from sales of assets 20 43 9
Capital advances to suppliers (21) (37) (39)
Other items 5 - 8
--------- --------- ---------
Net cash used in investing activities (745) (809) (524)
---------- --------- ---------
Cash flows from financing activities
Proceeds from long-term borrowings 295 - -
Net increase (decrease) in commercial paper borrowings (82) 273 22
Repayment of borrowings (22) - (2)
Dividends paid to shareowners (138) (134) (133)
Treasury stock purchases (8) (161) (200)
Other items 7 9 9
--------- --------- ---------
Net cash provided by (used in) financing activities 52 (13) (304)
--------- --------- ---------
Net change in cash and cash equivalents 5 (76) 10
Cash and cash equivalents at beginning of year 24 100 90
--------- --------- ---------
Cash and cash equivalents at end of year $ 29 $ 24 $ 100
========= ========= =========
The accompanying notes are an integral part of these financial statements.
36
37
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 joint ventures and
investments in minority-owned companies where it exercises significant
influence on the equity basis. Intercompany transactions and balances are
eliminated in consolidation.
TRANSLATION OF NON-U.S. CURRENCIES
Eastman uses the local currency as the "functional currency" to translate
the accounts of all consolidated entities outside the United States where
cash flows are primarily denominated in local currencies. The effects of
translating those operations that use the local currency as the
functional currency are included as a 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.
37
38
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
Basic earnings per share reflect reported earnings divided by the
weighted average number of common shares outstanding. Diluted earnings
per share include the effect of dilutive stock options outstanding during
the year. Prior earnings per share amounts have been restated to conform
to requirements of the new accounting standard effective for periods
ending after December 15, 1997.
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.
38
39
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 1996 and 1995 amounts to conform to
the 1997 presentation.
2. INVENTORIES
DECEMBER 31,
(Dollars in millions) 1997 1996
At FIFO or average cost (approximates current cost)
Finished goods $ 436 $ 426
Work in process 140 133
Raw materials and supplies 211 214
--------- ---------
Total inventories at FIFO or average cost 787 773
Reduction to LIFO value (276) (308)
--------- ---------
Total inventories at LIFO value $ 511 $ 465
========= =========
Inventories valued on the LIFO method were approximately 75% of total
inventories in 1997 and 1996.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
(Dollars in millions) 1997 1996 1995
Balance at beginning of year $ 7,530 $ 6,791 $ 6,389
Additions 749 796 464
Deductions (175) (57) (62)
---------- --------- ---------
Balance at end of year $ 8,104 $ 7,530 $ 6,791
========= ========= =========
Properties at end of year
Land $ 42 $ 41 $ 36
Buildings and building equipment 702 640 600
Machinery and equipment 6,757 6,315 5,819
Construction in progress 603 534 336
--------- --------- ---------
Total $ 8,104 $ 7,530 $ 6,791
========= ========= =========
39
40
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED DEPRECIATION
(Dollars in millions) 1997 1996 1995
Balance at beginning of year $ 4,010 $ 3,742 $ 3,483
Provision for depreciation 327 314 308
Deductions (114) (46) (49)
--------- --------- ---------
Balance at end of year $ 4,223 $ 4,010 $ 3,742
========= ========= =========
Construction-period interest of $295 million, $257 million, and $229
million, reduced by accumulated depreciation of $125 million, $111
million, and $97 million, is included in cost of properties at December
31, 1997, 1996, and 1995, 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, 1997 and
1996, Eastman's equity in the joint venture was $142 million and $138
million, respectively. The Company guarantees a portion of the joint
venture's third-party borrowings. Such guarantees are 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, 1997 and 1996, Eastman had a negative investment in the joint venture
of $42 million and $44 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 ($196 million and $175 million
of which have been paid through December 31, 1997 and 1996,
respectively). 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 $79 million and $64 million at December 31, 1997 and 1996,
respectively.
40
41
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PAYABLES AND OTHER CURRENT LIABILITIES
DECEMBER 31,
(Dollars in millions) 1997 1996
Trade creditors $ 281 $ 312
Accrued payrolls and vacation 99 101
Accrued variable-incentive compensation 92 137
Accrued pension liabilities 140 -
Accrued taxes 95 79
Other 247 158
--------- ---------
Total $ 954 $ 787
========= =========
6. LONG-TERM BORROWINGS
DECEMBER 31,
(Dollars in millions) 1997 1996
6 3/8% notes due 2004 $ 500 $ 499
7 1/4% debentures due 2024 495 495
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 296 -
Commercial paper and other 223 329
--------- ---------
Total $ 1,714 $ 1,523
========= =========
Eastman has access to an $800 million revolving credit facility (the "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% in 1997, 1996, and 1995. 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 December
31, 1997, the Company's commercial paper outstanding balance was $213 million,
at interest rates ranging between 6.10% and 6.90%. At December 31, 1996, a total
of $295 million of commercial paper was outstanding, at interest rates ranging
between 5.50% and 6.15%. 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. During first quarter 1997 the Company issued $300
million of 7.60% debentures due February 1, 2027, and used the proceeds to repay
previously outstanding commercial paper borrowings outstanding at that time.
41
42
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREOWNERS' EQUITY
(Dollars in millions) 1997 1996 1995
Common stock at par value $ 1 $ 1 $ 1
------------- ------------- --------------
Paid-in capital
Balance at beginning of year 37 30 22
Additions 40 7 8
------------- ------------- --------------
Balance at end of year 77 37 30
------------- ------------- --------------
Retained earnings 2,078 1,929 1,684
------------- ------------- --------------
Other
Balance at beginning of year 31 13 14
Change in cumulative translation
adjustment (52) 18 (1)
Change in unfunded minimum pension
liability (16) -- --
-------------- ------------- --------------
Balance at end of year (37) 31 13
-------------- ------------- --------------
Treasury stock at cost (366) (359) (200)
-------------- ------------- ---------------
Total $ 1,753 $ 1,639 $ 1,528
============= ============= ==============
Shares of common stock issued
Balance at beginning of year 83,386,459 83,250,683 83,067,368
Issued for employee compensation
and benefit plans 758,213 135,776 183,315
------------- ------------- --------------
Balance at end of year 84,144,672 83,386,459 83,250,683
============= ============= ==============
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 $1.76 per share in 1997, $1.72 per share in 1996, and $1.64
per share in 1995.
The Company established a benefit security trust in the fourth quarter,
1997, to provide a degree of financial security for unfunded obligations
under certain plans. The Company has contributed to the trust a warrant
to purchase up to one million shares of common stock of the Company for
par value. The warrant is exercisable by the trustee if the Company does
not meet certain funding obligations, which obligations would be
triggered by certain occurrences, including a change in control or
potential change in control, as defined, or failure by the Company to
meet its payment obligations under covered unfunded plans. Such warrant
is excluded from the computation of diluted earnings per share because
the conditions upon which the warrant is exercisable have not been met.
The additions to paid-in capital for the three years are the result of
exercises of stock options by employees and the issuance of shares to the
Employee Stock Ownership Plan to settle Eastman Performance Plan
obligations.
The Company repurchased 140,801 shares of Eastman common stock at a cost
of $8 million, 2,486,300 shares at a cost of $161 million, and 3,308,200
shares at a cost of $200 million, in 1997, 1996, and
42
43
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995, respectively. Repurchased common shares may be used to meet common
stock requirements for benefit plans and other corporate purposes.
Treasury stock at a cost of approximately $1 million (18,018 shares) and
$2 million (27,972 shares) was reissued in 1997 and 1996, respectively.
The Company's charitable foundation held 184,557 shares, 202,575 shares,
and 230,547 shares of Eastman common stock at December 31, 1997, 1996,
and 1995, respectively.
For 1997, 1996, and 1995, respectively, the weighted average number of
common shares outstanding used to compute basic earnings per share was
78.1 million, 78.5 million, and 81.7 million and for diluted earnings per
share was 78.8 million, 79.3 million, and 82.4 million, reflecting the
effect of dilutive options outstanding. Certain options outstanding at
the end of 1997, 1996, and 1995, respectively, were excluded in the
computation of diluted earnings per share because the options' exercise
prices were greater than average market price of the common shares.
Excluded were options to purchase 790,324 shares of common stock at a
range of prices from $59.00 to $74.25; 566,490 shares of common stock at
a range of prices from $57.125 to $74.25; and 489,942 shares of common
stock at a range of prices from $63.1875 to $68.9375 outstanding at the
end of 1997, 1996, and 1995, respectively.
8. STOCK OPTION AND COMPENSATION PLANS
OMNIBUS PLAN
Eastman's 1997 Omnibus Long-Term Compensation Plan (the "1997 Omnibus
Plan"), which is substantially similar to and intended to replace the 1994
Omnibus Long-Term Compensation Plan (the "1994 Omnibus Plan"), provides
for grants to employees of nonqualified stock options, incentive stock
options, tandem and freestanding stock appreciation rights, performance
shares, and various other stock and stock-based awards. Certain of these
awards may be based on criteria relating to Eastman performance as
established by the Compensation and Management Development Committee of
the Board of Directors. No new awards have been made under the 1994
Omnibus Plan following the effectiveness of the 1997 Omnibus Plan.
Outstanding grants and awards under the 1994 Omnibus Plan are unaffected
by the replacement of the 1994 Omnibus Plan with the 1997 Omnibus Plan.
The 1997 Omnibus Plan provides that options can be granted through April
30, 2002, for the purchase of Eastman common stock at an option price not
less than 50% of the per share fair market value on the date of the stock
option's grant. Substantially all grants awarded under the 1994 Omnibus
Plan and under the 1997 Omnibus Plan have been at option prices equal to
the fair market value on the date of grant. Options 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 7 million shares of
common stock available for option grants and other awards during the term
of the 1997 Omnibus Plan. The maximum number of shares of common stock
with respect to one or more options and/or SARs that may be granted during
any one calendar year under the 1997 Omnibus Plan to the Chief Executive
Officer or to any of the next four most highly compensated executive
officers (each, a "Covered Employee") is 200,000. The maximum fair market
value of any awards (other than options and SARs) that may be received by
a Covered Employee during any one calendar year under the 1997 Omnibus
Plan is equal to the fair market value of 100,000 shares of common stock
as of December 31 of the preceding year.
DIRECTOR LONG-TERM COMPENSATION PLAN
Eastman's 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.
43
44
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 applies intrinsic value accounting for its stock option plans.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant dates for awards under these plans consistent
with the methodology prescribed by SFAS No. 123, the Company's net
earnings and basic earnings per share would be reduced to the unaudited
pro forma amounts indicated below:
(Dollars in millions, except for per share amounts) 1997 1996 1995
Net earnings As reported $ 286 $ 380 $ 559
Pro forma $ 285 $ 375 $ 558
Basic earnings per share As reported $ 3.66 $ 4.84 $ 6.84
Pro forma $ 3.65 $ 4.78 $ 6.82
44
45
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
1997, 1996, and 1995, respectively, include: average expected volatility
of 21.61%, 25.23%, and 26.07%; average expected dividend yield of 2.92%,
2.56%, and 2.83%; and average risk-free interest rates of 6.14%, 5.76%,
and 6.37%. An expected option term of 6 years for all 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 the Company's stock had been traded for a period less than the
baseline expected term assumption, previous years' calculations have used
monthly volatility factors for five peer companies. The Company's
volatility is now considered consistent with the peer group; therefore,
for 1997 and subsequent years, the Company's volatility factors will be
utilized. 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:
1997 1996 1995
------------------------ ----------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- ---------------
Outstanding at beginning
of year 3,216,437 $ 47 2,850,532 $ 45 2,492,745 $ 41
Granted 623,735 60 542,591 55 566,679 62
Exercised 123,964 40 176,686 40 208,892 40
Forfeited or canceled - - - - - -
---------- ------ ---------- ------ ---------- -------
Outstanding at end
of year 3,716,208 $ 50 3,216,437 $ 47 2,850,532 $ 45
========= ========= =========
Options exercisable at
year-end 2,842,573 2,461,995 1,406,400
========= ========= =========
Weighted-average fair
value of options granted
during the year $14.65 $14.66 $ 17.60
Available for grant at end
of year 8,766,755 2,384,543 2,915,741
========= ========= =========
45
46
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ----------------- ---------------- ----------- ----------------
$31-$40 357,357 3.4 years $34 357,357 $34
43-44 1,692,686 6.1 43 1,692,686 43
48-63 1,103,017 8.1 57 254,690 53
64-74 563,148 7.4 65 537,840 65
--------- ----------
$31-$74 3,716,208 6.6 $50 2,842,573 $47
========= ==========
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. Allocated shares in the
ESOP totaled 2,289,826, 1,887,003, and 1,488,436 as of December 31, 1997,
1996, and 1995, 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") places a portion of each
employee's annual compensation at risk and provides a lump-sum payment to
plan participants based on the Company's financial performance. 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 $81 million, $131 million, and $229 million for 1997, 1996, and
1995, respectively. Of these amounts, approximately $36 million in each
year was 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 1997, 1996, and 1995
were $11 million, $6 million, and $10 million, respectively.
46
47
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) 1997 1996 1995
Earnings (loss) before income taxes
United States $ 541 $ 679 $ 825
Outside the United States (95) (72) 74
---------- ---------- ---------
Total $ 446 $ 607 $ 899
========= ========= =========
Provision (benefit) for income taxes
United States
Current $ 134 $ 190 $ 291
Deferred 14 19 (12)
Non-United States
Current 6 4 30
Deferred (8) (12) 2
State and other
Current 13 25 30
Deferred 1 1 (1)
--------- --------- ---------
Total $ 160 $ 227 $ 340
========= ========= =========
Differences between the provision for income taxes and income taxes
computed using the U.S. federal statutory income tax rate follow:
(Dollars in millions) 1997 1996 1995
Amount computed using the statutory rate $ 156 $ 212 $ 315
State income taxes 9 17 19
Foreign rate variance (4) 13 3
Foreign sales corporation benefit (8) (14) (14)
Other 7 (1) 17
--------- --------- ---------
Provision for income taxes $ 160 $ 227 $ 340
========= ========= =========
47
48
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) 1997 1996
Deferred tax assets
Postemployment obligations $ 292 $ 263
Payroll and related items 51 49
Inventories 17 13
Deferred revenue 19 21
Miscellaneous reserves 40 33
Preproduction and start-up costs 8 18
Other 36 17
--------- ---------
Total $ 463 $ 414
========= =========
Deferred tax liabilities
Depreciation $ 728 $ 677
Other 30 25
--------- ---------
Total $ 758 $ 702
========= =========
Unremitted earnings of subsidiaries outside the United States totaling
$25 million at December 31, 1997, are considered to be reinvested
indefinitely. If remitted, they would be substantially free of additional
tax. It is not practicable to determine the deferred tax liability for
temporary differences related to those unremitted earnings.
Current income taxes payable totaling $53 million and $34 million are
included in current liabilities at December 31, 1997 and 1996,
respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
DECEMBER 31, 1997 DECEMBER 31, 1996
RECORDED FAIR RECORDED FAIR
(Dollars in millions) AMOUNT VALUE AMOUNT VALUE
Long-term borrowings $ 1,714 $ 1,800 $ 1,523 $ 1,515
Foreign exchange contracts 62 149 74 63
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 fixed-rate borrowings on current
interest rates for comparable securities. The Company's floating-rate
borrowings approximate fair value.
48
49
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 had currency options with maturities of not more than 5 years to
exchange various foreign currencies for U.S. dollars in the aggregate
notional amount of $1.275 billion and $1.536 billion at December 31, 1997
and 1996, respectively. The net unrealized gain (loss) deferred on such
options was $87 million and $(11) million as of December 31, 1997 and
1996, respectively. Those amounts, based on dealer-quoted prices,
represent the estimated gain (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, 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,
1998 $ 61
1999 49
2000 28
2001 24
2002 18
2003 and beyond 63
-------
Total minimum payments required $ 243
=======
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.
49
50
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RENTAL EXPENSE
(Dollars in millions) 1997 1996 1995
Gross rentals $ 81 $ 66 $ 60
Less: Sublease income 1 2 12
--------- --------- ---------
Total $ 80 $ 64 $ 48
========= ========= =========
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
Eastman anticipates total capital expenditures in 1998 will be between
$550 million and $600 million and depreciation expense is expected to be
approximately $350 million. The Company had various purchase commitments
at the end of 1997 for materials, supplies, and energy incident to the
ordinary conduct of business. These commitments total approximately $800
million. Eastman has other long-term commitments relating to 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 1997 and
1996.
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) 1997 1996 1995
Service cost $ 49 $ 49 $ 35
Interest cost 103 92 76
Return on plan assets (137) (175) (116)
Net amortization 39 87 39
--------- --------- ---------
Total U.S. pension cost $ 54 $ 53 $ 34
========= ========= =========
Eastman's worldwide net pension cost was $59 million, $57 million, and
$38 million in 1997, 1996, and 1995, respectively.
See Note 14 for discussion of partial settlement/curtailment of pension
and other postemployment benefit liabilities.
50
51
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) 1997 1996
Vested benefit obligation $ 978 $ 1,029
========= =========
Accumulated benefit obligation $ 1,081 $ 1,119
========= =========
Projected benefit obligation $ 1,345 $ 1,410
Market value of assets 857 1,210
--------- ---------
Projected benefits in excess of plan assets 488 200
Unrecognized net loss (226) (70)
Unrecognized net transition asset 35 57
Unrecognized prior service cost (49) (30)
--------- ---------
Accrued pension cost $ 248 $ 157
========= =========
The plans' assets are principally listed stocks.
The assumptions used to develop the projected benefit obligation for the
Company's U.S. pension plans follow:
DECEMBER 31,
1997 1996
Discount rate 7.25% 7.75%
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.
51
52
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, 1997 and 1996:
DECEMBER 31, 1997
HEALTH LIFE
(Dollars in millions) CARE INSURANCE TOTAL
Accumulated postretirement benefit obligation
Retirees $ 300 $ 52 $ 352
Fully eligible active plan participants 55 - 55
Other active plan participants 136 41 177
--------- -------- --------
Total accumulated postretirement benefit
obligation 491 93 584
Plan assets at fair value 27 6 33
--------- -------- --------
Accumulated postretirement benefit obligation
in excess of plan assets $ 464 $ 87 551
========= ========
Unrecognized prior service cost 49
Unrecognized net loss 98
--------
Accrued postretirement benefit cost $ 502
========
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
========
52
53
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
1997
Service cost $ 6 $ 3 $ 9
Interest cost 31 7 38
Return on plan assets (1) (3) (4)
--------- -------- --------
Net periodic postretirement benefit cost $ 36 $ 7 $ 43
========= ======== ========
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
========= ======== ========
To estimate the Company's postretirement benefit cost, health care costs
were assumed to increase 8.00% for 1998, with the rate of increase
declining to 5.00% by 2002 and thereafter. The discount rate and salary
increase rate were assumed to be 7.25% and 4.00% at December 31, 1997,
7.75% and 4.00% at December 31, 1996, and 7.25% and 4.00% at December 31,
1995. If the health care cost trend rates were increased by one
percentage point, the Company's accumulated postretirement health care
benefit obligation as of December 31, 1997, would increase by $75
million, while the net periodic postretirement health care benefit cost
would increase by $8 million. See Note 14 for discussion of partial
settlement/curtailment of pension and other postemployment benefit
liabilities.
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.
14. EARLY RETIREMENT CHARGE
In fourth quarter 1997 the Company recorded a $62 million ($40 million
after tax) charge for the partial settlement/curtailment of pension and
other postemployment benefit liabilities. The charge resulted from the
early retirement of approximately 1,700 employees, a majority of whom
chose to take their retirement benefits as a lump sum. No special
payments or incentives were offered.
53
54
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 Company believes no significant changes to current
reporting will be required as a result of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which is
effective for 1998.
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, pharmaceutical, agricultural,
recreation, consumer durables, photographic, 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, environmental responsibility,
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 operations of Holston
Defense Corporation are included in the Specialty and Performance segment
and do not have a significant impact on the financial position or results
of operations of the Company.
The Core Plastics segment includes the Company's two major plastics
products, EASTAPAK polymers and TENITE polyethylene, as well as cellulose
esters 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, with increasing focus in Southeast Asia. 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.
54
55
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 1997 1996 1995
SALES
Specialty and Performance $ 2,607 $ 2,657 $ 2,647
Core Plastics 1,338 1,409 1,685
Chemical Intermediates 733 716 708
--------- --------- ---------
Total $ 4,678 $ 4,782 $ 5,040
========= ========= =========
OPERATING EARNINGS (LOSS)
Specialty and Performance $ 416(1) $ 519 $ 433
Core Plastics (56)(1) (1) 347
Chemical Intermediates 146(1) 145 184
--------- --------- ---------
Total $ 506 $ 663 $ 964
========= ========= =========
ASSETS
Specialty and Performance $ 3,019 $ 2,887 $ 2,776
Core Plastics 2,188 1,854 1,598
Chemical Intermediates 571 525 498
--------- --------- ---------
Total $ 5,778 $ 5,266 $ 4,872
========= ========= =========
DEPRECIATION EXPENSE
Specialty and Performance $ 172 $ 174 $ 178
Core Plastics 123 109 96
Chemical Intermediates 32 31 34
--------- --------- ---------
Total $ 327 $ 314 $ 308
========= ========= =========
CAPITAL EXPENDITURES
Specialty and Performance $ 227 $ 302 $ 176
Core Plastics 390 388 215
Chemical Intermediates 132 99 55
--------- --------- ---------
Total $ 749 $ 789 $ 446
========= ========= =========
(1)Operating earnings for 1997 reflect the $62 million ($40 million after tax)
charge for partial settlement/curtailment of pension and other postemployment
benefit liabilities. The charge was allocated to segments as follows: Specialty
and Performance, $34 million; Core Plastics, $18 million; and Chemical
Intermediates, $10 million. See Note 14 for a discussion of the charge.
55
56
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $626 million in 1997, $687 million in 1996, and $698
million in 1995.
(Dollars in millions) United States Europe Other Areas Eliminations Consolidated
1997
Sales $3,500 $ 755 $ 423 $4,678
Transfers among geographic areas 798 18 74 $ (890) --
------ ----- ----- ------- ------
Total sales $4,298 $ 773 $ 497 $ (890) $4,678
====== ===== ===== ======= ======
Operating earnings (losses) $ 580 $ (51) $ (37) $ 14 $ 506
====== ===== ===== ======= ======
Assets at end of year $5,628 $ 805 $ 625 $(1,280) $5,778
====== ===== ===== ======= ======
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
====== ===== ===== ======= ======
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
====== ===== ===== ======= ======
56
57
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
(Dollars in millions) 1997 1996 1995
Interest (net of amounts capitalized) $ 88 $ 79 $ 91
Income taxes 131 236 364
Cash flows from operating activities include gains (losses) from equity
investments of $11 million, $(3) million, and $(6) million for 1997,
1996, and 1995, respectively. Derivative financial instruments and
related gains and losses are included in cash flows from operating
activities. The effect on cash of foreign currency transactions and
exchange rate changes for all years presented was insignificant.
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 Statements of
Cash Flows. The Consolidated Statements of Cash Flows do not separately
reflect certain Eastman assets acquired and liabilities assumed through
noncash transactions.
17. HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly owned subsidiary of the
Company, has, as its sole business, managed the government-owned Holston
Army Ammunition Plant in Kingsport, Tennessee (the "Facility") since 1942
under a series of contracts with the Department of Army (the "DOA").
Holston is currently managing the Facility under a contract that expires
on December 31, 1998 (the "Contract"), unless such management is
otherwise extended by the DOA pursuant to the terms of the Contract or by
agreement between the parties. The Contract generally provides for
payment of a management fee to Holston and reimbursement by the DOA of
defined costs incurred by Holston for the operation of the Facility.
Holston's operating results historically have been insignificant to the
Company's consolidated sales and earnings.
The DOA has undertaken to accept bids from qualified companies to manage
the Facility upon termination of the Contract under terms and conditions
substantially different from those of the Contract. During fourth quarter
1997 the DOA advised Holston that, because of Holston's position on the
DOA's proposed terms and conditions, it was not a qualified participant
in the bidding process. The bidding process is still in progress, and its
outcome and impact on Holson's continued management of the Facility is
currently uncertain. Consequently, management does not believe that it is
reasonably assured that Holston will not continue to manage the Facility
in some capacity.
Pension and other postemployment benefits are currently provided to
Holston's present and past employees under the terms of Holston's plans.
Termination of Holston's management of the Facility, if it occurs, could
result in termination payments to Holston's then-current employees and
require additional funding for the acceleration of obligations under the
pension and other postretirement benefit plans (such payments and
additional funding referred to collectively as "Termination Costs").
Actual Termination Costs would depend upon a number of factors, all of
which are not yet known to the Company. If the Company subsequently were
to determine that it is probable that it will incur Termination Costs,
then the Company would, in accordance with generally accepted accounting
principles, be required to recognize the Termination Costs as
liabilities, and payments and reimbursements from the DOA, where
appropriate, as receivables. While the exact amount of Termination Costs
cannot be determined at this time, the Company estimates the range of
additional liabilities which it would recognize if Holston's management
of the Facility were to terminate on December 31, 1998, without giving
effect to any
57
58
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payment or reimbursement, to be approximately $50 million to $75 million.
The difference, if any, between any such liabilities and receivables
would result in a charge to then-current earnings. In the event of
termination of Holston's management of the Facility, delays in the
payment or reimbursement of all or portions of the Termination Costs may
require the Company to advance funds to pay such costs.
Although the DOA's position with respect to similar contracts is that it
has no legal liability for unfunded postretirement benefit costs, other
than pension obligations, and the DOA may disagree with the specific
amount of other Termination Costs, it is the opinion of the Company and
its management, based on the Contract terms, applicable law, and legal
and equitable precedents, that substantially all of the Termination Costs
would be paid by the DOA or recovered from the government in related
proceedings, and that the amounts, if any, not paid or recovered, or the
advancement of funds by the Company pending such reimbursement or
recovery, should not have a material adverse effect on the consolidated
financial position of the Company.
18. ENVIRONMENTAL MATTERS
Certain Eastman manufacturing sites generate hazardous and nonhazardous
wastes, of which the treatment, storage, transportation, and disposal are
regulated by various governmental agencies. In connection with the
cleanup of various hazardous waste sites, the Company, along with many
other entities, has been designated a potentially responsible party
("PRP") by the U.S. Environmental Protection Agency under the
Comprehensive Environmental Response, Compensation and Liability Act,
which potentially subjects PRPs to joint and several liability for such
cleanup costs. In addition, the Company will be required to incur costs
for environmental remediation and closure/postclosure under the federal
Resource Conservation and Recovery Act. Because of expected sharing of
costs, the availability of legal defenses, and the Company's preliminary
assessment of actions that may be required, the Company does not believe
its liability for these environmental matters, individually or in the
aggregate, will be material to Eastman's consolidated financial position,
results of operations, or competitive position.
The Company's environmental protection and improvement cash expenditures
were approximately $220 million, $175 million, and $150 million in 1997,
1996, and 1995, respectively, including investments in construction,
operations, and development.
19. LEGAL MATTERS
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent, commercial, contract, environmental, antitrust, health
and safety, and employment matters, which are being handled and defended
in the ordinary course of business. While the Company is unable to
predict the outcome of these matters, it does not believe, based upon
currently available facts, that the ultimate resolution of any of such
pending matters will have a material adverse effect on the Company's
business, financial position, or results of operations.
58
59
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(Dollars in millions, except per share amounts)
1997 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. (1)
Sales $ 1,171 $ 1,208 $ 1,145 $ 1,154
Operating earnings 134 157 148 67
Earnings before income taxes 114 141 148 43
Provision for income taxes 42 51 52 15
Net earnings 72 90 96 28
Basic earnings per share (2) .93 1.15 1.23 .36
Diluted earnings per share (2) .92 1.14 1.22 .35
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
Basic earnings per share (2) 1.41 1.42 1.23 .77
Diluted earnings per share (2) 1.39 1.41 1.22 .77
-------------------------
(1) Fourth quarter 1997 operating data reflects a charge of $62 million
($40 million after tax) resulting from partial settlement/curtailment of
pension and other postemployment benefit liabilities. See Note 14 for a
discussion of the charge.
(2) Each quarter is calculated as a discrete period; the sum of the four
quarters may not equal the calculated full-year amount. Earnings per
share for prior periods have been restated to conform to requirements of
the new accounting standard effective for periods ending after December
15, 1997.
59
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
60
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the heading "Election of Directors -- General" in the 1998
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 1998 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 1998 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 1998 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.
61
62
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 32
Report of independent accountants 33
Consolidated statements of earnings and retained earnings 34
Consolidated statements of financial position 35
Consolidated statements of cash flows 36
Notes to consolidated financial statements 37 - 59
2. Financial statement schedules
All schedules have been omitted because they are not applicable
or because the required information is shown in the financial
statements or notes thereto.
3. Exhibits filed as part of this report are listed in the Exhibit
Index appearing on page 65.
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, no reports on Form 8-K
were filed.
(c) The Exhibit Index and required Exhibits to this report are included
beginning at page 65.
(d) There are no applicable financial statement schedules required to be
filed as part of this report.
62
63
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 6, 1998
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 6, 1998
- ------------------------------ Board and Chief
Earnest W. Deavenport, Jr. Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ H. Virgil Stephens Senior Vice President and March 6, 1998
- ------------------------------ Chief Financial Officer
H. Virgil Stephens
PRINCIPAL ACCOUNTING OFFICER:
/s/ Patrick R. Kinsey Vice President and March 6, 1998
- ------------------------------ Comptroller
Patrick R. Kinsey
63
64
SIGNATURE TITLE DATE
- --------- ----- ----
DIRECTORS:
/s/ R. Wiley Bourne, Jr. Vice Chairman March 6, 1998
- ------------------------------ of the Board
R. Wiley Bourne, Jr. and Executive
Vice President
/s/ H. Jesse Arnelle Director March 6, 1998
- ------------------------------
H. Jesse Arnelle
/s/ Calvin A. Campbell, Jr. Director March 6, 1998
- ------------------------------
Calvin A. Campbell, Jr.
/s/ Jerry E. Dempsey Director March 6, 1998
- ------------------------------
Jerry E. Dempsey
/s/ John W. Donehower Director March 6, 1998
- ------------------------------
John W. Donehower
/s/ Lee Liu Director March 6, 1998
- ------------------------------
Lee Liu
/s/ Marilyn R. Marks Director March 6, 1998
- ------------------------------
Marilyn R. Marks
/s/ Gerald B. Mitchell Director March 6, 1998
- ------------------------------
Gerald B. Mitchell
/s/ John A. White Director March 6, 1998
- ------------------------------
John A. White
64
65
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 February 3, 1998 69-78
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 (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"))
4.09 Officer's Certificate pursuant to Sections 201 and 301 of
the Indenture related to 7.60% Debentures due February 1, 2027 (incorporated herein by
reference to Exhibit 4.09 1996 10-K)
65
66
EXHIBIT INDEX
Exhibit Description Sequential
Number Page
Number
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 (incorporated herein by reference to
Exhibit 10.01 to the 1996 10-K)
*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 Statement on Form 10, originally
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 (incorporated herein by reference to
Exhibit 10.05 to the 1996 10-K)
*10.06 Executive Deferred Compensation Plan, as amended (incorporated herein by reference to
Exhibit 10.06 to the 1996 10-K)
*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 Harold L. Henderson
(incorporated herein by reference to Exhibit 10.08 to the 1996 10-K)
*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 (incorporated herein by reference to
Exhibit 10.11 to the 1996 10-K)
66
67
EXHIBIT INDEX
Exhibit Description Sequential
Number Page
Number
*10.12 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)
*10.13 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)
*10.14 Eastman 1997-1999 Long-Term Performance Subplan of
1994 Omnibus Long-Term Compensation Plan (incorporated herein by reference to Exhibit
10.15 to 1996 10-K)
*10.15 Eastman 1998-2000 Long-Term Performance Subplan of 1997 Omnibus Long-Term Compensation
Plan 79-87
*10.16 1997 Omnibus Long-Term Compensation Plan (incorporated herein by reference to Appendix
A to Eastman Chemical Company's definitive 1997 Annual Meeting Proxy Statement filed
pursuant to Regulation 14A)
*10.17 Award Notice for Price-Vesting Stock Option Granted to CEO under 1997 Omnibus Long-
Term Compensation Plan (incorporated herein by reference to Exhibit 10.01 to Eastman
Chemical Company's Form 10-Q for the quarter ended September 30, 1997)
*10.18 Eastman Chemical Company Benefit Security Trust dated December 24, 1997 88-106
10.19 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)
10.20 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)
10.21 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)
10.22 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)
67
68
EXHIBIT INDEX
Exhibit Description Sequential
Number Page
Number
10.23 Imaging Chemicals License Agreement, dated as of December 31, 1993, between Eastman
Kodak Company and Eastman Chemical Company (incorporated herein by reference to
Exhibit 10.13 to the S-1)
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 107
21.01 Subsidiaries of the Company 108-109
23.01 Consent of Independent Accountants 110
27.01 Financial Data Schedule (for SEC use only) 111
99.01 Supplemental Business Segment Information 112
- ------------------------------
* Management contract or compensatory plan or arrangement filed pursuant to
Item 601(b)(10)(iii) of Regulation S-K.
68