See Note 18 to the Company’s unaudited consolidated financial statements for further information regarding debt issued on November 12, 2003.
In the first quarter 2002, the Company entered into interest rate swaps that converted the effective interest rate of the notes due in 2004 to a variable rate. These original interest rate swaps were settled during the fourth quarter 2002, resulting in $13 million cash proceeds being received by the Company. The gain resulting from the settlement of the swaps is reflected as an increase in the current portion of long-term borrowings and will be amortized into earnings as a reduction to interest expense through the maturity of the notes in January 2004. In conjunction with the settlement of the original interest rate swaps, new interest rate swaps were entered into in the fourth quarter 2002, converting the effective interest rate on the notes due in 2004 to variable rates that averaged 3.37% at September 30, 2003 and 4.07% at December 31, 2002. In the t
hird quarter 2003, the Company entered into interest rate swaps that converted the effective interest rate of a portion of the notes due in 2012 to variable rates such that the average rate was 6.54% at September 30, 2003. The recording of the fair value of the interest rate swaps and the corresponding debt resulted in increases of $4 million in other current assets and the current portion of long-term borrowings at September 30, 2003.
7. EARNINGS AND DIVIDENDS PER SHARE
|
|
Third Quarter |
|
First Nine Months |
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for earnings per share calculation: |
|
|
|
|
|
|
|
|
Basic |
77.2 |
|
77.1 |
|
77.1 |
|
77.0 |
|
Diluted |
77.2 |
|
77.2 |
|
77.1 |
|
77.2 |
|
|
|
|
|
|
|
|
|
As a result of the net loss reported for the third quarter and first nine months 2003, common shares underlying options to purchase 10,345,607 shares of common stock at a range of prices from $29.90 to $73.94 have been excluded from the calculation of diluted earnings (loss) per share. Certain shares underlying options to purchase 7,087,254 and 6,970,729 shares of common stock at a range of prices from $40.10 to $73.94 during the third quarter and the first nine months 2002 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 during those periods.
Additionally, 200,000 shares underlying an option issued to the former Chief Executive Officer in 1997 were excluded from diluted earnings per share calculations for the third quarter and the first nine months 2002 because the stock price conditions to exercise had not been met as to any of the shares as of September 30, 2002. The entire option was cancelled and forfeited on September 16, 2002, as none of the price vesting conditions had been met.
The Company declared cash dividends of $0.44 per share in the third quarters 2003 and 2002 and $1.32 per share in the first nine months 2003 and 2002.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. IMPAIRMENTS AND RESTRUCTURING CHARGES, NET
During the third quarter 2003, the Company recognized pre-tax impairments and restructuring charges of $496 million, consisting of $482 million in non-cash impairment charges, and severance charges of $14 million. For the first nine months 2003, pre-tax impairments and restructuring charges totaled $514 million, with non-cash impairment charges and severance charges totaling $497 million and $17 million, respectively. The following table summarizes the 2003 and 2002 charges:
|
|
|
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastman Division segments: |
|
|
|
|
|
|
|
|
CASPI segment: |
|
|
|
|
|
|
|
|
Fixed asset impairments |
$ |
194 |
$ |
-- |
$ |
194 |
$ |
-- |
|
Intangible asset impairments |
175 |
|
-- |
|
175 |
|
-- |
|
Goodwill impairments |
34 |
|
-- |
|
34 |
|
-- |
|
Severance costs |
8 |
|
-- |
|
11 |
|
-- |
|
Site closure costs |
-- |
|
(1) |
|
-- |
|
(1) |
| |
|
|
|
|
|
|
|
|
Total – CASPI segment |
411 |
|
(1) |
|
414 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
PCI segment: |
|
|
|
|
|
|
|
|
Fixed asset impairments |
79 |
|
-- |
|
94 |
|
-- |
|
Severance costs |
4 |
|
-- |
|
4 |
|
-- |
|
|
|
|
|
|
|
|
|
Total – PCI segment |
83 |
|
-- |
|
98 |
|
-- |
|
|
|
|
|
|
|
|
|
|
SP segment: |
|
|
|
|
|
|
|
|
Severance costs |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
Total – SP segment |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
Total Eastman Division |
495 |
|
(1) |
|
513 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division segments: |
|
|
|
|
|
|
|
|
Polymers segment |
|
|
|
|
|
|
|
|
Severance costs |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
Total – Polymers segment |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
Total Voridian Division |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
496 |
$ |
(1) |
$ |
514 |
$ |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill impairment |
|
34 |
|
-- |
|
34 |
|
-- |
|
Total asset impairments and restructuring charges |
|
462 |
|
(1) |
|
480 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
496 |
$ |
(1) |
$ |
514 |
$ |
(1) |
|
|
|
|
|
|
|
|
|
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") Segment
In the third quarter 2003, the Company reorganized the operating structure within its CASPI segment and changed the segment’s business strategy in response to the financial performance of certain underlying product lines. Those product lines include: acrylate ester monomers; composites (unsaturated polyester resins); inks and graphic arts raw materials; liquid resins; powder resins; and textile chemicals. Prior to the third quarter 2003, management was pursuing growth strategies aimed at significantly improving the financial performance of these product lines. However, due to the continued operating losses and deteriorating market conditions, management decided to pursue alternative strategies including restructuring, divestiture, and consolidation. This change affected both the manner in
which certain assets are used and the financial outlook for these product lines, thus triggering the impairments and certain restructuring charges.
The third quarter 2003 fixed asset impairments charges of $194 million primarily relate to assets associated with the above mentioned product lines, and primarily impact manufacturing sites in the North American and European regions that were part of the Lawter International, Inc. ("Lawter"), McWhorter Technologies, Inc ("McWhorter"), and Chemicke Zavody Sokolov ("Sokolov") acquisitions. Within these product lines, nine sites in North America and six sites in Europe were impaired. As the undiscounted future cash flows could not support the carrying value of the assets, the fixed assets were written down to fair value, as established primarily by appraisal.
The third quarter 2003 intangible asset impairments charges relate to definite-lived intangible assets of approximately $128 million and indefinite-lived intangibles of approximately $47 million. The definite-lived intangibles relate primarily to developed technology and customer lists, and the indefinite-lived intangibles primarily relate to trademarks. These intangible assets were primarily associated with the acquisitions of Lawter and McWhorter. As the undiscounted future cash flows could not support the carrying value of the definite-lived intangible assets, these assets were written down to fair value, as established primarily by appraisal. Indefinite-lived intangible assets were written down to fair value, as established by appraisal.
Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," the Company defined reporting units as one level below the operating segment level and considered the criteria set forth in SFAS No. 142 in aggregating the reporting units. This resulted in the CASPI segment being deemed a single reporting unit. In the third quarter 2003, the reorganization of the operating structure within the CASPI segment resulted in new reporting units one level below the operating segment. Due to the change in strategy and lack of similar economic characteristics, these reporting units did not meet the criteria necessary for aggregation. As a result, the goodwill associated with the CASPI segment was reassigned to the new reporting units based upon relative fair values. The reporting unit that contained
the above-mentioned product lines was assigned $34 million of goodwill out of the total CASPI segment goodwill of $333 million. Because the Company determined that this reporting unit could no longer support the carrying value of its assigned goodwill, the full amount of that goodwill was impaired. The fair value of the other reporting unit within CASPI was sufficient to support the carrying value of the remainder of the goodwill.
The third quarter 2003 severance costs of $8 million are discussed in further detail below.
In the first six months 2003, total asset impairments and restructuring charges of approximately $3 million were recognized. These charges primarily relate to employee severance costs and changes in estimates for previously accrued amounts.
In third quarter 2002, earnings were positively impacted by $1 million as a result of a favorable change in the estimate related to previously recognized restructuring costs in the CASPI segment.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Performance Chemicals and Intermediates ("PCI") Segment
The PCI segment’s charges of $79 million relate to the impairment of fixed assets used in certain commodity and specialty organic chemicals product lines as a result of increased competition and changes in business strategy in response to a change in market conditions and the financial performance of these product lines. Within the commodity product lines, the fixed asset impairments charge relates to assets at the Sokolov, Czech Republic facility. Within the specialty organic chemicals product lines, the fixed asset impairments charge relates to assets located at the Kingsport, Tennessee facility. As the undiscounted future cash flows could not support the carrying value of the assets, the fixed assets were written down to fair value, as established primarily by appraisal.
The third quarter 2003 severance costs of $4 million are discussed in further detail below.
In the second quarter 2003, the Company recorded an asset impairments charge of approximately $15 million related to the impairment of certain fixed assets used in the PCI segment’s fine chemicals product lines that are located in Llangefni, Wales. In response to industry conditions, during the second quarter 2003 the Company revised its strategy and the earnings forecast for the products manufactured by these assets. As the undiscounted future cash flows could not support the carrying value of the asset, the fixed assets were written down to fair value, as established primarily by discounted future cash flows of the impacted assets.
Severance charges
In the third quarter 2003, the Company recognized $14 million in restructuring charges related to the actual and probable involuntary separations of approximately 300 employees. These workforce reductions are the result of decisions made as part of the restructuring of the CASPI segment discussed above, the Company’s annual budgeting process, and site closure costs associated with the PCI segment.
The following table summarizes the charges and changes in estimates described above, other asset impairments and restructuring charges, the noncash reductions attributable to asset impairments and the cash reductions in shutdown reserves for severance costs and site closure costs paid:
|
(Dollars in millions) |
|
Balance at
January 1, 2002 |
|
Provision/ Adjustments |
|
Noncash Reductions |
|
Cash Reductions |
|
Balance at
December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash charges |
$ |
-- |
$ |
2 |
$ |
(2) |
$ |
-- |
$ |
-- |
|
Severance costs |
|
10 |
|
2 |
|
-- |
|
(10) |
|
2 |
|
Site closure costs |
|
13 |
|
3 |
|
-- |
|
(9) |
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
23 |
$ |
7 |
$ |
(2) |
$ |
(19) |
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1, 2003 |
|
Provision/ Adjustments |
|
Noncash Reductions |
|
Cash Reductions |
|
Balance at
September 30,2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash charges |
$ |
-- |
$ |
497 |
$ |
(497) |
$ |
-- |
$ |
-- |
|
Severance costs |
|
2 |
|
17 |
|
-- |
|
(3) |
|
16 |
|
Site closure costs |
|
7 |
|
-- |
|
-- |
|
(3) |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
9 |
$ |
514 |
$ |
(497) |
$ |
(6) |
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
Substantially all severance and site closure costs are expected to be applied to the reserves within one year.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. ACQUISITIONS
Ariel Research Corporation
In January 2002, Eastman acquired Ariel Research Corporation ("Ariel") for approximately $8 million, including $6 million cash paid at closing and a $2 million promissory note paid in January 2003. Ariel is a provider of worldwide regulatory information, software products and services that enable corporations to manage product safety and stewardship functions, including requirements for workplace, environmental and dangerous goods compliance.
The transaction, which was financed with available cash and commercial paper borrowings, was accounted for by the purchase method of accounting and, accordingly, the results of Ariel for the period from the acquisition date are included in the accompanying unaudited consolidated financial statements and reported in the Developing Businesses segment. Tangible assets acquired were recorded at their fair values. Definite-lived intangible assets of approximately $7 million are being amortized on a straight-line basis over 3 to 10 years. Assuming this transaction had been made at January 1, 2002, the consolidated pro forma results for the first nine months 2002 would not have been materially different from reported results.
10. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
The Company is exposed to market risk, such as changes in currency exchange rates, raw material and energy costs and interest rates. The Company uses various derivative financial instruments pursuant to the Company's hedging policies to mitigate these market risk factors and their effect on the cash flows of the underlying transactions. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. Financial instruments held as part of each hedging program are more fully described in Note 8 "Fair Value of Financial Ins
truments" to the Company’s audited consolidated financial statements contained in the 2002 Annual Report on Form 10-K.
At September 30, 2003, mark-to-market losses from currency, raw material and energy and certain interest rate hedges that were included in accumulated other comprehensive loss totaled approximately $2 million. If realized, approximately $1 million of this balance will be reclassified into earnings during the next 12 months. The mark-to-market gains or losses on non-qualifying, excluded and ineffective portions of hedges are recognized in cost of sales or other income and charges immediately. Such amounts did not have a material impact on earnings for all periods presented.
11. OTHER OPERATING INCOME AND OTHER (INCOME) CHARGES, NET
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income |
$ |
-- |
$ |
-- |
$ |
(20) |
$ |
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
$ |
(4) |
$ |
(4) |
$ |
(20) |
$ |
(7) |
|
Other charges |
5 |
|
7 |
|
15 |
|
14 |
|
|
|
|
|
|
|
|
|
Other (income) charges, net |
$ |
1 |
$ |
3 |
$ |
(5) |
$ |
7 |
|
|
|
|
|
|
|
|
|
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other Operating Income
Other operating income includes gains and losses on sales of assets that are not a component of an entity. Other operating income for the first nine months 2003 reflected a gain of $20 million on the sale of the Company’s high-performance crystalline plastics assets, which were formerly a part of the Company’s SP segment.
Other (Income) Charges
Included in other income are the Company’s portion of earnings from its equity investments, gains on sales of non-operating assets, royalty income, gains on foreign exchange transactions and other miscellaneous items. Included in other charges are losses from foreign exchange transactions, the Company’s portion of losses from its equity investments, losses on sales of nonoperating assets, fees on securitized receivables and other miscellaneous items.
Other income for each period included net gains on foreign currency transactions, net of hedging, primarily attributed to the strengthening of the euro, and results from the Company’s equity investments.
Other charges for the third quarter and the first nine months 2002 included the write-down to fair value of certain technology business venture investments. Results for the first nine months 2002 also reflected a loss of $12 million due to remeasurement of an Argentine peso-denominated tax receivable.
12. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX
SFAS No. 143
In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations," the Company recorded asset retirement obligations primarily related to closure and post-closure environmental liabilities associated with certain property, plant and equipment. This resulted in the Company recording asset retirement obligations of $28 million and an after-tax credit to earnings of $3 million during the first quarter 2003.
If the asset retirement obligation measurement and recognition provisions of SFAS No. 143 had been in effect on January 1, 2002, the aggregate carrying amount of those obligations on that date would have been $27 million. If the amortization of asset retirement cost and accretion of asset retirement obligation provisions of SFAS No. 143 had been in effect during 2002, the impact on "Earnings before cumulative effect of changes in accounting principle" in 2002 would have been immaterial.
SFAS No. 142
The Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets; require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment; require reporting units to be identified for the purpose of assessing potential future impairments of goodwill; and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the adoption of SFAS No. 142, the Company completed in the first quarter 2002 the impairment test for intangible assets with indefinite useful lives other than goodwill. As a result of this impairment test, it was determined that the fair value of certain trademarks related to the CASPI segment, as established by appraisal and based on discounted future cash flows, was less than the recorded value. Accordingly, the Company recognized an after-tax impairment charge of approximately $18 million in the first quarter of 2002 to reflect lower than previously expected cash flows from certain related products. This charge is reported in the Unaudited Consolidated Statements of Earnings (Loss), Comprehensive Income (Loss), and Retained Earnings as the cumulative effect of a change in
accounting principle. Additionally, the Company reclassified $12 million of its intangible assets related to assembled workforce and the related deferred tax liabilities of approximately $5 million to goodwill. During the second quarter 2002, the Company performed the transitional impairment test on its goodwill as required upon adoption of this Statement, and determined that no impairment of goodwill existed as of January 1, 2002. The Company completed its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter 2002 and determined that no impairment existed as of September 30, 2002. The Company plans to continue its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter of each year, unless events warrant more frequent testing.
In the third quarter 2003, the Company impaired certain goodwill and indefinite-lived intangible assets in the CASPI segment as discussed in Note 8 above. Additionally, the Company completed its annual impairment review of the remaining goodwill and indefinite-lived intangible assets. No further impairment of goodwill or indefinite-lived intangible assets was required due to this review.
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
(Dollars in millions) |
Cumulative Translation Adjustment |
|
Unfunded Minimum Pension Liability |
|
Unrealized Gains (Losses) on Investments |
|
Unrealized Gains (Losses) on Derivative Instruments |
|
Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001 |
$ |
(133) |
$ |
(116) |
$ |
-- |
$ |
(2) |
$ |
(251) |
|
Period change |
102 |
|
(145) |
|
(2) |
|
1 |
|
(44) |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002 |
(31) |
|
(261) |
|
(2) |
|
(1) |
|
(295) |
|
Period change |
98 |
|
-- |
|
(1) |
|
(1) |
|
96 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2003 |
$ |
67 |
$ |
(261) |
$ |
(3) |
$ |
(2) |
$ |
(199) |
|
|
|
|
|
|
|
|
|
|
|
Except for cumulative translation adjustment, amounts of other comprehensive income (loss) are presented net of applicable taxes. Because cumulative translation adjustment is considered a component of permanently invested unremitted earnings of subsidiaries outside the United States, no taxes are provided on such amounts.
14. SEGMENT INFORMATION
The Company’s products and operations are managed and reported in six operating segments. Effective January 1, 2003, the Company realigned its divisional structure into three divisions. Eastman Division consists of the CASPI segment, the PCI segment and the SP segment. Voridian Division contains the Polymers segment and the Fibers segment. Developing Businesses Division contains the Developing Businesses segment.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The CASPI segment manufactures raw materials, additives and specialty polymers, primarily for the paints and coatings, inks and graphic arts, adhesives and other markets. The CASPI segment's products consist of binders and resins, liquid vehicles, pigment concentrates and additives, unsaturated polyester resins and polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as key components in paints and inks to form a protective coating or film, and bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol solvents, maintain the binders in liquid form for ease of application. Pigment concentrates and additives, such as cellulosic polymers, Texanol? coalescing aid and chlori
nated polyolefins, provide different properties or performance enhancements to the end product. Unsaturated polyester resins are used primarily in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions are traditionally used as textile sizes to protect fibers during processing in textile manufacturing, and the technology is also used in water-based paints, coatings and inks. Additional products are developed in response to, or in anticipation of, new applications where the Company believes significant value can be achieved.
The PCI segment manufactures diversified products that are used in a variety of markets and industrial and consumer applications, including chemicals for agricultural intermediates, fibers, food and beverage ingredients, photographic chemicals, pharmaceutical intermediates, polymer compounding and chemical manufacturing intermediates. The PCI segment also offers custom manufacturing services through its custom synthesis business.
The SP segment produces highly specialized copolyesters, cellulosic plastics and compounded polyethylene plastics that possess unique performance properties for value-added end uses such as appliances, store fixtures and displays, building and construction, electronics and electronic packaging, medical packaging, personal care and cosmetics, performance films, tape and labels, biodegradeables, cups and lids, fiber and strapping, photographic and optical, graphic arts and general packaging. The SP segment’s key products include engineering and specialty polymers, specialty film and sheet products, and packaging film and fiber products.
The Polymers segment manufactures and supplies PET polymers for use in beverage and food packaging and other applications such as custom-care and cosmetics packaging, health care and pharmaceutical uses, household products and industrial. PET polymers serve as source products for packaging a wide variety of products including carbonated soft drinks, water, beer and personal care items and food containers that are suitable for both conventional and microwave oven use. The Polymers segment also manufactures low-density polyethylene and linear low-density polyethylene, which are used primarily for packaging and film applications and in extrusion coated containers such as milk and juice cartons.
The Fibers segment manufactures Estron? acetate tow and Estrobond? triacetin plasticizers which are used primarily in cigarette filters; Estron? and Chromspun? acetate yarns for use in apparel, home furnishings and industrial fabrics; and acetyl chemicals.
The Developing Businesses segment includes new businesses and certain investments in non-traditional growth opportunities that leverage the Company’s technology expertise, intellectual property and know-how into business models that extend to new customers and markets. The segment includes, among other new and developing businesses, Cendian Corporation ("Cendian"), a logistics provider for chemical and plastics companies; Ariel Research Corporation ("Ariel"), a provider of international chemical and regulatory compliance solutions for environmental, health and safety operations; and Eastman’s gasification services.
The Company’s divisional structure allows it to align costs more directly with the activities and businesses that generate them. Goods and services are transferred between the three divisions at predetermined prices which may be in excess of cost. Accordingly, the divisional structure results in the recognition of interdivisional sales revenue and operating earnings. Such interdivisional transactions are eliminated in the Company’s unaudited consolidated financial statements.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Effective January 1, 2003, sales, operating results and assets for developing businesses activities were moved from the CASPI, PCI and SP segments to the Developing Businesses segment. Accordingly, amounts for 2002 have been reclassified to reflect this change. In addition, during the second quarter of 2003, the Company revised the Assets by Division and Segment as of December 31, 2002 to appropriately reflect the allocation of certain assets shared by the segments comprising Eastman Division. These revisions had no effect on the consolidated financial statements.
|
|
Third Quarter, 2003 |
|
(Dollars in millions) |
|
External Sales |
|
Interdivisional Sales |
|
Total Sales |
|
|
|
|
|
|
|
|
Sales by Division and Segment |
|
|
|
|
|
|
|
Eastman Division |
|
|
|
|
|
|
|
Coatings, Adhesives, Specialty Polymers, and Inks |
$ |
400 |
$ |
-- |
$ |
400 |
|
Performance Chemicals and Intermediates |
|
283 |
|
120 |
|
403 |
|
Specialty Plastics |
|
135 |
|
14 |
|
149 |
|
|
|
|
|
|
|
|
Total Eastman Division |
|
818 |
|
134 |
|
952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division |
|
|
|
|
|
|
|
Polymers |
|
442 |
|
14 |
|
456 |
|
Fibers |
|
163 |
|
20 |
|
183 |
|
|
|
|
|
|
|
|
Total Voridian Division |
|
605 |
|
34 |
|
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developing Businesses Division |
|
|
|
|
|
|
|
Developing Businesses |
|
21 |
|
104 |
|
125 |
| |
|
|
|
|
|
|
|
Total Developing Businesses Division |
|
21 |
|
104 |
|
125 |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Total Eastman Chemical Company |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter, 2002* |
|
|
|
External Sales |
|
Interdivisional Sales |
|
Total Sales |
|
|
|
|
|
|
|
|
Sales by Division and Segment |
|
|
|
|
|
|
|
Eastman Division |
|
|
|
|
|
|
|
Coatings, Adhesives, Specialty Polymers, and Inks |
$ |
401 |
$ |
-- |
$ |
401 |
|
Performance Chemicals and Intermediates |
|
281 |
|
98 |
|
379 |
|
Specialty Plastics |
|
141 |
|
12 |
|
153 |
|
|
|
|
|
|
|
|
Total Eastman Division |
|
823 |
|
110 |
|
933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division |
|
|
|
|
|
|
|
Polymers |
|
382 |
|
16 |
|
398 |
|
Fibers |
|
165 |
|
17 |
|
182 |
|
|
|
|
|
|
|
|
Total Voridian Division |
|
547 |
|
33 |
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developing Businesses Division |
|
|
|
|
|
|
|
Developing Businesses |
|
4 |
|
89 |
|
93 |
| |
|
|
|
|
|
|
|
Total Developing Businesses Division |
|
4 |
|
89 |
|
93 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
1,374 |
$ |
232 |
$ |
1,606 |
|
|
|
|
|
|
|
*Sales revenue for 2002 has been reclassified to reflect the Company’s new organizational structure and segments effective in the first quarter 2003.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
First Nine Months, 2003 |
|
(Dollars in millions) |
|
External Sales |
|
Interdivisional Sales |
|
Total Sales |
|
|
|
|
|
|
|
|
Sales by Division and Segment |
|
|
|
|
|
|
|
Eastman Division |
|
|
|
|
|
|
|
Coatings, Adhesives, Specialty Polymers, and Inks |
$ |
1,209 |
$ |
-- |
$ |
1,209 |
|
Performance Chemicals and Intermediates |
|
909 |
|
360 |
|
1,269 |
|
Specialty Plastics |
|
417 |
|
40 |
|
457 |
|
|
|
|
|
|
|
|
Total Eastman Division |
|
2,535 |
|
400 |
|
2,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division |
|
|
|
|
|
|
|
Polymers |
|
1,306 |
|
54 |
|
1,360 |
|
Fibers |
|
475 |
|
60 |
|
535 |
|
|
|
|
|
|
|
|
Total Voridian Division |
|
1,781 |
|
114 |
|
1,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developing Businesses Division |
|
|
|
|
|
|
|
Developing Businesses |
|
50 |
|
296 |
|
346 |
| |
|
|
|
|
|
|
|
Total Developing Businesses Division |
|
50 |
|
296 |
|
346 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
4,366 |
$ |
810 |
$ |
5,176 |
|
|
|
|
|
|
|
|
|
First Nine Months, 2002* |
|
|
|
External Sales |
|
Interdivisional Sales |
|
Total Sales |
|
|
|
|
|
|
|
|
Sales by Division and Segment |
|
|
|
|
|
|
|
Eastman Division |
|
|
|
|
|
|
|
Coatings, Adhesives, Specialty Polymers, and Inks |
$ |
1,178 |
$ |
-- |
$ |
1,178 |
|
Performance Chemicals and Intermediates |
|
816 |
|
277 |
|
1,093 |
|
Specialty Plastics |
|
394 |
|
36 |
|
430 |
|
|
|
|
|
|
|
|
Total Eastman Division |
|
2,388 |
|
313 |
|
2,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division |
|
|
|
|
|
|
|
Polymers |
|
1,123 |
|
39 |
|
1,162 |
|
Fibers |
|
486 |
|
55 |
|
541 |
|
|
|
|
|
|
|
|
Total Voridian Division |
|
1,609 |
|
94 |
|
1,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developing Businesses Division |
|
|
|
|
|
|
|
Developing Businesses |
|
8 |
|
236 |
|
244 |
| |
|
|
|
|
|
|
|
Total Developing Businesses Division |
|
8 |
|
236 |
|
244 |
| |
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
4,005 |
$ |
643 |
$ |
4,648 |
|
|
|
|
|
|
|
*Sales revenues for 2002 has been reclassified to reflect the Company’s new organizational structure and segments effective in the first quarter 2003.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 (3) |
|
2003 |
|
2002 (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss) by Division and |
|
|
|
|
|
|
|
|
Segment |
|
|
|
|
|
|
|
|
Eastman Division |
|
|
|
|
|
|
|
|
Coatings, Adhesives, Specialty |
|
|
|
|
|
|
|
|
Polymers, and Inks (1) (2) |
$ |
(395) |
$ |
22 |
$ |
(376) |
$ |
72 |
|
Performance Chemicals and |
|
|
|
|
|
|
|
|
Intermediates (1) (2) |
(83) |
|
11 |
|
(77) |
|
12 |
|
Specialty Plastics (1) (2) |
12 |
|
12 |
|
53 |
|
30 |
|
|
|
|
|
|
|
|
|
Total Eastman Division |
(466) |
|
45 |
|
(400) |
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division |
|
|
|
|
|
|
|
|
Polymers (1) (2) |
2 |
|
(3) |
|
56 |
|
49 |
|
Fibers |
34 |
|
36 |
|
95 |
|
109 |
|
|
|
|
|
|
|
|
|
Total Voridian Division |
36 |
|
33 |
|
151 |
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developing Businesses Division |
|
|
|
|
|
|
|
|
Developing Businesses |
(13) |
|
(17) |
|
(52) |
|
(50) |
|
|
|
|
|
|
|
|
|
Total Developing Businesses Division |
(13) |
|
(17) |
|
(52) |
|
(50) |
|
|
|
|
|
|
|
|
|
|
Eliminations |
3 |
|
-- |
|
(5) |
|
(3) |
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
(440) |
$ |
61 |
$ |
(306) |
$ |
219 |
|
|
|
|
|
|
|
|
|
(1) Third quarter 2003 operating results for the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment included impairment and restructuring charges of approximately $411 million. Third quarter 2002 operating results for the CASPI segment included a $1 million favorable change in estimate related to previously recorded restructuring reserves. Third quarter 2003 operating results for the Performance Chemicals and Intermediates segment included impairment and restructuring charges of approximately $83 million. Third quarter 2003 operating earnings for the Specialty Plastics segment included restructuring charges of approximately $1 million. Third quarter 2003 operating earnings
for the Polymers segment included restructuring charges of approximately $1 million.
(2) First nine months 2003 operating results for the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment included impairment and restructuring charges of approximately $414 million. First nine months 2002 operating results for the CASPI segment included a $1 million favorable change in estimate related to previously recorded restructuring reserves. First nine months 2003 operating results for the Performance Chemicals and Intermediates segment included impairment and restructuring charges of approximately $98 million. First nine months 2003 operating earnings for the Specialty Plastics segment included a gain of $20 million for the sale of the Company’s high-performance
crystalline plastics assets and restructuring charges of approximately $1 million. First nine months 2003 operating earnings for the Polymers segment included restructuring charges of approximately $1 million.
(3) Operating earnings (loss) for 2002 have been reclassified to reflect the Company’s new organizational structure and segments effective in the first quarter of 2003.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
September 30, |
|
December 31, |
|
(Dollars in millions) |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets by Division and Segment |
|
|
|
|
|
Eastman Division |
|
|
|
|
|
Coatings, Adhesives, Specialty Polymers, and Inks |
$ |
1,482 |
$ |
1,978 |
|
Performance Chemicals and Intermediates |
|
1,576 |
|
1,657 |
|
Specialty Plastics |
|
763 |
|
795 |
|
|
|
|
|
|
Total Eastman Division |
|
3,821 |
|
4,430 |
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division |
|
|
|
|
|
Polymers |
|
1,275 |
|
1,253 |
|
Fibers |
|
560 |
|
548 |
|
|
|
|
|
|
Total Voridian Division |
|
1,835 |
|
1,801 |
|
|
|
|
|
|
|
|
|
|
|
|
Developing Businesses Division |
|
|
|
|
|
Developing Businesses |
|
46 |
|
42 |
|
|
|
|
|
|
Total Developing Businesses Division |
|
46 |
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
5,702 |
$ |
6,273 |
|
|
|
|
|
|
|
|
|
|
|
15. LEGAL MATTERS
General
From time to time, the Company and its 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 such pending matters, including the sorbates litigation and the asbestos litigation described in the following paragraphs, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could
negatively impact earnings or cash flows in a particular future period.
Sorbates Litigation
As previously reported, on September 30, 1998, the Company entered into a voluntary plea agreement with the U.S. Department of Justice and agreed to pay an $11 million fine to resolve a charge brought against the Company for violation of Section One of the Sherman Act. Under the agreement, the Company entered a plea of guilty to one count of price-fixing for sorbates, a class of food preservatives, from January 1995 through June 1997. The plea agreement was approved by the United States District Court for the Northern District of California on October 21, 1998. The Company recognized the entire fine as a charge against earnings in the third quarter of 1998 and paid the fine in installments over a period of five years. On October 26, 1999, the Company pleaded guilty in a Federal Court of Canada
to a violation of the Competition Act of Canada and was fined $780,000 (Canadian). The plea in Canada admitted that the same conduct that was the subject of the United States guilty plea had occurred with respect to sorbates sold in Canada, and prohibited repetition of the conduct and provides for future monitoring. The Canadian fine has been paid and was recognized as a charge against earnings in the fourth quarter of 1999.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Following the September 30, 1998 plea agreement, the Company, along with other defendants, was sued in federal, state and Canadian courts in more than twenty putative class action lawsuits filed on behalf of purchasers of sorbates and products containing sorbates, claiming those purchasers paid more for sorbates and for products containing sorbates than they would have paid in the absence of the defendants’ price-fixing. All but three of these lawsuits have been resolved via settlement. No class has been certified in any of the three unresolved private cases, and the trial court in one of them decided in Octobe
r 2002 that the case would not proceed as a class action, though that decision has been appealed by the plaintiff.
In addition, six states have sued the Company and other defendants in connection with the sorbates matter, seeking damages, restitution and civil penalties on behalf of consumers of sorbates in those respective states. One of those six cases has been tentatively settled; defense motions to dismiss are pending in three cases; and two motions to dismiss have been granted. Seven other states have advised the Company that they intend to bring similar actions against the Company and others. A settlement with those states has also tentatively been reached.
The Company has recognized charges to earnings in 2003 and each of the past four years for estimated and actual costs, including legal fees and expenses, related to the sorbates fine and litigation. While the Company intends to continue to defend vigorously the remaining sorbates actions unless they can be settled on acceptable terms, the ultimate outcome of the matters still pending and of additional claims that could be made is not expected to have a material impact on the Company's financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to monetary damages, costs or expenses and charges against earnings in particular periods.
Asbestos Litigation
Over the years, Eastman was named as a defendant, along with numerous other defendants, in lawsuits in various state courts in which plaintiffs alleged injury due to exposure to asbestos at Eastman’s manufacturing sites and sought unspecified monetary damages and other relief. Historically, these cases were dismissed or settled without a material effect on Eastman’s financial condition, results of operations, or cash flows.
As previously reported, Eastman, like many other companies, has recently experienced an increase in the number of asbestos claims against it. Currently, there are approximately 11,000 claims asserted against the Company in 33 cases that also involve hundreds of other defendants. By far, the majority of these claims are in Mississippi. In the recently filed cases in Mississippi, plaintiffs allege expo
sure to asbestos-containing products allegedly made by Eastman. Based on its investigation to date, the Company has information that it manufactured limited amounts of an asbestos-containing plastic product between the mid-1960's and the early 1970's. The Company's investigation has found no evidence that any of the Mississippi plaintiffs worked with or around any such product alleged to have been manufactured by the Company. The Company intends to defend vigorously all of these actions or to settle them on acceptable terms.
The Company continues to evaluate the allegations and claims made in recent asbestos-related lawsuits and its insurance coverages. Based on such evaluation to date, the Company continues to believe that the ultimate resolution of asbestos cases will not have a material impact on the Company’s financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to monetary damages, costs or expenses and charges against earnings in particular periods. To date, costs incurred by the Company related to the recent asbestos-related lawsuits have not been material, and in the case of the Mississippi claims have been limited to legal fees and expenses.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS
Accounts Receivable Securitization Program
In 1999, the Company entered into an agreement that allows the Company to sell certain domestic accounts receivable under a planned continuous sale program to a third party. The agreement permits the sale of undivided interests in domestic trade accounts receivable. Receivables sold to the third party totaled $200 million at September 30, 2003 and at December 31, 2002. Undivided interests in designated receivable pools were sold to the purchaser with recourse limited to the purchased interest in the receivable pools. Fees paid by the Company under this agreement are based on certain variable market rate indices and totaled approximately $1 million in the third quarters 2003 and 2002 and approximately $3 million in the first nine months 2003 and 2002. Average monthly proceeds from collections re
invested in the continuous sale program were approximately $253 million and $266 million in the third quarters 2003 and 2002, respectively, and approximately $252 million and $250 million in the first nine months 2003 and 2002, respectively. The portion that continues to be recognized in the Consolidated Statements of Financial Position is domestic trade receivables of $152 million and $93 million at September 30, 2003 and December 31, 2002, respectively.
Guarantees
The Company had the following obligations of equity affiliates and residual value guarantees at September 30, 2003:
|
(Dollars in millions) |
|
|
|
|
|
|
|
Obligations of equity affiliates |
$ |
137 |
|
Residual value guarantees |
|
83 |
|
|
|
|
Total |
$ |
220 |
|
|
|
Obligations of Equity Affiliates
Eastman has long-term commitments relating to joint ventures and guarantees of up to $137 million of the principal amount of the joint ventures’ third-party borrowings. The Company believes, based on current facts and circumstances and the structure of the ventures, that the likelihood of a payment pursuant to such guarantees is remote.
Residual Value Guarantees
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. Under these operating leases, the residual value guarantees at September 30, 2003 totaled approximately $83 million. The Company believes, based on current facts and circumstances, that the likelihood of a material payment pursuant to such guarantees is remote.
17. RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. All companies with variable interests in variable interest entities ("VIE’s") created after January 31, 2003, must apply the provisions of this Interpretation to those entities immediately. A public company with a variable interest in a VIE created before February 1, 2003, must apply the provis
ions of this Interpretation to that entity by the end of the first interim or annual reporting period ending after December 15, 2003. The Company is currently evaluating the effect FIN 46 will have on its consolidated financial position, liquidity, or results of operations for VIE’s created before February 1, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 amends SFAS No. 133 to require contracts with comparable characteristics be accounted for similarly. SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment qualifies as a derivative and clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. This Statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003, where the guidance should be applied prospectively. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain financial instruments, which under previous guidance were accounted for as equity, be classified as liabilities or assets in statements of financial position. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.
18. SUBSEQUENT EVENTS
On November 12, 2003, the Company issued notes in the principal amount of $250 million due 2018 and bearing interest at 6.3% per annum. Proceeds from the sale of the notes, net of approximately $2 million in transaction fees, were $246 million and will be used, along with cash generated from business activities and other borrowings, for the repayment of the Company’s outstanding $500 million 6 3/8% notes due on January 15, 2004.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
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 audited consolidated financial statements, including related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the 2002 Annual Report on Form 10-K, and the unaudited consolidated financial statements included elsewhere in this report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
The Company’s results of operations as presented in the Company’s unaudited consolidated financial statements of this Form 10-Q are described below:
|
Earnings (Loss) |
|
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions, except per share amounts) |
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
$ |
(440) |
$ |
61 |
$ |
(306) |
$ |
219 |
|
Net earnings (loss) before cumulative effect of changes in |
|
|
|
|
|
|
|
|
accounting principles |
(336) |
|
24 |
|
(283) |
|
92 |
|
Net earnings (loss) |
(336) |
|
24 |
|
(280) |
|
74 |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
Before cumulative effect of changes in accounting |
|
|
|
|
|
|
|
|
principles |
$ |
(4.35) |
$ |
0.31 |
$ |
(3.66) |
$ |
1.19 |
|
Cumulative effect of changes in accounting principles, net |
-- |
|
-- |
|
0.04 |
|
(0.23) |
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share |
$ |
(4.35) |
$ |
0.31 |
$ |
(3.62) |
$ |
0.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
Before cumulative effect of changes in accounting |
|
|
|
|
|
|
|
|
principles |
$ |
(4.35) |
$ |
0.31 |
$ |
(3.66) |
$ |
1.19 |
|
Cumulative effect of changes in accounting principles, net |
-- |
|
-- |
|
0.04 |
|
(0.23) |
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share |
$ |
(4.35) |
$ |
0.31 |
$ |
(3.62) |
$ |
0.96 |
|
|
|
|
|
|
|
|
|
Operating results for the third quarter 2003 declined to a loss of $440 million compared to operating earnings for the third quarter 2002 of $61 million. The decline in operating earnings was primarily attributable to asset impairments and restructuring charges of approximately $496 million and higher raw material and energy costs partially offset by higher selling prices and the continued impact of cost reduction measures. Operating earnings for the third quarter 2003 were positively impacted by approximately $11 million due to the previously reported change in vacation policy.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating results for the first nine months 2003 declined to a loss of $306 million compared with operating earnings for the first nine months 2002 of $219 million. The decline in operating earnings was primarily attributable to asset impairments and restructuring charges of $514 million and higher raw material and energy costs partially offset by higher selling prices and the continued impact of cost reduction measures. Operating results for the first nine months were also positively impacted by:
-
a gain of $20 million for the sale of the Company’s high-performance crystalline plastics assets, which were formerly a part of the Company’s Specialty Plastics ("SP") segment;
-
a gain of approximately $14 million from the insurance settlement related to the previously disclosed 2002 operational disruptions at the Company’s Rotterdam, the Netherlands and Columbia, South Carolina facilities;
-
a reduction in costs of approximately $29 million as a result of the previously reported change in vacation policy which was part of cost reduction measures implemented by the Company in the first quarter 2003. The Company expects the change in vacation policy to impact its results for the year 2003 only.
Net earnings for the first nine months 2002 included the write-down to fair value of certain technology business venture investments and a loss of $12 million due to remeasurement of an Argentine peso-denominated tax receivable.
|
|
Third Quarter |
|
Volume Effect |
|
Price Effect |
|
Product
Mix Effect |
|
Exchange
Rate
Effect |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
$ |
1,444 |
$ |
1,374 |
|
5 % |
|
(1)% |
|
3 % |
|
-- % |
|
3 % |
The increase in sales revenue for the third quarter 2003 compared to the third quarter 2002 was primarily due to higher selling prices and favorable foreign currency exchange rates, particularly for the euro. The increase in selling prices and foreign currency exchange rates had a positive impact on sales revenue of $40 million and $36 million, respectively.
|
|
First Nine Months |
|
Volume Effect |
|
Price Effect |
|
Product
Mix Effect |
|
Exchange
Rate
Effect |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
$ |
4,366 |
$ |
4,005 |
|
9 % |
|
(1)% |
|
6 % |
|
-- % |
|
4 % |
The increase in sales revenue for the first nine months 2003 compared to the first nine months 2002 was primarily due to higher selling prices and favorable foreign currency exchange rates which had a positive impact on sales revenue of $223 million and $141 million, respectively.
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
$ |
200 |
$ |
202 |
|
(1) % |
$ |
625 |
$ |
636 |
|
(2)% |
|
As a percentage of sales |
13.9% |
|
14.7% |
|
|
|
14.3% |
|
15.9% |
|
|
Gross profit for the third quarter and first nine months 2003 decreased slightly compared to the third quarter and first nine months 2002 primarily due to higher raw material and energy costs and lower sales volume that were partially offset by higher selling prices and the continued impact of cost reduction measures. The higher raw material and energy costs were primarily attributable to the following raw materials: propane, paraxylene, ethylene glycol, and natural gas.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company expects that higher raw material and energy costs combined with a difficult market environment will continue to negatively impact operating results for the remainder of 2003, mitigated to the extent the Company is able to continue to offset this impact in part through higher selling prices for certain of its products and through various cost reduction measures.
The insurance settlement of approximately $14 million related to the previously disclosed 2002 operational disruptions at the Company’s plants in Rotterdam, the Netherlands and Columbia, South Carolina had a positive impact on gross profit in the first nine months 2003.
The Company continues to implement a variety of cost control measures to manage discretionary spending. Of the measures taken, a change in vacation policy favorably impacted the third quarter and the first nine months 2003 results by approximately $11 million and $29 million, respectively, and is expected to have a similar impact for the fourth quarter of 2003 only. The Company expects that the other cost control measures implemented during 2003 will continue to positively impact its results going forward.
The Company is also working on other measures to improve its cost structure and profitability. Included in that effort is a review of the Company’s portfolio of products and businesses, primarily in the Eastman Division. The Company expects during the fourth quarter 2003 to continue to identify and pursue implementation of restructuring, divestiture, and consolidation alternatives for certain identified portions of the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment to improve profitability.
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and General |
|
|
|
|
|
|
|
|
|
|
|
|
Administrative Expenses |
$ |
100 |
$ |
100 |
|
-- % |
$ |
308 |
$ |
300 |
|
3 % |
|
Research and Development |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
44 |
|
42 |
|
5 % |
|
129 |
|
118 |
|
9 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
144 |
$ |
142 |
|
|
$ |
437 |
$ |
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of sales |
9.9% |
|
10.3% |
|
|
|
10.0% |
|
10.4% |
|
|
Selling and general administrative expenses ("SG&A expenses") for the third quarter 2003 compared to the third quarter 2002 were flat.
The increase in SG&A expenses for the first nine months 2003 compared to the first nine months 2002 was primarily due to higher costs associated with the Company’s growth initiatives, including the business-building efforts within the Developing Businesses segment.
Research and development expenses for the third quarter and the first nine months 2003 were higher compared to the third quarter and the first nine months 2002 primarily due to the Company’s increased efforts to develop certain operational efficiencies and efforts associated with new business initiatives. The Company expects full year 2003 research and development expense to be higher than full year 2002 for the same reasons.
Combined costs related to selling and general administrative expenses and research and development expenses are expected to continue to be at or below 11% of sales revenue.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Impairments and Restructuring Charges, net
During the third quarter 2003, the Company recognized pre-tax impairments and restructuring charges of $496 million, consisting of $482 million in non-cash impairment charges, and severance charges of $14 million. For the first nine months 2003, pre-tax impairments and restructuring charges totaled $514 million, with non-cash impairment charges and severance charges totaling $497 million and $17 million, respectively. The following table summarizes the 2003 and 2002 charges:
|
|
|
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastman Division segments: |
|
|
|
|
|
|
|
|
CASPI segment: |
|
|
|
|
|
|
|
|
Fixed asset impairments |
$ |
194 |
$ |
-- |
$ |
194 |
$ |
-- |
|
Intangible asset impairments |
175 |
|
-- |
|
175 |
|
-- |
|
Goodwill impairments |
34 |
|
-- |
|
34 |
|
-- |
|
Severance costs |
8 |
|
-- |
|
11 |
|
-- |
|
Site closure costs |
-- |
|
(1) |
|
-- |
|
(1) |
| |
|
|
|
|
|
|
|
|
Total – CASPI segment |
411 |
|
(1) |
|
414 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
PCI segment: |
|
|
|
|
|
|
|
|
Fixed asset impairments |
79 |
|
-- |
|
94 |
|
-- |
|
Severance costs |
4 |
|
-- |
|
4 |
|
-- |
|
|
|
|
|
|
|
|
|
Total – PCI segment |
83 |
|
-- |
|
98 |
|
-- |
|
|
|
|
|
|
|
|
|
|
SP segment: |
|
|
|
|
|
|
|
|
Severance costs |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
Total – SP segment |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
Total Eastman Division |
495 |
|
(1) |
|
513 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voridian Division segments: |
|
|
|
|
|
|
|
|
Polymers segment |
|
|
|
|
|
|
|
|
Severance costs |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
Total – Polymers segment |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
Total Voridian Division |
1 |
|
-- |
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
496 |
$ |
(1) |
$ |
514 |
$ |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill impairment |
|
34 |
|
-- |
|
34 |
|
-- |
|
Total asset impairments and restructuring charges |
|
462 |
|
(1) |
|
480 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Eastman Chemical Company |
$ |
496 |
$ |
(1) |
$ |
514 |
$ |
(1) |
|
|
|
|
|
|
|
|
|
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") Segment
In the third quarter 2003, the Company reorganized the operating structure within its CASPI segment and changed the segment’s business strategy in response to the financial performance of certain underlying product lines. Those product lines include: acrylate ester monomers; composites (unsaturated polyester resins); inks and graphic arts raw materials; liquid resins; powder resins; and textile chemicals. Prior to the third quarter 2003, management was pursuing growth strategies aimed at significantly improving the financial performance of these product lines. However, due to the continued operating losses and deteriorating market conditions, management decided to pursue alternative strategies including restructuring, divestiture, and consolidation. This change affected both the manner in
which certain assets are used and the financial outlook for these product lines, thus triggering the impairments and certain restructuring charges.
The third quarter 2003 fixed asset impairments charges of $194 million primarily relate to assets associated with the above mentioned product lines, and primarily impact manufacturing sites in the North American and European regions that were part of the Lawter International, Inc. ("Lawter"), McWhorter Technologies, Inc ("McWhorter"), and Chemicke Zavody Sokolov ("Sokolov") acquisitions. Within these product lines, nine sites in North America and six sites in Europe were impaired. As the undiscounted future cash flows could not support the carrying value of the assets, the fixed assets were written down to fair value, as established primarily by appraisal.
The third quarter 2003 intangible asset impairments charges relate to definite-lived intangible assets of approximately $128 million and indefinite-lived intangibles of approximately $47 million. The definite-lived intangibles relate primarily to developed technology and customer lists, and the indefinite-lived intangibles primarily relate to trademarks. These intangible assets were primarily associated with the acquisitions of Lawter and McWhorter. As the undiscounted future cash flows could not support the carrying value of the definite-lived intangible assets, these assets were written down to fair value, as established primarily by appraisal. Indefinite-lived intangible assets were written down to fair value, as established by appraisal.
Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," the Company defined reporting units as one level below the operating segment level and considered the criteria set forth in SFAS No. 142 in aggregating the reporting units. This resulted in the CASPI segment being deemed a single reporting unit. In the third quarter 2003, the reorganization of the operating structure within the CASPI segment resulted in new reporting units one level below the operating segment. Due to the change in strategy and lack of similar economic characteristics, these reporting units did not meet the criteria necessary for aggregation. As a result, the goodwill associated with the CASPI segment was reassigned to the new reporting units based upon relative fair values. The reporting unit that contained
the above-mentioned product lines was assigned $34 million of goodwill out of the total CASPI segment goodwill of $333 million. Because the Company determined that this reporting unit could no longer support the carrying value of its assigned goodwill, the full amount of that goodwill was impaired. The fair value of the other reporting unit within CASPI was sufficient to support the carrying value of the remainder of the goodwill.
The third quarter 2003 severance costs of $8 million are discussed in further detail below.
In the first six months 2003, total asset impairments and restructuring charges of approximately $3 million were recognized. These charges primarily relate to employee severance costs and changes in estimates for previously accrued amounts.
In third quarter 2002, earnings were positively impacted by $1 million as a result of a favorable change in the estimate related to previously recognized restructuring costs in the CASPI segment.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Performance Chemicals and Intermediates ("PCI") Segment
The PCI segment’s charges of $79 million relate to the impairment of fixed assets used in certain commodity and specialty organic chemicals product lines as a result of increased competition and changes in business strategy in response to a change in market conditions and the financial performance of these product lines. Within the commodity product lines, the fixed asset impairments charge relates to assets at the Sokolov, Czech Republic facility. Within the specialty organic chemicals product lines, the fixed asset impairments charge relates to assets located at the Kingsport, Tennessee facility. As the undiscounted future cash flows could not support the carrying value of the assets, the fixed assets were written down to fair value, as established primarily by appraisal.
The third quarter 2003 severance costs of $4 million are discussed in further detail below.
In the second quarter 2003, the Company recorded an asset impairments charge of approximately $15 million related to the impairment of certain fixed assets used in the PCI segment’s fine chemicals product lines that are located in Llangefni, Wales. In response to industry conditions, during the second quarter 2003 the Company revised its strategy and the earnings forecast for the products manufactured by these assets. As the undiscounted future cash flows could not support the carrying value of the asset, the fixed assets were written down to fair value, as established primarily by discounted future cash flows of the impacted assets.
Severance charges
In the third quarter 2003, the Company recognized $14 million in restructuring charges related to the actual and probable involuntary separations of approximately 300 employees. These workforce reductions are the result of decisions made as part of the restructuring of the CASPI segment discussed above, the Company’s annual budgeting process, and site closure costs associated with the PCI segment.
The following table summarizes the charges and changes in estimates described above, other asset impairments and restructuring charges, the noncash reductions attributable to asset impairments and the cash reductions in shutdown reserves for severance costs and site closure costs paid:
|
(Dollars in millions) |
|
Balance at
January 1, 2002 |
|
Provision/ Adjustments |
|
Noncash Reductions |
|
Cash Reductions |
|
Balance at
December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash charges |
$ |
-- |
$ |
2 |
$ |
(2) |
$ |
-- |
$ |
-- |
|
Severance costs |
|
10 |
|
2 |
|
-- |
|
(10) |
|
2 |
|
Site closure costs |
|
13 |
|
3 |
|
-- |
|
(9) |
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
23 |
$ |
7 |
$ |
(2) |
$ |
(19) |
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1, 2003 |
|
Provision/ Adjustments |
|
Noncash Reductions |
|
Cash Reductions |
|
Balance at
September 30,2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash charges |
$ |
-- |
$ |
497 |
$ |
(497) |
$ |
-- |
$ |
-- |
|
Severance costs |
|
2 |
|
17 |
|
-- |
|
(3) |
|
16 |
|
Site closure costs |
|
7 |
|
-- |
|
-- |
|
(3) |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
9 |
$ |
514 |
$ |
(497) |
$ |
(6) |
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
Substantially all severance and site closure costs are expected to be applied to the reserves within one year.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Interest Expense, Net
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest costs |
$ |
32 |
$ |
34 |
|
|
$ |
99 |
$ |
99 |
|
|
|
Less capitalized interest |
1 |
|
2 |
|
|
|
3 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
31 |
|
32 |
|
(3) % |
|
96 |
|
95 |
|
1 % |
|
Interest income |
1 |
|
2 |
|
|
|
4 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
$ |
30 |
$ |
30 |
|
-- % |
$ |
92 |
$ |
91 |
|
1 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense for the third quarter 2003 compared to the third quarter 2002 was flat as a result of lower interest rates, offset by an increase in total borrowings less cash and cash equivalents ("Net Debt").
Net interest expense for the first nine months 2003 compared to the first nine months 2002 increased slightly primarily due to an increase in Net Debt partially offset by lower interest rates. The Company expects Net Debt at the end of 2003 will be similar to or slightly higher than Net Debt at year-end 2002.
Other Operating Income and Other (Income) Charges, Net
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income |
$ |
-- |
$ |
-- |
|
N/A |
$ |
(20) |
$ |
-- |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
$ |
(4) |
$ |
(4) |
|
N/A |
$ |
(20) |
$ |
(7) |
|
>100% |
|
Other charges |
5 |
|
7 |
|
(29)% |
|
15 |
|
14 |
|
7 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) charges, net |
$ |
1 |
$ |
3 |
|
|
$ |
(5) |
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Income
Other operating income includes gains and losses on sales of assets that are not a component of an entity. Other operating income for the first nine months 2003 reflected a gain of $20 million on the sale of the Company’s high-performance crystalline plastics assets, which were formerly a part of the Company’s SP segment.
Other (Income) Charges
Included in other income are the Company’s portion of earnings from its equity investments, gains on sales of non-operating assets, royalty income, gains on foreign exchange transactions and other miscellaneous items. Included in other charges are losses from foreign exchange transactions, the Company’s portion of losses from its equity investments, losses on sales of nonoperating assets, fees on securitized receivables and other miscellaneous items.
Other income for each period included net gains on foreign currency transactions, net of hedging, primarily attributed to the strengthening of the euro, and results from the Company’s equity investments.
Other charges for the third quarter and the first nine months 2002 included the write-down to fair value of certain technology business venture investments. Results for the first nine months 2002 also reflected a loss of $12 million due to remeasurement of an Argentine peso-denominated tax receivable.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for
income taxes |
$ |
(135) |
$ |
4 |
|
>(100)% |
$ |
(110) |
$ |
29 |
|
>(100)% |
|
Effective tax rate |
28% |
|
14% |
|
|
|
28% |
|
24% |
|
|
The expected tax benefit rate of 28% for the quarter and first nine months 2003 was primarily due to the estimated impact of the treatment of third quarter impairment and restructuring charges.
Historically, the Company recorded benefits from a foreign sales corporation or extraterritorial income exclusion. The Company expects benefits from the extraterritorial income exclusion to continue at least through 2003 and that its annual effective tax rate in 2003 will be similar to the effective tax rate for the third quarter and first nine months.
Cumulative Effect of Change in Accounting Principles, Net of Tax
|
|
|
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principles, net |
$ |
-- |
$ |
-- |
$ |
3 |
$ |
(18) |
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," at January 1, 2003 the Company recorded asset retirement obligations primarily related to closure and post closure environmental liabilities associated with certain property, plant and equipment. This resulted in the Company recording asset retirement obligations of $28 million and an after-tax credit to earnings of $3 million during the first quarter 2003.
If the asset retirement obligation measurement and recognition provisions of SFAS No. 143 had been in effect on January 1, 2002, the aggregate carrying amount of those obligations on that date would have been $27 million. If the amortization of asset retirement cost and accretion of asset retirement obligation provisions of SFAS No. 143 had been in effect during 2002, the impact on "Earnings before cumulative effect of changes in accounting principle" in 2002 would have been immaterial.
SFAS No. 142
The Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets; require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment; require reporting units to be identified for the purpose of assessing potential future impairments of goodwill; and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In connection with the adoption of SFAS No. 142, the Company completed in the first quarter 2002 the impairment test for intangible assets with indefinite useful lives other than goodwill. As a result of this impairment test, it was determined that the fair value of certain trademarks related to the CASPI segment, as established by appraisal and based on discounted future cash flows, was less than the recorded value. Accordingly, the Company recognized an after-tax impairment charge of approximately $18 million in the first quarter of 2002 to reflect lower than previously expected cash flows from certain related products. This charge is reported in the Unaudited Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings as the cumulative effect of a change in accounting pr
inciple. Additionally, the Company reclassified $12 million of its intangible assets related to assembled workforce and the related deferred tax liabilities of approximately $5 million to goodwill. During the second quarter 2002, the Company performed the transitional impairment test on its goodwill as required upon adoption of this Statement, and determined that no impairment of goodwill existed as of January 1, 2002. The Company completed its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter 2002 and determined that no impairment existed as of September 30, 2002. The Company plans to continue its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter of each year, unless events warrant more frequent testing.
In the third quarter 2003, the Company impaired certain goodwill and indefinite-lived intangible assets in the CASPI segment as discussed in Note 8 above. Additionally, the Company completed its annual impairment review of the remaining goodwill and indefinite-lived intangible assets. No further impairment of goodwill or indefinite-lived intangible assets was required due to this review.
SUMMARY BY OPERATING SEGMENT
The Company’s products and operations are managed and reported in six operating segments. Effective January 1, 2003, the Company realigned its divisional structure into three divisions. Eastman Division consists of the CASPI segment, the PCI segment and the SP segment. Voridian Division contains the Polymers segment and the Fibers segment. Developing Businesses Division contains the Developing Businesses segment.
The CASPI segment manufactures raw materials, additives and specialty polymers, primarily for the paints and coatings, inks and graphic arts, adhesives and other markets. The CASPI segment's products consist of binders and resins, liquid vehicles, pigment concentrates and additives, unsaturated polyester resins and polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as key components in paints and inks to form a protective coating or film, and bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol solvents, maintain the binders in liquid form for ease of application. Pigment concentrates and additives, such as cellulosic polymers, Texanol? coalescing aid and chlori
nated polyolefins, provide different properties or performance enhancements to the end product. Unsaturated polyester resins are used primarily in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions are traditionally used as textile sizes to protect fibers during processing in textile manufacturing, and the technology is also used in water-based paints, coatings and inks. Additional products are developed in response to, or in anticipation of, new applications where the Company believes significant value can be achieved.
The PCI segment manufactures diversified products that are used in a variety of markets and industrial and consumer applications, including chemicals for agricultural intermediates, fibers, food and beverage ingredients, photographic chemicals, pharmaceutical intermediates, polymer compounding and chemical manufacturing intermediates. The PCI segment also offers custom manufacturing services through its custom synthesis business.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The SP segment produces highly specialized copolyesters, cellulosic plastics and compounded polyethylene plastics that possess unique performance properties for value-added end uses such as appliances, store fixtures and displays, building and construction, electronics and electronic packaging, medical packaging, personal care and cosmetics, performance films, tape and labels, biodegradeables, cups and lids, fiber and strapping, photographic and optical, graphic arts and general packaging. The SP segment’s key products include engineering and specialty polymers, specialty film and sheet products, and packaging film and fiber products.
The Polymers segment manufactures and supplies PET polymers for use in beverage and food packaging and other applications such as custom-care and cosmetics packaging, health care and pharmaceutical uses, household products and industrial. PET polymers serve as source products for packaging a wide variety of products including carbonated soft drinks, water, beer and personal care items and food containers that are suitable for both conventional and microwave oven use. The Polymers segment also manufactures low-density polyethylene and linear low-density polyethylene, which are used primarily for packaging and film applications and in extrusion coated containers such as milk and juice cartons.
The Fibers segment manufactures Estron? acetate tow and Estrobond? triacetin plasticizers which are used primarily in cigarette filters; Estron? and Chromspun? acetate yarns for use in apparel, home furnishings and industrial fabrics; and acetyl chemicals.
The Developing Businesses segment includes new businesses and certain investments in non-traditional growth opportunities that leverage the Company’s technology expertise, intellectual property and know-how into business models that extend to new customers and markets. The segment includes, among other new and developing businesses, Cendian Corporation ("Cendian"), a logistics provider for chemical and plastics companies; Ariel Research Corporation ("Ariel"), a provider of international chemical and regulatory compliance solutions for environmental, health and safety operations; and Eastman’s gasification services.
The Company’s divisional structure allows it to align costs more directly with the activities and businesses that generate them. Goods and services are transferred between the three divisions at predetermined prices which may be in excess of cost. Accordingly, the divisional structure results in the recognition of interdivisional sales revenue and operating earnings. Such interdivisional transactions are eliminated in the Company’s consolidated financial statements.
Effective January 1, 2003, sales and operating results for developing businesses activities were moved from the CASPI, PCI and SP segments to the Developing Businesses segment. Accordingly, amounts for 2002 have been reclassified to reflect this change.
Due to the fact that interdivisional sales are eliminated in the Company’s consolidated financial statements, the following segment discussions pertain primarily to external sales revenue. For additional information concerning the results for the Company’s operating segments, see Note 14 to the Company’s unaudited consolidated financial statements and Exhibit 99.01 to this Form 10-Q.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EASTMAN DIVISION
|
CASPI Segment |
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales |
$ |
400 |
$ |
401 |
|
-- % |
$ |
1,209 |
$ |
1,178 |
|
3 % |
|
|
Volume effect |
|
|
|
|
(10) % |
|
|
|
|
|
(7)% |
|
|
Price effect |
|
|
|
|
3 % |
|
|
|
|
|
2 % |
|
|
Product mix effect |
|
|
|
|
4 % |
|
|
|
|
|
3 % |
|
|
Exchange rate effect |
|
|
|
|
3 % |
|
|
|
|
|
5 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interdivisional sales |
-- |
|
-- |
|
-- % |
|
-- |
|
-- |
|
-- % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
(395) |
|
22 |
|
>(100)% |
|
(376) |
|
72 |
|
>(100)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments and |
|
|
|
|
|
|
|
|
|
|
|
|
restructuring charges, net |
411 |
|
(1) |
|
|
|
414 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales revenue for the third quarter 2003 compared to the third quarter 2002 was flat primarily due to favorable shifts in foreign currency exchange rates and product mix and an increase in selling prices that were offset by a decrease in sales volume. Higher selling prices contributed approximately $13 million to sales revenue. Foreign currency exchange rates had a positive impact on sales revenue for the third quarter 2003 of $13 million primarily due to the strengthening of the euro. A favorable shift in product mix towards higher margin products had a positive impact on sales revenue for the third quarter 2003 of $11 million. The decline in sales volume, which had a negative impact on sales revenue for the third quarter 2003 of $39 million, was primarily attributable to forgoing sal
es of certain low-margin products and reduced sales to customers in the coatings resins market who met some of their product requirements internally as a result of lower demand.
The increase in external sales revenue for the first nine months 2003 compared to the first nine months 2002 was primarily due to favorable shifts in foreign currency exchange rates and product mix and higher selling prices that more than offset the decrease in sales volume. Foreign currency exchange rates had a positive impact on sales revenue for the first nine months 2003 of $57 million primarily due to the strengthening of the euro. A favorable shift in product mix towards higher margin products had a positive impact on sales revenue for the third quarter 2003 of $44 million. The decline in sales volume, which had a negative impact on sales revenue for the first nine months 2003 of $88 million, was primarily attributable to forgoing sales of certain low-margin products and an increasingly c
ompetitive global business environment.
Operating earnings for the third quarter and first nine months 2003 declined significantly compared to the third quarter 2002 primarily due to the asset impairments and restructuring charges related to this segment of approximately $411 million. For more information on the asset impairments and restructuring charges see the discussion of impairments and restructuring charges above and in Note 8 to the Company’s unaudited consolidated financial statements. Additionally, higher raw materials costs, which were partially offset by higher selling prices and cost reduction measures, contributed to the decrease in operating earnings.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
PCI Segment |
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales |
$ |
283 |
$ |
281 |
|
1 % |
$ |
909 |
$ |
816 |
|
11 % |
|
|
Volume effect |
|
|
|
|
(6)% |
|
|
|
|
|
1 % |
|
|
Price effect |
|
|
|
|
5 % |
|
|
|
|
|
9 % |
|
|
Product mix effect |
|
|
|
|
1 % |
|
|
|
|
|
(1)% |
|
|
Exchange rate effect |
|
|
|
|
1 % |
|
|
|
|
|
2 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interdivisional sales |
120 |
|
98 |
|
23 % |
|
360 |
|
277 |
|
30 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
(83) |
|
11 |
|
>(100)% |
|
(77) |
|
12 |
|
>(100)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments and |
|
|
|
|
|
|
|
|
|
|
|
|
restructuring charges, net |
83 |
|
-- |
|
|
|
98 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The slight increase in external sales revenue for the third quarter 2003 compared to the third quarter 2002 was primarily attributed to higher selling prices and favorable shifts in product mix and foreign currency exchange rates that more than offset a decline in sales volume. The increase in selling prices, mostly for intermediate chemicals, had a positive impact on sales revenue of $13 million and was primarily attributable to higher raw material and energy costs. The decline in sales volume had a negative impact on sales revenue of $18 million and was primarily attributed to an increasingly competitive global business environment. The increase in interdivisional sales revenue for the third quarter 2003 was primarily due to higher selling prices driven by higher raw material and energy costs
.
The increase in external sales revenue for the first nine months 2003 compared to the first nine months 2002 was primarily attributable to higher selling prices and a favorable shift in foreign currency exchange rates. The increase in selling prices had a positive impact on sales revenue of $76 million and was primarily attributable to oxo chemical prices that increased consistent with higher raw material and energy costs. Foreign currency exchange rates also had a positive impact on sales revenue of $18 million primarily due to the strengthening of the euro. The increase in interdivisional sales revenue for the first nine months 2003 was primarily due to higher selling prices driven by higher raw material and energy costs.
The decrease in operating earnings for the third quarter and the first nine months 2003 compared to the third quarter and the first nine months 2002 was primarily due to asset impairments and restructuring charge of approximately $83 million. Additionally, lower sales volume and higher raw material and energy costs were partially offset by higher selling prices and cost reduction measures. For more information on the asset impairments and restructuring charges see the discussion of impairments and restructuring charges above and Note 8 to the Company’s unaudited consolidated financial statements.
During 2001, the Company reported that a large customer of the PCI segment did not intend to renew its contract for a custom synthesis product beyond June 30, 2002. As a consequence, impairment charges totaling approximately $70 million related to the impacted assets were recorded during 2001 as part of the restructuring of the fine chemicals product lines. Subsequently, the customer initiated discussions with the Company which resulted in two amendments to the agreement to extend the custom synthesis product contract through June 2004 based on renegotiated terms. Effective July 1, 2003, Eastman and the customer entered into a multi-year agreement in which the Company will remain the sole global supplier for the customer's custom synthesis product.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
SP Segment |
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales |
$ |
135 |
$ |
141 |
|
(4)% |
$ |
417 |
$ |
394 |
|
6 % |
|
|
Volume effect |
|
|
|
|
(8)% |
|
|
|
|
|
2 % |
|
|
Price effect |
|
|
|
|
1 % |
|
|
|
|
|
(1)% |
|
|
Product mix effect |
|
|
|
|
1 % |
|
|
|
|
|
1 % |
|
|
Exchange rate effect |
|
|
|
|
2 % |
|
|
|
|
|
4 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interdivisional sales |
14 |
|
12 |
|
14 % |
|
40 |
|
36 |
|
13 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
12 |
|
12 |
|
--% |
|
53 |
|
30 |
|
77 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments and |
|
|
|
|
|
|
|
|
|
|
|
|
restructuring charges, net |
1 |
|
-- |
|
|
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income |
-- |
|
-- |
|
|
|
20 |
|
-- |
|
|
The decrease in external sales revenue for the third quarter 2003 compared to the third quarter 2002 was primarily due to lower sales volume, primarily attributed to reduced demand for packaging, film, and fiber products with photographic applications that were partially offset by a favorable shift in foreign currency exchange rates. The decrease in sales volume had a negative impact on sales revenue of approximately $12 million. The favorable shifts in foreign currency exchange rates, in the amount of approximately $3 million, were primarily the result of the strengthening of the euro.
External sales revenue for the first nine months 2003 increased compared to the first nine months 2002 primarily due to the positive impact of foreign currency exchange rates and higher sales volume. Favorable shifts in foreign currency exchange rates, primarily due to the strengthening of the euro, contributed to increased sales revenue in the amount of $14 million. The increase in sales volume, primarily for specialty film and sheet products, had a positive impact on sales revenue of $8 million.
Operating earnings for the third quarter 2003 were flat compared to the third quarter 2002 primarily due to lower sales volume and restructuring charges, which were offset by cost reduction efforts and a favorable shift in foreign currency exchange rates.
Operating earnings for the first nine months 2003 increased compared to the first nine months 2002 primarily due to a gain on the sales of the segment’s high-performance crystalline plastics assets in the amount of $20 million and cost reduction measures. Additionally, positive changes in sales volume and foreign currency exchange rates were partially offset by lower selling prices, with higher raw material and energy costs, and restructuring charges.
New competitors in Asia and Europe continue to negatively impact results for copolyesters. However, the Company is committed to maintaining cost advantages obtained from its scale of operations and manufacturing experience and to increasing utilization of its current capacity.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
VORIDIAN DIVISION
|
Polymers Segment |
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales |
$ |
442 |
$ |
382 |
|
16 % |
$ |
1,306 |
$ |
1,123 |
|
16 % |
|
|
Volume effect |
|
|
|
|
9 % |
|
|
|
|
|
1 % |
|
|
Price effect |
|
|
|
|
3 % |
|
|
|
|
|
11 % |
|
|
Product mix effect |
|
|
|
|
1 % |
|
|
|
|
|
-- % |
|
|
Exchange rate effect |
|
|
|
|
3 % |
|
|
|
|
|
4 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interdivisional sales |
14 |
|
16 |
|
(3)% |
|
54 |
|
39 |
|
41 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
2 |
|
(3) |
|
>100% |
|
56 |
|
49 |
|
14 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments and |
|
|
|
|
|
|
|
|
|
|
|
|
restructuring charges, net |
1 |
|
-- |
|
|
|
1 |
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in external sales revenue for the third quarter 2003 compared to the third quarter 2002 was due in large part to higher sales volume, for both PET polymers and polyethylene, which had a positive impact on sales revenue of $35 million. An increase in selling prices, which were primarily the result of higher raw material and energy costs, also contributed to sales revenue in the amount of approximately $12 million. A favorable shift in foreign currency exchange rates, primarily as a result of the strengthening of the euro, also had a positive impact on sales revenue of $13 million.
The increase in external sales revenue for the first nine months 2003 compared to the first nine months 2002 was due in large part to higher selling prices, for both PET polymers and polyethylene, which had a positive impact on sales revenue of $128 million. A favorable shift in foreign currency exchange rates, particularly for the euro, also had a positive impact on sales revenue of $40 million.
Operating earnings in the third quarter 2003 increased compared to the third quarter of 2002 primarily due to lower operating costs, higher sales volume and higher selling prices that more than offset higher raw material and energy costs, and $1 million in restructuring charges. Third quarter 2002 operating results included approximately $23 million in costs related to operational disruptions.
Operating earnings for the first nine months 2003 increased compared to the first nine months 2002 primarily due to higher selling prices, in particular for PET polymers and polyethylene, and the positive impact of a favorable shift in foreign currency exchange rates, primarily for the euro. In addition, 2003 operating earnings were positively impacted by the $14 million insurance settlement for the 2002 operational disruptions. The changes in selling prices and foreign currency exchange rates were partially offset by higher raw material and energy costs and a restructuring charge of $1 million. First nine months 2002 operating earnings included approximately $28 million in costs related to operational disruptions.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
Fibers Segment |
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales |
$ |
163 |
$ |
165 |
|
(1)% |
$ |
475 |
$ |
486 |
|
(2)% |
|
|
Volume effect |
|
|
|
|
15 % |
|
|
|
|
|
2 % |
|
|
Price effect |
|
|
|
|
-- % |
|
|
|
|
|
1 % |
|
|
Product mix effect |
|
|
|
|
(18)% |
|
|
|
|
|
(7)% |
|
|
Exchange rate effect |
|
|
|
|
2 % |
|
|
|
|
|
2 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interdivisional sales |
20 |
|
17 |
|
15 % |
|
60 |
|
55 |
|
9 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
34 |
|
36 |
|
(6)% |
|
95 |
|
109 |
|
(13)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The slight decrease in external sales revenue for the third quarter 2003 compared to the third quarter 2002 was due to an unfavorable shift in product mix that was mostly offset by an increase in sales volume and a favorable shift in foreign currency exchange rates. The unfavorable shift in product mix was due to higher sales volume of lower margin products that had a negative impact on sales revenue of approximately $29 million. Foreign currency exchange rates had a positive impact on sales revenue of $3 million that was primarily due to the strengthening of the euro. An increase in sales volume, primarily for acetyl chemicals, had a positive impact on sales revenue of $25 million. The increase in interdivisional sales revenue for the first nine months 2003 was primarily due to higher selling
prices resulting from higher raw material and energy costs.
The slight decrease in external sales revenue for the first nine months 2003 compared to the first nine months 2002 was primarily due to an unfavorable shift in product mix, which had a negative impact on sales revenue of $37 million. The unfavorable shift in product mix was primarily due to higher sales volume of lower margin products. The unfavorable shift in product mix was partially offset by increases in sales volume, primarily for acetyl chemicals, and favorable shifts in foreign currency exchange rates, primarily due to the strengthening of the euro, of $10 million and $12 million, respectively. The increase in interdivisional sales revenue for the first nine months 2003 was primarily due to higher selling prices resulting from higher raw material and energy costs.
The decline in operating earnings for the third quarter 2003 compared to the third quarter 2002 was primarily due to an unfavorable shift in product mix that was mostly offset by higher sales volume, a favorable shift in foreign currency exchange rates, and cost reduction measures.
The decline in operating earnings for the first nine months 2003 compared to the first nine months 2002 was primarily due to an unfavorable shift in product mix, which resulted mainly from the timing of acetate tow sales to China and a decline of acetate tow demand in North America, that was partially offset by increased sales volume of acetyl chemicals.
The Company continues to expect 2003 operating earnings for the Fibers segment to be about 5% lower than 2002 operating earnings.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DEVELOPING BUSINESSES DIVISION
|
Developing Businesses Segment |
|
|
Third Quarter |
|
First Nine Months |
|
(Dollars in millions) |
2003 |
|
2002 |
|
Change |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales |
$ |
21 |
$ |
4 |
|
>100 % |
$ |
50 |
$ |
8 |
|
>100 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interdivisional sales |
104 |
|
89 |
|
16 % |
|
296 |
|
236 |
|
25 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
(13) |
|
(17) |
|
27 % |
|
(52) |
|
(50) |
|
(4)% |
The increase in external sales revenue for the third quarter and the first nine months 2003 compared to the third quarter and the first nine months 2002 was primarily due to the continued implementation of customer contracts by Cendian and the implementation of gasification services contracts. The increase in interdivisional sales revenue for the third quarter and the first nine months 2003 compared to the third quarter and the first nine months 2002 was primarily due to geographic expansion of the logistics services provided by Cendian to Eastman Division and Voridian Division.
Operating results for the Developing Businesses segment improved by $4 million in the third quarter 2003 compared with the third quarter 2002 primarily due to increased sales revenue related to Cendian that more than offset costs associated with efforts to increase external sales revenue.
Operating results for the Developing Businesses segment decreased in the first nine months 2003 compared to the first nine months 2002, primarily due to an increase in SG&A expenses associated with business building efforts partially offset by improved operating results related to Cendian.
For 2003, the Company expects to invest approximately 1% of sales revenue in new, growth-oriented business opportunities in the Developing Businesses segment.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY BY CUSTOMER LOCATION
Sales Revenue
|
|
Third Quarter |
|
Volume Effect |
|
Price Effect |
|
Product
Mix Effect |
|
Exchange
Rate
Effect |
|
(Dollars in millions) |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
$ |
832 |
$ |
788 |
|
6 % |
|
1 % |
|
5 % |
|
-- % |
|
-- % |
|
Europe, Middle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East, and Africa |
|
336 |
|
300 |
|
12 % |
|
3 % |
|
(4) % |
|
2 % |
|
11 % |
|
Asia Pacific |
|
157 |
|
168 |
|
(7)% |
|
(11)% |
|
2 % |
|
2 % |
|
-- % |
|
Latin America |
|
119 |
|
118 |
|
1 % |
|
(5)% |
|
5 % |
|
-- % |
|
1 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
1,444 |
$ |
1,374 |
|
5 % |
|
(1)% |
|
3 % |
|
-- % |
|
3 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter 2003 sales revenue in the United States and Canada increased $44 million compared to the third quarter 2002 primarily due to higher selling prices, particularly in the Polymers and PCI segments, which had a positive impact on sales revenue of $42 million.
The increase in sales revenue in Europe, the Middle East, and Africa for the third quarter 2003 compared to the third quarter 2002 was primarily due to favorable shifts in foreign currency exchange rates, which had a positive impact on sales revenue of $34 million, primarily due to the strengthening of the euro.
The decrease in sales revenue in the Asia Pacific region in the third quarter 2003 compared to the third quarter 2002 was primarily due to decreased sales volume partially offset by higher selling prices. The decrease in sales volume, primarily for the PCI and Fibers segments, had a negative impact on sales revenue of $19 million. Favorable shifts in product mix, in particular for the PCI segment, partially offset the decrease in sales volume in the amount of approximately $4 million.
Third quarter 2003 sales revenue in Latin America increased slightly compared to the third quarter 2002 primarily due to higher selling prices, particularly in the Polymers segment, in the amount of $6 million, which were partially offset by a decrease in sales volume, primarily in the PCI segment, of $5 million.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
|
First Nine Months |
|
Volume Effect |
|
Price Effect |
|
Product
Mix Effect |
|
Exchange
Rate
Effect |
|
(Dollars in millions) |
|
2003 |
|
2002 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
$ |
2,505 |
$ |
2,303 |
|
9 % |
|
-- % |
|
7 % |
|
2 % |
|
-- % |
|
Europe, Middle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East, and Africa |
|
1,033 |
|
886 |
|
17 % |
|
(1)% |
|
(1) % |
|
2 % |
|
17 % |
|
Asia Pacific |
|
478 |
|
471 |
|
2 % |
|
(4) % |
|
4 % |
|
1 % |
|
1 % |
|
Latin America |
|
350 |
|
345 |
|
2 % |
|
(9)% |
|
13 % |
|
1 % |
|
(3) % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
4,366 |
$ |
4,005 |
|
9 % |
|
(1)% |
|
6 % |
|
-- % |
|
4 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in sales revenue in the United States and Canada for the first nine months 2003 compared to the first nine months 2002 was primarily due to higher selling prices, particularly for the Polymers segment, which had a positive impact on sales revenue of $168 million.
First nine months 2003 sales revenue in Europe, the Middle East, and Africa increased compared to the first nine months 2002 primarily due to foreign currency exchange rates which had a positive impact on sales revenue of $147 million, primarily due to the strengthening of the euro.
First nine months 2003 sales revenue in the Asia Pacific region increased slightly compared to the first nine months 2002 primarily due to higher selling prices partially offset by lower sales volume, particularly for the PCI segment, in the amount of approximately $18 million and $17 million, respectively.
First nine months 2003 sales revenue in Latin America increased compared to the first nine months 2002 primarily due to higher selling prices, particularly for the Polymers segment, which had a positive impact on sales revenue of $46 million and were partially offset by a decrease in sales volume, primarily attributable to the Polymers segment, in the amount of approximately $31 million.
With a substantial portion of sales to customers outside the United States of America, 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. See Note 10 to the Company’s unaudited consolidated financial statements for additional information on the Company’s foreign currency hedging transactions.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
|
|
First Nine Months |
|
(Dollars in millions) |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in): |
|
|
|
|
|
Operating activities |
$ |
46 |
$ |
541 |
|
Investing activities |
|
(126) |
|
(188) |
|
Financing activities |
|
56 |
|
(331) |
|
|
|
|
|
|
Net change in cash and cash equivalents |
$ |
(24) |
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
$ |
53 |
$ |
88 |
|
|
|
|
|
Cash Flows
Cash used in operating activities in the first nine months 2003 reflected a $60 million net decrease in Net Working Capital, which is defined as the net change in receivables, inventory and trade payables, and a significant decrease in liabilities for employee benefits and incentive pay which included a contribution of $238 million to the Company’s U.S. defined benefit pension plans.
Cash used in investing activities in the first nine months 2003 decreased primarily due to proceeds from the sale of the Company’s high performance crystalline plastics assets of $28 million, and a return of a deposit on equipment obtained with lease financing in 2003 of approximately $15 million, included as part of other items, net.
Cash provided by financing activities in the first nine months 2003 totaled $56 million due primarily to proceeds from long term borrowings of $248 million partially offset by a decrease in commercial paper borrowings of $88 million and dividend payments to stockholders in the amount of $102 million. The Company expects total borrowings less cash and cash equivalents ("Net Debt") at the end of 2003 will be similar to or slightly higher than Net Debt at year-end 2002.
Liquidity
Eastman has access to a $600 million revolving credit facility (the "Credit Facility") expiring in July 2005. Any borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates, principally LIBOR. The Credit Facility requires facility fees on the total commitment that vary based on Eastman's credit rating. The rate for such fees was 0.15% as of September 30, 2003 and December 31, 2002. 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 presented.
Eastman typically utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Because the Credit Facility expires in July 2005, the commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings on a long-term basis. At September 30, 2003, the Company’s commercial paper borrowings were $55 million at an effective interest rate of 1.18%. At December 31, 2002, the Company's commercial paper borrowings were $143 million at an effective
interest rate of 1.66%.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. On April 3, 2002, Eastman issued notes in the principal amount of $400 million due 2012 and bearing interest at 7% per annum. Net proceeds from the sale of the notes were $394 million and were used to repay portions of outstanding borrowings under the Credit Facility and commercial paper borrowings. On June 16, 2003, the Company issued notes in the principal amount of $250 million due 2008 and bearing interest at 3 1/4% per annum. Proceeds from the sale of the notes, net of $2 million in transaction fees, were $248 million and were used to repay portions of commercial paper borrowings.
The Company has $500 million of 6 3/8% coupon debt maturing January 15, 2004, which is reflected in borrowings due within one year in the unaudited Consolidated Statements of Financial Position at September 30, 2003. The Company expects to retire and refinance this debt from a combination of cash generated from business activities, new long-term borrowings, and available short-term borrowing capacity.
On November 12, 2003, the Company issued notes in the principal amount of $250 million due 2018 and bearing interest at 6.3% per annum. Proceeds from the sale of the notes, net of approximately $2 million in transaction fees, were $246 million and will be used, along with cash generated from business activities and other borrowings, for the repayment of the Company’s outstanding notes due on January 15, 2004.
In the first quarter 2002, the Company entered into interest rate swaps that converted the effective interest rates of the notes due in 2004 to variable rate. These original interest rate swaps were settled during the fourth quarter 2002, resulting in $13 million cash proceeds being received by the Company. The gain resulting from the settlement of the swaps is reflected as an increase in the current portion of long-term borrowings and will be amortized into earnings as a reduction to interest expense through the maturity of the notes in January 2004. In conjunction with the settlement of the original interest rate swaps, new interest rate swaps were entered into in the fourth quarter 2002, converting the effective interest rates on the notes due in 2004 to variable rates that
averaged 3.37% at September 30, 2003 and 4.07% at December 31, 2002. The recording of the fair value of the interest rate swaps and the corresponding debt resulted in increases of $4 million in other current assets and the current portion of long-term borrowings at September 30, 2003. In the third quarter 2003, the Company entered into interest rate swaps that converted the effective interest rate of a portion of the notes due in 2012 to variable rates such that the average rate was 6.54% at September 30, 2003. The recording of the fair value of the interest rate swaps and the corresponding debt resulted in increases of $4 million in other current assets and the current portion of long-term borrowings at September 30, 2003.
The Company contributed $98 million to its U.S. defined benefit pension plans in the third quarter 2003 and contributed $238 million to its U.S. defined benefit pension plans during the first nine months 2003, thus completing its expected funding of these pension plans for 2003. The Company anticipates that additional funding of $0 to $40 million may be required in 2004, although the amount of such additional funding will be dependent upon interest rates, actual return on plan assets, retirement and attrition rates of employees, and other factors.
The expected return on assets and assumed discount rate used to calculate the Company’s pension and other postemployment benefit obligations are established each December 31. The expected return on assets is based upon the long-term expected returns in the markets in which the pension trust invests its funds, primarily the domestic, international, and private equities markets. The assumed discount rate is based upon an index of high-quality, long-term corporate borrowing rates. The following table illustrates the sensitivity to a change in the expected return on assets and assumed discount rate for U.S. pension plans and other postretirement welfare plans:
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
Change in
Assumption |
Impact on
2003 Pre-tax
Pension Expense |
Impact on
December 31, 2002 Projected Benefit Obligation for U.S. Pension Plans |
Impact on
December 31, 2002 Benefit Obligation for Other U.S. Postretirement Plans |
|
|
|
|
|
|
|
|
|
|
25 basis point
decrease in discount
rate |
+$5 Million |
+$43 Million |
+$35 Million |
|
|
|
|
|
|
25 basis point
increase in discount
rate |
-$5 Million |
-$41 Million |
-$34 Million |
|
|
|
|
|
|
25 basis point
decrease in expected return on assets |
+$2 Million |
No Impact |
N/A |
|
|
|
|
|
|
25 basis point
increase in expected
return on assets |
-$2 Million |
No Impact |
N/A |
|
|
|
|
The Company does not anticipate that a change in postemployment obligations caused by a change in the assumed discount rate will impact the benefits expense recognized or cash contributions made to the pension plans during 2003. However, an after-tax charge or credit will be recorded directly to other comprehensive income, a component of stockholders’ equity, as of December 31, 2003 for the impact on the pension’s projected benefit obligation of the change in interest rates, if any. While the amount of the change in these obligations does not correspond directly to cash funding requirements, it is an indication of the amount the Company will be required to contribute to the plans in future years. The amount and timing of such cash contributions is dependent upon interest rates, actual
returns on plan assets, retirement and attrition rates of employees, and other factors.
Cash flows from operations and the sources of liquidity described above are expected to be available and sufficient to meet foreseeable cash flow requirements. However, the Company’s cash flows from operations can be affected by numerous factors including risks associated with global operations, raw materials availability and cost, demand for and pricing of Eastman’s products, capacity utilization and other factors described under "Forward-Looking Statements and Risk Factors" below.
Capital Expenditures
Capital expenditures were $159 million and $162 million for the first nine months 2003 and 2002, respectively. The Company continues its emphasis on cash flow management and, for 2003, expects that capital spending and other directed investments for small acquisitions and other ventures will be at or below $260 million. Long-term commitments related to planned capital expenditures are not material.
Other Commitments
At September 30, 2003, the Company’s obligations related to notes and debentures totaled $2.2 billion to be paid over a period of 24 years, including $500 million maturing within one year. Other borrowings, related primarily to commercial paper borrowings, totaled approximately $55 million.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company had various purchase obligations at September 30, 2003 totaling approximately $1.5 billion over a period of approximately 15 years for materials, supplies and energy incident to the ordinary conduct of business. The Company also had various lease commitments for property and equipment under cancelable, noncancelable and month-to-month operating leases totaling approximately $220 million over a period of several years. Of the total lease commitments, approximately 24% relate to machinery and equipment, including computer and communications equipment and production equipment; approximately 43% relate to real property, including office space, storage facilities and land; and approximately 33% relate to railcars. The obligations described above are summarized in the following table:
|
(Dollars in millions) |
|
Payments Due For |
|
|
|
|
Period |
|
Notes and Debentures |
|
Commercial Paper and Other Borrowings |
|
Purchase Obligations |
|
Operating Leases |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
$ |
-- |
$ |
-- |
$ |
52 |
$ |
13 |
$ |
65 |
|
2004 |
|
506 |
|
-- |
|
210 |
|
36 |
|
752 |
|
2005 |
|
-- |
|
55 |
|
211 |
|
29 |
|
295 |
|
2006 |
|
-- |
|
-- |
|
207 |
|
27 |
|
234 |
|
2007 |
|
-- |
|
-- |
|
204 |
|
22 |
|
226 |
|
2008-2012 |
|
649 |
|
-- |
|
491 |
|
57 |
|
1,197 |
|
Beyond 2012 |
|
999 |
|
-- |
|
159 |
|
36 |
|
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
2,154 |
$ |
55 |
$ |
1,534 |
$ |
220 |
$ |
3,963 |
|
|
|
|
|
|
|
|
|
|
|
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. The Company believes, based on current facts and circumstances, that a material payment pursuant to such guarantees in excess of the payments included above is remote. Under these operating leases, the residual value guarantees at September 30, 2003 totaled approximately $83 million.
As described in Note 16 to the Company’s unaudited consolidated financial statements, Eastman entered into an agreement in 1999 that allows it to sell undivided interests in certain domestic trade accounts receivable under a planned continuous sale program to a third party. Under this agreement, receivables sold to the third party totaled $200 million at September 30, 2003 and December 31, 2002. Undivided interests in designated receivable pools were sold to the purchaser with recourse limited to the purchased interest in the receivable pools.
The Company did not have any other material relationships with unconsolidated entities or financial partnerships, often referred to as special purpose entities, for the purpose of facilitating off-balance sheet arrangements with contractually narrow or limited purposes. Thus, Eastman is not materially exposed to any financing, liquidity, market, or credit risk related to the above or any other such relationships.
Treasury Stock Transactions
The Company is currently authorized to repurchase up to $400 million of its common stock. No shares of Eastman common stock were repurchased by the Company during the first nine months 2003. A total of 2,746,869 shares of common stock at a cost of approximately $112 million, or an average price of approximately $41 per share, have been repurchased under the authorization. Repurchased shares may be used to meet common stock requirements for compensation and benefit plans and other corporate purposes. In the first quarter 2002, the Company issued 126,614 previously repurchased shares as the annual Company contribution to the Eastman Investment and Employee Stock Ownership Plan.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Dividends
The Company declared cash dividends of $0.44 per share in the third quarters 2003 and 2002 and $1.32 per share in the first nine months 2003 and 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. All companies with variable interests in variable interest entities ("VIE’s") created after January 31, 2003, must apply the provisions of this Interpretation to those entities immediately. A public company with a variable interest in a VIE created before February 1, 2003, must apply the provis
ions of this Interpretation to that entity by the end of the first interim or annual reporting period ending after December 15, 2003. The Company is currently evaluating the effect FIN 46 will have on its consolidated financial position, liquidity, or results of operations for VIE’s created before February 1, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 amends SFAS No. 133 to require contracts with comparable characteristics be accounted for similarly. SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment qualifies as a derivative and clarifies when a derivative contains a fin
ancing component that warrants special reporting in the statement of cash flows. This Statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003, where the guidance should be applied prospectively. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain financial instruments, which under previous guidance were accounted for as equity, be classified as liabilities or assets in statements of financial position. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, liquidity, or results of operations.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
For 2003, the Company expects:
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that higher raw material and energy costs on a year over year basis that will negatively impact operating results for the Company, which the Company expects to offset, in part, through price increases for certain of its products and through various cost control measures;
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to continue to evaluate the allegations and claims made in recent asbestos-related lawsuits and its insurance coverages, and that the ultimate resolution of asbestos cases will not have a material impact on the Company’s financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to monetary damages, costs or expenses and charges against earnings in particular periods;
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to continue to review its portfolio of products and businesses across the Company, primarily in the Eastman Division, and that some product lines or businesses may be restructured or removed from the Company’s portfolio to improve profitability;
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company continues to work towards achieving the goal of earning a return over the cost of capital. However, a number of factors have been negatively impacting efforts to achieve this goal. These factors include higher raw material and energy costs, a continued lack of pricing power for some of the Company’s products, and a difficult market environment, particularly for manufacturing.
The Company does not expect to achieve its goal of earning a return over the cost of capital for the full year 2003. However, the Company will continue to work towards this goal on a quarter-by-quarter basis by taking action in a number of areas, including:
The above expectations of the Company should be read in conjunction with the longer-term expectations provided in its 2002 Annual Report on Form 10-K.
See "Forward-Looking Statements and Risk Factors" below.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The expectations under "Outlook" and certain other statements in this report may be forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. These statements and other written and oral forward-looking statements made by the Company from time to time may relate to, among other things, such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters; legal proceedings; exposure to, and effects of hedging of, raw material and energy costs and foreign currencies; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin, and sales; earnings, cash flow, dividends and other exp
ected financial conditions; expectations, strategies, and plans for individual products, businesses, segments and divisions as well as for the whole of Eastman Chemical Company; cash requirements and uses of available cash; financing plans; pension expenses and funding; credit rating; cost reduction and control efforts and targets; integration of acquired businesses; development, production, commercialization and acceptance of new products, services and technologies and related costs; and asset and product portfolio changes.
These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, the following are some of the important factors that could c
ause the Company's actual results to differ materially from those in any such forward-looking statements:
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The Company has manufacturing and marketing operations throughout the world, with approximately 45% of the Company's sales revenue attributable to sales outside the United States. Economic factors, including foreign currency exchange rates, could affect the Company's sales revenue, expenses and results. Although the Company utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in foreign currencies, any changes in strategy in regard to risk management tools can also affect sales revenue, expenses and results and there can be no assurance that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws, regulations, or other political factors in any of the countries in which the Co
mpany operates could affect business in that country or region, as well as the Company's results of operations and financial condition.
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The Company has made and may continue to make acquisitions, divestitures and investments, and enter into alliances, as part of its strategies for growth and improved profitability. The completion of such transactions are subject to the timely receipt of necessary regulatory and other consents and approvals needed to complete the transactions which could be delayed for a variety of reasons, including the satisfactory negotiation of the transaction documents and the fulfillment of all closing conditions to the transactions. Additionally, after completion of the transactions, there can be no assurance that such transactions will be successfully completed on a timely and cost-efficient basis or that they will achieve projected operating earnings or cost reduction targets.
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The Company has made strategic investments in technology, services businesses, and other ventures in order to build certain Eastman capabilities. There can be no assurance that such investments will achieve their objectives or that they will be beneficial to the Company's results of operations.
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The Company owns assets in the form of equity in other companies, including joint ventures, technology investments and Genencor. Such investments are minority investments in companies which are not managed or controlled by the Company and are subject to all of the risks associated with changes in value of such investments including the market valuation of those companies whose shares are publicly traded.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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In addition to cost reduction initiatives, the Company is striving to improve margins on its products through price increases, where warranted and accepted by the market; however, the Company's earnings could be negatively impacted should such increases be unrealized, not be sufficient to cover increased raw material and energy costs, or have a negative impact on demand and volume.
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The Company is reliant on certain strategic raw materials for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate short-term market fluctuations in raw material costs. There can be no assurance, however, that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which the Company operates or does business, or in countries or regions that are key suppliers of strategic raw materials, could affect availability and costs of raw materials.
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While temporary shortages of raw materials and energy may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuous availability and price are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic or world market and political conditions, changes in government regulation, war or other outbreak of hostilities. Eastman’s operations or products may, at times, be adversely affected by these factors.
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The Company's competitive position in the markets in which it participates is, in part, subject to external factors. For example, supply and demand for certain of the Company's products is driven by end-use markets and worldwide capacities which, in turn, impact demand for and pricing of the Company's products.
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The Company's facilities and businesses are subject to complex health, safety and environmental laws and regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. The amount accrued reflects the Company’s assumptions about remedial requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unantici
pated government enforcement action, or changes in health, safety, environmental, chemical control regulations and testing requirements could result in higher or lower costs.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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The Company accesses the capital and credit markets on a regular basis. Access to these markets and the cost of capital is dependent in part upon the Company's credit rating received from independent credit rating agencies. An adverse change in the Company's credit rating could affect the renewal of existing credit facilities or the Company's ability to obtain access to new credit facilities or other debt financing in the future, could adversely affect the terms under which the Company can borrow, and could increase the cost of new borrowings, other debt, or capital.
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The Company’s operations from time to time are parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company believes amounts reserved are adequate for such pending matters; however, results of operations could be affected by significant litigation adverse to the Company.
The foregoing list of important factors does not include all such factors nor necessarily present them in order of importance. This disclosure, including that under "Outlook" and "Forward-Looking Statements and Risk Factors," and other forward-looking statements and related disclosures made by the Company in this report and elsewhere from time to time, represents management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public Company disclosures
(such as in filings with the Securities and Exchange Commission or in Company press releases) on related subjects.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2003.
There has been no change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
General
From time to time, the Company and its 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 such pending matters, including the sorbates litigation and the asbestos litigation described in the following paragraphs, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could
negatively impact earnings or cash flows in a particular future period.
Sorbates Litigation
As previously reported, on September 30, 1998, the Company entered into a voluntary plea agreement with the U.S. Department of Justice and agreed to pay an $11 million fine to resolve a charge brought against the Company for violation of Section One of the Sherman Act. Under the agreement, the Company entered a plea of guilty to one count of price-fixing for sorbates, a class of food preservatives, from January 1995 through June 1997. The plea agreement was approved by the United States District Court for the Northern District of California on October 21, 1998. The Company recognized the entire fine as a charge against earnings in the third quarter of 1998 and paid the fine in installments over a period of five years. On October 26, 1999, the Company pleaded guilty in a Federal Court of Canada
to a violation of the Competition Act of Canada and was fined $780,000 (Canadian). The plea in Canada admitted that the same conduct that was the subject of the United States guilty plea had occurred with respect to sorbates sold in Canada, and prohibited repetition of the conduct and provides for future monitoring. The Canadian fine has been paid and was recognized as a charge against earnings in the fourth quarter of 1999.
Following the September 30, 1998 plea agreement, the Company, along with other defendants, was sued in federal, state and Canadian courts in more than twenty putative class action lawsuits filed on behalf of purchasers of sorbates and products containing sorbates, claiming those purchasers paid more for sorbates and for products containing sorbates than they would have paid in the absence of the defendants’ price-fixing. All but three of these lawsuits have been resolved via settlement. No class has been certified in any of the three unresolved private cases, and the trial court in one of them decided in Octobe
r 2002 that the case would not proceed as a class action, though that decision has been appealed by the plaintiff.
In addition, six states have sued the Company and other defendants in connection with the sorbates matter, seeking damages, restitution and civil penalties on behalf of consumers of sorbates in those respective states. One of those six cases has been tentatively settled; defense motions to dismiss are pending in three cases; and two motions to dismiss have been granted. Seven other states have advised the Company that they intend to bring similar actions against the Company and others. A settlement with those states has also tentatively been reached.
The Company has recognized charges to earnings in 2003 and each of the past four years for estimated and actual costs, including legal fees and expenses, related to the sorbates fine and litigation. While the Company intends to continue to defend vigorously the remaining sorbates actions unless they can be settled on acceptable terms, the ultimate outcome of the matters still pending and of additional claims that could be made is not expected to have a material impact on the Company's financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to monetary damages, costs or expenses and charges against earnings in particular periods.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
Asbestos Litigation
Over the years, Eastman was named as a defendant, along with numerous other defendants, in lawsuits in various state courts in which plaintiffs alleged injury due to exposure to asbestos at Eastman’s manufacturing sites and sought unspecified monetary damages and other relief. Historically, these cases were dismissed or settled without a material effect on Eastman’s financial condition, results of operations, or cash flows.
As previously reported, Eastman, like many other companies, has recently experienced an increase in the number of asbestos claims against it. Currently, there are approximately 11,000 claims asserted against the Company in 33 cases that also involve hundreds of other defendants. By far, the majority of these claims are in Mississippi. In the recently filed cases in Mississippi, plaintiffs allege expo
sure to asbestos-containing products allegedly made by Eastman. Based on its investigation to date, the Company has information that it manufactured limited amounts of an asbestos-containing plastic product between the mid-1960's and the early 1970's. The Company's investigation has found no evidence that any of the Mississippi plaintiffs worked with or around any such product alleged to have been manufactured by the Company. The Company intends to defend vigorously all of these actions or to settle them on acceptable terms.
The Company continues to evaluate the allegations and claims made in recent asbestos-related lawsuits and its insurance coverages. Based on such evaluation to date, the Company continues to believe that the ultimate resolution of asbestos cases will not have a material impact on the Company’s financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to monetary damages, costs or expenses and charges against earnings in particular periods. To date, costs incurred by the Company related to the recent asbestos-related lawsuits have not been material, and in the case of the Mississippi claims have been limited to legal fees and expenses.
ITEM 5. OTHER EVENTS
On October 29, 2003, the Company announced two executive appointments, both of which will be effective November 15, 2003. Richard A. Lorraine was named senior vice president and chief financial officer. He will succeed James P. Rogers, who was named executive vice president and president of the Eastman Division. Mr. Lorraine was most recently executive vice president and chief financial officer for Occidental Chemical Corporation in Dallas, Texas. Mr. Rogers has served as the Company’s chief financial officer since joining Eastman in 1999 and has served as chief operations officer of the Eastman Division since 2002.
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 57.
(b) On July 24, 2003, the Company furnished under Item 12 of Form 8-K the text of its publicly released financial results for the second quarter of 2003.
On August 20, 2003, the Company furnished under Item 12 of Form 8-K the text of its publicly released additional financial information for the Coatings, Adhesives, Specialty Polymers
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
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.
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Eastman Chemical Company |
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Date: November 13, 2003 |
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By: |
/s/ James P. Rogers |
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James P. Rogers |
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Senior Vice President and
Chief Financial Officer |
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
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Exhibit |
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Sequential |
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Number |
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Description |
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Page Number |
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3.01 |
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Amended and Restated Certificate of Incorporation of Eastman Chemical Company, as amended (incorporated by reference to Exhibit 3.01 to Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001) |
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3.02 |
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Amended and Restated Bylaws of Eastman Chemical Company, as amended December 5, 2002 (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, 2002) |
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4.01 |
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Form of Eastman Chemical Company Common Stock certificate as amended February 1, 2001 (incorporated herein by reference to Exhibit 4.01 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (the "March 31, 2001 10-Q")) |
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4.02 |
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Stockholder Protection Rights Agreement dated as of December 13, 1993, between Eastman Chemical Company and American Stock Transfer, 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) |
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4.03 |
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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")) |
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4.04 |
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Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by reference to Exhibit 4(c) to the 8-K) |
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4.05 |
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Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the 8-K) |
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4.06 |
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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")) |
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4.07 |
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Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the June 8-K) |
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4.08 |
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Form of 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 10-K")) |
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
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Exhibit |
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Sequential |
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Description |
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Page Number |
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4.09 |
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Form of 7% Notes due April 15, 2012 (incorporated herein by reference to Exhibit 4.09 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002) |
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4.10 |
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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) |
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4.11 |
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$200,000,000 Accounts Receivable Securitization agreement dated April 13, 1999 (amended April 11, 2000), between the Company and Bank One, NA, as agent. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request. |
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4.12 |
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Credit Agreement, dated as of July 13, 2000 (the "Credit Agreement") among Eastman Chemical Company, the Lenders named therein, and Citibank, N.A. as Agent (incorporated herein by reference to Exhibit 4.11 to Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000) |
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4.13 |
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Form of 3 1/4% Notes due June 16, 2008 (incorporated herein by reference to Exhibit 4.13 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2003) |
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4.14 |
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Form of 6.30% notes due 2018 |
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59-65 |
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12.01 |
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Statement re: Computation of Ratios of Earnings to Fixed Charges |
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66 |
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31.01 |
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Rule 13a – 14(a) Certification |
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67 |
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by J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, for the quarter ended September 30, 2003 |
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31.02 |
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Rule 13a – 14(a) Certification
by James P. Rogers, Senior Vice President and Chief Financial Officer, for the quarter ended September 30, 2003 |
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68 |
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32.01 |
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Section 1350 Certification by J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, for the quarter ended September 30, 2003 |
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69 |
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32.02 |
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Section 1350 Certification by James P. Rogers, Senior Vice President and Chief Financial Officer, for the quarter ended September 30, 2003 |
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70 |
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99.01 |
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Operating Segment Information, External Sales Revenue Change, Volume Effect, Price Effect and Interdivisional Effect |
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71-72 |