1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 62-1539359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N. EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class March 31, 1999
Common Stock, par value $0.01 per share 78,175,774
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
- --------------------------------------------------------------------------------
PAGE 1 OF 44 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 22
2
TABLE OF CONTENTS
- -----------------------------------------------------------------------------------------------------
ITEM PAGE
- -----------------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
1. Financial Statements 3-9
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-18
PART II. OTHER INFORMATION
1. Legal Proceedings 19-20
2. Changes in Securities 20
6. Exhibits and Reports on Form 8-K 20
SIGNATURES
Signatures 21
2
3
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE INCOME,
AND RETAINED EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FIRST QUARTER
1999 1998
EARNINGS
Sales $ 1,023 $ 1,148
Cost of sales 829 894
------- -------
Gross profit 194 254
Selling and general administrative expenses 76 75
Research and development costs 47 46
------- -------
Operating earnings 71 133
Interest expense, net 26 21
Other (income) charges, net 8 (2)
------- -------
Earnings before income taxes 37 114
Provision for income taxes 12 40
------- -------
Net earnings $ 25 $ 74
======= =======
Earnings per share:
--Basic $ .32 $ .95
======= =======
--Diluted $ .31 $ .94
======= =======
COMPREHENSIVE INCOME
Net earnings $ 25 $ 74
Other comprehensive loss (29) (1)
------- -------
Comprehensive income (loss) $ (4) $ 73
======= =======
RETAINED EARNINGS
Retained earnings at beginning of period $ 2,188 $ 2,078
Net earnings 25 74
Cash dividends declared (35) (35)
------- -------
Retained earnings at end of period $ 2,178 $ 2,117
======= =======
The accompanying notes are an integral part of these financial statements.
3
4
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN MILLIONS)
MARCH 31, DECEMBER 31,
1999 1998
ASSETS
Current assets
Cash and cash equivalents $ 55 $ 29
Receivables 748 759
Inventories 521 493
Other current assets 147 117
------- -------
Total current assets 1,471 1,398
------- -------
Properties
Properties and equipment at cost 8,605 8,594
Less: Accumulated depreciation 4,633 4,560
------- -------
Net properties 3,972 4,034
------- -------
Other noncurrent assets 448 418
------- -------
Total assets $ 5,891 $ 5,850
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 828 $ 959
------- -------
Total current liabilities 828 959
Long-term borrowings 1,851 1,649
Deferred income tax credits 443 415
Postemployment obligations 746 712
Other long-term liabilities 179 181
------- -------
Total liabilities 4,047 3,916
------- -------
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares authorized;
shares issued -- 84,439,140 and 84,432,114) 1 1
Paid-in capital 93 94
Retained earnings 2,178 2,188
Other comprehensive loss (47) (18)
------- -------
2,225 2,265
Less: Treasury stock at cost (6,421,790 and 5,326,990 shares) 381 331
------- -------
Total shareowners' equity 1,844 1,934
------- -------
Total liabilities and shareowners' equity $ 5,891 $ 5,850
======= =======
The accompanying notes are an integral part of these financial statements.
4
5
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
FIRST QUARTER
1999 1998
Cash flows from operating activities
Net earnings $ 25 $ 74
----- -----
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation 87 82
Benefit for deferred income taxes (3) (6)
(Increase) decrease in receivables 28 (52)
Increase in inventories (28) (7)
Decrease in incentive pay and employee
benefit liabilities (107) (56)
Increase in liabilities excluding borrowings,
incentive pay, and employee benefit liabilities 9 10
Other items, net 7 5
----- -----
Total adjustments (7) (24)
----- -----
Net cash provided by operating activities 18 50
----- -----
Cash flows from investing activities
Additions to properties and equipment (76) (135)
Acquisitions and investments in joint ventures (12) -
Proceeds from sales of assets - 1
Capital advances to suppliers (21) (21)
----- -----
Net cash used in investing activities (109) (155)
----- -----
Cash flows from financing activities
Net increase in commercial paper borrowings 203 147
Dividends paid to shareowners (35) (34)
Treasury stock purchases (50) -
Other items (1) 6
----- -----
Net cash provided by financing activities 117 119
----- -----
Net change in cash and cash equivalents 26 14
Cash and cash equivalents at beginning of period 29 29
----- -----
Cash and cash equivalents at end of period $ 55 $ 43
===== =====
The accompanying notes are an integral part of these financial statements.
5
6
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared by the Company in accordance and consistent with the
accounting policies stated in the Company's 1998 Annual Report on Form
10-K and should be read in conjunction with the consolidated financial
statements appearing therein. In the opinion of the Company, all
normally recurring adjustments necessary for a fair presentation have
been included in the interim unaudited consolidated financial
statements. The unaudited interim consolidated financial statements are
based in part on estimates made by management.
The Company has reclassified certain 1998 amounts to conform to the
1999 presentation.
2. INVENTORIES
MARCH 31, DECEMBER 31,
(Dollars in millions) 1999 1998
At FIFO or average cost (approximates current cost):
Finished goods $ 407 $ 409
Work in process 154 138
Raw materials and supplies 199 203
----- -----
Total inventories 760 750
Reduction to LIFO value (239) (257)
----- -----
Total inventories at LIFO value $ 521 $ 493
===== =====
Inventories valued on the LIFO method are approximately 70% of total
inventories in each of the periods.
3. HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly owned subsidiary of
the Company, managed, as its primary business, the government-owned
Holston Army Ammunition Plant in Kingsport, Tennessee (the "Facility")
under a series of contracts with the Department of Army (the "DOA")
from 1949 until expiration of the Contract (the "Contract") on December
31, 1998. The DOA awarded a contract to manage the Facility to a third
party commencing January 1, 1999.
The Contract provides for payment of a management fee to Holston and
reimbursement by the DOA of allowable costs incurred for the operation
of the Facility. Holston's operating results historically have been
insignificant to the Company's consolidated sales and earnings.
Pension and other postretirement benefits have been provided to
Holston's present and past employees under the terms of Holston's
employee benefit plans. In prior reporting periods, the Company has
recognized, in accordance with generally accepted accounting
principles, a charge to earnings of approximately $89 million for
pension and other postretirement benefit obligations related to
Holston's management of the Facility under the Contract. The Company
expects that the DOA will reimburse these pension and other
postretirement benefit obligations and such amounts will be credited to
earnings at the time of receipt of reimbursement from the DOA. The
reimbursement may or may not occur in a single payment.
In addition to the above, the Company has recognized a receivable of
$48 million, which is expected to be reimbursed by the DOA, for pension
obligations and termination costs related to expiration of the
Contract.
6
7
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Holston terminated its pension plan in a standard termination as of
January 1, 1999. In order to terminate the pension plan in a standard
termination, the assets of the plan had to be sufficient to provide all
benefit liabilities with respect to each participant. A delay in
reimbursement by the DOA resulted in the Company advancing
approximately $35 million in first quarter 1999 toward the funding of
these liabilities. The ending of Holston's operation of the Facility
also resulted in obligations for severance pay to eligible Holston
employees (the amount based on length of service). A delay in
reimbursement by the DOA resulted in the Company advancing
approximately $4 million for such obligations in first quarter 1999.
The Company will likely be required to advance additional funds to pay
pension benefit liabilities and termination costs if there are further
delays in payment or reimbursement by the DOA.
As previously reported, the Company is negotiating with the DOA the
settlement of certain postretirement benefit obligations. The Company's
potential obligation for these postretirement benefits, if any, in
excess of the negotiated amount will be recognized as a liability at
such time that it is probable and reasonably estimable that projected
benefit obligations exceed assets provided by the DOA. The Company
expects that the DOA will reimburse the Company for all costs
associated with operation of the Facility and expiration of the
Contract.
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 postretirement obligations, it is the opinion
of the Company, based on the Contract terms, applicable law, and legal
and equitable precedents, that substantially all of the other
postretirement benefit costs will 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 or results of
operations of the Company.
4. PAYABLES AND OTHER CURRENT LIABILITIES
MARCH 31, DECEMBER 31,
(Dollars in millions) 1999 1998
Trade creditors $ 312 $ 316
Accrued payrolls and vacation 99 100
Accrued variable-incentive compensation 10 74
Accrued pension liabilities 112 182
Accrued taxes 90 58
Other 205 229
-------- ---------
Total $ 828 $ 959
======== =========
5. DISTILLATION PRODUCTS INDUSTRIES
In first quarter 1999, the Company announced a phase-out of operations
at Distillation Products Industries in Rochester, New York. The Company
recorded a pre-tax charge to earnings of $8 million ($5.4 million after
tax) in first quarter 1999 for costs associated with employee
termination benefits, dismantlement costs, and the write-down of plant
and equipment used at the site. This charge was recorded in Cost of
Sales for the Specialty and Performance segment.
7
8
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. IMPAIRMENT OF ASSETS
The Company recorded in first quarter 1999 a pre-tax charge to earnings
of $6.8 million ($4.6 million after tax) for the write-off of
construction in progress related to an epoxybutene ("EpB") plant
project which was determined to have no future value. This charge was
recorded in Cost of Sales for the Specialty and Performance segment.
7. DIVIDENDS
FIRST QUARTER
1999 1998
Cash dividends declared per share $ .44 $.44
8. EARNINGS PER SHARE
FIRST QUARTER
1999 1998
Shares used for earnings per share calculation (in millions):
--Basic 78.7 78.4
--Diluted 78.8 79.2
Certain shares underlying options outstanding during the first quarters
of 1999 and 1998 were excluded from the computation of diluted earnings
per share because the options' exercise prices were greater than the
average market price of the common shares. Excluded from first quarter
1999 and 1998 calculations were shares underlying options to purchase
1,919,940 shares of common stock at a range of prices from $44.16 to
$74.25 and 567,350 shares of common stock at a range of prices from
$62.88 to $74.25 outstanding at March 31, 1999 and 1998, respectively.
Additionally, 200,000 shares underlying an option issued to the Chief
Executive Officer in third quarter 1997 were excluded from diluted
earnings per share calculations because the conditions to exercise had
not been met as to any of the shares as of March 31, 1999.
9. SUPPLEMENTAL CASH FLOW INFORMATION
In March 1998, the Company issued 536,188 treasury shares to its
Employee Stock Ownership Plan as partial settlement of the Company's
Eastman Performance Plan payout. The shares issued had a market value
of $35 million and a carrying value of $33 million. This noncash
transaction is not reflected in the Consolidated Statement of Cash
Flows.
10. SUBSEQUENT EVENTS
SECURITIZATION OF ACCOUNTS RECEIVABLE
On April 13, 1999, the Company entered into an agreement that will
allow the Company to sell certain domestic accounts receivable under a
planned continuous sale program to a third party. Undivided interests
in designated receivable pools will be sold to the purchaser, with
recourse limited to the receivables purchased. As of the date of this
filing, no receivables had been sold to the third party. Fees to be
paid by the Company under this agreement will be based on certain
variable market rate indices.
8
9
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MERGER AGREEMENT WITH LAWTER INTERNATIONAL, INC.
On April 28, 1999, the Company and Lawter International, Inc. announced
approval by their respective boards of directors of a definitive merger
agreement under which the Company expects to acquire the outstanding
shares of Lawter International, Inc. in a transaction valued at
approximately $500 million, including debt assumed. Lawter
International, Inc. develops, produces and markets specialty products
for the inks and coatings market. Under the terms of the agreement, the
Company will commence a tender offer to purchase all outstanding shares
of Lawter International, Inc. common stock for $12.25 per share.
Following completion of the tender offer, the Company expects to
consummate a cash merger to acquire any shares not previously tendered.
The Company expects that the tender offer will be accepted by
shareowners of Lawter International, Inc. by the end of second quarter
1999. The transaction will be financed with cash and other currently
available sources of liquidity.
9
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
1998 Annual Report on Form 10-K and the unaudited interim consolidated financial
statements included elsewhere in this report. All references to earnings per
share contained in this report are diluted earnings per share unless otherwise
noted.
RESULTS OF OPERATIONS
EARNINGS
(Dollars in millions, except per share amounts) FIRST QUARTER
1999 1998 CHANGE
Operating earnings $ 71 $ 133 (47)%
Net earnings 25 74 (66)
Earnings per share:
- --Basic .32 .95 (66)%
- --Diluted .31 .94 (67)
Although sales volume improved overall for the quarter, results reflect a
continuation of global economic conditions which exerted extreme pressure on
selling prices. Selling prices declined for most products, negatively impacting
every segment and region. Lower selling prices were particularly evident for
EASTAPAK polymers and commodity grade polyethylenes sold in North America and
Europe, a result of excess industry capacity for polyethylene terephthalate
("PET") and competitive polyethylene market conditions. Lower selling prices for
oxo products sold in North America also significantly impacted results for the
quarter.
The decline in selling prices was mitigated somewhat by lower costs for major
raw materials including propane feedstock, paraxylene, purified terephthalic
acid, and ethylene glycol. Cost structure improvements resulting from the
Company's Advantaged Cost 2000 initiative also positively impacted results.
Results for the quarter were negatively impacted by charges related to a
discontinued capital project and the phase-out of operations at Distillation
Products Industries in Rochester, New York. See Notes 5 and 6 to Consolidated
Financial Statements.
Foreign currency fluctuations, net of currency hedging transactions, had a
slight negative impact on earnings.
10
11
SUMMARY BY INDUSTRY SEGMENT
(Dollars in millions)
SPECIALTY AND PERFORMANCE SEGMENT
FIRST QUARTER
1999 1998 CHANGE
Sales $ 632 $ 685 (8)%
Operating earnings 83 105 (21)
Sales volumes improved slightly overall but revenues declined as economic
conditions and competitive markets pressured selling prices for all product
lines. Specialty plastics volumes declined slightly as a result of lower volumes
for EASTAPAK polymers and cellulosic plastics, while SPECTAR volume continued to
grow. Sales volumes for fibers and performance chemicals were relatively
unchanged from first quarter last year. Coatings, inks and resins results
reflected a continuation of lower prices for neopentyl glycols but slightly
higher volumes overall. Sales volumes for fine chemicals improved but a shift in
the mix of products sold had a negative impact on revenues.
Operating earnings were negatively impacted by the decline in selling prices and
charges related to a discontinued capital project and the phase-out of
operations at Distillation Products Industries in Rochester, New York (see Notes
5 and 6 to Consolidated Financial Statements). The effect of lower selling
prices was partially offset by lower raw materials costs and cost structure
improvements resulting from the Company's Advantaged Cost 2000 initiative.
CORE PLASTICS SEGMENT
FIRST QUARTER
1999 1998 CHANGE
Sales $ 229 $ 275 (17)%
Operating loss (36) (10) >(100)
Significantly lower selling prices attributable to excess PET industry capacity
resulted in substantially lower revenues for EASTAPAK polymers in all regions.
Although sales volumes for EASTAPAK polymers reflected the Company's additional
available capacity at manufacturing sites which began production mid-year 1998,
volumes were impacted somewhat by operational problems in North America and
Europe and the weakened Brazilian economy. Sales volumes improved significantly
for commodity grade polyethylenes, but the impact was more than offset by lower
selling prices.
Operating earnings were negatively impacted by the decline in selling prices,
partially offset by lower raw materials costs and cost structure improvements
resulting from the Company's Advantaged Cost 2000 initiative.
CHEMICAL INTERMEDIATES SEGMENT
FIRST QUARTER
1999 1998 CHANGE
Sales $ 162 $ 188 (14)%
Operating earnings 24 38 (37)
Sales and earnings were significantly lower due to lower selling prices,
particularly for oxo products. Lower costs for major raw materials and cost
structure improvements resulting from the Company's Advantaged Cost 2000
initiative partially offset the impact of lower selling prices.
11
12
(For supplemental analysis of Specialty and Performance, Core Plastics, and
Chemical Intermediates segment results, see Exhibit 99.01 to this Form 10-Q.)
SUMMARY BY CUSTOMER LOCATION
(Dollars in millions)
SALES BY REGION
FIRST QUARTER
1999 1998 CHANGE
United States and Canada $ 662 $ 754 (12)%
Europe, Middle East, and Africa 174 207 (16)
Asia Pacific 111 98 13
Latin America 76 89 (15)
Sales in the United States for first quarter 1999 declined in all segments and
were $619 million, down 13% from 1998 first quarter sales of $713 million. The
decrease was primarily due to lower selling prices. Significantly lower selling
prices were experienced for EASTAPAK polymers, commodity polyethylenes, and
chemical intermediates.
Sales outside the United States for first quarter 1999 were $404 million, down
7% from 1998 first quarter sales of $435 million. Sales outside the United
States were 39% of total sales in first quarter 1999 compared with 38% for first
quarter 1998. Selling prices declined in all regions. Increased sales in Asia
Pacific mainly resulted from higher volume for fibers, specialty plastics,
coatings, inks and resins. In Europe, volumes were relatively unchanged and the
decline was attributable to lower selling prices for EASTAPAK polymers. Sales
volumes improved in Latin America, but lower selling prices, particularly for
EASTAPAK polymers, resulted in lower sales.
SUMMARY OF CONSOLIDATED RESULTS
(Dollars in millions)
FIRST QUARTER
1999 1998 CHANGE
SALES $ 1,023 $ 1,148 (11)%
Sales volumes overall were slightly higher in first quarter 1999, but revenues
declined as a result of lower selling prices attributable to the global economy
and competitive market conditions. Sales in first quarter 1999 were not
significantly impacted by foreign currency fluctuations.
FIRST QUARTER
1999 1998 CHANGE
GROSS PROFIT $ 194 $ 254 (24)%
As a percentage of sales 19.0% 22.1%
Gross profit declined primarily as a result of significantly lower selling
prices. Also impacting gross profit were charges related to a discontinued
capital project and the phase-out of operations at Distillation Products
Industries in Rochester, New York. Lower raw materials costs and cost structure
improvements had a positive effect on gross profit.
12
13
FIRST QUARTER
1999 1998 CHANGE
GROSS INTEREST COSTS $31 $32
LESS CAPITALIZED INTEREST 5 11
--- ---
NET INTEREST EXPENSE $26 $21 24%
=== ===
Capitalized interest declined in 1999 as several substantial projects in the
Company's major capital investment program were completed during 1998.
FIRST QUARTER
1999 1998 CHANGE
OTHER (INCOME) CHARGES, NET $ 8 $ (2) >(100)%
Other income and other charges include interest income and royalty income, gains
and losses on asset sales, results from equity investments, foreign exchange
transactions, and other items. The change in other income was due primarily to
losses on foreign exchange transactions.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
FINANCIAL INDICATORS 1999 1998
For the first three months:
Ratio of earnings to fixed charges 2.0x 3.8x
At the periods ended March 31, 1999 and December 31, 1998:
Current ratio 1.8x 1.5x
Percent of long-term borrowings to total capital 50% 46%
Percent of floating-rate borrowings to total borrowings 18% 13%
CASH FLOW
FIRST QUARTER
(Dollars in millions) 1999 1998
Net cash provided by (used in)
Operating activities $ 18 $ 50
Investing activities (109) (155)
Financing activities 117 119
----- -----
Net change in cash and cash equivalents $ 26 $ 14
===== =====
Cash and cash equivalents at end of period $ 55 $ 43
===== =====
Cash provided by operating activities declined from first quarter 1998, mainly
due to lower selling prices, offset somewhat by lower costs for major raw
materials. Cash provided by operations also declined due to funding of Company
obligations to the Employee Stock Ownership Plan, such obligation having been
funded with treasury stock in 1998, and funding of pension plans. Cash used in
investing activities declined as a result of reduced capital expansion activity
in 1999. Cash provided by financing activities reflects an increase in
commercial paper borrowings and the payment of dividends in both years and
treasury stock purchases in 1999.
13
14
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 1999, the Company estimates that depreciation will be $360 million and that
capital expenditures will be equal to or less than depreciation. Long-term
commitments related to planned capital expenditures are not material. The
Company had various purchase commitments at the end of 1998 for materials,
supplies, and energy incident to the ordinary conduct of business. These
commitments approximate $2 billion over 15 years.
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 rate for such fee was .075% as
of March 31, 1999. 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 March 31,
1999, the Company's commercial paper outstanding balance was $326 million at an
effective interest rate of 5.01%. At March 31, 1998, the Company's commercial
paper outstanding balance was $360 million at an effective interest rate of
5.72%.
The Company has an effective registration statement on file with the Securities
and Exchange Commission to issue up to $1 billion of debt or equity securities.
No securities have been sold from this shelf registration.
During 1998, the Company issued $23 million tax-exempt bonds at variable
interest rates, the proceeds of which are to be used for the construction of
certain solid waste disposal facilities in Kingsport, Tennessee. The proceeds
from this issuance are held in trust and become available to the Company as
expenditures are made for construction of the designated solid waste disposal
facilities. Approximately $4 million of qualifying expenditures related to these
projects had been made as of March 31, 1999.
On April 13, 1999, the Company entered into an agreement that will allow the
Company to sell certain domestic accounts receivable under a planned continuous
sale program to a third party. Undivided interests in designated receivable
pools will be sold to the purchaser, with recourse limited to the receivables
purchased. As of the date of this filing, no receivables had been sold to the
third party. Fees to be paid by the Company under this agreement will be based
on certain variable market rate indices.
On April 28, 1999, the Company and Lawter International, Inc. announced approval
by their respective boards of directors of a definitive merger agreement under
which the Company expects to acquire the outstanding shares of Lawter
International, Inc. in a transaction valued at approximately $500 million,
including debt assumed. Under the terms of the agreement, the Company will
commence a tender offer to purchase all outstanding shares of Lawter
International, Inc. common stock for $12.25 per share. Following completion of
the tender offer, the Company expects to consummate a cash merger to acquire any
shares not previously tendered. The transaction will be financed with cash and
other currently available sources of liquidity.
The Company is currently authorized to purchase up to $400 million of its common
stock. During first quarter 1999, a total of 1,094,800 shares of common stock at
a cost of approximately $50 million was repurchased. Repurchased shares may be
used to meet common stock requirements for compensation and benefit plans and
other corporate purposes.
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
14
15
DIVIDENDS FIRST QUARTER
1999 1998
Cash dividends declared per share $ .44 $ .44
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 date-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. This is a significant issue
for most, if not all, companies, with far reaching implications, some of which
cannot be anticipated or predicted with any degree of certainty. Year 2000
problems could affect many of the Company's processes, including production,
distribution, research and development, financial, administrative and
communications operations. The Company's date-dependent systems can be
summarized in three categories: computerized business systems; computerized
distributed control systems for manufacturing; and other devices using embedded
chips.
Internal identification of all business systems, manufacturing systems and
embedded chip devices for year 2000 compliance is complete. An outside
consultant has evaluated the Company's identification, assessment, and testing
process related to manufacturing and embedded equipment and concluded that the
results of the internal processes are reliable.
The Company considers its key enterprise business computer systems capable of
accurately handling year 2000 dates. Final integrated acceptance testing of the
Company's existing key enterprise business computer systems was completed
successfully during 1998. Very few problems were encountered in this area,
primarily because of the Company's aggressive implementation of enterprise
software and standardized desktop/office software earlier this decade. The
Company will continue its year 2000 assessment and testing efforts for new or
modified business computer systems throughout 1999.
Assessment of statements of product compliance from the manufacturers of our
date-dependent manufacturing control systems and embedded chip devices is
complete. A minimal number of devices have been determined to be non-compliant,
with most requiring software upgrades at minimal cost. Remediation of the
non-compliant equipment and software identified by vendors to have possible date
compliancy problems is proceeding on schedule. A testing plan approved by senior
management is being used to evaluate all manufacturing control systems for
date-sensitive issues and to test a representative sample of these control
systems. The majority of upgrades to the manufacturer's stated level of
compliance for our manufacturing control systems and embedded chip devices has
been completed. The Company plans to complete assessment, testing, and most of
the remediation or workaround solutions on critical control systems and embedded
chip devices by June 1999 and is on target to meet that completion date.
However, because of plant scheduling and equipment lead times, some upgrade work
may not occur until the second half of 1999. Additionally, some lower priority
embedded chip devices may not be tested or remediated but will be managed by
contingency plans. Although some risk is inherent with this plan, the Company
believes the risk is controllable with contingency plans being developed and
that this plan does not pose significant problems for the Company's various
manufacturing control systems.
As a result of assessments, modifications, upgrades, or replacements planned,
ongoing or already completed, the Company believes the year 2000 issue as it
relates to the Company's own date-dependent systems will not pose significant
problems for the Company's business, processes and operations. The Company
believes that the costs of modifications, upgrades, or replacements of software,
hardware, or capital equipment which would not be incurred but for year 2000
compatibility requirements have not and will not have a material impact on the
Company's financial position or results of operations. Overall costs
attributable to the Company's year 2000 efforts, incurred over a period of
several years, are expected to be less than $20 million.
15
16
The Company has identified and is communicating with key suppliers and other
service providers to determine if entities with which the Company transacts
business have an effective plan in place to address the year 2000 issue, and to
determine the extent of the Company's vulnerability to the failure of third
parties to remediate their own year 2000 issue. While all customers have not
been surveyed directly, the Company has exchanged information with certain
customers as they contact Eastman about its year 2000 compliance. In addition,
the Company has identified key customers with whom it is exchanging more
detailed information. The Company has received year 2000 disclosure statements
from 96% of companies surveyed which includes our raw materials suppliers,
indirect suppliers and other key service providers. The Company is proceeding
with a more detailed assessment of selected critical suppliers, service
providers and key customers to further assess the Company's risk. The Company
expects to complete these assessments by June 1999. Assessment of suppliers,
service providers and customers is dependent upon the accuracy and validity of
their year 2000 disclosure statements.
A business contingency planning team composed of key business managers has been
assigned to develop company-wide contingency plans. This team is actively
assessing the internal and external risks posed by the year 2000 issue such as
energy, telecommunications, financial, transportation and material supply
disruptions. Existing business continuity plans adjusted for unique year 2000
issues provide the basis for contingency planning. Major elements of the plan
will be completed by June 1999 with refinement and execution continuing up to
and through the year 2000 rollover.
Based on current plans and efforts to date, the Company does not anticipate that
the year 2000 issue will have a material effect on results of operations or
financial condition. However, a number of customers have indicated a potential
change in their buying patterns such that they may increase inventories during
the fourth quarter 1999, which could defer purchases during the first quarter
2000. If this were to occur, it could have a material impact upon operating
results for each of these quarters. The Company will continue to assess and work
with customers to determine the likelihood of these changes occurring and their
impact on the Company. The above expectations are subject to uncertainties. For
example, if the Company is unsuccessful in identifying or remediating all year
2000 problems in its critical operations, or if it is affected by the inability
of suppliers or major customers to continue operations due to such a problem,
then the Company's results of operations or financial condition could be
materially impacted.
HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly owned subsidiary of the
Company, managed the government-owned Holston Army Ammunition Plant in
Kingsport, Tennessee (the "Facility") under contract with the Department of Army
("DOA") from 1949 until expiration of the contract (the "Contract") on December
31, 1998. The DOA awarded a contract to manage the Facility to a third party
effective January 1, 1999.
The Contract provides for reimbursement of allowable costs incurred by Holston.
The Company has recognized liabilities associated with Holston's curtailment of
pension, other postretirement benefits and other termination costs in accordance
with generally accepted accounting principles and expects the DOA to reimburse
substantially all such costs and payments. The recording of previously
unrecognized liabilities for pension and other termination costs had no effect
on earnings because the Company also recorded a receivable from the DOA for
reimbursement of such amounts. Reimbursement of certain previously recognized
pension and postretirement benefit costs will be credited to earnings at the
time of receipt of reimbursement from the DOA. A delay in reimbursement by the
DOA resulted in the Company advancing funds in early 1999 to pay a portion of
such costs. The Company will likely be required to advance additional funds to
pay pension benefit liabilities, as well as other postretirement and termination
costs, if there are further delays in payment or reimbursement by the DOA. The
Company expects no significant impact on financial position or results of
operations related to expiration of the Contract. See Note 3 to Consolidated
Financial Statements.
16
17
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. The Company is evaluating the effect of this standard on its financial
statements and will comply with requirements of the new standard which become
effective for the Company's 2000 financial reporting cycle.
OUTLOOK
Although encouraged by recent volume gains for some products, the Company
remains cautious about the next few months. Given the current economic
environment and continued pressure on selling prices, the Company anticipates
that it will be a challenge to improve earnings in 1999 over those of 1998.
Current global economic conditions and industry overcapacities are expected to
continue to pressure selling prices for most products. Demand for EASTAPAK
polymers, SPECTAR copolymers, and new polyethylene performance polymers, MXSTEN
and TENITE HIFOR, are expected to continue to grow. The 1999 start up of the new
oxo facility in Singapore is expected to provide volume growth capacities in the
Asia Pacific region.
The Company expects growth in the coatings, inks, resins and adhesives markets
as a result of the recently announced pending acquisition of Lawter
International, Inc. Based upon expected cost savings and revenue synergies, the
Company expects the transaction to be accretive to earnings in the first full
year after the merger.
The Company expects Asia Pacific sales volume will continue to improve due to
new available capacities, although selling prices in the region will likely be
depressed. Given current Brazilian economic conditions and the impact on the
region, the Company anticipates it will be a challenge to improve sales and
earnings for Latin America. Growth in Europe is expected to continue to be a
challenge in 1999. The Company anticipates that sales prices and volumes in
North America will continue to be pressured.
The Company will continue to pursue alternatives to diminish the impact of the
container plastics business on its portfolio, while focusing on improving cash
flow from this business.
The Company estimates that depreciation in 1999 will be approximately $360
million and plans capital expenditures equal to or less than depreciation. Gross
interest cost is expected to remain level with 1998, but capitalized interest is
expected to decrease as capital expenditures decline and capital improvements
now underway are completed.
In 1999, the Company has placed an increased priority on cash flow through
increased sales volumes, reduced capital expenditures, working capital reduction
efforts, continued emphasis on cost structure improvements and productivity
gains through its Advantaged Cost 2000 initiative, reinforced by basing a
portion of annual incentive payments for senior management on free cash flow.
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; additional available manufacturing capacity; capital spending and
depreciation; the year 2000 issue; legal proceedings; global economic
conditions; and supply and demand, volumes, prices, costs, margins, and sales
and earnings and cash flow 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 underlying 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.
17
18
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: continued pressure on selling prices from global economic
conditions and industry overcapacities; continued good demand overall for the
Company's products; continued demand growth worldwide for EASTAPAK polymers;
continued capacity additions within the PET industry worldwide; capacity
additions within the ethylene industry worldwide; availability of key purchased
raw materials with no significant increase in costs; continued market reception
of new polyethylene products and continued shift of polyethylene product mix to
less commodity products; availability of recent or planned manufacturing
capacity increases for container plastics, SPECTAR, coatings, and oxo products;
realization of expected cost savings and revenue synergies related to the
pending acquisition of Lawter International, Inc.; improved manufacturing plant
operations and maintenance; and labor and material productivity gains sufficient
to meet targeted cost structure reductions.
______________
EASTAPAK, EpB, SPECTAR, MXSTEN, and TENITE HIFOR are trademarks of Eastman
Chemical Company.
18
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of
business. While the Company is unable to predict the outcome of these
matters, it does not believe, based upon currently available facts,
that the ultimate resolution of any of such pending matters, including
those described in the following paragraphs, will have a material
adverse effect on the Company's overall financial position or results
of operations. However, adverse developments could negatively impact
earnings in a particular period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, Eastman entered into a
voluntary plea agreement with the Department of Justice and agreed to
pay an $11 million fine to resolve a charge brought against the Company
for violation of Section One of the Sherman Act. Under the agreement,
Eastman entered a plea of guilty to one count of price-fixing for
sorbates, a class of food preservatives, from January 1995 through June
1997. The plea agreement was approved by the United States District
Court for the Northern District of California on October 21, 1998. The
Company recognized the entire fine in third quarter 1998 and is paying
the fine in installments over a period of five years.
In addition, the Company, along with other companies, has been named as
a defendant in ten antitrust lawsuits brought subsequent to the
Company's plea agreement as putative class actions on behalf of certain
purchasers of sorbates. In each case, the plaintiffs allege that the
defendants engaged in a conspiracy to fix the price of sorbates and
that the class members paid more for sorbates than they would have paid
absent the defendants' conspiracy. Four of the suits were filed in
Superior Courts for the State of California under various state
antitrust and consumer protection laws on behalf of classes of indirect
purchasers of sorbates; four of the proceedings are pending in United
States District Court for the Northern District of California, three
under federal antitrust laws on behalf of classes of direct purchasers
of sorbates and one under California's antitrust and consumer
protection laws on behalf of a class of all indirect purchasers of
sorbates; and two cases were filed in Circuit Courts for the State of
Tennessee under the antitrust and consumer protection laws of various
states, including Tennessee, on behalf of classes of indirect
purchasers of sorbates in those states. The plaintiffs in each case
seek treble damages of unspecified amounts, attorneys' fees and costs,
and other unspecified relief; in addition, certain of the actions claim
restitution, injunction against alleged illegal conduct, and other
equitable relief. Each proceeding is in preliminary pretrial motion and
discovery stage, and none of the proposed classes has been certified.
The Company intends vigorously to defend these actions unless they can
be settled on terms acceptable to the parties. These matters could
result in the Company being subject to monetary damages and expenses.
The Company recognized a charge to earnings in the fourth quarter of
1998 of $8 million for the estimated costs, including legal fees,
related to the pending sorbates litigation described above. Because of
the early stage of these putative class action lawsuits, however, the
ultimate outcome of these matters cannot presently be determined, and
they may result in greater or lesser liability than that currently
provided for in the Company's financial statements.
19
20
ENVIRONMENTAL MATTER
As previously reported, in May 1997 the Company received notice from
the Tennessee Department of Environment and Conservation ("TDEC")
alleging that the manner in which hazardous waste was fed into certain
boilers at the Tennessee Eastman facility in Kingsport, Tennessee
violated provisions of the Tennessee Hazardous Waste Management Act.
Based upon recent communications with the TDEC and the U.S.
Environmental Protection Agency, the Company believes that these
agencies are 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.
ITEM 2. CHANGES IN SECURITIES
(c) On January 1, 1999, the Company granted options to purchase an
aggregate of 551 shares of its common stock on or after July
1, 1999 at an exercise price of $45.4375 per share. Such
options were granted to non-employee directors who elected
under the 1996 Non-Employee Director Stock Option Plan to
receive options in lieu of all or a portion of their
semi-annual cash retainer fee. The Company issued the options
in reliance upon the exemption from registration of Section
4(2) of the Securities Act of 1933.
The Company did not sell any other equity securities during
the quarterly period ended March 31, 1999 in transactions not
registered under the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in the
Exhibit Index appearing on page 22.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1999.
20
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastman Chemical Company
Date: April 29, 1999 By: /s/ Allan R. Rothwell
---------------------
Allan R. Rothwell
Senior Vice President and
Chief Financial Officer
21
22
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
3.01 Amended and Restated Certificate of Incorporation of Eastman
Chemical Company (incorporated herein by reference to Exhibit 3.01
to Eastman Chemical Company's Registration Statement on Form S-1,
File No. 33-72364, as amended)
3.02 Amended and Restated By-laws of Eastman Chemical Company, as
amended October 1, 1994 (incorporated by reference to Exhibit 3.02
to Eastman Chemical Company's Annual Report on Form 10-K for the
year ended December 31, 1994)
4.01 Form of Eastman Chemical Company Common Stock certificate
(incorporated herein by reference to Exhibit 3.02 to Eastman
Chemical Company's Annual Report on Form 10-K for the year ended
December 31, 1993)
4.02 Stockholder Protection Rights Agreement dated as of
December 13, 1993, between Eastman Chemical Company and First Chicago
Trust Company of New York, as Rights Agent (incorporated herein by
reference to Exhibit 4.4 to Eastman Chemical Company's Registration
Statement on Form S-8 relating to the Eastman Investment Plan, File
No. 33-73810)
4.03 Indenture, dated as of January 10, 1994, between Eastman Chemical
Company and The Bank of New York, as Trustee (incorporated herein
by reference to Exhibit 4(a) to Eastman Chemical Company's current
report on Form 8-K dated January 10, 1994 (the "8-K"))
4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by
reference to Exhibit 4(c) to the 8-K)
4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein
by reference to Exhibit 4(d) to the 8-K)
4.06 Officers' Certificate pursuant to Sections 201 and 301 of the
Indenture (incorporated herein by reference to Exhibit 4(a) to
Eastman Chemical Company's Current Report on Form 8-K dated
June 8, 1994 (the "June 8-K"))
4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by
reference to Exhibit 4(b) to the June 8-K)
22
23
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
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 to the 1996 10-K)
4.10 Credit Agreement, dated as of December 19, 1995 (the "Credit
Agreement") among Eastman Chemical Company, the Lenders named
therein, and The Chase Manhattan Bank, as Agent (incorporated
herein by reference to Exhibit 4.08 to Eastman Chemical Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
*10.01 Eastman ESOP Excess Plan (as amended) 24-31
*10.02 Eastman Executive Deferred Compensation Plan (as amended) 32-42
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 43
27.01 Financial Data Schedule for First Quarter 1999 (for SEC use only)
99.01 Supplemental Business Segment Information 44
- -------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement filed pursuant
to Item 601(b)(10)(iii) of Regulation S-K.
23