Eastman
is the largest producer of polyethylene terephthalate ("PET") polymers for
packaging based on capacity share and is a leading supplier of raw materials
for coatings, adhesives, specialty plastic products and other formulated
products, and of cellulose acetate fibers. Eastman has 17 manufacturing sites in
10 countries that supply chemicals, fibers, and plastics products to customers
throughout the world. Eastman is leveraging its heritage of innovation and
strength in polyester, acetyl, and organic chemistry technologies to drive
growth and meet increasing demand in four select markets: building and
construction, packaging, health, and electronics. In 2004, the Company had
sales revenue of $6.6 billion, operating earnings of $175 million, and net
earnings of $170 million. Included in 2004 results were asset impairments and
restructuring charges and other operating income of $206 million and $7 million,
respectively. Earnings were $2.18 per diluted share in 2004.
The
Company’s products and operations are managed and reported in six operating
segments. Effective January 1, 2002, the Company implemented a divisional
structure that aligned the businesses into two divisions; Eastman and Voridian.
On January 1, 2003, the Company realigned the divisional structure to add the
Developing Businesses Division, and reclassified its sales, operating earnings,
and assets from Eastman Division. Eastman Division consists of the Coatings,
Adhesives, Specialty Polymers, and Inks (“CASPI”) segment, the Performance
Chemicals and Intermediates (“PCI”) segment and the Specialty Plastics (“SP”)
segment. Voridian Division contains the Polymers segment and the Fibers segment.
Developing Businesses Division contains the Developing Businesses (“DB”) segment
to better align the Company resources with its strategy. Segments are determined
by the customer markets in which we sell our products. On July 31, 2004, the
Company completed the sale of certain businesses, product lines, and related
assets within the CASPI segment. See Note 20 to the Company’s consolidated
financial statements for certain financial information related to the Company’s
operating segments.
EASTMAN
DIVISION
Business
and Industry Overview
Operating
in a variety of markets with varying growth prospects and competitive factors,
the segments in Eastman Division manufacture a diverse portfolio of commodity
and specialty chemicals and plastics that are used in a wide range of consumer
and industrial markets. Eastman Division has 13 manufacturing sites in 8
countries. Eastman Division is comprised of the following segments: CASPI, PCI,
and SP, which are more fully discussed below.
The CASPI
segment generally competes in the markets for raw materials for paints and
coatings, inks, adhesives, and other formulated products. Growth in these
markets in North America and Europe typically approximates economic growth in
general, due to the wide variety of end uses for these applications and
dependence on the economic conditions of the markets for durable goods, packaged
goods, automobiles, and housing. However, higher growth sub-markets exist within
North America and Europe, driven primarily by increasing governmental
regulation. For example, industry participants are promoting coatings and
adhesives products and technologies designed to be protective of the environment
by reducing air emissions. Growth in Asia and Latin America is substantially
higher, driven primarily by the requirements of industrializing economies.
The PCI
segment competes in diverse markets for its performance chemicals and
intermediates chemicals offerings. Performance chemicals products are
specifically developed based on product performance criteria. The focus in these
markets is on specific opportunities for value-added products and market size.
Growth opportunities and other industry characteristics are a function of the
level and extent to which a producer chooses to participate in niche
opportunities driven by these customer specifications. For PCI intermediates
products, the end-use markets are varied, from durables to food products to
pharmaceuticals and, although opportunities for differentiation on service and
product offerings exist, these products compete primarily on
price.
The SP
segment competes in the market for plastics that meet specific performance
criteria, typically determined on an application-by-application basis. Specialty
plastics product development is dependent upon a manufacturer’s ability to
design products that achieve specific performance characteristics determined by
the customer, while doing so either more effectively or more efficiently than
alternative materials such as polycarbonate and acrylic. Increases in market
share are gained through the development of new applications, substitution of
plastic for other materials, and particularly, displacement by plastic resins in
existing applications. The SP segment produces specialty
copolyesters, plastic sheeting, cellulose esters, and cellulose
plastics. The Company estimates that the market growth for copolyesters, which
has historically been high due to the relatively small market size, will
continue to be higher than general economic growth due to displacement
opportunities. Eastman believes that the cellulosic plastics markets will be
flat or, at best, equal to the rate of growth of the economy in
general.
Strategy
The
Company’s objectives for Eastman Division are to improve gross margins and
exploit growth opportunities in core businesses.
Eastman
Division continues to work to maximize the value of core businesses by improving
gross margins through:
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Enhancing
pricing processes and pricing strategies, and implementing pricing systems
to improve the responsiveness to increases in operating costs and other
factors impacting gross margins; |
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Focusing
on more profitable products and business lines to maximize earnings
potential of product mix; |
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Completing
cost reduction programs, including a Six Sigma* quality improvement
program aimed at reducing costs, improving customer satisfaction, and
improving efficiency through reduction of variations and
defects; |
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Implementing
information technology solutions to maximize the Company’s enterprise
resource planning system used in product planning and other manufacturing
processes to reduce safety stock, improve responsiveness to demand
forecasting, and increase manufacturing efficiency;
and |
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Maintaining
high utilization of manufacturing assets, particularly for intermediates
and specialty polymers, and pursuing debottlenecking and other
opportunities to expand capacities. |
Related
to the above activities, the Company continues to evaluate its portfolio of
products and businesses in Eastman Division, which could result in further
restructuring, divestiture, or consolidation, particularly in the PCI
segment.
*Six
Sigma is a trademark of Motorola, Inc.
· Exploit
Growth Opportunities in Core Businesses
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Develop
New Specialty Products and Expand into New
Markets |
The
Company believes that it is a market leader based on sales in a number of
Eastman Division’s product lines, and is focused on growth through continued
innovation and displacement of competitive products with offerings that provide
greater functionality or better value. This includes development of new products
for existing applications and expansion into new applications with existing
products.
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Leverage
Opportunities Created by the Broad Product
Line |
Eastman
Division is able to offer a broad array of complementary products that customers
would otherwise need to obtain from multiple manufacturers. Our diverse
portfolio and integrated manufacturing assets allow Eastman Division to further
benefit from advancements and developments with respect to one product line by
applying them to other product lines. For example, efficiency is created through
the operation of large plants that produce numerous products related to
different segments. This allows a customer to place an order for multiple
products, which may be produced by different segments, and have them delivered
from the same location, reducing costs and order time.
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Pursue
Opportunities for Business Development and Global
Diversification |
Eastman
Division currently has in place and continues to pursue opportunities for joint
ventures, equity investments and other alliances. These
strategic initiatives are expected to diversify and strengthen businesses by
providing access to new markets and high-growth areas as well as providing an
efficient means of ensuring that Eastman is involved in technological innovation
in or related to the chemicals industry. The Company is committed to pursuing
these initiatives in order to capitalize on new business concepts that
differentiate it from other chemical manufacturers and that will provide
incremental growth beyond that which is inherent in the chemicals industry and
at lower capital investment requirements. For example, in 2003, Eastman entered
into a joint venture with Qilu Eastman Specialty Chemical Ltd., located in Zibo
City, China to construct a plant that became operational November 2004. The
plant has started production of Texanol™ ester alcohol coalescing aid for the
paint market within the CASPI segment and TXIB™ plasticizer for the glove and
flooring markets within the PCI segment.
CASPI
SEGMENT
Through
the CASPI segment, Eastman Division manufactures raw materials, liquid vehicles,
additives, and specialty polymers, all of which are integral to the production
of paints and coatings, inks, adhesives, and other formulated products. The
CASPI segment focuses on producing raw materials rather than finished products
in order to develop long-term, strategic relationships and achieve preferred
supplier status with its customers.
On July
31, 2004, the Company completed the sale of certain businesses, product lines
and related assets within the CASPI segment. The divested businesses and product
lines were acrylate ester monomers, composites (unsaturated polyester resins),
inks and graphic arts raw materials, liquid resins, powder resins, and textile
chemicals.
In 2004,
the continuing product lines within the CASPI segment had sales revenue of
approximately 18% of Eastman’s total sales and 30% of Eastman Division’s total
sales. All product lines had sales revenue of approximately $1.6 billion,
representing 24% of Eastman’s total sales and 37% of Eastman Division’s total
sales.
The CASPI
segment's products consist of:
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Coatings
Additives and Solvents |
The
additives product lines consist of: cellulosic polymers, which enhance the
aesthetic appeal and improve the performance and metallic flake orientation of
industrial and automotive original equipment and refinish coatings and inks;
Texanol™ ester alcohol, which improves film formation and durability in
architectural latex paints; and chlorinated polyolefins, which promotes the
adherence of paints and coatings to plastic substrates. Solvents, which consist
of ester, ketone, glycol ether and alcohol solvents, are used in both paints and
inks to maintain the formulation in liquid form for ease of application.
Environmental regulations that impose limits on the emission of hazardous air
pollutants continue to impact coatings formulations requiring compliant coatings
raw materials. Eastman’s coatings additives and solvents are used primarily in
compliant coatings, such as waterborne (latex) and high solids coatings, and
additional products are under development to meet the growing demand for paints
that are protective of the environment. Coatings, additives and solvents
comprised 40% of the CASPI segment’s total sales and 57% of the CASPI segment’s
total sales from continuing product lines for 2004.
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Adhesives
Raw Materials |
The
adhesives product line consists of hydrocarbon resins, rosins resins, resin
dispersions, and polymer raw materials. These products are sold to adhesive
formulators and tape and label manufacturers for use as raw materials in hot
melt and pressure sensitive adhesives and as binders in nonwoven products (such
as disposable diapers, feminine products, and pre-saturated wipes). Eastman has
a leadership position in hydrogenated gum rosins used in adhesive and chewing
gum applications. Eastman offers the broadest product portfolio of raw materials
for the adhesives industry, ranking as the second largest global tackifier
supplier. Adhesives comprised 30% of the CASPI segment’s total sales and 43% of
the CASPI segment’s total sales from continuing product lines for 2004.
Prior to
their divestiture on July 31, 2004, the CASPI segment included the following:
composites (unsaturated polyester resins), certain acrylic monomers, inks and
graphic arts raw materials, liquid resins, powder resins, and textile chemicals.
These product lines comprised 30% of the CASPI segment’s total sales for
2004.
A key
element of the CASPI segment growth strategy is the continued development of
innovative product offerings, building on proprietary technologies in
high-growth markets and regions that meet customers’ evolving needs and improve
the quality and performance of customers’ end products. Eastman Division
believes that its ability to leverage its broad product line and research and
development capabilities across this segment make it uniquely capable of
offering a broad array of solutions for new and emerging markets.
The CASPI
segment is focused on the expansion of the coatings and inks additives and
solvents product offerings into other high-growth areas. These include market
areas with growth due to specific market trends and product developments, such
as high solids and water-based coatings and inks, as well as growth in
geographic areas due to the level and timing of industrial development. The
Company's global manufacturing presence and new joint venture operation for
Texanol™ ester alcohol in Zibo City, China, position it to take advantage of
areas of high industrial growth.
The CASPI
segment is focused on the expansion of the adhesives raw materials product
offerings into other high-growth areas. Additionally, within this group of
product lines, the CASPI segment has an ongoing program to realize significant
savings through focused cost reduction initiatives, outsourcing, and other
projects that leverage best manufacturing practices, infrastructure, and
business processes. As part of the CASPI segment’s efforts to improve
profitability, it completed the restructuring of certain production assets in
North America, which should positively contribute to operating results in 2005.
Additionally, the segment should continue to realize growth in Asia through its
joint venture operation in Nanjing, China.
In the
future, the Company intends to continue to leverage its resources to strengthen
its CASPI innovation pipeline through improved market connect and the expanded
use of proprietary products and technologies. Although CASPI sales and
application development is often specialized by end-use market, developments in
technology may be successfully shared across multiple end uses and markets.
As a
result of the variety of end uses for its products, the customer base in the
CASPI segment is broad and diverse. This segment has more than 1,500 customers
around the world and 80% of its sales revenue in 2004 was attributable to
approximately 205 customers. CASPI focuses on establishing long-term, customer
service oriented relationships with its strategic customers in order to become
their preferred supplier. CASPI anticipates significant growth potential in its
ability to leverage these relationships to provide sales opportunities in
previously underserved markets, as well as expand the scope of its value-added
services. However, from time to time, customers decide to develop products
internally or diversify their sources of supply that had been provided by
Eastman. Growth in North American and European markets typically coincide with
economic growth in general, due to the wide variety of end uses for these
applications and their dependence on the economic conditions of the markets for
durable goods, packaged goods, automobiles, and housing.
Competition
within the CASPI segment markets varies widely depending on the specific product
or product group. Because of the depth and breadth of its product offerings,
Eastman does not believe that any one of its competitors presently offers all of
the products that it manufactures within the CASPI segment. However, many of the
Company’s competitors within portions of its CASPI segment are substantially
larger companies, such as Dow Chemical Company (“Dow”), BASF Corporation
(“BASF”), and Exxon Mobil Corporation, which have greater financial and other
resources than those of Eastman. Additionally, within each market in this
segment, the Company competes with other smaller, regionally focused companies
that may have advantages based on location, local market knowledge,
manufacturing strength in a specific product, or other factors. At any time, any
one or more of these competitors could develop additional products that compete
with, or that may make obsolete, some of Eastman’s current product
offerings.
Eastman
does not believe that any of its competitors is dominant within the CASPI
segment's markets. Further, the Company attempts to maintain competitive
advantages through its level of vertical integration, breadth of product and
technology offerings, low-cost manufacturing position, consistent product
quality, and process and market knowledge. In addition, Eastman attempts to
leverage its strong customer base and long-standing customer relationships to
promote substantial recurring business, further strengthening its competitive
position.
PCI
SEGMENT
The
Company’s 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 Company
believes it has one of the industry’s broadest product offerings, ranging from
custom manufacturing to high volume manufacturing of complex organic molecules
for customers. In 2004, the PCI segment had sales revenue of $1.9 billion, which
represented 20% of Eastman’s total sales and 46% of Eastman Division's total
sales. PCI segment sales for 2004 included $583 million of interdivisional
sales.
Because a
portion of the PCI segment's sales are derived from higher margin, highly
specialized products with niche applications, success in the PCI segment will
require the Company to continue to innovate and develop new products and find
new applications for its existing products. PCI intends to target high-growth
specialty products, such as additives for food, personal care, and
pharmaceuticals, where it believes the highest returns can be generated. PCI is
also concentrating its efforts on new uses for existing products, such as
sucrose acetate isobutyrate and specialty anhydrides. Some of Eastman Division's
other products in this segment are more substitutable and price sensitive in
nature, requiring the Company to operate on a lower cost basis while maintaining
high quality products and customer service.
The PCI
segment offers over 150 products to customers, many of whom are major producers
in a broad range of markets. The following is a summary of key products:
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Intermediates
Chemicals |
Eastman
manufactures a variety of intermediates chemicals based on oxo and acetyl
chemistries. Intermediates comprised approximately 81% of the PCI segment’s
revenue for 2004. Approximately 77% of the revenue for intermediate chemicals
are generated in North America. Sales in all regions are generated through a mix
of the Company’s direct sales force and a network of distributors. The Company
is the largest marketer of acetic anhydride in the United States, a critical
component of analgesics and other pharmaceutical and agricultural products, and
is the only U.S. producer of acetaldehyde, a key intermediate in the production
of vitamins and other specialty products. Eastman manufactures one of the
broadest ranges of oxo aldehyde derivatives products in the world. The PCI
segment’s other intermediate products include plasticizers, glycols, and polymer
intermediates. Many of the products in this portion of the PCI segment are
priced based on supply and demand of substitute and competing products. In order
to maintain a competitive position, the Company strives to operate with a low
cost manufacturing base. Intermediates chemicals sales revenue is approximately
18% acetyl based, 26% oxo based, and 56% other intermediates chemicals in 2004.
Eastman
manufactures complex organic molecules such as diketene derivatives, specialty
ketones, and specialty anhydrides for fiber and food and beverage ingredients,
which are typically used in market niche applications. The Company also engages
in custom manufacturing of complex organic chemicals where business is developed
on a customer-by-customer basis after significant consultation and analysis.
These niche and custom manufacturing products are typically priced based on the
amount of value added rather than supply and demand factors. Performance
chemicals produces nonanoyloxybenzenesulfonate bleach activator for a key
customer. Performance chemicals comprised 19% of the PCI segment’s total sales
for 2004.
The PCI
segment focuses on continuing to develop and access markets with high-growth
potential for the Company’s performance chemicals, while maintaining its
competitive advantage as a low-cost, high quality, and customer service oriented
supplier of products to other chemicals customers. The Company engages in
customer focused research and development initiatives in order to develop new
products and find additional applications for existing products, both in
response to, and in anticipation of, customer needs. The Company believes that
this strategy will enable it to remain a leader in application-specific, higher
margin PCI products. In the future, the Company expects to continue to
capitalize on applications such as these in the personal care, food and
beverage, and pharmaceutical segments, and intends to seek to create additional
opportunities to apply its products in new and innovative ways.
In order
to build on and maintain its status as a low cost producer, Eastman continuously
focuses on cost control, operational efficiency, and capacity utilization to
maximize earnings. The Company's highly integrated and world-scale manufacturing
facilities position it to achieve its strategic goals. For example, the
Kingsport, Tennessee manufacturing facilities allow the PCI segment to produce
acetic anhydride and other acetyl derivatives from coal rather than natural gas
or other petroleum feedstocks. Similarly, at the Longview, Texas facility, the
PCI segment utilizes local ethane and propane supplies along with Eastman's
proprietary oxo-technology in the world’s largest single-site, oxo aldehyde
manufacturing facility to produce a wide range of alcohols, esters, and other
derivatives products. These integrated facilities, combined with large scale
production processes and continuous focus on additional process improvements,
allow the PCI segment to remain cost competitive with, and for some products
cost-advantaged over, its competitors. A recent example of Eastman’s continuous
pursuit of cost and productivity improvement is the successful debottlenecking
of olefin production operations at the Longview site. Additional volume
resulting from this effort allows the PCI segment to take advantage of the
olefins stream’s positioning within what is now viewed as the early stages of an
olefins cyclical upturn.
The
Company continues to evaluate the various businesses and product lines of the
PCI segment, which could result in restructuring, divestiture, or consolidation
to improve profitability.
Because
of the niche applications of the PCI segment’s performance chemical products,
each individual product offering is tailored to specific end uses. Intermediates
chemicals are generally more readily substitutable, and have a more identifiable
potential customer base. In order to obtain a better understanding of its
customers’ requirements, which in turn allows it to focus on developing
application-specific products, the Company focuses on establishing long-term
relationships with its customers. During 2004, the PCI segment, specifically in
the area of intermediates chemicals, developed long-term relationships that are
expected to better position the business over the entirety of the olefins cycle.
Additionally, the PCI segment is engaged in continual effort directed toward
optimizing product and customer mix. Approximately 80% of the PCI segment’s
sales revenue in 2004 was to 65 out of approximately 1,300 customers
worldwide.
The PCI
segment’s products are used in a variety of markets and end uses, including
agrochemical, automotive, beverages, catalysts, nutrition, pharmaceuticals,
coatings, flooring, medical devices, toys, photographic and imaging, household
products, polymers, textiles, and industrials. The markets for products with
market-based pricing in the PCI segment are cyclical. This cyclicality is caused
by periods of supply and demand imbalance, either when incremental capacity
additions are not offset by corresponding increases in demand, or when demand
exceeds existing supply. Demand, in turn, is based on general economic
conditions, raw material and energy prices, consumer demand and other factors
beyond the Company’s control. Eastman may be unable to increase or maintain its
level of PCI sales in periods of economic stagnation or downturn, and future PCI
results of operations may fluctuate from period to period due to these economic
conditions. The Company believes many of these markets are in the early stages
of an olefin cyclical upturn. Cyclicality is expected to remain a significant
factor in the PCI segment, particularly in the near term, as existing capacity
becomes absorbed and utilization rates increase from current levels. The Company
believes that, as excess capacity is absorbed, it will be in a strong position
to take advantage of the improved market conditions that accompany this cyclical
upturn.
For the
majority of the PCI segment's intermediates chemicals, there historically have
been significant barriers to entry, primarily due to the fact that the relevant
technology has been held by a small number of companies. As this technology has
become more readily available, competition from multinational chemical
manufacturers has intensified. Eastman competes with these and other producers
primarily based on price, as products are interchangeable, and, to a lesser
extent, based on technology, marketing, and other resources. Eastman’s major
competitors for this part of the segment include large multinational companies
such as Dow, Celanese AG, BASF, and Exxon Mobil Corporation. While some of the
Company’s competitors within the PCI segment have greater financial resources
than Eastman, which may better enable them to compete on price, the Company
believes it maintains a strong position due to a combination of its scale of
operations, breadth of product line, level of integration, and technology
leadership.
For
performance chemicals and other niche applications, there are typically few
equivalent products, as the products and their applications are very
specialized. For this reason, producers compete with others only to the extent
they attempt to manufacture similar or enhanced products that share performance
characteristics. Barriers to entry in this market have typically been
technology; cost due to raw material, integration, size or capacity issues; and
customer service. On a general level, Eastman’s primary competitors for
performance chemicals are multinational specialty chemical manufacturers such as
Ciba Specialty Chemicals Holding Inc., Clariant International Ltd., and Lonza
Group Ltd. Recently, an increasing number of producers, primarily from China and
India, have been entering the market primarily on price, benefiting from
low-cost labor, less stringent home country environmental regulations, and
government support. These producers may later focus on improving their product
quality and customer service. Although the entry of new competitors is impacting
the pricing of existing products, Eastman believes it currently maintains a
competitive advantage over these competitors due to the combination of its
research and development applications, low-cost manufacturing base due to
vertical integration, long-term customer relations, and related customer service
focus, as well as the fact that these competitors are frequently unable to
produce products of consistently high quality.
SP
SEGMENT
The SP
segment produces highly specialized copolyesters and cellulosic plastics that
possess unique performance properties for value-added end uses such as
appliances, store fixtures and displays, building and construction, electronic
packaging, medical devices and packaging, personal care and cosmetics,
performance films, tape and labels, fibers/nonwovens, photographic and optical
film, graphic arts and general packaging. In 2004, the SP segment had sales
revenue of $695 million, which represented approximately 10% of Eastman’s total
sales and 17% of Eastman Division’s total sales.
Specialty
copolyester products within the SP segment, including modified specialty
copolyesters such as Eastar™ and Spectar™, have higher than industry average
growth rates. Eastman’s specialty copolyesters, which generally are based on
Eastman's market leading supply of cyclohexane dimethanol modified polymers,
typically fill a market position between polycarbonates and acrylics. While
polycarbonates traditionally have had some superior performance characteristics,
acrylics have been less expensive. Specialty copolyesters combine superior
performance with competitive pricing and are taking market share from both
polycarbonates and acrylics based on their relative performance and
pricing.
The SP
segment also includes cellulosic plastics, which has historically been a steady
business with strong operating margins for the Company, and includes what
Eastman believes is a market leading position in North American cellulose esters
for tape and film products and cellulose plastics for molding
applications.
Eastman
has the ability within its SP segment to modify its polymers and plastics to
control and customize their final properties, creating numerous opportunities
for new application development, including the expertise to develop new
materials and new applications starting from the molecular level in the research
laboratory to the final designed application in the customer’s plant. In
addition, the SP segment has a long history of manufacturing excellence with
strong process improvement programs providing continuing cost reduction.
Manufacturing process models and information technology systems support global
manufacturing sites and provide monitoring and information transfer capability
that speed up the innovation process.
The SP
segment’s key products are:
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Engineering
and Specialty Polymers |
Engineering
and specialty polymers accounted for approximately 45% of the SP segment’s 2004
sales revenue. Engineering and specialty polymers include a broad line of
polyesters, copolyesters, alloys, and cellulosic plastics that are sold to a
diverse and highly fragmented customer base in numerous market segments on a
global basis. Approximately 50% of the revenues from engineering and specialty
polymers are generated in North America. Sales in all regions are generated
through a mix of the Company’s direct sales force and a network of distributors.
Engineering and specialty polymers products are sold into three sectors: durable
goods (components used in appliances and to a lesser degree, automobiles);
medical goods (disposable medical devices, healthcare equipment and instruments,
and pharmaceutical packaging); and personal care and consumer goods (housewares,
cosmetics, eyewear, tools, toys, and a variety of other uses). Engineering and
specialty polymers sales revenue is approximately 55% to personal care and
consumer goods markets, approximately 25% to durable goods markets, and
approximately 20% to medical goods markets.
Engineering
and specialty polymers products are heavily specification-driven. The Company
works with original equipment manufacturing companies to enable product
designers to design polymers for a specified use in a specified product.
Although the average life cycle of many of these products is shrinking over
time, the Company works to identify uses for the polymers in products that will
have multi-year lives. In working with original equipment manufacturing
companies on new consumer product designs, new polymer products are often
developed for use in a particular type of end-use product. Eastman uses ten
different trademarks to identify its SP segment products.
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Specialty
Film and Sheet |
Approximately
30% of the SP segment’s 2004 revenue resulted from sales of specialty film and
sheet products. The key end-use markets for specialty film and sheet are
packaging, in-store fixtures and displays, and building and construction. The SP
segment’s specialty film and sheet annual sales revenue is approximately 60% to
packaging, 35% to displays, and 5% to building and construction.
Direct
customers are film and sheet producers, but extensive marketing activities
target customers in end-use markets. The Company is a major supplier of resins
to the specialty film and sheet markets, but with less than 10% of the global
specialty film and sheet end-use markets, substantial growth opportunities exist
for Eastman. The growth strategy is to penetrate new market segments or
geographies and offer a substitute for other materials by providing an improved
or lower cost solution or design flexibility that enhances the growth potential
of the Company’s customers.
Specialty
film and sheet is sold in the packaging end-use markets including medical and
electronic component trays, shrink label films, and multilayer films.
Copolyester use in these markets is relatively mature with the exception of
shrink label films. Competitive materials in these end-use markets are typically
PET polymers, polyvinyl chloride (“PVC”) and polystyrene. Eastman’s primary
brands for these markets are Eastar™ and Embrace™ copolyesters.
In the
display market, Spectar™ copolyester is marketed primarily for point of purchase
displays including indoor sign and store fixtures. Eastar™ copolyester is
marketed into the graphics market. Copolyester use in these end-use markets is
expected to grow above market rates. Competitive materials in these end-use
markets are polymethylmethacrylate (“PMMA”)
and polycarbonate.
The
building and construction end-use market is a new focus for specialty film and
sheet beginning with Kelvx™ resin for the sign market. The Company plans to seek
a number of new opportunities within this end-use market. The use of copolyester
in these markets is expected to grow significantly above market rates.
Competitive materials for building and construction uses are typically PMMA and
polycarbonate.
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Packaging,
Film and Fiber |
Packaging,
film and fiber products, which represented approximately 25% of the SP segment’s
2004 revenue, include a range of specialty polymer products for markets such as
photographic, optical film, fibers/nonwovens, and tapes/labels uses. Customers
are typically manufacturers of film and fiber products, employing a range of
processing technologies, including film and sheet melt extrusion, solvent
casting, and fiber extrusion. These
films and
fibers products are further converted to produce value-added products, such as
photographic film, adhesive tape, or nonwoven articles, which are sold as
branded items. Products include cellulose esters, copolyesters, specialty
polyesters and concentrates/additives. Packaging, film and fiber sales consist
of 70% photographic and optical film, 15% tapes and labels, and 15% packaging,
industrial film and nonwovens. Currently, North America comprises 90% of sales
revenue for packaging, film and fiber. Competition
is primarily from other producers of copolyesters and cellulose esters.
The
Company competes in market niches requiring polymers with combinations of
clarity, toughness, and chemical resistance.
The SP
segment is focused on innovation and marketing and, within the past three years,
has commercialized over 20 new products. Eastman Division believes that the
continued differentiation of its current offerings and introduction of new
products will provide access to previously underserved markets, such as its
introduction of polymers with higher heat resistance and products designed to be
protective of the environment. Additionally, the SP segment develops product
enhancements in order to respond to specific market needs, and expects this to
result in increased market penetration for existing products. The SP model of
innovation leverages a unique and growing portfolio of cellulosics and specialty
copolyesters, such as CadenceTM, a
copolyester for calendaring for film applications, EastarTM and
Durastar™ copolyesters for cosmetic and household applications, and Kelvx™ resin
for higher temperature sheet applications. This product portfolio is focused on
substitution for other materials, such as polycarbonate, acrylonitrile butadiene
styrene (“ABS”), acrylic, or PVC, in applications that require clarity,
toughness, and chemical resistance.
The
Company expects to continue to pursue profitable alliances with strategic
customers to engage in branding in order to increase name recognition, to offer
one of the industry’s widest varieties of products and to maintain its focus on
high-growth markets, all with the intent of maximizing the return from its
recognized brand position in its SP products.
The SP
segment continues to leverage the advantages of being an integrated polyester
manufacturer, and will continue to pursue opportunities within the Company’s
integrated polyester stream.
The
customer base in the SP segment is broad and diverse, consisting of over 700
companies worldwide in a variety of industries. Approximately 80% of the SP
segment’s 2004 revenue was attributable to approximately 65 customers. The SP
segment seeks to develop mutually beneficial relationships with its customers
throughout various stages of product life cycles. By doing so, it is better able
to understand its customers’ needs as those customers develop new products, and
more effectively bring new solutions to market. Additionally, the SP segment
builds additional brand loyalty.
Competition
for Eastman Division’s products in the SP segment varies as a function of where
the products are in their life cycle. For example, the SP segment's products in
the introduction phase of the life cycle compete mainly on the basis of
performance. As products begin to advance in the life cycle, and substitute
products come into existence, the basis of competition begins to shift, taking
into account factors such as price, customer service, and brand loyalty. At
maturity, where one or more competitors may have equivalent products in the
market, competition is based primarily on price. Many large, well-recognized
manufacturers produce substitute products of different materials, some of which
may offer better performance characteristics than those of the Company, and
others of which may be offered at a lower price.
Eastman
Division has a full array of products moving across the SP segment’s life cycle
as described above. For example, two commonly used plastics materials in the
heavy gauge sheet market are acrylic and polycarbonate. In general, acrylics are
lower in cost, but polycarbonates provide higher performance. Eastman’s products
capture portions of both markets. Customers of the SP segment can select from
products that offer improved performance over acrylics at a slightly higher
cost, or products that are lower cost than polycarbonates while still possessing
excellent performance properties. In this way, the SP segment is able to meet
the industry need for low-cost, high performance plastics materials and maintain
a significant advantage over its competitors. With regard to engineering and
specialty polymers products, the Company competes in market areas requiring
polymers with combinations of clarity, toughness, and chemical resistance.
Eastman’s primary competitors for engineering and specialty polymers are
companies such as Bayer AG, Dow, GE Plastics, and others, including
polycarbonate, acrylic and clear ABS producers in regions outside North America.
Specialty film and sheet competitors also include polymer companies, such as: GE
Plastics; Bayer AG; Dow; Cyro; Ineos; Autoglas; SK Chemical Industries (“SK”);
Selenis, Industrias de Polimeros, S. A. (Selenis); Polyone; and OxyVinyls, which
sell PETG, polycarbonate, acrylic, and/or polyvinyl chloride resins. Competition
for packaging, film and fiber products is primarily from other producers of
polyester and producers of cellulose ester polymers such as Acetati SpA and
Daicel Chemical Industries, Ltd. Competition with other polymers such as
acrylic, PVC, polystyrene, polypropylene, and polycarbonate is also significant
in several markets and applications. Channels to customers include
corporate accounts, direct sales, e-commerce, and distributors.
Eastman
Division believes that it maintains competitive advantages over its competitors
in the SP segment throughout the product life cycle. At product introduction,
Eastman Division’s breadth of offerings combined with its research and
development capabilities and customer service orientation enable it to quickly
bring a wide variety of products to market. As products enter the growth phase
of the life cycle, Eastman Division is able to continue to leverage its product
breadth by receiving revenues from multiple sources, as well as retaining
customers from long-term relationships. As products become price sensitive,
Eastman Division can take advantage of its scale of operations and vertical
integration to remain profitable as a low-cost manufacturer.
Eastman
Division believes it has competitive advantages in copolyester and cellulose
ester plastics. However, new competitors have begun selling copolyester products
in the past few years. These new competitors cannot yet produce the wide variety
of specialty copolyesters offered by Eastman Division or offer the same level of
technical assistance. Additionally, Eastman Division is committed to increasing
the utilization of current capacity and maintaining its cost advantages obtained
from its scale of operations and manufacturing experience. To this end, during
2004 Eastman closed its copolyester manufacturing facility in Hartlepool,
England and consolidated production at other sites to create a more integrated
and efficient global manufacturing structure. Also during the year Eastman sold
its Eastar™ Bio copolyester business and technology platform to Novamont S.p.A.
There can be no assurance, however, that the SP segment will be able to maintain
this competitive advantage and if it is unable to do so, its results of
operations could be adversely affected.
EASTMAN
DIVISION GENERAL INFORMATION
Sales,
Marketing and Distribution
The
Company markets Eastman Division products primarily through a global sales
organization, which has a presence in the United States as well as in over 35
other countries around the world. Eastman Division has a number of broad product
lines which require a sales and marketing strategy that is tailored to specific
customers in order to deliver high quality products and high levels of service
to all of its customers worldwide. Judgment and process knowledge are critical
in determining the application of Eastman Division’s products for a particular
customer. Through a highly skilled and specialized sales force that is capable
of providing customized business solutions for each of its three operating
segments, Eastman Division is able to establish long-term customer relationships
and strives to become the preferred supplier of specialty chemicals and
plastics.
Eastman
Division’s products are marketed through a variety of selling channels, with the
majority of sales being direct and the balance sold primarily through indirect
channels such as distributors. International sales tend to be made more
frequently through distributors than domestic sales. Eastman Division's
customers throughout the world have the choice of obtaining products and
services through Eastman's website, www.eastman.com, through
any of the global customer service centers, or through any of Eastman's direct
sales force or independent distributors. Customers who choose to use the
Company’s website can conduct a wide range of business transactions such as
ordering online, accessing account and order status, and obtaining product and
technical data. Eastman is an industry leader in the implementation and
utilization of e-business technology for marketing products to customers and was
one of the first chemical companies to
offer
this capability. Eastman views this as an opportunity to increase supply chain
efficiency by having an enterprise resource-planning platform with connectivity
to customers. These sales and marketing capabilities combine to reduce costs and
provide a platform for growth opportunities for the Company by providing
potential customers new methods to access Eastman’s products.
Eastman
Division’s products are shipped to customers directly from Eastman's
manufacturing plants as well as from distribution centers worldwide, with the
method of shipment generally determined by the customer.
Intellectual
Property and Trademarks
The
Company considers its Eastman Division-related intellectual property portfolio
to be a valuable corporate asset which it expands and vigorously protects
globally through a combination of patents that expire at various times,
trademarks, copyrights, and trade secrets. The Company’s primary strategy
regarding its Eastman Division-related intellectual property portfolio is to
protect all innovations that provide its segments with a significant competitive
advantage. The Company also derives value from its intellectual property by
actively licensing and selling patents and expertise worldwide. In addition,
when appropriate, the Company licenses technology from third parties that
complement Eastman Division’s strategic business objectives. Neither Eastman
Division’s business as a whole nor any particular segment is materially
dependent upon any one particular patent, trademark, copyright, or trade secret.
As a producer of a broad and diverse portfolio of chemicals and plastics,
Eastman Division’s intellectual property and trademarks relate to a wide variety
of products and processes. As the laws of many foreign countries do not protect
intellectual property to the same extent as the laws of the United States,
Eastman Division cannot assure that it will be able to adequately protect all of
its intellectual property assets.
Research
and Development
Eastman
Division devotes significant resources to its research and development programs,
which are primarily targeted towards three objectives:
| |
· |
improving
existing products and processes to lower costs, improving product quality,
and reducing potential environmental
impact; |
| |
· |
developing
new products and processes; and |
| |
· |
developing
new product lines and markets through applications
research. |
Eastman
Division’s research and development program comes from a long tradition of
innovation in the overall Eastman culture that dates back well over 75 years.
Eastman Division research and development activities are closely aligned with
the overall Eastman business strategy. The goal of greener, smarter, and low
cost is evidenced by the introduction in 2004 of targeted new products, smarter
customer solutions, and innovative new applications for established products
into new markets.
VORIDIAN
DIVISION
Business
and Industry Overview
The
Voridian Division consists of the Polymers segment and the Fibers segment. The
Polymers segment contains two principal product lines, PET polymers and
polyethylene (“PE”). The PET polymers product line is large, global in scope and
has the largest capacity share of all competitors in the polyesters for
packaging industry. The PE product line is primarily North American in scope and
has a relatively small market share. The Fibers segment is made up of acetate
tow, acetate yarn, and acetyl chemical products. Voridian is one of the two
largest worldwide producers of acetate tow and acetate yarn. Globally positioned
to serve its growing markets, Voridian has eight manufacturing plants in six
countries, as well as access to PET polymers production through two contract
manufacturing arrangements in Asia that are currently inactive.
PET
polymers for the packaging industry are clear, lightweight plastics used in
applications such as beverage containers, edible oil and other food containers,
film and sheet. Packages made from PET polymers are characterized by their light
weight, high strength, durability, clarity, low cost, safety, and recyclability.
PE products consist of low density polyethylene (“LDPE”) and linear low density
polyethylene (“LLDPE”) and are used in extrusion coating, film, and molding
applications.
Both the
PET polymers and PE product lines compete to a large degree on price. Both can
also be characterized as capital intensive. Success in each depends largely on
attaining low cost through technology innovation, manufacturing scale, capacity
utilization, access to reliable and inexpensive utilities, energy and raw
materials, and efficient manufacturing processes.
The
acetate tow market, which Voridian believes is over $2 billion annually, grew at
a rate of approximately 2% annually from 1999 to 2003 and between 8% and 9% from
2003 to 2004. The current increase in demand is attributed primarily
to:
| · |
a
decline in the use of polypropylene tow in China and its replacement by
acetate tow; |
| · |
requirements
in the European Union, Brazil, and China to reduce tar deliveries in
cigarettes, resulting in cigarette filter manufacturers producing longer
cigarette filters; and |
| · |
an
increase in production of filtered cigarettes
worldwide. |
Voridian
estimates that the market for acetate yarn was approximately $330 million in
2004. The demand for acetate yarn has declined by approximately 25% since
1999 due to the impact of 'business casual' fashions and the substitution by
polyester yarn in some applications. This decrease in demand has led to
associated decreases in pricing and profitability throughout the market.
However, the overall market demand has stabilized for the past two
years.
Due to
the announced exit from the acetate yarn business by a major competitor,
worldwide acetate yarn production capacity is expected to decline below current
product demand levels during 2005. While the overall market demand for
acetate yarn must decline due to the reduction in production capacity below
current demand levels, it is expected that the remaining industry production
capacity will be fully utilized, resulting in improved industry
profitability.
Strategy
Voridian
participates in price sensitive markets where product performance is a
requirement for involvement and low cost is the primary driver for success. As a
result, the division’s strategic goals focus on maintaining quality products,
operational excellence, and its global position as one of the most efficient
producers of polymers and fibers in the world. The key elements of this strategy
include:
Voridian
is a global leader in market share in two of its major product markets and
expects to leverage its product knowledge, experience, and scale to further
reduce production costs and increase output. As a highly integrated major PET
polymers producer and one of only a few integrated acetate fiber producers,
Voridian intends to develop further efficiencies to enhance its cost
position.
| · |
Superior
Process Technology |
Voridian
has a demonstrated expertise in developing and implementing improved process
technologies. Through efficient use of research and development, Voridian
intends to continue that trend and to develop increasingly efficient
technologies with the goal of lowering manufacturing costs and improving
operating margins. In September, 2004 the Company announced a
breakthrough technology for the manufacture of PET resin. The IntegRex
technology redefines the paraxylene
(“PX”) to PET manufacturing
process, allowing Voridian to meet future market demand with the most advanced
technology.
Voridian
intends to expand its production capabilities in a capital-efficient manner.
Efforts will include maximizing capacity utilization at existing manufacturing
facilities, reducing bottlenecks at those facilities, asset expansions utilizing
improved process technologies, and smart growth through participation in
strategic manufacturing alliances and contract manufacturing or toll
arrangements.
Voridian’s
product quality and innovation make it a recognized industry leader in the
markets in which it participates. Through the efficient use of research and
development, Voridian will continue to develop and commercialize new products
and processes where customer needs and consumer preference offer improved
returns or increased market share.
POLYMERS
SEGMENT
In 2004,
the Polymers segment had revenues of $2.3 billion, which represented 33% of the
Company’s total sales and 73% of Voridian’s total sales. The segment consists of
two principal product lines, PET polymers and PE.
PET
polymers production is vertically integrated back to the raw material paraxylene
for a substantial majority of its capacity. Voridian’s PET polymers for
packaging product line is the world’s largest based on capacity share; is the
most global based on manufacturing sites; and is the broadest based on formula
diversity. PET polymers for packaging are used in a wide variety of products
including carbonated soft drinks, water, juice, personal care items, household
cleaners, beer and food containers that are suitable for both conventional and
microwave oven use. Voridian has PET polymers manufacturing sites in the United
States, Mexico, Argentina, Great Britain, Spain, and the Netherlands. In
addition, Voridian has access to PET polymers production through contract
manufacturing arrangements at two sites in Asia. Voridian competes primarily in
North America, Latin America, and Europe. The PE product lines are manufactured
entirely in the United States and have a relatively small market
share.
PET
polymers are used in beverage and food packaging and other applications such as
custom-care and cosmetics packaging, health care and pharmaceutical uses,
household products and industrial packaging applications. PET polymers offer
fast and easy processing, superb clarity, excellent colorability and color
consistency, durability and strength, impact and chemical resistance, and high
heat stability. PET accounted for 80% of the revenue in the Polymers segment.
The
Polymers segment also offers a PE product line manufactured in the United States
including LDPE and LLDPE. The LLDPE products are produced using the Company’s
proprietary Energx™ manufacturing technology for gas-phase polyethylene
production. Voridian PE products are used primarily for extrusion coating, film,
and molding applications. The LDPE and LLDPE product lines accounted for
approximately 20% of the Polymers segment’s sales revenue in 2004.
Voridian
intends to capitalize on the growth in the PET polymers industry with timely and
efficient capacity additions including debottlenecking existing production
processes, asset expansions, new assets, contract-manufacturing arrangements,
and manufacturing alliances. This growth strategy will rely on continuous
process technology improvements from the efficient use of research and
development.
Capitalizing
on the Company’s new IntegRex
technology, the Polymers segment has announced a new 350-thousand-metric-ton
expansion at its PET polymers site in Columbia, South Carolina. Timed to come on
line in conjunction with the need for additional capacity in the NAFTA region,
the new facility is expected to be fully operational in the fourth quarter of
2006 and at full capacity in time for the peak 2007 demand season.
Where
driven by improved returns or increased market share, Voridian expects to
continue to provide customers with innovative new products and incremental
improvements in existing products. Voridian currently maintains the industry’s
broadest product offering for PET polymers including: Voridian Aqua™ polymer for
the water bottle market, Heatwave™ polymer for hotfill markets, Versatray™
polymer for the dual ovenable tray market, Elegante™ polymer for the cosmetics
and personal care markets, Vitiva™ polymer for ultraviolet (“UV”) light
sensitive applications, and Voridian™ polymers for a wide range of markets
including carbonated soft drink and other food and beverage packaging
applications.
The
largest 70 customers within the Polymers segment accounted for more than 80% of
the segment’s total sales revenue in 2004. These customers are primarily PET
polymer container suppliers to large volume beverage markets such as carbonated
soft drinks, water, and juice, with strong participation in custom areas such as
food, liquor, sport and fruit beverages, health and beauty aids, and household
products. In 2004, the worldwide market for PET polymers, including containers,
film and sheet, was approximately 11 million metric tons. Demand for PET
polymers has grown briskly over the past several years, driven by its popularity
as a substitute for glass and aluminum. PET polymers have already made
significant inroads in soft drink and water bottles, and producers are currently
targeting markets such as hot-fill and barrier containers for beer, soups, and
sauces. Industry analysts report that PET polymers consumption grew worldwide
from 1.0 million metric tons in 1989 to approximately 11 million metric tons in
2004, a compound annual growth rate of 15%. Global demand for PET polymers is
expected to grow approximately 10% annually over the next several
years.
In the
LDPE product line, Voridian is a significant producer of materials used in
extrusion coating applications and is one of only two North American producers
of acrylate copolymers. In LLDPE market, Voridian employs its proprietary
Energx™ technology to produce products that compete in higher strength film and
packaging markets.
Major
competitors for the Polymers segment include DAK Americas, Equipolymers, Far
Eastern Textiles Ltd, Invista, M&G, Nan Ya Plastics Company, Reliance
Industries, and Wellman.
The
strong growth in demand for PET polymers, coupled with ease of access to
conventional manufacturing technology, has resulted in the presence of over 100
significant resin producers in this market in 2004, up from fewer than 20 in
1995. Voridian comes closest to being a fully global competitor with
manufacturing sites in North America, Latin America and Western Europe, as well
as the aforementioned contract manufacturing arrangements in Asia. The level of
competition, however, varies by region. Competition is primarily on the basis of
price with product performance, quality, service, and reliability being
requirements for participation.
Industry
pricing is strongly affected by raw material costs and capacity utilization. PET
polymers global supply has exceeded demand since 1997 as a result of capacity
being introduced into the market at a rate exceeding that of demand growth.
While the demand for PET polymers continues to increase steadily, excess
capacity, primarily in Asia, remains. Though other regions may approach balanced
supply and demand in coming years, the excess Asian capacity is likely to
negatively impact PET polymers pricing worldwide.
Voridian
is a niche polyethylene producer due to its size and ability to target specific
markets. Competitive advantage in these markets is achieved via operating
efficiencies and new product offerings. Some polyethylene producers are
substantially larger than Voridian, and have greater market presence and
resources devoted to polyethylene than Voridian. This may allow them, or other
competitors, to price competing products at lower levels, or devote substantial
resources to product development, that Voridian is unable or unwilling to match,
which may at some point reduce Voridian’s polyethylene revenues.
Voridian
intends to continue to develop and maintain competitive advantage through
manufacturing process technology innovation, operational excellence,
manufacturing integration, and the efficient execution of research and
development.
FIBERS
SEGMENT
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 acetate flake and acetyl raw materials for other acetate fiber
producers. Voridian is one of the world’s two largest suppliers of acetate tow
and has been a market leader in the manufacture and sale of acetate tow since it
began producing the product in the early 1950’s. Voridian is also one of the
world’s two largest producers of acetate yarn. In 2004, the Fibers segment had
sales revenue of approximately $819 million, which represented 11% of the
Company’s total sales and 27% of Voridian’s total sales.
Voridian’s
long history and experience in the fibers markets are reflected in its operating
expertise, both within the Company and in support of its customers’ processes.
Voridian’s expertise in internal operating processes allows it to achieve a
consistently high level of product quality, a differentiating factor in the
industry. Further, Voridian’s fully integrated facilities allow it to reduce its
dependence on necessary petrochemicals from third parties. Voridian management
believes that all of these factors combine to make it a leader in performance
and cost position.
Voridian’s
high-quality products, technical expertise, and superior customer service in the
Fibers segment are its key competitive strengths. Voridian’s industry knowledge
and knowledge of its Fibers segment customers’ processes allow it to assist its
customers in maximizing their processing efficiencies, promoting repeat sales,
and mutually beneficial, long-term customer relationships. Voridian’s scale,
strong customer base, long-standing customer relationships, and expert technical
service contribute to its market-leading position. Voridian’s goal is to build
on these strengths to improve its strategic position.
Voridian’s
main products in the Fibers segment are acetate tow, acetate yarn, and acetyl
chemical products.
Voridian
manufactures acetate tow according to customer specifications for use in the
manufacturing of cigarette filters.
Voridian
is a market leader offering over 50 types of acetate yarn. Chromspun™ and
Estron™ acetate yarns are used in apparel, home furnishings, and industrial
applications. Voridian acetate yarn products have characteristics that allow for
highly efficient mill processability. From a retail customer’s perspective,
garments containing Estron™ and Chromspun™ yarns have a silky feel, rich color,
supple drape, breathability, and comfort. Chromspun™ acetate yarn is available
in more than 80 colors. Effective January 1, 2005, the Company increased the
minimum order quantity for Chromspun™ specialty colors to improve gross margins
for this product line.
| |
Ø |
Acetyl
Chemical Products |
Voridian’s
acetyl chemicals are primarily comprised of acetate flake as part of its highly
integrated production chain, along with acetylation-grade acetic acid and acetic
anhydride for other acetate fiber producers. In addition, Voridian manufactures
triacetin plasticizers for use by cigarette manufacturers as a bonding agent in
cigarette filters.
Voridian’s
strategy in the Fibers segment is as follows:
In the
Fibers segment, Voridian focuses on high quality products, excellent customer
service, operational efficiencies, and potential alliances to take advantage of
global market growth.
| |
Ø |
Continue
to Capitalize on Operating
Expertise |
The
Fibers segment emphasizes incremental product and process improvements to
continue to meet customers’ evolving needs and to maximize efficiencies in the
supply chain through collaborative planning. The Fibers segment intends to
further focus on refining its processes to lower manufacturing costs and provide
additional product quality and operations improvements.
| |
Ø |
Maintain
Cost-Effective Operations and Consistent Cash
Flows |
The
Fibers segment expects to continue to operate in a cost effective manner,
capitalizing on its scale and vertical integration, and intends to make further
productivity and efficiency improvements through continued investments in
research and development. The Company plans to reinvest in the Fibers business
to continue to improve product performance and productivity in order to generate
consistently strong cash flows.
The
customer base in the Fibers segment is relatively concentrated, consisting of
approximately 190 companies, primarily those involved in the production of
cigarettes and in the textiles industry. The largest 20 customers within the
Fibers segment, multinational as well as regional cigarette producers and
textile industry fabric manufacturers, accounted for greater than 80% of the
segment’s total sales revenue in 2004.
Voridian
is well known for its expert technical service. Voridian periodically reviews
customers’ processes and provides process training to some of its customers'
employees to assist them in the efficient use of Voridian’s products. Voridian
also engages in collaborative planning with its customers to maximize supply
chain management. These customer-focused efforts, combined with Voridian’s long
history and product quality reputation, have resulted in many long-term customer
relationships, a key competitive advantage.
Competition
in the fibers industry is based primarily on product quality, technical and
customer service, reliability, long-term customer relationships, and price.
Competitors in the fibers market include one global supplier in the acetate tow
and acetate yarn markets, and several regional competitors in each market.
In late
2004, a major competitor announced its intention to cease production of acetate
filament yarn by mid-2005. Assuming this occurs as announced, Voridian would
then become the world leader in acetate yarn production and the only producer in
North America. The yarn market is expected to tighten significantly
as this
competitor exits
from the acetate yarn market. Voridian management believes it is well positioned
to benefit from the current supply/demand conditions due to its scale of
operations and level of integration.
In the
acetate tow market, a major competitor has joint venture capacity in China and
has announced construction of additional capacity through joint ventures with
the government-owned China National Tobacco Corporation. Increased local
production in China may diminish access to this market by Voridian and other
competitors over
time. However,
current global capacity utilization rates are expected to remain very high with
industry structure changes expected from a recent announcement by a competitor
to close certain North American production facilities.
VORIDIAN
DIVISION GENERAL INFORMATION
Sales,
Marketing and Distribution
Voridian
primarily markets its products through direct sales channels; however, it
employs contract representatives and resellers where beneficial. As part of its
commitment to customer and technical service which leads to increased repeat
sales, Voridian periodically provides audits of customers’ processes, as well as
process training to some of its customers' employees. Voridian is committed to
maintaining its high level of customer service by remaining current with
customer needs, market trends, and performance requirements.
Through
the use of e-business platforms that improve connectivity and reduce costs,
Voridian offers its customers an internet option, www.voridian.com, for
placing and tracking orders and generating reports. Voridian also provides
integrated direct capabilities to customers, allowing enhanced collaborative
planning to improve supply chain efficiencies.
Intellectual
Property and Trademarks
The
Company believes that significant advantages can be obtained through the
continued focus on branding its products and, for this reason, protects its
Voridian Division-related intellectual property through a combination of patents
that expire at various times, trademarks, licenses, copyrights, and trade
secrets. The Company expects to expand its portfolio of technologies licensed to
other companies in the future. To date, the Company has selectively licensed a
fairly extensive portfolio of patented Voridian polyester, intermediates, and
polyethylene technologies. The Company has formed an alliance to license PTA
technology, which it has branded as EPTA
Technology, with
Lurgi Oel Gas Chemie, an EPC firm headquartered in Germany and to SK, a PET and
PTA producer headquartered in South Korea. Energx™ polyethylene technology has
been licensed to Chevron-Phillips Chemical Company, headquartered in the United
States, Hanwha Chemical, headquartered in South Korea, and BP Amoco (“BP”),
headquartered in the United Kingdom. BP is also licensed to market and
sub-license the technology to other gas-phase LLDPE producers. Additionally, the
Company has formed an alliance with W.R. Grace/Davison Catalysts to further
exploit Energx™ globally. Voridian Division’s intellectual property portfolio is
an important asset. However, neither its business as a whole nor any particular
segment is materially dependent upon any one particular patent, trademark,
copyright, or trade secret. As the laws of many foreign countries do not protect
intellectual property to the same extent as the laws of the United States,
Voridian Division cannot assure that it will be able to adequately protect all
of its intellectual property assets.
Research
and Development
Voridian
directs its research and development programs for the Polymers segment toward
five key objectives:
| |
· |
Lowering
manufacturing costs through process technology innovations and process
improvement efforts; |
| |
· |
Developing
new products and services in PET polymers through applications research
and customer feedback; |
| |
· |
Developing
new products and processes that are compatible with Voridian’s commitment
to producing products that are protective of the
environment; |
| |
· |
Enhancing
product quality by improvement in manufacturing technology and processes;
and |
| |
· |
Marketing,
licensing and delivering PET polymers, EPTA™, and polyethylene product and
production technologies. |
Voridian’s
research and development efforts in the Polymers segment have resulted in
significant improvements in manufacturing process efficiencies and are
continuing to yield sustainable competitive advantage. Those efforts have also
resulted in new products that have met with wide acceptance in the marketplace.
In the PET polymers business, Voridian has introduced twenty-one new products
since the beginning of 2000 including: two Voridian Aqua™ polymer formulas for
the water market; two Elegante™ polymer formulas for the personal care/cosmetics
market; HeatwaveÔ polymer
for hot-fill beverage applications that require UV protection; VersaTray™
polymer for food packaging and cooking, suitable for both conventional and
microwave oven use; new resins for the refillable carbonated soft drink market
in Latin America; new resins for bulk water in Latin America; and new enhanced
reheat resins for the European and Asian markets.
In 2004,
over two years of significant, concentrated research and development efforts
resulted in the announcement of IntegRex
technology, a breakthrough innovation in the integrated manufacturing of PX to
PET resin specifically designed for packaging applications. A team comprised of
company experts in areas ranging from polyester intermediates process chemistry
to PET product and process R&D to procurement and construction successfully
developed new technology and techniques for each step along the manufacturing
path from PX to PET. This team also began concentrated engineering, procurement,
construction, operations, and maintenance efforts in parallel with the
technology work. The new technology and plans to construct a new
350-thousand-metric-ton manufacturing facility based on that technology were
announced in September of 2004.
Research
and development efforts for the Fibers segment are primarily focused on
incremental process and product improvements, as well as cost reduction, with
the goal of increasing sales and reducing costs. Recent
achievements
have included fiber product advancements that allow improved processability on
customers’ equipment and improved packaging design. Voridian also engages in
research to assist acetate tow customers in the cigarette industry in the
effective use of Voridian products and in the customers’ own product development
efforts.
DEVELOPING
BUSINESSES DIVISION
Developing
Businesses Segment
The DB
segment includes new businesses and certain investments in 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 four major developing businesses, including Eastman’s
Gasification Services and Diagnostics business, as well as two early stage
businesses. These businesses have the potential to have a material impact on the
Company’s financial results. The segment is continuing to evaluate a small
number of additional initiatives for future development.
In 2004,
Eastman decided to discontinue participation in businesses that provide general
services to the chemical/materials industry. Accordingly, Eastman has sold its
interest in Ariel Research Corporation. The Company’s logistics services
currently performed by its logistics subsidiary, Cendian Corporation, are
planned to be fully integrated back to Eastman by April 2005.
| Ø |
Eastman
Gasification Services |
The
Company has launched a service business to assist owners of gasification plants,
including those built as an alternative clean technology for power generation.
Recognized as an industry leader in reliability and efficiency of gasification
operations, Eastman has operated a coal gasification plant in Kingsport,
Tennessee for over 20 years. The Company has leveraged its expertise in
gasification by offering operations and maintenance services to third party
gasification facilities. In the fourth quarter of 2002, the Company entered into
a cooperative agreement with Texaco Development Corporation, a wholly-owned
subsidiary of Chevron Texaco Corporation that enables the Company to provide
operation, maintenance, management and technical services, as well as parts
fabrication and sales, for gasification plants of Texaco Development licensees.
With the acquisition of Chevron Texaco’s gas business by General Electric Energy
in mid-2004, this cooperative agreement has been assigned to General Electric
Energy by Chevron Texaco.
Eastman
launched a new food safety diagnostics business, Centrus International.
Centrus sells detection equipment and single-use disposables that enable food
processors to have more timely and accurate detection of contaminants in the
food supply, including pathogenic organisms. The equipment is designed to
be used in food processing plants. This business leverages Eastman’s deep
experience in analytical chemistry and its biosciences capabilities to develop
rapid test techniques. Eastman’s experience with the safe operations of
industrial processes will also help support growing needs in the food
industry. This business first realized sales revenue in the DB segment in
2004.
Strategy
Developing
Businesses is expanding on the Company’s core business of chemicals, plastics,
and fibers manufacturing to develop growth platforms that allow it to take
advantage of its technological capabilities, long-term customer relationships,
and operational skills. Developing Businesses uses a disciplined stage gating
process in evaluating projects to weigh expected returns against investment
levels at various stages of development. Those that meet the initial
requirements go on to the next stage where a cross-functional team of experts
from marketing, technology, business, and finance determine if there is a
compelling business plan, and viable means for capturing value from it. A small
number of the programs that meet these stringent analyses are then selected for
implementation and business entry.
Customers
and Markets
Eastman
Gasification Services serves current owners of gasification plants, such as
Premcor Delaware City Refinery, as well as parties investigating or intending to
build a new gasification plant. These parties may include
regulated
or unregulated electric utilities or independent power companies investigating
gasification for power production, chemical companies such as ammonia producers,
refineries interested in petcoke destruction and hydrogen production, or private
developers.
The
diagnostics business has initially targeted its offerings to food processors and
other manufacturers who need to carefully monitor product purity with respect to
contaminants such as molds or micro-organisms, such as cosmetics. The Company is
continuing its efforts to establish a growing customer base.
Competition
Because
of the specialized nature of the DB segment coal gasification services, there
are few existing third party providers of similar services. Customer
alternatives to these services are to use internal resources, supplemented by
assistance from engineering firms or the gasification technology supplier.
Competition
in the food safety market ranges from commercial contract testing laboratories
to small family-owned companies selling a single testing product. Eastman
expects the market to consolidate in favor of companies who can enable customers
to achieve rapid results via in-plant tests and who can support the global needs
of multi-national customers.
EASTMAN
CHEMICAL COMPANY GENERAL INFORMATION
Sources
and Availability of Raw Materials and Energy
Eastman
purchases a substantial portion, estimated to be approximately 75%, of its key
raw materials and energy through long-term contracts, generally of three to five
years initial duration with renewal or cancellation options for each party. Most
of those agreements do not require the Company to purchase materials or energy
if its operations are reduced or idle. The cost of raw materials and energy is
generally based on market price at the time of purchase, although derivative
financial instruments, valued at quoted market prices, have been utilized to
mitigate the impact of short-term market price fluctuations. Key raw materials
and purchased energy include propane, ethane, paraxylene, ethylene glycol, PTA,
natural gas, coal, cellulose, methanol, electricity, and a wide variety of
precursors for specialty organic chemicals. The Company has multiple suppliers
for most key raw materials and energy and uses quality management principles,
such as the establishment of long-term relationships with suppliers and on-going
performance assessment and benchmarking, as part of the supplier selection
process. When appropriate, the Company purchases raw materials from a single
source supplier to maximize quality and cost improvements, and has developed
contingency plans that would minimize the impact of any supply disruptions from
single source suppliers.
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. The Company’s
cost of raw materials and energy as a percent of total cost of operations was
estimated to be approximately 55% for 2004.
Capital
Expenditures
Capital
expenditures were $248 million, $230 million, and $427 million in 2004, 2003,
and 2002, respectively. Capital expenditures for 2002 included $161 million
related to the purchase of certain machinery and equipment previously utilized
under an operating lease. For 2005, the Company expects that capital spending
will be approximately $340 million to $360 million which will exceed estimated
2005 depreciation and amortization of $310 million.
Employees
Eastman
employs approximately 12,000 men and women worldwide. Approximately 6% of the
total worldwide labor force is represented by unions, mostly outside the United
States.
Customers
Eastman
has an extensive customer base and, while it is not dependent on any one
customer, loss of certain top customers could adversely affect the Company until
such business is replaced. The top 100 customers accounted for approximately 60%
of the Company's 2004 sales revenue.
Intellectual
Property and Trademarks
While the
Company’s intellectual property portfolio is an important Company asset which it
expands and vigorously protects globally through a combination of patents that
expire at various times, trademarks, copyrights, and trade secrets, neither its
business as a whole nor any particular segment is materially dependent upon any
one particular patent, trademark, copyright, or trade secret. As a producer of a
broad and diverse portfolio of both specialty and commodity chemicals, plastics,
and fibers, Eastman owns well over 1,000 active United States patents and more
than 900 active foreign patents, expiring at various times over several years,
and also owns over 3,000 active worldwide trademarks. The Company’s intellectual
property relates to a wide variety of products and processes. As the laws of
many foreign countries do not protect intellectual property to the same extent
as the laws of the United States, Eastman cannot assure that it will be able to
adequately protect all of its intellectual property assets.
Research
and Development
For 2004,
2003 and 2002, Eastman’s research and development expense totaled $154 million,
$173 million, and $159 million, respectively. Research and development expenses
are expected to decrease slightly in 2005; however, the Company will continue to
increase its technology efforts associated with new products and process
technologies.
Seasonality
The
Company typically experiences a seasonal decline in earnings in the fourth
quarter. Demand in the CASPI segment is typically stronger in the second and
third quarters due to increased use of coatings products in the building and
construction industries, and weaker during the winter months and the holiday
season because of seasonal construction downturns. The Polymers segment
typically experiences stronger demand for PET polymers for beverage plastics
during the second quarter due to higher consumption of beverages, while demand
typically weakens during the third quarter. Seasonality in the SP segment is
associated with certain segments of the photographic and adhesive tape market,
coupled with the effect of a typical year-end inventory reduction by several
customers.
Environmental
Eastman
is subject to laws, regulations, and legal requirements relating to the use,
storage, handling, generation, transportation, emission, discharge, disposal and
remediation of, and exposure to, hazardous and non-hazardous substances and
wastes in all of the countries in which it does business. These health, safety
and environmental considerations are a priority in the Company’s planning for
all existing and new products and processes. The Health, Safety, Environmental
and Security Committee of Eastman’s Board of Directors reviews the Company's
policies and practices concerning health, safety and the environment and its
processes for complying with related laws and regulations, and monitors related
matters.
The
Company’s policy is to operate its plants and facilities in a manner that
protects the environment and the health and safety of its employees and the
public. The Company intends to continue to make expenditures for environmental
protection and improvements in a timely manner consistent with its policies and
with the technology available. In some cases, applicable environmental
regulations such as those adopted under the U.S. Clean Air Act and Resource
Conservation and Recovery Act, and related actions of regulatory agencies,
determine the timing and amount of environmental costs incurred by the
Company.
The
Company accrues environmental costs when it is probable that the Company has
incurred a liability and the amount can be reasonably estimated. 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, unanticipated
government enforcement action, or changes in health, safety, environmental,
chemical control regulations, and testing requirements could result in higher or
lower costs.
Other
matters pertaining to health, safety, and the environment are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 11 to the Company’s consolidated financial
statements.
Backlog
On
January 1, 2005, Eastman’s backlog of firm sales orders was estimated to be
approximately $306 million compared with approximately $238 million at January
1, 2004. The Company manages its inventory levels to control the backlog of
products depending on customers' needs. In areas where the Company is the single
source of supply, or competitive forces or customers' needs dictate, the Company
may carry additional inventory to meet customer requirements.
Investment
in Genencor
The
Company holds an approximately 42% equity interest in Genencor International,
Inc. ("Genencor"). Genencor is a publicly traded biotechnology company engaged
in the discovery, development, manufacture, and marketing of biotechnology
products for the industrial chemicals, agricultural, and health care markets,
and a developer of integrated genomics technology. The Company was an early
stage investor and held a 50% interest prior to Genencor's initial public
offering in 2000.
On
January 27, 2005, the Company announced that it has entered into an agreement
with Danisco A/S under which Danisco will acquire all of Eastman’s equity
interest in Genencor for $419 million in cash as part of Danisco’s acquisition
of all the outstanding common stock of Genencor. Closing of this sale, which is
subject to satisfaction of certain customary conditions, is targeted for first
quarter 2005 and is expected to be completed no later than May 31, 2005.
Following public announcement of Danisco’s agreements to acquire Genencor,
several purported class action complaints, two naming Eastman as a party, have
been filed in state courts of Delaware and California, in each case seeking,
among other things, to enjoin the proposed acquisition of Genencor by
Danisco. On March 9, 2005, the parties to the complaints pending in
Delaware executed a memorandum of understanding that, subject to court approval,
will result in a dismissal of such complaints and a release with respect to the
alleged claims. 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 will have a material adverse
effect on its overall financial condition, results of operations or cash flows.
Genencor
is
accounted for by the equity method of accounting for investments in common
stock. Genencor’s common stock is registered under the
Securities Exchange Act of 1934 and is listed on the NASDAQ National Market
System under the symbol GCOR. See the “Investments” section of Note 1 and Note 5
to the Company’s consolidated financial statements for more information on the
accounting for this investment and its current market value.
Available
Information - SEC Filings and Corporate Governance
Materials
The
Company makes available free of charge, through the “Investors - SEC Filings”
section of its Internet website (www.eastman.com), its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably
practicable after electronically filing such material with, or furnishing it to,
the Securities and Exchange Commission (the “SEC”). Once filed with the SEC,
such documents may be read and/or copied at the SEC’s Public Reference Room at
450 Fifth Street N.W., Washington, D.C. 20549. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers, including
Eastman Chemical Company, that electronically file with the SEC at http://www.sec.gov.
The
Company also makes available free of charge, through the “Investors - Corporate
Governance” section of its internet website (www.eastman.com), the
Corporate Governance Guidelines of its Board of Directors, the charters of each
of the committees of the board, and codes of ethics and business conduct for
directors, officers and employees. Such materials are also available in print
upon the written request of any stockholder to Eastman Chemical Company, P.O.
Box 511, Kingsport, Tennessee 37662-5075, Attention: Investor
Relations.
Financial
Information About Geographic Areas
For
information about revenues and long-lived assets based on geographic areas, see
Note 20 to the Company’s consolidated financial statements.
EXECUTIVE
OFFICERS OF THE COMPANY
Certain
information about the Company's executive officers is provided
below:
J. Brian
Ferguson, age 50, is Chairman of the Board and Chief Executive Officer. Mr.
Ferguson joined the Company in 1977. He was named Vice President, Industry and
Federal Affairs in 1994, became Managing Director, Greater China in 1997, was
named President, Eastman Chemical Asia Pacific in 1996, became President,
Polymers Group in 1999, became President, Chemicals Group in 2001, and was
elected to his current position in 2002.
James P.
Rogers, age 53, was appointed Executive Vice President of the Company and
President of Eastman Division effective November 2003. Mr. Rogers joined the
Company in 1999 as Senior Vice President and Chief Financial Officer and in
2002, was also appointed Chief Operations Officer of Eastman Division. Mr.
Rogers served previously as Executive Vice President and Chief Financial Officer
of GAF Materials Corporation (“GAF”). He also served as Executive Vice
President, Finance, of International Specialty Products, Inc., which was spun
off from GAF in 1997.
Allan R.
Rothwell, age 57, is Executive Vice President of the Company and President of
Voridian Division. Mr. Rothwell joined the Company in 1969, became Vice
President and General Manager, Container Plastics Business Organization in 1994,
and was appointed Vice President, Corporate Development and Strategy in 1997. He
was named Senior Vice President and Chief Financial Officer in 1998, became
President, Chemicals Group in 1999, became President, Polymers Group in 2001,
and was appointed to his current position in 2002.
Theresa
K. Lee, age 52, is Senior Vice President, Chief Legal Officer and Corporate
Secretary. Ms. Lee joined Eastman as a staff attorney in 1987, served as
Assistant General Counsel for the health, safety, and environmental legal staff
from 1993 to 1995, and served as Assistant General Counsel for the corporate
legal staff from 1995 until her appointment as Vice President, Associate General
Counsel and Secretary in 1997. She became Vice President, General Counsel, and
Secretary of Eastman in 2000 and was appointed to her current position in
2002.
Richard
A. Lorraine, age 59, joined Eastman in November 2003 as Senior Vice President
and Chief Financial Officer. Mr. Lorraine served as Executive Vice President and
Chief Financial Officer of Occidental Chemical Corporation from 1995 until 2003,
and at ITT Automotive Group as President of the Aftermarket Group from 1990 to
1995 and Vice President and Chief Financial Officer from 1985 to 1990. Mr.
Lorraine started his career with Westinghouse Electric Corporation, where he
held various financial positions.
Gregory
O. Nelson, age 53, is Senior Vice President and Chief Technology Officer. Dr.
Nelson joined Eastman in 1982 as a research chemist and held a number of
positions in the research and development organization. He became Director,
Polymers Research Division in 1995 and was named Vice President, Polymers
Technology in 1997. He was appointed to his present position in 2001 and named
Senior Vice President in 2002.
Norris P.
Sneed, age 49, is Senior Vice President, Human Resources, Communications and
Public Affairs. Mr. Sneed joined the Company in 1979 as a chemical engineer. In
1989, he was assigned to Eastman’s Arkansas Operations where he was
superintendent for different manufacturing and new business development
departments. In 1997, he served as assistant to the CEO. He was named managing
director for Eastman’s Argentina operations in 1999, Vice President of
Organization Effectiveness in the Human Resources, Communications and Public
Affairs organization in 2001, and was appointed to his current position in June
2003.
Curtis E.
Espeland, age 40, is Vice President and Controller of the Company. Mr. Espeland
joined Eastman in 1996. At Eastman, Mr. Espeland has served as Director of
Internal Auditing and Director of Financial Services, Asia Pacific, was named
Assistant Controller of the Company and Controller of Eastman Division in 2002,
and was appointed to his current position in December 2002. Prior to joining
Eastman, he was an audit and business advisory manager with Arthur Andersen
LLP.
ITEM
2. PROPERTIES
PROPERTIES
At
December 31, 2004, Eastman operated 17 manufacturing sites in 10 countries.
Utilization of these facilities may vary with product mix and economic,
seasonal, and other business conditions, but none of the principal plants are
substantially idle. The Company's plants, including approved expansions,
generally have sufficient capacity for existing needs and expected near-term
growth. These plants are generally well maintained, in good operating condition,
and suitable and adequate for their use. Unless otherwise indicated, all of the
properties are owned. The locations and general character of the major
manufacturing facilities are:
| |
Segment
using manufacturing facility |
|
Location |
CASPI |
PCI |
SP |
Polymers |
Fibers |
| |
|
|
|
|
|
|
USA
and Canada
Batesville,
Arkansas |
x |
x |
|
|
|
|
Jefferson,
Pennsylvania |
x |
|
|
|
|
|
Columbia,
South Carolina |
|
|
x |
x |
|
|
Kingsport,
Tennessee |
x |
x |
x |
x |
x |
|
Longview,
Texas |
x |
x |
|
x |
|
|
Franklin,
Virginia* |
x |
|
|
|
|
|
Europe |
|
|
|
|
|
|
Workington,
England |
|
|
|
x |
x |
|
Middelburg,
Netherlands |
x |
|
|
|
|
|
Rotterdam,
Netherlands** |
|
|
|
x |
|
|
San
Roque, Spain |
|
x |
x |
x |
|
|
Llangefni,
Wales |
|
x |
|
|
|
|
Asia
Pacific |
|
|
|
|
|
|
Kuantan,
Malaysia** |
|
|
x |
|
|
|
Jurong
Island, Singapore** |
|
x |
|
|
|
|
Zibo
City, China*** |
x |
x |
|
|
|
|
Latin
America
Zarate,
Argentina |
|
|
|
x |
|
|
Cosoleacaque,
Mexico |
|
|
|
x |
|
|
Uruapan,
Mexico |
x |
|
|
|
|
| * |
indicates
a location that Eastman leases from a third party.
|
| ** |
indicates
a location that Eastman leases from a third party under a long-term ground
lease. |
| *** |
Eastman
holds a 51% share in the joint venture Qilu Eastman Specialty Chemical
Ltd. |
Eastman
has a 50% interest in Primester, a joint venture that manufactures cellulose
acetate at its Kingsport, Tennessee plant. The production of cellulose acetate
is an intermediate step in the manufacture of acetate tow and other cellulose
acetate based products. The Company also has a 50% interest in a manufacturing
facility in Nanjing, China. The Nanjing facility produces Eastotac™ hydrocarbon
tackifying resins for pressure-sensitive adhesives, caulks, and sealants.
Eastotac™ hydrocarbon resins are also used to produce hot melt adhesives for
packaging applications in addition to glue sticks, tapes, labels, and other
adhesive applications.
Eastman
has distribution facilities at all of its plant sites. In addition, the Company
owns or leases over 100 stand-alone distribution facilities in the United States
and 17 other countries. Corporate headquarters are in Kingsport, Tennessee. The
Company's regional headquarters are in Miami, Florida; Capelle aan den Ijsel,
the Netherlands; Rotterdam, the Netherlands; Singapore; and Kingsport,
Tennessee. Technical service is provided to the Company's customers from
technical service centers in Kingsport, Tennessee; Kirkby, England; and
Singapore. Customer service centers are located in Kingsport, Tennessee;
Rotterdam, the Netherlands; Miami, Florida; and Singapore.
A summary
of properties, classified
by type, is contained in Note 3 to the Company’s consolidated financial
statements.
ITEM
3. 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, asbestos, 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. Only two of these lawsuits have not been resolved via
settlement. One of those cases was dismissed for want of prosecution. In
the other case, an intermediate appellate court affirmed in 2004 a trial court
ruling that the case could not proceed as a class action. That decision has been
appealed and the issue will be decided by the state’s highest court. 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. Two of those six
cases have been settled; defense motions to dismiss were granted in three other
cases and those dismissals are now final. A defense motion to dismiss
another state case was denied in September 2004. The
defendants are seeking reconsideration of that denial and have also appealed the
September ruling. In late 2004, seven
other states sued the Company and others. Those seven cases have now been
settled.
The
Company has recognized charges to earnings 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 two
sorbates actions unless they can be settled on acceptable terms, the ultimate
outcome of the matters still pending and of any 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 has been 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.
In
recently filed cases, plaintiffs allege exposure 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 plaintiffs worked with or
around any such product alleged to have been manufactured by the Company. The
Company intends to defend vigorously the approximately 3,000 pending claims or
to settle them on acceptable terms.
The
Company has finalized an agreement with an insurer that issued primary general
liability insurance to certain predecessors of the Company prior to the
mid-1970s, pursuant to which that issuer will provide coverage for a portion of
certain of the Company's costs of defending against, and paying for, settlements
or judgments in connection with asbestos-related lawsuits.
Evaluation
of the allegations and claims made in recent asbestos-related lawsuits continue
to be reviewed by the Company. 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.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of the Company's stockholders during the
fourth quarter of 2004.
PART
II
ITEM
5. MARKET
FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(a) The
Company's common stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol EMN. The following table presents the high and low closing
sales prices of the common stock on the NYSE and the cash dividends per share
declared by the Company's Board of Directors for each quarterly period of 2003
and 2004.
|
|
|
|
|
|
|
High |
|
|
Low |
|
|
Cash
Dividends Declared |
|
| 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter |
|
|
|
|
$ |
38.40 |
|
$ |
27.89 |
|
$ |
0.44 |
|
Second
Quarter |
|
|
|
|
|
33.95 |
|
|
28.82 |
|
|
0.44 |
|
Third
Quarter |
|
|
|
|
|
36.60 |
|
|
31.46 |
|
|
0.44 |
|
Fourth
Quarter |
|
|
|
|
|
39.53 |
|
|
31.46 |
|
|
0.44 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter |
|
|
|
|
$ |
43.70 |
|
$ |
38.00 |
|
$ |
0.44 |
|
Second
Quarter |
|
|
|
|
|
46.97 |
|
|
41.90 |
|
|
0.44 |
|
Third
Quarter |
|
|
|
|
|
47.77
|
|
|
42.19 |
|
|
0.44 |
|
Fourth
Quarter |
|
|
|
|
|
58.17 |
|
|
44.86 |
|
|
0.44 |
|
As of
December 31, 2004, there were 79,336,711 shares of the Company's common stock
issued and outstanding, which shares were held by 33,709 stockholders of record.
These shares include 122,725 shares held by the Company's charitable foundation.
The Company has declared a cash dividend of $0.44 per share during the first
quarter of 2005. Quarterly dividends on common stock, if declared by the
Company's Board of Directors, are usually paid on or about the first business
day of the month following the end of each quarter. The payment of dividends is
a business decision to be made by the Board of Directors from time to time based
on the Company's earnings, financial position and prospects, and such other
considerations as the Board considers relevant. Accordingly, while management
currently expects that the Company will continue to pay the quarterly cash
dividend, its dividend practice may change at any time.
For
information concerning issuance of shares and option grants in 2004 under
compensation and benefit plans and shares held by the Company's charitable
foundation, see Notes 13 and 14 to the Company’s consolidated financial
statements.
The
exercise price for shares issued upon exercise of options by management
employees was paid either in cash or by surrender of previously issued
shares of Company common stock having a fair market value equal to the aggregate
exercise price of the options exercised. Such options had previously been
granted to management employees under the Omnibus Long-Term Compensation Plans.
The Company issued the shares purchased by management employees in the option
exercises in reliance upon the exemption from registration of Section 4(2) of
the Securities Act of 1933.
Information
required by Item 201(d) of Regulation S-K is set forth under Part III — Item 12
— “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters—Securities Authorized for Issuance Under Equity Compensation
Plans” and is incorporated herein by reference.
(c)
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
|
Period |
Total
Number
of
Shares
Purchased
(1) |
|
Average
Price Paid Per Share
(2) |
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
(3) |
|
Approximate
Dollar
Value
(in millions) that May Yet Be Purchased Under the Plans or Programs
(3) |
|
October
1- 31, 2004 |
1,000 |
$ |
47.82 |
|
-- |
$ |
288 |
|
November
1-30, 2004 |
4,945 |
$ |
52.39 |
|
-- |
$ |
288 |
|
December
1-31, 2004 |
9,582 |
$ |
53.10 |
|
-- |
$ |
288 |
|
Total |
15,527 |
|
|
|
-- |
$ |
288 |
| (1) |
Shares
surrendered to the Company by employees to satisfy individual tax
withholding obligations upon vesting of previously issued shares of
restricted common stock and shares surrendered by employees as payment to
the Company of the purchase price for shares of common stock under the
terms of previously granted stock options. Shares are not part of any
Company repurchase plan. |
| (2) |
Average
price paid per share reflects the weighted average of the closing price of
Eastman stock on the business date the shares were surrendered by the
employee stockholder as a result of vesting of the restricted shares to
which the tax withholding obligation relates or the exercise of stock
options. |
| (3) |
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 2004, 2003 and 2002 under this authorization. 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. For additional information see Note 13 to
the Company’s consolidated financial
statements. |
ITEM
6. SELECTED
FINANCIAL DATA
|
Summary
of Operating Data |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
| |
|
|
|
|
|
|
|
|
|
|
|
Sales |
$ |
6,580 |
$ |
5,800 |
$ |
5,320 |
$ |
5,390 |
$ |
5,292 |
|
Operating
earnings (loss) |
|
175 |
|
(267) |
|
208 |
|
(120) |
|
562 |
|
Earnings
(loss) from operations before cumulative effect of change in accounting
principle |
|
170 |
|
(273) |
|
79 |
|
(175) |
|
303 |
|
Cumulative
effect of change in |
|
|
|
|
|
|
|
|
|
|
|
accounting
principle, net |
|
-- |
|
3 |
|
(18) |
|
-- |
|
-- |
|
Net
earnings (loss) |
|
170 |
|
(270) |
|
61 |
|
(175) |
|
303 |
| |
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share before |
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect of change in |
|
|
|
|
|
|
|
|
|
|
|
accounting
principle |
$ |
2.20 |
$ |
(3.54) |
$ |
1.02 |
$ |
(2.28) |
$ |
3.95 |
|
Cumulative
effect of change in |
|
|
|
|
|
|
|
|
|
|
|
accounting
principle, net |
|
-- |
|
0.04 |
|
(0.23) |
|
-- |
|
-- |
|
Net
earnings (loss) per share |
$ |
2.20 |
$ |
(3.50) |
$ |
0.79 |
$ |
(2.28) |
$ |
3.95 |
| |
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share before |
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect of change in |
|
|
|
|
|
|
|
|
|
|
|
accounting
principle |
$ |
2.18 |
$ |
(3.54) |
$ |
1.02 |
$ |
(2.28) |
$ |
3.94 |
|
Cumulative
effect of change in |
|
|
|
|
|
|
|
|
|
|
|
accounting
principle, net |
|
-- |
|
0.04 |
|
(0.23) |
|
-- |
|
-- |
|
Net
earnings (loss) per share |
$ |
2.18 |
$ |
(3.50) |
$ |
0.79 |
$ |
(2.28) |
$ |
3.94 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Statement
of Financial Position Data |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Current
assets |
$ |
1,768 |
$ |
2,010 |
$ |
1,547 |
$ |
1,464 |
$ |
1,523 |
|
Net
properties |
|
3,192 |
|
3,419 |
|
3,753 |
|
3,627 |
|
3,925 |
|
Total
assets |
|
5,872 |
|
6,244 |
|
6,287 |
|
6,092 |
|
6,550 |
|
Current
liabilities |
|
1,099 |
|
1,477 |
|
1,247 |
|
960 |
|
1,258 |
|
Long-term
borrowings |
|
2,061 |
|
2,089 |
|
2,054 |
|
2,143 |
|
1,914 |
|
Total
liabilities |
|
4,688 |
|
5,201 |
|
5,016 |
|
4,710 |
|
4,738 |
|
Total
stockholders’ equity |
|
1,184 |
|
1,043 |
|
1,271 |
|
1,382 |
|
1,812 |
|
Dividends
declared per share |
|
1.76 |
|
1.76 |
|
1.76 |
|
1.76 |
|
1.76 |
In 2002,
the Company adopted the non-amortization provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 142. As a result of the adoption of SFAS No.
142, results for the years 2002, 2003, and 2004 do not include certain amounts
of amortization of goodwill and indefinite-lived intangible assets that are
included in prior years’ financial results. If the non-amortization provisions
of SFAS No. 142 had been applied in the prior years, the Company would not have
recognized amortization expense of $18 million and $16 million in 2001 and 2000,
respectively.
Effective
January 1, 2003, the Company’s method of accounting for environmental
closure and postclosure costs changed as a result of the adoption of SFAS
No. 143, “Accounting for Asset Retirement Obligations.” If the provisions
of SFAS No. 143 had been in effect in prior years, the impact on the Company’s
financial results would have been immaterial. See Note 23 to the Company’s
consolidated financial statements for additional information.
On July
31, 2004, the Company completed the sale of certain businesses, product lines
and related assets within the CASPI segment. For more information regarding the
impact of this divestiture on financial results, refer to the Form 8-K filed on
August 16, 2004 and the CASPI segment discussion of Part II, Item 7 - Management
Discussion and Analysis section of this Form 10-K.
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the consolidated financial statements for Eastman
Chemical Company ("Eastman" or the "Company"), which have been prepared in
accordance with accounting principles generally accepted in the United States of
America, and should be read in conjunction with the Company's consolidated
financial statements included elsewhere in this Annual Report. All references to
earnings per share contained in this report are diluted earnings per share
unless otherwise noted.
CRITICAL
ACCOUNTING POLICIES
In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, the Company’s
management must make decisions which impact the reported amounts and the related
disclosures. Such decisions include the selection of the appropriate accounting
principles to be applied and assumptions on which to base estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to
allowances for doubtful accounts, impaired assets, environmental costs, U.S.
pension and other postemployment benefits, litigation and contingent
liabilities, and income taxes. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company’s management
believes the critical accounting policies described below are the most important
to the fair presentation of the Company’s financial condition and results. These
policies require management’s more significant judgments and estimates in the
preparation of the Company’s consolidated financial statements.
Allowances
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company believes, based on historical results, the likelihood of actual write
offs having a material impact on financial results or earnings per share is low.
However, if one of the Company’s key customers were to file for bankruptcy, or
otherwise be unable to make its required payments, or there was a significant
continued slow down in the economy, the Company could be forced to increase its
allowances. This could result in a material charge to earnings. The Company’s
allowances were $15 million and $28 million at December 31, 2004 and 2003,
respectively.
Impaired
Assets
The
Company evaluates the carrying value of long-lived assets, including
definite-lived intangible assets, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Such events and
circumstances include, but are not limited to, significant decreases in the
market value of the asset, adverse change in the extent or manner in which the
asset is being used, significant changes in business climate, or current or
projected cash flow losses associated with the use of the assets. The carrying
value of a long-lived asset is considered impaired when the total projected
undiscounted cash flows from such assets are separately identifiable and are
less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of the long-lived
asset. For long-lived assets to be held and used, fair value of fixed (tangible)
assets and definite-lived intangible assets is determined primarily using either
the projected cash flows discounted at a rate commensurate with the risk
involved or appraisal. For long-lived assets to be disposed of by sale or other
than by sale, fair value is determined in a similar manner, except that fair
values are reduced for disposal costs.
As the
Company’s assumptions related to long-lived assets are subject to change,
additional write-downs may be required in the future. If estimates of fair value
less costs to sell are revised, the carrying amount of the related asset is
adjusted, resulting in a charge to earnings. The Company recorded fixed
(tangible) asset impairments of $134 million and definite-lived intangible asset
impairments of $5 million and indefinite lived intangible asset impairments of
$1 million during 2004.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability and the amount can be reasonably estimated.
When a single amount cannot be reasonably estimated but the cost can be
estimated within a range, the Company accrues the minimum amount. This
undiscounted accrued amount reflects the Company’s assumptions about remediation
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, unanticipated government enforcement action, or changes in health,
safety, environmental, and chemical control regulations and testing requirements
could result in higher or lower costs. Estimated future environmental
expenditures for remediation costs range from the minimum or best estimate of
$25 million to the maximum of $45 million at December 31, 2004.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 143,
“Accounting for Asset Retirement Obligations,” the Company also establishes
reserves for closure/postclosure costs associated with the environmental and
other assets it maintains. Environmental assets include but are not limited to
land fills, water treatment facilities, and ash ponds. When these types of
assets are constructed, a reserve is established for the future environmental
costs anticipated to be associated with the closure of the site based on an
expected life of the environmental assets. These future expenses are charged
into earnings over the estimated useful life of the assets. Currently, the
Company estimates the useful life of each individual asset up to 50 years. If
the Company changes its estimate of the asset retirement obligation costs or its
estimate of the useful lives of these assets, the future expenses to be charged
into earnings could increase or decrease.
The
Company’s reserve for environmental contingencies was $56 million and $61
million at December 31, 2004 and 2003, respectively, representing the minimum or
best estimate for remediation costs and, for asset retirement obligation costs,
the amount accrued to date over the facilities’ estimated useful lives.
United
States Pension and Other Postemployment Benefits
The
Company maintains defined benefit pension plans that provide eligible employees
with retirement benefits. Additionally, Eastman provides life insurance and
health care benefits for eligible retirees and health care benefits for
retirees’ eligible survivors. The costs and obligations related to these
benefits reflect the Company’s assumptions related to general economic
conditions (particularly interest rates), expected return on plan assets, rate
of compensation increase for employees and health care cost trends. At December
31, 2004, the Company assumed a discount rate of 5.75%; an expected return on
assets of 9%; a rate of compensation increase of 3.75%; and an initial health
care cost trend of 9% decreasing to an ultimate trend rate of 5% in 2009. The
cost of providing plan benefits also depends on demographic assumptions
including retirements, mortality, turnover, and plan participation.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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:
|
Change
in
Assumption |
Impact
on
2005
Pre-tax U.S.
Pension
Expense |
Impact
on December 31, 2004
Projected
Benefit Obligation for U.S. Pension Plans |
Impact
on December 31, 2004
Benefit
Obligation for Other U.S. Postretirement
Plans |
| |
|
|
|
|
25
basis point
decrease
in discount
rate |
+$5
Million |
+$51
Million |
+$23
Million |
| |
|
|
|
|
25
basis point
increase
in discount
rate |
-$5
Million |
-$49
Million |
-$22
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
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. If actual experience differs from these assumptions, the
difference is recorded as an unrecognized gain (loss) and then amortized into
earnings over a period of time, which may cause the cost of providing these
benefits to increase or decrease. The charges applied to earnings in 2004, 2003,
and 2002 due to the amortization of unrecognized actuarial losses were $44
million, $32 million, and $20 million, respectively.
The
Company does not anticipate that a change in pension and other post-employment
obligations caused by a change in the assumed discount rate will impact the cash
contributions to be made to the pension plans during 2005. However, an after-tax
charge or credit will be recorded directly to accumulated other comprehensive
income (loss), a component of stockholders’ equity, as of December 31, 2005 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.
Litigation
and Contingent Liabilities
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, 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 accrues a
liability for such matters when it is probable that a liability has been
incurred and the amount can be reasonably estimated. The Company believes the
amounts reserved are adequate for such pending matters; however, results of
operations could be affected by significant litigation adverse to the Company.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Income
Taxes
The
Company records deferred tax assets and liabilities based on temporary
differences between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates expected to be in effect for the year in
which the differences are expected to reverse. The ability to realize the
deferred tax assets is evaluated through the forecasting of taxable income using
historical and projected future operating results, the reversal of existing
temporary differences, and the availability of tax planning strategies.
Valuation allowances are recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized. In the event that the
actual outcome of future tax consequences differs from our estimates and
assumptions, the resulting change to the provision for income taxes could have a
material adverse impact on the consolidated results of operations and statement
of financial position. As of December 31, 2004, a valuation allowance of $221
million has been provided against the deferred tax assets.
2004
OVERVIEW
Since the
beginning of 2002, the Company has been implementing a turnaround strategy to
improve profitability, which included an evaluation of its portfolio and
implementation of initiatives to reduce costs. In 2004, the evaluation led
to restructuring,
divestitures, and consolidation within the Company, including the sale of
underperforming businesses, product lines and related assets within the
Company’s Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”) segment;
the rationalization of capacity and consolidation of production in the Specialty
Plastics (“SP”) segment; the implementation of a more integrated organizational
structure in the Polymers segment; and restructuring of the Developing
Businesses (“DB”) segment. These actions resulted in asset impairments and
restructuring charges in 2004 of $206 million. Further, in January 2005, the
Company announced that it has entered into an agreement with Danisco A/S to sell
Eastman’s equity interest in Genencor International, Inc., (“Genencor”), which
is targeted for first quarter 2005 and is expected to be completed by May 31,
2005.
In full
year 2004, operating earnings were $175 million, an improvement from the $267
million operating loss in 2003 and the best since 2000. These results included
the impact of asset impairments and restructuring charges and a tax benefit
received, both described in Notes 15 and 18 of the consolidated financial
statements. The improved results were also accomplished through increased sales
volume primarily attributed to a strengthening economy, new applications of
certain products and increased substitution of polyethylene terephthalate
(“PET”) polymers for other materials; increased selling prices, particularly in
the Performance Chemicals and Intermediates (“PCI”) and Polymers segments; a
continued focus on more profitable businesses and product lines, particularly in
the Company’s Eastman Division; ongoing labor and benefits reduction measures;
and the application of process improvement technologies.
The
Company also improved its cash flow from operations in 2004 by $250 million
compared with 2003. The increased cash flow from operations, combined with
proceeds from the divestiture of assets, resulted in the reduction of net debt
(long and short term debt minus cash and cash equivalents) of approximately $300
million. In addition, during 2004 the Company continued to maintain its
financial discipline while improving profitability. This was demonstrated by
keeping selling, general and administrative expenses and research and
development expenses below 10 percent of sales revenue; having capital
expenditures below depreciation and amortization; and maintaining a strong
dividend.
The
Company has also taken several initiatives to continue to improve margins in
2005, including the improvement of pricing processes and pricing strategies,
particularly to recover historically high costs of raw materials and energy, and
reduction of the labor force by approximately 20 percent. These actions,
combined with a strengthening economy, have positioned the Company to enter a
period of growth with increased profitability and financial
flexibility.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
RESULTS
OF OPERATIONS
SUMMARY
OF CONSOLIDATED RESULTS - 2004 COMPARED WITH 2003
The
Company’s results of operations as presented in the Company’s consolidated
financial statements appearing in this Annual Report are summarized and analyzed
below:
|
Earnings
(Loss) |
|
|
|
|
| |
|
|
|
|
|
(Dollars
in millions, except per share amounts) |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Operating
earnings (loss) |
$ |
175 |
$ |
(267) |
|
Net
earnings (loss) before cumulative effect of change in accounting
principle |
|
170 |
|
(273) |
|
Net
earnings (loss) |
|
170 |
|
(270) |
|
Earnings
(loss) per share |
|
|
|
|
|
--Basic |
|
2.20 |
|
(3.50) |
|
--Diluted |
|
2.18 |
|
(3.50) |
| |
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
206 |
|
489 |
|
Goodwill
impairments |
|
-- |
|
34 |
|
Other
operating income |
|
(7) |
|
(33) |
Operating
results for 2004 increased $442 million over results for 2003. This improvement
included a $317 million reduction in asset impairments and restructuring charges
partially offset by lower other operating income of $26 million. In addition,
earnings were positively impacted by the following factors:
| · |
increased
selling prices of approximately $350
million; |
| · |
increased
volumes, excluding restructured, divested, and consolidated businesses and
product lines; |
| · |
focus
on more profitable product lines and the impact of favorable product
mix; |
| · |
improved
cost structure; and |
| · |
favorable
impact of foreign exchange. |
The above
items more than offset an estimated $600 million increase in raw materials and
energy costs.
Other
operating income of $7 million in 2004 resulted from the sale of Ariel Research
Corporation (“Ariel”), formerly part of the Company’s DB segment. Other
operating income in 2003 included a $20 million gain from the sale of the
Company’s high-performance crystalline plastics assets, which were formerly a
part of the SP segment, and a gain of $13 million for the sale of the Company’s
colorant product lines and related assets, which were formerly part of the CASPI
segment.
Operating
results for 2003 were impacted by a reduction in costs of approximately $40
million as a result of the previously reported change in vacation policy. This
policy was part of cost reduction measures implemented by the Company in the
first quarter 2003. This change in policy impacted 2003 only. Also positively
impacting 2003 results was a gain of approximately $14 million recorded as a
credit to cost of sales on the earnings statement from the insurance settlement
related to the previously disclosed 2002 operational disruptions at the
Company’s Rotterdam, the Netherlands and Columbia, South Carolina facilities.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
(Dollars
in millions) |
|
2004 |
|
2003 |
Change |
Volume
Effect |
Price
Effect |
Product
Mix
Effect |
Exchange
Rate Effect |
| |
|
|
|
|
|
|
|
|
|
|
Sales |
$ |
6,580 |
$ |
5,800 |
13% |
4% |
6% |
1% |
2% |
Sales
revenue increased for 2004 compared to 2003 primarily due to increased selling
prices, particularly for the polymers and the PCI segments, increased sales
volumes, and favorable foreign currency exchange rates, of
approximately $363 million, $243 million, and $128 million,
respectively. The
increase in selling prices was primarily in response to an increase in raw
material and energy costs and the Company’s efforts to improve profitability.
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
Change |
| |
|
|
|
|
|
|
|
Gross
Profit |
$ |
978
|
$ |
810 |
|
21
% |
|
As
a percentage of sales |
|
14.9% |
|
14.0
% |
|
|
Gross
profit for 2004 increased compared to 2003 primarily due to the following
factors:
| · |
increased
selling prices in response to higher raw materials, particularly in PCI
and Polymers, and the Company’s continued efforts to improve
profitability; |
| · |
volumes,
excluding restructured, divested, and consolidated businesses and product
lines, increased across all segments due to strengthening general economic
conditions and the substitution of other materials with SPBO and Polymers
products; |
| · |
focus
on more profitable product lines, achieved by a variety of actions,
including restructuring, divestiture, and consolidation activity, as well
as improving product mix, particularly in CASPI, SPBO, and Fibers;
and |
| · |
improved
cost structure through restructuring efforts and cost reduction
programs. |
The above
items more than offset higher raw material and energy costs primarily
attributable to paraxylene, ethylene glycol, propane, coal, and natural gas.
The
Company expects that higher raw material and energy costs will continue to
negatively impact gross profit during 2005, 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
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 2003 results by approximately $40 million. This change in
vacation policy did not have a significant impact on 2004 results.
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
Change |
| |
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses (SG&A) |
$ |
450 |
$ |
414 |
|
9
% |
|
Research
and Development Expenses (R&D) |
|
154 |
|
173 |
|
(11)
% |
| |
$ |
604 |
$ |
587 |
|
|
|
As
a percentage of sales |
|
9.2% |
|
10.1% |
|
|
The
increase in SG&A expenses for 2004 compared to 2003 was primarily due to
higher compensation and employee related costs as well as higher professional
service fees. Research and Development (“R&D”) expenses for 2004 were lower
compared to 2003 primarily due to reduced labor costs as well as reduced project
spending within Voridian Division. The Company continues to view the majority of
the costs within the DB segment as an extension of its R&D efforts, and
management expects for 2005 that these DB and R&D costs combined will be
approximately 3 percent of revenue.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Impairments
and Restructuring Charges, Net
Impairments
and restructuring charges totaled $206 million during 2004, consisting of
non-cash asset impairments of $140 million and restructuring charges of $66
million. Effective January 1, 2004, certain commodity product lines were
transferred from the Performance Chemicals and Intermediates (“PCI”) segment to
the CASPI segment, which resulted in the reclassification of asset impairment
and severance charges of approximately $42 million for 2003.
The
following table summarizes the 2004 and 2003 charges:
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
Eastman
Division segments: |
|
|
|
|
|
|
|
CASPI
segment: |
|
|
|
|
|
|
|
Fixed
asset impairments |
|
$ |
57 |
|
$ |
235 |
|
Intangible
asset impairments |
|
|
6 |
|
|
175 |
|
Goodwill
impairments |
|
|
-- |
|
|
34 |
|
Severance
charges |
|
|
12 |
|
|
15 |
|
Site
closure costs |
|
|
6 |
|
|
3 |
|
|
|
|
|
|
|
|
|
PCI
segment: |
|
|
|
|
|
|
|
Fixed
asset impairments |
|
|
27 |
|
|
55 |
|
Severance
charges |
|
|
10 |
|
|
2 |
|
Site closure costs |
|
|
1 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
SP
segment |
|
|
|
|
|
|
|
Fixed
asset impairments |
|
|
41 |
|
|
-- |
|
Severance
charges |
|
|
10 |
|
|
1 |
|
Site closure costs |
|
|
2 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
Total
Eastman Division |
|
$ |
172 |
|
$ |
520 |
|
| |
|
|
|
|
|
|
|
Voridian
Division segments: |
|
|
|
|
|
|
|
Polymers
Segment: |
|
|
|
|
|
|
|
Fixed
asset impairments |
|
|
-- |
|
|
1 |
|
Severance
charges |
|
|
13 |
|
|
1 |
|
| |
|
|
|
|
|
|
|
Fibers
segment: |
|
|
|
|
|
|
|
Severance charges |
|
|
-- |
|
|
1 |
|
| |
|
|
|
|
|
|
|
Total
Voridian Division |
|
$ |
13 |
|
$ |
3 |
|
| |
|
|
|
|
|
|
|
Developing
Businesses Division segment: |
|
|
|
|
|
|
|
Fixed asset impairments |
|
|
9 |
|
|
-- |
|
Severance costs |
|
|
8 |
|
|
-- |
|
Restructuring charges |
|
|
4 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
Total
Developing Businesses segment |
|
$ |
21 |
|
$ |
-- |
|
| |
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
206 |
|
$ |
523 |
|
| |
|
|
|
|
|
|
|
Total
asset impairments and restructuring charges, net |
|
$ |
206 |
|
$ |
489 |
|
|
Total
goodwill impairments |
|
|
-- |
|
|
34 |
|
| |
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
206 |
|
$ |
523 |
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
2004
Asset
Impairments and Restructuring Charges
During
the fourth quarter 2004, the Company recorded asset impairments of $9 million
and site closure and other restructuring charges of $9 million. The non-cash
asset impairments relate to the adjustment to fair value of assets at Cendian
Corporation (“Cendian”), the Company’s logistics subsidiary, impacting the DB
segment, resulting from a decision to reintegrate Cendian’s logistics activities
into Eastman. In addition, the Company recognized restructuring charges of $9
million primarily related to actual and expected severance of Cendian and other
employees, as well as site closure charges primarily related to previously
announced manufacturing plant closures.
In the
third quarter 2004, the Company recognized asset impairments of approximately
$27 million, primarily related to assets at the Company’s Batesville, Arkansas
and Longview, Texas manufacturing facilities. These impairments primarily relate
to certain fixed assets in the performance chemicals product lines in the PCI
segment that management decided to rationalize due to increased foreign
competition. Also in third quarter, the CASPI segment incurred
approximately $2 million in site closure charges primarily related to previously
announced manufacturing plant closures, while the DB segment incurred
approximately $3 million in restructuring charges related to the reorganization
of Cendian.
In the
second quarter 2004, the Company recognized $62 million in asset impairment
charges related to assets held for sale. The assets were part of the Company’s
sale of certain businesses and product lines within the CASPI segment, which was
completed July 31, 2004. The charges reflect adjustment of the recorded values
of these assets to the expected sales proceeds. Also in second quarter 2004, the
Company recognized an additional $4 million of site closure costs related
primarily to previously announced manufacturing plant closures. These charges
had an impact of approximately $2 million each to the CASPI and SP segments.
In the
first quarter 2004, the Company recognized impairment charges of approximately
$41 million and severance charges of $5 million primarily related to the closure
of its copolyester manufacturing facility in Hartlepool, United Kingdom. The
decision to close the Hartlepool site, which manufactured products that are
within the Company’s SP segment’s product lines, was made in order to
consolidate production at other sites to create a more integrated and efficient
global manufacturing structure. Accordingly, the carrying value of the
manufacturing fixed assets was written down to fair value as established by
appraisal and available market data. In addition, the Company recognized $1
million of fixed asset impairments and $1 million of site closure costs related
to additional impairments within the CASPI reorganization and changes in
estimates for previously accrued amounts.
In
addition to the items discussed above, during 2004 the Company recognized $43
million in severance charges from ongoing cost reduction efforts throughout the
Company and costs related to the Company’s employee separation programs
announced in April 2004, resulting in severance charges to the CASPI, PCI, SP,
Polymers, and DB segments of $12 million, $10 million, $5 million, $13 million,
and $3 million, respectively.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Asset
Impairments and Restructuring Charges
2003
CASPI
Segment
In the
third quarter, 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. Prior to the third quarter
2003, management was pursuing growth strategies aimed at significantly improving
the financial performance of these product groups. 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 groups, thus triggering the
impairments and certain restructuring charges.
The third
quarter fixed asset impairment charges of approximately $234 million primarily
related to assets associated with the above mentioned underperforming product
lines, and primarily impacted 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 intangible asset impairment charges related to definite-lived intangible
assets of approximately $128 million and indefinite-lived intangibles of
approximately $47 million. The definite-lived intangibles related primarily to
developed technology and customer lists, and the indefinite-lived intangibles
primarily related 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.
In the
fourth quarter, the Company recognized fixed asset impairments and site closure
costs of $1 million and $3 million, respectively. The fixed asset impairments
relate to additional impairments associated with the CASPI reorganization, as
discussed above. The site closure charges relate primarily to additional costs
related to the closure of the Company’s Dusseldorf manufacturing site.
Other
Segments
In the
second quarter, the Company recorded an asset impairment charge of approximately
$15 million related to the impairment of certain fixed assets used in certain of
the PCI segment’s performance 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In the
third and fourth quarter, the PCI segment incurred charges of $40 million
related to the impairment of fixed assets used in performance 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. The fixed asset impairments charge related to assets located at
the Kingsport, Tennessee facility.
In the
fourth quarter 2003, an asset impairment charge of $1 million was recorded
related to certain research and development assets classified as held for sale.
The fair value of these assets was determined using the estimated proceeds from
sale less cost to sell. These charges impacted the Polymers segment.
During
2003, the Company recognized $20 million in severance costs for the actual and
probable employee separations from consolidation and restructuring activities in
the CASPI segment and ongoing cost reduction efforts throughout the Company.
These changes are reflected in CASPI, PCI, SP, Polymers, and Fibers segments of
$15 million, $2 million, $1 million, $1 million, and $1 million, respectively.
The
following table summarizes the charges and changes in estimates described above,
other asset impairments and restructuring charges, the non-cash 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, 2003 |
|
Provision/
Adjustments |
|
Non-cash
Reductions |
|
Cash
Reductions |
|
Balance
at
December
31, 2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges |
|
$ |
-- |
|
$ |
500 |
|
$ |
(500 |
) |
$ |
-- |
|
$ |
-- |
|
Severance
costs |
|
|
2 |
|
|
20 |
|
|
-- |
|
|
(12 |
) |
|
10 |
|
|
Site
closure costs |
|
|
7 |
|
|
3 |
|
|
-- |
|
|
(5 |
) |
|
5 |
|
|
Total |
|
$ |
9 |
|
$ |
523 |
|
$ |
(500 |
) |
$ |
(17 |
) |
$ |
15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
January
1, 2004 |
|
|
Provision/
Adjustments |
|
|
Non-cash
Reductions |
|
|
Cash
Reductions |
|
|
Balance
at
December
31, 2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges |
|
$ |
-- |
|
$ |
140 |
|
$ |
(140 |
) |
$ |
-- |
|
$ |
-- |
|
Severance
costs |
|
|
10 |
|
|
53 |
|
|
-- |
|
|
(37 |
) |
|
26 |
|
|
Site
closure costs |
|
|
5 |
|
|
13 |
|
|
-- |
|
|
(9 |
) |
|
9 |
|
|
Total |
|
$ |
15 |
|
$ |
206 |
|
$ |
(140 |
) |
$ |
(46 |
) |
$ |
35 |
|
Substantially
all severance and site closure costs are expected to be applied to the reserves
within one year.
Actual
and probable involuntary separations totaled approximately 1,200 employees
during 2004. As of the end of 2004, substantially all separations accrued for
were completed.
During
2003, terminations related to actual and probable involuntary separations
totaled approximately 500 employees. As of the end of 2003, approximately 350 of
these terminations had occurred, with the remaining primarily relating to
previously announced consolidation and restructuring activities of certain
European CASPI manufacturing sites that were completed in early 2004.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Other
Operating Income
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
Other
operating income |
|
$ |
(7 |
) |
$ |
(33 |
) |
Other
operating income for 2004 totaled approximately $7 million for the gain on sale
of Ariel in the fourth quarter, reflected in the DB segment.
Other
operating income for 2003 totaled approximately $33 million and reflected gains
of approximately $20 million on the sale of the Company’s high-performance
crystalline plastic assets in first quarter, and approximately $13 million on
the sale of the Company’s colorant product lines and related assets in fourth
quarter. These items were reflected within the SP and CASPI segments,
respectively.
Interest
Expense, Net
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
Change |
| |
|
|
|
|
|
|
|
Gross
interest costs |
$ |
126 |
$ |
133 |
|
|
|
Less:
capitalized interest |
|
3 |
|
3 |
|
|
|
Interest
expense |
|
123 |
|
130 |
|
(5)
% |
|
Interest
income |
|
8 |
|
6 |
|
|
|
Interest
expense, net |
$ |
115 |
$ |
124 |
|
(7)
% |
Lower
gross interest costs for 2004 compared to 2003 reflected lower average debt
levels due to paydown of debt throughout the year, which were partially offset
by higher average interest rates.
For 2005,
the Company expects net interest expense to decrease compared to 2004 due to
lower expected gross interest costs as a result of lower average
borrowings.
Other
(Income) Charges, net
|
(Dollars
in millions) |
|
|
|
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other
income |
|
|
|
|
$ |
(24 |
) |
$ |
(28 |
) |
|
Other
charges |
|
|
|
|
|
20 |
|
|
18 |
|
|
Other
(income) charges, net |
|
|
|
|
$ |
(4 |
) |
$ |
(10 |
) |
Included
in other income are the Company’s portion of earnings from its equity
investments, gains on sales of non-operating assets, royalty income, net gains
on foreign exchange transactions and other miscellaneous items. Included in
other charges are net losses on 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 2004 primarily reflects the Company’s portion of earnings from its
equity investment in Genencor of $14 million. Other charges for 2004 consist
primarily of net losses on foreign exchange transactions of $7 million, fees on
securitized receivables of $4 million, and writedowns to fair value of certain
technology business venture investments due to other than temporary declines in
value of $3 million.
Other
income for 2003 primarily reflects net gains on foreign exchange transactions of
$13 million and the Company’s portion of earnings from its equity investment in
Genencor of $10 million. Other charges for 2003 consist primarily of writedowns
to fair value of certain technology business venture investments due to other
than temporary declines in value of $4 million, fees on securitized receivables
of $3 million, and other miscellaneous charges.
For more
information on the Company’s equity investment in Genencor, see “Item 1 -
Business - Investment in Genencor” and Note 5 to the Company’s consolidated
financial statements.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Provision
(Benefit) for Income Taxes
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
Change |
| |
|
|
|
|
|
|
|
Provision
(benefit) for income taxes |
$ |
(106) |
$ |
(108) |
|
(2.0)
% |
|
Effective
tax rate |
|
N/A |
|
28% |
|
|
The 2004
effective tax rate was impacted by $90 million of deferred tax benefits
resulting from the expected utilization of a capital loss resulting from the
sale of certain businesses and product lines and related assets in the CASPI
segment and $26 million of tax benefit resulting from the favorable resolution
of a prior year capital loss refund claim. In addition, the effective tax rates
for both 2004 and 2003 were impacted by the treatment of asset impairments and
restructuring charges resulting in lower expected tax benefits in certain
jurisdictions. The 2003 effective tax rate was also impacted by non-deductible
goodwill impairments.
Excluding
the above items, the effective tax rate for 2004 and 2003 was 26 percent and 28
percent, respectively. These rates reflect the impact of foreign rate variances
and extraterritorial income exclusion benefits on normal taxable
earnings.
In both
years, the Company has recorded benefits from the extra-territorial income
(“ETI”) exclusion. On October 22, 2004, the President of the United States
signed the American Jobs Creation Act of 2004 (the “Jobs Act”). The Jobs Act
provides a deduction for income from qualified domestic production activities,
which will be phased in from 2005 through 2010. The Jobs Act also provides for a
two-year phase-out of the ETI exclusion. The domestic manufacturing benefit has
no effect on deferred tax assets or liabilities existing at the enactment date.
Rather, the impact of this deduction will be reported in the period in which the
deduction is claimed on the Company’s federal income tax return. The Company is
currently assessing the details of the Jobs Act and the net effect of the phase
out of the ETI exclusion and the phase in of this new deduction. This analysis
is expected to be completed in mid-2005. Until such time, it is not possible to
determine what impact this legislation will have on the Company’s consolidated
tax accruals or effective tax rate.
The Act
also creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign corporations. The
deduction is subject to a number of limitations. The Company is not yet in a
position to decide whether, and to what extent, foreign earnings might be
repatriated. Based upon analysis to date, however, it is reasonably possible
that some amount up to $500 million might be repatriated considering the
limitation under section 965 (b) of the Internal Revenue Code. The related
income tax effects of any such repatriation cannot be reasonably estimated at
this time. The Company has not provided for U.S. federal income and foreign
withholding taxes on $318 million of undistributed earnings from non-U.S.
operations as of December 31, 2004. Until the Company’s analysis of the Act is
completed, the Company will continue to permanently reinvest those earnings. The
Company expects to be in a position to finalize this assessment by mid 2005.
The
Company expects its effective tax rate in 2005 will be approximately 30
percent.
Cumulative
Effect of Changes in Accounting Principles, Net
|
(Dollars
in millions) |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Cumulative
effect of change in accounting principles, net |
$ |
-- |
$ |
3 |
SFAS
No. 143
As
required by SFAS No. 143, “Accounting for Asset Retirement Obligations,” at
January 1, 2003, the Company recognized existing asset retirement obligations
adjusted for cumulative accretion to the date of adoption, asset
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
retirement
costs capitalized as an increase to the carrying amount of the associated
long-lived asset and accumulated depreciation on those capitalized costs. As a
result of adoption of this standard, the Company recognized an after-tax credit
to earnings of $3 million during the first quarter 2003, primarily related to a
reduction in certain environmental liabilities.
SUMMARY
BY OPERATING SEGMENT
The
Company’s products and operations are managed and reported in three divisions
comprising six operating segments. Eastman Division consists of the CASPI
segment, the PCI segment, and the SP segment. Voridian Division contains the
Polymers segment and the Fibers segment. The Developing Businesses Division
consists of the DB segment.
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 divisions at predetermined prices that 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.
The CASPI
segment manufactures raw materials, additives and specialty polymers, primarily
for the paints and coatings, inks, and adhesives markets. The CASPI segment's
products consist of liquid vehicles, coatings additives, and hydrocarbon resins
and rosins and rosin esters. Liquid vehicles, such as ester, ketone and alcohol
solvents, maintain the binders in liquid form for ease of application. Coatings
additives, such as cellulosic polymers, Texanol™ ester alcohol and chlorinated
polyolefins, enhance the rheological, film formation and adhesion properties of
paints, coatings and inks. Hydrocarbon resins and rosins and rosin esters are
used in adhesive, ink, and polymers compounding applications. Additional
products are developed in response to, or in anticipation of, new applications
where the Company believes significant value can be achieved. On July 31, 2004,
the Company completed the sale of certain businesses, product lines and related
assets within the CASPI segment. The divested businesses and product lines were
composites (unsaturated polyester resins), certain acrylic monomers, inks and
graphic arts raw materials, liquid resins, powder resins, and textile
chemicals.
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’s key products include engineering and specialty polymers, specialty
film and sheet products, and packaging film and fiber products. Included in
these are highly specialized copolyesters and cellulosic plastics that possess
unique performance properties for value-added end uses such as appliances, store
fixtures and displays, building and construction, electronic packaging, medical
packaging, personal care and cosmetics, performance films, tape and labels,
fiber, photographic and optical film, graphic arts, and general packaging.
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 in extrusion coating,
film and molding applications.
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; acetate flake for use by other acetate tow producers; and acetyl
chemicals.
The DB
segment includes new businesses and certain investments in 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, Centrus, a new
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
business
in food safety diagnostics, and Eastman’s gasification services. The DB segment
also includes the results of Cendian, which is being reintegrated back into
Eastman, and Ariel, which was sold in fourth quarter, 2004.
Effective
January 1, 2004, certain commodity product lines were transferred from the PCI
segment to the CASPI segment, which resulted in the reclassification of asset
impairment charges of approximately $42 million for 2003.
Effective
January 1, 2003, sales and operating results for developing businesses
activities were moved from the CASPI, PCI, and SP segments to the DB segment.
During 2002, these amounts were included within the CASPI, PCI, and SP segments.
During 2001, these amounts had been split among all segments.
Accordingly,
the prior year amounts for sales and operating earnings have been reclassified
for all periods presented. These revisions had no effect on the Company’s
consolidated financial statements.
For
additional information concerning an analysis of the results of the Company’s
operating segments, see Note 20 to the Company’s consolidated financial
statements and Exhibits 99.01 and 99.02 to this Annual Report.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
EASTMAN
DIVISION
CASPI
Segment |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
Change |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
external sales |
|
$ |
1,554 |
|
$ |
1,683 |
|
|
(8)
|
% |
Volume
effect |
|
|
|
|
|
|
|
|
(11)
|
% |
Price
effect |
|
|
|
|
|
|
|
|
2
|
% |
Product
mix effect |
|
|
|
|
|
|
|
|
(1)
|
% |
Exchange
rate effect |
|
|
|
|
|
|
|
|
2
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Sales
- restructured, divested, and consolidated product lines (1) |
|
|
441 |
|
|
719 |
|
|
(39)
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Sales
- continuing product lines |
|
|
1,113 |
|
|
964 |
|
|
15
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Interdivisional
Sales |
|
|
1 |
|
|
-- |
|
|
--
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Total
operating earnings (loss) |
|
|
67 |
|
|
(402 |
) |
|
>
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss) - restructured, divested, and consolidated product
lines
(1) (2) |
|
|
(85 |
) |
|
(538 |
) |
|
84
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating
earnings - continuing product lines |
|
|
152 |
|
|
136 |
|
|
12
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Total
asset impairments and restructuring charges |
|
|
81 |
|
|
462 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges - restructured, divested, and
consolidated product lines (1) |
|
|
72 |
|
|
457 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges - continuing product
lines |
|
|
9
|
|
|
5 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Other
operating income |
|
|
-- |
|
|
13 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
(1) These
businesses and product lines include acrylate ester monomers, composites
(unsaturated polyester resins), inks and graphic arts raw materials, liquid
resins, powder resins and textile chemicals divested on July 31, 2004 as well as
other restructuring, divestiture and consolidation activities that the Company
has completed related to these businesses and product lines.
(2) Includes
allocated costs consistent with the Company’s historical practices, some of
which remain and were reallocated to the remainder of the segment and other
segments subsequent to restructure, consolidation and divestiture.
On July
31, 2004, the Company completed the sale of certain businesses, product lines
and related assets within the CASPI segment. This sale includes portions of the
resins and monomers, and
inks and graphic arts product groups. As a result, the Company has presented
CASPI segment sales revenue, operating earnings, and asset impairments and
restructuring charges for restructured, divested, and consolidated product lines
and continuing product lines. For additional information, see Exhibits 99.01 and
99.02 filed with this report.
External
sales revenue decreased $129 million due to lower sales volume resulting from
the divestiture discussed above. Excluding the sales from these sources for both
2004 and 2003, sales revenue increased by 15 percent primarily due to an 11
percent increase in volume. Continuing businesses benefited from improved
end-market demand attributable to strong economic growth and successful
marketing of existing products in new applications.
Operating
earnings increased $469 million due to lower asset impairment and restructuring
charges of approximately $381 million as well as a continued focus on more
profitable businesses and product lines, increased
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
sales
volume, and continued cost reduction efforts that were partially offset by
higher raw materials and energy costs, especially propane.
|
PCI
Segment |
|
| |
|
|
|
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
Change |
|
External
sales |
|
$ |
1,347 |
|
$ |
1,098 |
|
|
23
|
% |
Volume
effect |
|
|
|
|
|
|
|
|
12
|
% |
Price
effect |
|
|
|
|
|
|
|
|
11
|
% |
Product
mix effect |
|
|
|
|
|
|
|
|
(1)
|
% |
Exchange
rate effect |
|
|
|
|
|
|
|
|
1
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Interdivisional
sales |
|
|
583 |
|
|
495 |
|
|
18
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss) |
|
|
16 |
|
|
(45 |
) |
|
>100
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
|
38 |
|
|
57 |
|
|
|
|
The
increase in external sales revenue of $249 million is primarily due to increased
sales volume and higher selling prices. The increase in volume had a positive
impact on sales revenue of $133 million and was attributable to improved
end-market demand as a result of strong economic growth and implementation of
long-term supply arrangements with key customers. Additionally, higher selling
prices, as a result of significantly increased raw material and energy costs,
had a positive impact on sales revenues of $117 million. The increase in
interdivisional sales was due to both higher selling prices as a result of
higher raw material and energy costs and increased volume.
Operating
earnings increased $61 million, partially due to a decrease in asset impairment
and restructuring charges of $19 million. Operating earnings were also favorably
impacted by higher sales volume, higher selling prices, and continued cost
reduction efforts that more than offset higher raw materials and energy prices.
Volume growth was primarily due to improved end-market demand as a result of
strong economic growth, implementation of long-term supply arrangements with key
customers and debottlenecking of production capacity at the Longview, Texas
site. Asset impairment and restructuring charges of $38 million in 2004 relate
to manufacturing facilities in the Company’s Batesville, Arkansas and Longview,
Texas sites. Asset impairment and restructuring charges of $57 million in 2003
related to the Company’s manufacturing site in Llangefni, Wales.
|
SP
Segment |
|
| |
|
|
|
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
Change |
|
| |
|
|
|
|
|
|
|
|
|
|
External
sales |
|
$ |
644 |
|
$ |
559 |
|
|
15
|
% |
Volume
effect |
|
|
|
|
|
|
|
|
12
|
% |
Price
effect |
|
|
|
|
|
|
|
|
1
|
% |
Product
mix effect |
|
|
|
|
|
|
|
|
--
|
% |
Exchange
rate effect |
|
|
|
|
|
|
|
|
2
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Interdivisional
sales |
|
|
51 |
|
|
49 |
|
|
4
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating
earnings |
|
|
13 |
|
|
63 |
|
|
(79)
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
|
53 |
|
|
1 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Other
operating income |
|
|
-- |
|
|
20 |
|
|
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
increase in external sales revenue of $85 million for 2004 compared to 2003 was
primarily due to higher sales volume attributed to strong market demand for
products in both new and existing applications including eyewear, housewares,
and cosmetics packaging in North America and Asia Pacific regions. The increase
in volume had a positive impact on sales revenue of $65 million.
Operating
earnings for 2004 decreased $50 million compared to 2003 primarily due to asset
impairments and restructuring charges of $53 million related primarily to the
closure of the Hartlepool, United Kingdom manufacturing site as well as
severance charges related to the Company’s employee separation programs.
Operating earnings in 2003 included a gain of $20 million on the sale of the
segment’s high performance crystalline plastics assets. In addition, the
operating earnings improved year over year due to increased sales volumes, a
continued focus on more profitable businesses and product lines, and continued
cost reduction efforts that more than offset higher raw materials and energy
costs.
VORIDIAN
DIVISION
|
Polymers
Segment |
|
| |
|
|
|
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
Change |
|
| |
|
|
|
|
|
|
|
|
|
|
External
sales |
|
$ |
2,183 |
|
$ |
1,756 |
|
|
24
|
% |
Volume
effect |
|
|
|
|
|
|
|
|
9
|
% |
Price
effect |
|
|
|
|
|
|
|
|
12
|
% |
Product
mix effect |
|
|
|
|
|
|
|
|
--
|
% |
Exchange
rate effect |
|
|
|
|
|
|
|
|
3
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Interdivisional
sales |
|
|
69 |
|
|
68 |
|
|
1
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating
earnings |
|
|
25 |
|
|
62 |
|
|
(60)
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
|
13 |
|
|
2 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
External
sales revenue increased $427 million primarily due to higher selling prices and
increased sales volume. Higher selling prices had a positive impact on sales
revenue of $211 million, primarily in response to higher raw material and energy
costs and improving market conditions in the second half of 2004. The volume
increase is mostly a result of continued strong end-market demand for PET
polymers and continued substitution for other competitive materials in North
America, Latin America, and Europe and had a positive impact on sales revenue of
$156 million.
Operating
earnings decreased $37 million, including an asset impairment and restructuring
charge increase of $11 million. Operating earnings were also impacted by
increased selling prices and higher sales volumes that were more than offset by
higher raw material and energy costs, particularly, paraxylene and ethylene
glycol. Included in the 2003 results is a $14 million gain in 2003 from an
insurance settlement related to the 2002 operational disruptions at the
Company’s Rotterdam, the Netherlands and Columbia, South Carolina facilities.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Fibers
Segment |
|
| |
|
|
|
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
Change |
|
| |
|
|
|
|
|
|
|
|
|
|
External
sales |
|
$ |
731 |
|
$ |
635 |
|
|
15
|
% |
Volume
effect |
|
|
|
|
|
|
|
|
13
|
% |
Price
effect |
|
|
|
|
|
|
|
|
(2)
|
% |
Product
mix effect |
|
|
|
|
|
|
|
|
3
|
% |
Exchange
rate effect |
|
|
|
|
|
|
|
|
1
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Interdivisional
sales |
|
|
88 |
|
|
80 |
|
|
10
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating
earnings |
|
|
146 |
|
|
125 |
|
|
17
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
|
-- |
|
|
1 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
External
sales revenue increased $96 million. Increased sales volume had a positive
impact of $83 million and improved product mix had a $17 million impact on
revenue. The increase in sales volume and favorable shift in product mix were
primarily attributable to acetyl chemicals in North America and acetate tow in
the Asia Pacific region.
Operating
earnings increased $21 million primarily due to increased sales volume that was
partially offset by higher raw material and energy costs.
DEVELOPING
BUSINESSES DIVISION
|
Developing
Businesses Segment |
|
| |
|
|
|
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
Change |
|
| |
|
|
|
|
|
|
|
|
|
|
External
sales |
|
$ |
121 |
|
$ |
69 |
|
|
75
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Interdivisional
sales |
|
|
424 |
|
|
396 |
|
|
7
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating
loss |
|
|
(86 |
) |
|
(65 |
) |
|
(32)
|
% |
| |
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
|
21 |
|
|
-- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Other
operating income |
|
|
7 |
|
|
-- |
|
|
|
|
External
sales revenue increased $52 million primarily due to the continuing
implementation of third-party contracts at Cendian, the Company’s logistics
subsidiary. The increase in interdivisional sales revenue for 2004 was primarily
due to the increase in logistics services provided by Cendian to Eastman
Division and Voridian Division business segments and the increase in sales
volumes in those segments.
Operating
losses increased $21 million primarily due to asset impairments and
restructuring charges of $21 million mainly related to the restructuring of
Cendian. Also included in 2004 operating results is a $7 million gain from the
sale of Ariel, a wholly owned subsidiary and provider of chemical regulatory
products and services.
In 2004,
the operating results for the DB segment were below the Company’s expectations,
primarily due to the inability of Cendian to achieve sufficient margins to
offset operating costs. As a result, the Company announced Cendian will not be
pursuing new customers or renewing contracts with existing customers, and the
Company will
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
reintegrate
its logistics function. Reintegration is expected to be completed by the end of
first quarter, 2005, which will result in elimination of associated
interdivisional sales revenue.
The
Company continues to view the majority of the SG&A and R&D costs within
the DB segment as an extension of its R&D efforts, and management expects
for 2005 that these combined R&D costs will be approximately 3 percent of
revenue.
SUMMARY
BY CUSTOMER LOCATION - 2004 COMPARED WITH 2003
Sales
Revenue (excluding interdivisional sales)
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
Change |
|
Volume
Effect |
|
Price
Effect |
|
Product
Mix
Effect |
|
Exchange
Rate
Effect |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada |
$ |
3,723 |
$ |
3,302 |
|
13
% |
|
6
% |
|
8
% |
|
(1)
% |
|
--
% |
|
Europe,
Middle East, and Africa |
|
1,467 |
|
1,368 |
|
7
% |
|
(5)
% |
|
2
% |
|
1
% |
|
9
% |
|
Asia
Pacific |
|
785 |
|
643 |
|
22
% |
|
9
% |
|
6
% |
|
6
% |
|
1
% |
|
Latin
America |
|
605 |
|
487 |
|
24
% |
|
11
% |
|
11
% |
|
1
% |
|
1% |
| |
$ |
6,580 |
$ |
5,800 |
|
|
|
|
|
|
|
|
|
|
The
increase in sales revenue in the United States and Canada for 2004 compared to
2003 was primarily due to higher selling prices, particularly for the Polymers
and PCI segment, which had a positive impact on sales revenue of $247 million.
The higher selling prices mostly related to sales of intermediates chemicals,
PET polymers, and polyethylene, and were primarily in response to increases in
raw material and energy costs and high industry-wide capacity utilization. While
the impact of the restructuring, divestiture, and consolidation activities in
the CASPI segment had a negative impact on sales revenue, overall higher sales
volumes, particularly for the Polymers and PCI segment, had a positive impact on
sales revenue of $192 million.
2004
sales revenue in Europe, the Middle East, and Africa increased compared to 2003
due to favorable shifts in foreign currency exchange rates which had a positive
impact on sales revenue of $119 million, primarily due to the strengthening of
the euro. 2004 sales volume declined 4% due to the impact of the restructuring,
divestiture, and consolidation activities in the CASPI segment. In all other
segments, 2004 sales volumes increased compared to 2003.
2004
sales revenue in the Asia Pacific region increased significantly compared to
2003 primarily due to higher sales volume, particularly in the Fibers segment,
which had a positive impact on sales revenue of $57 million. A favorable shift
in product mix and higher selling prices, particularly for intermediates
products in the PCI segment, contributed $42 million and $36 million,
respectively, to sales revenue.
2004
sales revenue in Latin America increased significantly compared to 2003
primarily due to higher sales volumes and higher selling prices, primarily
related to PET polymers, each of which had a positive impact on sales revenue of
$55 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 and euros. 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. For more information on these practices, see Note 8 to the
Company’s consolidated financial statements and Part II--Item 7A--"Quantitative
and Qualitative Disclosures About Market Risk."
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
OF CONSOLIDATED RESULTS - 2003 COMPARED WITH 2002
|
Earnings
(Loss) |
|
|
|
|
| |
|
|
|
|
|
(Dollars
in millions, except per share amounts) |
|
2003 |
|
2002 |
| |
|
|
|
|
|
Operating
earnings (loss) |
$ |
(267) |
$ |
208 |
|
Net
earnings (loss) before cumulative effect of change in accounting
principle |
|
(273) |
|
79 |
|
Net
earnings (loss) |
|
(270) |
|
61 |
|
Earnings
(loss) per share |
|
|
|
|
|
--Basic |
|
(3.50) |
|
0.79 |
|
--Diluted |
|
(3.50) |
|
0.79 |
| |
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
489 |
|
5 |
|
Goodwill
impairments |
|
34 |
|
-- |
|
Other
operating income |
|
(33) |
|
-- |
Operating
results for 2003 declined to a loss of $267 million compared to operating
earnings for 2002 of $208 million. The decline in operating earnings was
primarily attributable to asset impairments and restructuring charges and
goodwill impairments of $489 million and $34 million, respectively. Other
operating income related to a gain of $20 million for the sale of the Company’s
high-performance crystalline plastics assets, which were formerly a part of the
SP segment, and a gain of $13 million for the sale of the Company’s colorant
product lines and related assets, which were formerly part of the CASPI segment.
Additionally, higher raw material and energy costs partially offset by higher
selling prices had a negative impact on gross profit of approximately $100
million. Continued cost reduction efforts and favorable foreign currency
exchange rates had a positive impact on earnings.
Other
factors impacting operating earnings for 2003 include:
| · |
a
reduction in costs of approximately $40 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; |
| · |
a
gain of approximately $14 million recognized in the earnings statement as
a credit to cost of sales from the insurance settlement related to the
previously disclosed 2002 operational disruptions at the Company’s
Rotterdam, the Netherlands, and Columbia, South Carolina facilities;
|
| · |
increased
pension and other post-employment benefits expense of approximately $25
million; and |
| · |
lower
depreciation and amortization expense of $30
million. |
Operating
results for 2002 were negatively impacted by several items:
| · |
approximately
$39 million due to operational disruptions at the Company’s Columbia,
South Carolina and Rotterdam, the Netherlands
facilities; |
| · |
costs
pertaining to asset charges relating primarily to equipment dismantlement
and other write-offs recorded in 2002 totaling approximately $17
million; |
| · |
an
unfavorable shift in product mix; and |
| · |
asset
impairments and restructuring charges totaling approximately $5 million
(as described more fully below and in Note 15 to the Company’s
consolidated financial statements). |
Net
earnings for 2002 included the write-down to fair value of certain technology
business venture investments and a loss of $12 million due to re-measurement of
an Argentine peso-denominated tax receivable.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
(Dollars
in millions) |
|
2003 |
|
2002 |
Change |
Volume
Effect |
Price
Effect |
Product
Mix
Effect |
Exchange
Rate Effect |
| |
|
|
|
|
|
|
|
|
|
|
Sales |
$ |
5,800 |
$ |
5,320 |
9
% |
(1)
% |
5
% |
1
% |
4
% |
Sales
revenue increased for 2003 compared to 2002 primarily due to increased selling
prices, particularly for the polymers and the PCI segments, and favorable
foreign currency exchange rates, particularly for the euro, of $275 million and
$192 million, respectively. The increase in selling prices was primarily in
response to an increase in raw material and energy costs.
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
| |
|
|
|
|
|
|
|
Gross
Profit |
$ |
810
|
$ |
779 |
|
4
% |
|
As
a percentage of sales |
|
14.0
% |
|
14.6
% |
|
|
Gross
profit for 2003 increased compared to 2002 primarily due to higher selling
prices, continued cost reduction efforts, and favorable foreign currency
exchange rates that more than offset higher raw material and energy costs. The
higher raw material and energy costs were primarily attributable to the
following raw materials: propane, paraxylene, ethylene glycol, and natural gas.
The decrease in gross profit as a percentage of sales is attributable to higher
raw material and energy costs that were partially offset by selling price
increases and had a negative impact on gross profit of approximately $100
million.
An
insurance settlement of approximately $14 million related to the previously
reported 2002 operational disruptions at the Company’s plants in Rotterdam, the
Netherlands, and Columbia, South Carolina had a positive impact on gross profit
in 2003. In 2002, the same operational disruptions had a negative impact of $39
million. Both the charge in 2002 and the credit received in 2003 were reflected
in cost of sales in the earnings statement of each year.
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
| |
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses |
$ |
414 |
$ |
407 |
|
2
% |
|
Research
and Development Expenses |
|
173 |
|
159 |
|
9
% |
| |
$ |
587 |
$ |
566 |
|
|
|
As
a percentage of sales |
|
10.1% |
|
10.6% |
|
|
The
increase in SG&A expenses for 2003 compared to 2002 was primarily due to
higher costs associated with the Company’s growth initiatives, including the
business-building efforts within the DB segment. R&D expenses for 2003 were
higher compared to 2002 primarily due to the costs related to the Company’s
increased efforts to develop certain operational efficiencies and efforts
associated with new business initiatives.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Asset
Impairments and Restructuring Charges, Net
Impairments
and restructuring charges totaled $523 million during 2003, consisting of
non-cash asset impairments of $500 million and restructuring charges of $23
million. Effective
January 1, 2004, certain commodity product lines were transferred from the
Performance Chemicals and Intermediates (“PCI”) segment to the CASPI segment,
which resulted in the reclassification of asset impairment and severance charges
of approximately $42 million for 2003.
The
following table summarizes the 2003 and 2002 charges:
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Eastman
Division Segments: |
|
|
|
|
|
CASPI
Segment: |
|
|
|
|
|
Fixed
asset impairments |
$ |
235 |
$ |
2 |
|
Intangible
asset impairments |
|
175 |
|
-- |
|
Goodwill
impairments |
|
34 |
|
-- |
|
Severance
charges |
|
15 |
|
-- |
|
Site
closure costs |
|
3 |
|
3 |
|
|
|
|
|
|
|
PCI
Segment: |
|
|
|
|
|
Fixed
asset impairments |
|
55 |
|
(1) |
|
Severance
charges |
|
2 |
|
-- |
| |
|
|
|
|
|
SP
Segment |
|
|
|
|
|
Severance
charges |
|
1 |
|
-- |
| |
|
|
|
|
|
Total
Eastman Division |
$ |
520 |
$ |
4 |
| |
|
|
|
|
|
Voridian
Division Segments: |
|
|
|
|
|
Polymers
Segment: |
|
|
|
|
|
Fixed
asset impairments |
|
1 |
|
1 |
|
Severance
charges |
|
1 |
|
-- |
| |
|
|
|
|
|
Fibers
Segment: |
|
|
|
|
|
Severance charges |
|
1 |
|
-- |
| |
|
|
|
|
|
Total
Voridian Division |
$ |
3 |
$ |
1 |
| |
|
|
|
|
|
Total
Eastman Chemical Company |
$ |
523 |
$ |
5 |
| |
|
|
|
|
|
Total
asset impairments and restructuring charges, net |
|
489 |
|
5 |
|
Total
goodwill impairments |
|
34 |
|
-- |
| |
|
|
|
|
|
Total
Eastman Chemical Company |
$ |
523 |
$ |
5 |
2003
CASPI
Segment
In the
third quarter, 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. Prior to the third quarter
2003, management was pursuing growth strategies aimed at significantly improving
the financial performance of these product groups. 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 groups, thus triggering the
impairments and certain restructuring charges.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The third
quarter fixed asset impairment charges of approximately $234 million primarily
related to assets associated with the above mentioned underperforming product
lines, and primarily impacted 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 intangible asset impairment charges related to definite-lived intangible
assets of approximately $128 million and indefinite-lived intangibles of
approximately $47 million. The definite-lived intangibles related primarily to
developed technology and customer lists, and the indefinite-lived intangibles
primarily related 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.
In the
fourth quarter, the Company recognized fixed asset impairments and site closure
costs of $1 million and $3 million, respectively. The fixed asset impairments
relate to additional impairments associated with the CASPI reorganization, as
discussed above. The site closure charges relate primarily to additional costs
related to the closure of the Company’s Dusseldorf manufacturing site.
Other
Segments
In the
second quarter, the Company recorded an asset impairment charge of approximately
$15 million related to the impairment of certain fixed assets used in certain of
the PCI segment’s performance 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.
In the
third and fourth quarter, the PCI segment incurred charges of $40 million
related to the impairment of fixed assets used in performance 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. The fixed asset impairments charge related to assets
located at the Kingsport, Tennessee facility.
In the
fourth quarter 2003, an asset impairment charge of $1 million was recorded
related to certain research and development assets classified as held for sale.
The fair value of these assets was determined using the estimated proceeds from
sale less cost to sell. These charges impacted the Polymers segment.
During
2003, the Company recognized $20 million in severance costs for the actual and
probable employee separations from consolidation and restructuring activities in
the CASPI segment and ongoing cost reduction efforts throughout the Company.
These changes are reflected in CASPI, PCI, SP, Polymers, and Fibers segments of
$15 million, $2 million, $1 million, $1 million, and $1 million, respectively.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
2002
CASPI
Segment
A change
in estimate for site closure costs for Philadelphia, Pennsylvania and Portland,
Oregon resulted in a $1 million credit to earnings in the third quarter. In the
fourth quarter, the Company recognized restructuring charges of approximately $4
million related to closure of plants in Dusseldorf, Germany; Rexdale, Canada;
and LaVergne, Tennessee; and additionally recognized an asset impairment charge
of approximately $2 million related to certain other European assets.
Other
Segments
In the
fourth quarter, a net $1 million credit to earnings was recorded for the PCI
segment due to a $2 million credit associated with previously impaired fine
chemicals product lines assets, and a charge of $1 million related to impaired
assets used in certain research and development activities.
During
2002, the Company recorded charges related to the write-down of underperforming
polyethylene assets in the Polymers segment totaling approximately $1
million.
The
following table summarizes the charges and changes in estimates described above,
other asset impairments and restructuring charges, the non-cash 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
December
31, 2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges |
|
$ |
-- |
|
$ |
500 |
|
$ |
(500 |
) |
$ |
-- |
|
$ |
-- |
|
Severance
costs |
|
|
2 |
|
|
20 |
|
|
--
|
|
|
(12 |
) |
|
10
|
|
|
Site
closure costs |
|
|
7 |
|
|
3 |
|
|
--
|
|
|
(5 |
) |
|
5 |
|
|
Total |
|
$ |
9 |
|
$ |
523 |
|
$ |
(500 |
) |
$ |
(17 |
) |
$ |
15 |
|
Substantially
all severance and site closure costs are expected to be applied to the reserves
within one year.
During
2003, terminations related to actual and probable involuntary separations
totaled approximately 500 employees. As of the end of 2003, approximately 350 of
these terminations had occurred, with the remaining primarily
relating to previously announced consolidation and restructuring activities of
certain European CASPI manufacturing sites that were completed in early
2004.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Other
Operating Expense
|
(Dollars
in millions) |
|
2003 |
|
2002 |
| |
|
|
|
|
|
Other
operating expense |
$ |
(33) |
$ |
-- |
Other
operating income for 2003 totaled approximately $33 million and reflected gains
of approximately $20 million on the sale of the Company’s high-performance
crystalline plastic assets in first quarter, and approximately $13 million on
the sale of the Company’s colorant product lines and related assets in fourth
quarter. These items were reflected within the SP and CASPI segments,
respectively.
Interest
Expense, Net
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
| |
|
|
|
|
|
|
|
Gross
interest costs |
$ |
133 |
$ |
132 |
|
|
|
Less:
capitalized interest |
|
3 |
|
4 |
|
|
|
Interest
expense |
|
130 |
|
128 |
|
2
% |
|
Interest
income |
|
6 |
|
6 |
|
|
|
Interest
expense, net |
$ |
124 |
$ |
122 |
|
2
% |
Slightly
higher gross interest costs for 2003 compared to 2002 reflected higher average
debt levels due to bond offerings in June and November, with total proceeds of
$495 million, in anticipation of the maturity of $500 million of 6 3/8% bonds
due January 15, 2004, that were partially offset by lower average interest
rates. For more information on the new bond issues and post year-end bond
retirements, see Notes 7 and 10 to the Company’s consolidated financial
statements.
Other
(Income) Charges, net
|
(dollars
in millions) |
|
2003 |
|
2002 |
| |
|
|
|
|
|
Other
Income |
$ |
(28) |
$ |
(14) |
|
Other
Charges |
|
18 |
|
16 |
|
Other
(Income) Charges, net |
$ |
(10) |
$ |
2 |
Included
in other income are the Company’s portion of earnings from its equity
investments, gains on sales of non-operating assets, royalty income, net gains
on foreign exchange transactions, and other miscellaneous items. Included in
other charges are net losses on 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 2003 primarily reflects net gains on foreign exchange transactions of
$13 million and the Company’s portion of earnings from its equity investment in
Genencor of $10 million. Other charges for 2003 consist primarily of writedowns
to fair value of certain technology business venture investments due to other
than temporary declines in value of $4 million, fees on securitized receivables
of $3 million, and other miscellaneous charges.
Other
income for 2002 primarily reflects $9 million of earnings from the Company’s
equity investment in Genencor, net of a restructuring charge of $5 million.
Additionally, other income included a net gain on foreign exchange transactions
of $4 million. Other charges for 2002 primarily reflected a write-down to fair
value of certain technology business venture investments due to other than
temporary declines in value of $8 million and fees on securitized receivables of
$4 million.
For more
information on the Company’s equity investment in Genencor, see “Item 1 -
Business - Investment in Genencor” and Note 5 to the Company’s consolidated
financial statements.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Provision
(Benefit) for Income Taxes
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
| |
|
|
|
|
|
|
|
Provision
(benefit) for income taxes |
$ |
(108) |
$ |
5 |
|
N/A |
|
Effective
tax rate |
|
28% |
|
5% |
|
|
The 2003
tax rate of 28% was impacted primarily by the treatment of the asset impairments
and restructuring charges resulting in a lower expected tax benefit in certain
foreign jurisdictions. This, coupled with non-deductible goodwill impairments,
resulted in an effective tax benefit rate lower than the statutory rate.
The 2002
effective tax rate was reduced by a net credit of $17 million resulting from the
favorable resolution of prior periods’ tax contingencies, by a reduction in
international taxes related to the implementation of the Company’s divisional
structure, and the elimination of nondeductible goodwill and indefinite-lived
intangible asset amortization resulting from the implementation of SFAS No.
142.
In both
years, the Company has recorded benefits from a foreign sales corporation or
extraterritorial income exclusion.
Cumulative
Effect of Changes in Accounting Principles, Net
|
(Dollars
in millions) |
|
2003 |
|
2002 |
| |
|
|
|
|
|
Cumulative
effect of change in accounting principle, net |
$ |
3 |
$ |
(18) |
SFAS
No. 143
As
required by SFAS No. 143, “Accounting for Asset Retirement Obligations,” at
January 1, 2003, the Company recognized existing asset retirement obligations
adjusted for cumulative accretion to the date of adoption, asset retirement
costs capitalized as an increase to the carrying amount of the associated
long-lived asset and accumulated depreciation on those capitalized costs. As a
result of adoption of this standard, the Company recognized an after-tax credit
to earnings of $3 million during the first quarter 2003, primarily related to a
reduction in certain environmental liabilities.
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.
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 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 2003,
the Company impaired certain goodwill and indefinite-lived intangible assets in
the CASPI segment as discussed in Note 15 to the Company’s consolidated
financial statements. 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
EASTMAN
DIVISION
|
CASPI
Segment |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2003* |
|
2002* |
|
Change |
| |
|
|
|
|
|
|
|
External
Sales |
$ |
1,683 |
$ |
1,601 |
|
5
% |
|
Volume
effect |
|
|
|
|
|
(5)
% |
|
Price
effect |
|
|
|
|
|
2
% |
|
Product
mix effect |
|
|
|
|
|
3
% |
|
Exchange
rate effect |
|
|
|
|
|
5
% |
| |
|
|
|
|
|
|
|
Interdivisional
sales |
|
-- |
|
-- |
|
N/A |
| |
|
|
|
|
|
|
|
Operating
earnings (loss) |
|
(402) |
|
51 |
|
N/A |
| |
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
462 |
|
5 |
|
|
| |
|
|
|
|
|
|
|
Other
operating income |
|
(13) |
|
-- |
|
|
* Sales
revenue and operating earnings have been realigned to reflect certain product
movements between CASPI and PCI segments effective in the first quarter
2004.
2003
Compared With 2002
The
increase in external sales revenue for 2003 compared to 2002 was primarily due
to favorable shifts in foreign currency exchange rates, improved product mix,
and slightly higher selling prices that more than offset a decrease in sales
volume. Foreign currency exchange rates had a positive impact on sales revenue
of $84 million primarily due to the strengthening of the euro. A favorable shift
in product mix towards higher priced products had a positive impact on sales
revenue of $48 million. Additionally, higher selling prices, as a result of
increased raw material and energy costs had a positive impact on sales revenues
of $34 million. The decline in sales volume, which had a negative impact on
sales revenue of $82 million, was primarily attributable to forgoing sales of
certain low-margin products and restructuring and divestiture actions that were
taken during the year.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings for 2003 declined significantly compared to 2002 primarily due to the
asset impairments and restructuring charges and goodwill impairments related to
this segment of $462 million. Higher raw material and energy costs and lower
sales volume, which were partially offset by higher selling prices, cost
reduction measures, and the favorable impact of foreign currency exchange rates
contributed to the decrease in operating earnings. Additionally, a gain of
approximately $13 million from the sale of the segment’s colorant product lines
contributed to earnings. For more information on the asset impairments and
restructuring charges, see the discussion of impairments and restructuring
charges above and in Note 15 to the Company’s consolidated financial statements.
|
PCI
Segment |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2003* |
|
2002* |
|
Change |
| |
|
|
|
|
|
|
|
External
Sales |
$ |
1,098 |
$ |
1,023 |
|
7
% |
|
Volume
effect |
|
|
|
|
|
(1)
% |
|
Price
effect |
|
|
|
|
|
7
% |
|
Product
mix effect |
|
|
|
|
|
--
% |
|
Exchange
rate effect |
|
|
|
|
|
1
% |
| |
|
|
|
|
|
|
|
Interdivisional
sales |
|
495 |
|
383 |
|
29
% |
| |
|
|
|
|
|
|
|
Operating
earnings (loss) |
|
(45) |
|
21 |
|
N/A |
| |
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
57 |
|
(1) |
|
|
* Sales
revenue and operating earnings have been realigned to reflect certain product
movements between CASPI and PCI segments effective in the first quarter
2004.
2003
Compared With 2002
The
increase in external sales revenue for 2003 compared to 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 $73 million and was primarily attributable to oxo chemical prices
that increased in response to higher raw material and energy costs. Foreign
currency exchange rates also had a positive impact on sales revenue of $12
million primarily due to the strengthening of the euro. The increase in
interdivisional sales revenue for 2003 was primarily due to higher selling
prices as a result of higher raw material and energy costs.
The
decrease in operating earnings 2003 compared to 2002 was primarily due to asset
impairments and restructuring charge of approximately $57 million. Additionally,
higher raw material and energy costs were largely 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 15 to the Company’s consolidated financial
statements.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
SP
Segment |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
| |
|
|
|
|
|
|
|
External
Sales |
$ |
559 |
$ |
528 |
|
6
% |
|
Volume
effect |
|
|
|
|
|
1
% |
|
Price
effect |
|
|
|
|
|
--
% |
|
Product
mix effect |
|
|
|
|
|
1
% |
|
Exchange
rate effect |
|
|
|
|
|
4
% |
| |
|
|
|
|
|
|
|
Interdivisional
sales |
|
49 |
|
45 |
|
9
% |
| |
|
|
|
|
|
|
|
Operating
earnings |
|
63 |
|
34 |
|
85
% |
| |
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
1 |
|
- |
|
|
| |
|
|
|
|
|
|
|
Other
operating income |
|
20 |
|
- |
|
|
2003
Compared With 2002
External
sales revenue for 2003 increased compared to 2002 primarily due to favorable
shifts in foreign currency exchange rates. These shifts, primarily due to the
strengthening of the euro, contributed $20 million of the increased sales
revenue. Additionally, slight increases in sales volume and some improvement in
product mix contributed to the overall increase in revenues.
Operating
earnings for 2003 increased compared to 2002 primarily due to a gain of $20
million on the sale of the segment’s high-performance crystalline plastics
assets, cost reduction measures, and favorable shifts in foreign currency
exchange rates that were partially offset by higher raw material and energy
costs.
VORIDIAN
DIVISION
|
Polymers
Segment |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
| |
|
|
|
|
|
|
|
External
Sales |
$ |
1,756 |
$ |
1,510 |
|
16
% |
|
Volume
effect |
|
|
|
|
|
2
% |
|
Price
effect |
|
|
|
|
|
11
% |
|
Product
mix effect |
|
|
|
|
|
(1)
% |
|
Exchange
rate effect |
|
|
|
|
|
4
% |
| |
|
|
|
|
|
|
|
Interdivisional
sales |
|
68 |
|
55 |
|
24
% |
| |
|
|
|
|
|
|
|
Operating
earnings (loss) |
|
62 |
|
35 |
|
77
% |
| |
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
2 |
|
1 |
|
|
2003
Compared With 2002
The
increase in external sales revenue for 2003 compared to 2002 was primarily due
to higher selling prices, for both PET polymers and polyethylene, which had a
positive impact on sales revenue of $162 million. A favorable shift in foreign
currency exchange rates, particularly for the euro, also had a positive impact
on sales revenue of $60 million. Additionally, new industry capacity in North
America that began production earlier in 2003 than the Company had anticipated,
resulted in a smaller than expected increase in sales revenue from volume.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings for 2003 increased compared to 2002 primarily due to a $14 million
insurance settlement recorded as a credit to cost of sales in the earnings
statement of 2003. This settlement partially offsets the $39 million in charges
to the cost of sales in 2002 for the operational disruptions that occurred in
Europe and the United States. Other factors impacting operating earnings
included higher selling prices, for both PET polymers and polyethylene, and the
positive impact of a favorable shift in foreign currency exchange rates,
primarily for the euro. The positive shifts in selling prices and foreign
currency exchange rates were more than offset by higher raw material and energy
costs, added PET polymers capacity in North America, which negatively impacted
volumes, and asset impairments and restructuring charges of $2 million.
|
Fibers
Segment |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
| |
|
|
|
|
|
|
|
External
Sales |
$ |
635 |
$ |
642 |
|
(1)
% |
|
Volume
effect |
|
|
|
|
|
4
% |
|
Price
effect |
|
|
|
|
|
1
% |
|
Product
mix effect |
|
|
|
|
|
(9)
% |
|
Exchange
rate effect |
|
|
|
|
|
3
% |
| |
|
|
|
|
|
|
|
Interdivisional
sales |
|
80 |
|
72 |
|
11
% |
| |
|
|
|
|
|
|
|
Operating
earnings |
|
125 |
|
133 |
|
(6)
% |
| |
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net |
|
1 |
|
-- |
|
|
2003
Compared With 2002
The
slight decrease in external sales revenue for 2003 compared to 2002 was
primarily due to an unfavorable shift in product mix, which had a negative
impact on sales revenue of $57 million. The unfavorable shift in product mix was
primarily due to a decrease in sales of acetate tow in North America partially
offset by increased sales of acetate tow in other parts of the world. The shift
in product mix was mostly offset by increases in sales volume, primarily for
acetyl chemicals, and favorable shifts in foreign currency exchange rates,
primarily for the euro, of $28 million and $16 million, respectively.
The
decline in operating earnings for 2003 compared to 2002 was primarily due to an
unfavorable shift in product mix, primarily due to a decline of acetate tow
demand in North America that was partially offset by increased acetate tow
demand in other parts of the world.
DEVELOPING
BUSINESSES DIVISION
|
Developing
Businesses Segment |
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
| |
|
|
|
|
|
|
|
External
Sales |
$ |
69 |
$ |
16 |
|
>100
% |
| |
|
|
|
|
|
|
|
Interdivisional
sales |
$ |
396 |
$ |
330 |
|
20
% |
| |
|
|
|
|
|
|
|
Operating
loss |
$ |
(65) |
$ |
(70) |
|
7
% |
2003
Compared With 2002
The
increase in external sales revenue for 2003 compared to 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 2003 compared to 2002 was primarily due to
geographic expansion of the logistics services provided by Cendian to Eastman
Division and Voridian Division.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
results for the DB segment improved in 2003 compared to 2002, primarily due to
improved operating performance at Cendian that was partially offset by higher
costs associated with other growth initiatives.
SUMMARY
BY CUSTOMER LOCATION - 2003 COMPARED WITH 2002
Sales
Revenue (excluding interdivisional sales)
|
(Dollars
in millions) |
|
2003 |
|
2002 |
|
Change |
|
Volume
Effect |
|
Price
Effect |
|
Product
Mix
Effect |
|
Exchange
Rate
Effect |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada |
$ |
3,302 |
$ |
3,040 |
|
9
% |
|
1
% |
|
7
% |
|
1
% |
|
--
% |
|
Europe,
Middle East, and Africa |
|
1,368 |
|
1,170 |
|
17
% |
|
(1)
% |
|
--
% |
|
2
% |
|
16
% |
|
Asia
Pacific |
|
643 |
|
636 |
|
1
% |
|
(5)
% |
|
3
% |
|
2
% |
|
1
% |
|
Latin
America |
|
487 |
|
474 |
|
3
% |
|
(7)
% |
|
11
% |
|
--
% |
|
(1)
% |
| |
$ |
5,800 |
$ |
5,320 |
|
|
|
|
|
|
|
|
|
|
The
increase in sales revenue in the United States and Canada for 2003 compared to
2002 was primarily due to higher selling prices, particularly for the Polymers
and PCI segment, which had a positive impact on sales revenue of $206 million.
The higher selling prices mostly related to sales of intermediates chemicals,
PET polymers, and polyethylene, and were primarily in response to increases in
raw material and energy costs.
2003
sales revenue in Europe, the Middle East, and Africa increased compared to 2002
due to favorable shifts in foreign currency exchange rates which had a positive
impact on sales revenue of $191 million, primarily due to the strengthening of
the euro.
2003
sales revenue in the Asia Pacific region increased slightly compared to 2002
primarily due to higher selling prices and a favorable shift in product mix that
was offset by lower sales volume. Higher selling prices, particularly for
intermediates products and PET polymers, and a favorable shift in product mix
contributed $22 million and $13 million, respectively, to sales revenue. Lower
sales volume, particularly for the PCI and Fibers segments, had a negative
impact on sales revenue of $33 million.
2003
sales revenue in Latin America increased slightly compared to 2002 primarily due
to higher selling prices, primarily related to PET polymers, which had a
positive impact on sales revenue of $52 million. These increases were partially
offset by a decrease in sales volume, primarily attributable to lower sales of
PET polymers and PCI segment intermediates chemicals, in the amount of
approximately $34 million.
LIQUIDITY,
CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION
Cash
Flows
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Net
cash provided by (used in): |
|
|
|
|
|
|
|
Operating
activities |
$ |
494
|
$ |
244
|
$ |
801
|
|
Investing
activities |
|
(148) |
|
(160) |
|
(467) |
|
Financing
activities |
|
(579) |
|
397 |
|
(323) |
|
Net
change in cash and cash equivalents |
$ |
(233) |
$ |
481
|
$ |
11
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period |
$ |
325 |
$ |
558 |
$ |
77 |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Cash
provided by operating activities increased $250 million in 2004 compared to 2003
primarily as a result of changes in employee benefits and incentive pay
liabilities as cash funding for U.S. defined benefit pension plans decreased
$235 million. Increased net earnings in 2004 were due to higher gross margins
and lower asset impairment charges, which were partially offset by changes in
working capital, primarily accounts receivable.
Cash
provided by operating activities in 2003 decreased $557 million compared to 2002
primarily as a result of changes in employee benefits and incentive pay
liabilities which had a year-over-year impact of $295 million on cash flows from
operations. This impact largely reflected the change in the Company’s
contributions to its U.S. defined benefit pension plans which were $238 million
in 2003 versus $3 million in 2002. In addition, changes in working capital,
primarily accounts receivable, reduced year-over-year cash provided from
operations by $123 million. The remaining decrease related to changes in other
items.
Cash used
in investing activities in 2004 decreased $12 million compared to 2003. In 2004,
the Company sold certain businesses and product lines in its CASPI segment as
well as Ariel, resulting in total net proceeds of $127 million. In 2003, the
Company sold its high-performance crystalline plastics assets and its colorant
product lines and related assets for $70 million. The Company used an additional
$18 million for additions to properties and equipment in 2004 as compared to
2003. In 2003, the Company received a return of a deposit of approximately $15
million.
Cash used
in investing activities in 2003 decreased $307 million compared to 2002. In
addition to the $70 million in proceeds from sales of assets in 2003 described
above, additions to properties and equipment decreased $197 million in 2003.
This decrease is primarily due to the 2002 purchase of $161 million of certain
machinery and equipment previously utilized under an operating lease. Cash used
in investing activities in 2003 and 2002 also reflects other small acquisitions.
Cash used
in financing activities in 2004 totaled $579 million and reflects the January
2004 repayment of $500 million of 6 3/8% notes and a decrease in commercial
paper and credit facility borrowings of $50 million, offset by cash from stock
option exercises of $77 million. Cash provided by financing activities in 2003
totaled $397 million primarily due to proceeds from long term borrowings of $495
million and an increase in commercial paper borrowings of $39 million. Cash used
in financing activities in 2002 reflected a significant decrease in commercial
paper and short-term borrowings attributable to the use of proceeds from
long-term debt issued during 2002 and the use of cash generated from operations
to repay indebtedness. The payment of dividends is also reflected in all
periods.
The
significant increase in cash and cash equivalents at the end of 2003 compared to
2002 is due to the issuance of two long-term notes in 2003 in anticipation of
the maturity of $500 million of 6 3/8% notes due January 2004. As described
above, the debt was paid in January 2004.
In 2005,
priorities for use of available cash will be to pay the dividend, reduce
outstanding borrowings and fund targeted growth initiatives. On January 27,
2005, the Company announced that it has entered into an agreement with Danisco
A/S under which Danisco will acquire all of Eastman’s equity interest in
Genencor for $419 million in cash as part of Danisco’s acquisition of all the
outstanding common stock of Genencor. Closing of this sale, which is subject to
satisfaction of certain customary conditions, is targeted for first quarter 2005
and is expected to be completed by May 31, 2005.
Liquidity
Eastman
has access to a $700 million revolving credit facility (the "Credit Facility")
expiring in April 2009. 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 December 31,
2004, 2003 and 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 to meet its liquidity needs. The Credit
Facility provides liquidity support for commercial paper borrowings and general
corporate purposes. Accordingly, outstanding commercial
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
paper
borrowings reduce borrowings available under the Credit Facility. Because the
Credit Facility expires in April 2009, the Company has the ability to refinance
commercial paper borrowings on a long-term basis. Therefore, any commercial
paper borrowings supported by the Credit Facility are classified as long-term
borrowings. At December 31, 2004, the Company’s commercial paper and revolving
credit facility borrowings totaled $146 million at an effective interest rate of
2.98%. At December 31, 2003, the Company's commercial paper borrowings were $196
million at an effective interest rate of 1.85%.
The
Company has effective shelf registration statements filed with the Securities
and Exchange Commission to issue a combined $1.1 billion of debt or equity
securities.
On
January 15, 2004, the Company retired $500 million of debt bearing interest at 6
3/8% per annum. These notes were reflected in borrowings due within one year in
the Consolidated Statements of Financial Position at December 31, 2003. This
debt was retired with a combination of cash generated from business activities,
new long-term borrowings and available short-term borrowing capacity.
The
Company contributed $3 million to its U.S. defined benefit pension plans during
2004. The Company anticipates that additional funding of between $40 and $60
million may be required in 2005.
Cash
flows from operations and the sources of capital described above are expected to
be available and sufficient to meet foreseeable cash flow requirements including
those requirements related to the normal seasonal increase in working capital
expected in the first half of the year. 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. Furthermore, the Company
believes maintaining a financial profile consistent with an investment grade
company is important to its long term strategic and financial flexibility.
Capital
Expenditures
Capital
expenditures were $248 million, $230 million, and $427 million for 2004, 2003
and 2002, respectively. Capital expenditures for 2002 include $161 million
related to the purchase of certain machinery and equipment previously utilized
under an operating lease. The Company expects that 2005 capital spending will be
approximately $340 million to $360 million which will exceed estimated 2005
depreciation and amortization of $310 million. In 2005, the Company will pursue
projects that include the new PET facility in South Carolina, utilizing
IntegRex
technology,
as well as other growth initiatives
Other
Commitments
At
December 31, 2004, the Company’s obligations related to notes and debentures
totaled approximately $1.9 billion to be paid over a period of 25 years. Other
borrowings, related primarily to credit facility borrowings, totaled
approximately $146 million.
The
Company had various purchase obligations at December 31, 2004 totaling
approximately $1.9 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 $183 million over a period of several years. Of the total lease
commitments, approximately 20% relate to machinery and equipment, including
computer and communications equipment and production equipment; approximately
55% relate to real property, including office space, storage facilities and
land; and approximately 25% relate to railcars.
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
December 31, 2004 totaled $90 million and consisted primarily of leases for
railcars, company aircraft, and other equipment. The Company believes, based on
current facts and circumstances, that a material payment pursuant to such
guarantees is remote.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
addition, the Company had other liabilities at December 31, 2004 totaling
approximately $1.3 billion related to pension, retiree medical, and other
postemployment obligations.
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 |
|
Other
Liabilities (a) |
|
Total |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
$ |
1 |
$ |
-- |
$ |
279 |
$ |
43 |
$ |
144 |
$ |
467 |
|
2006 |
|
4 |
|
-- |
|
274 |
|
34 |
|
146 |
|
458 |
|
2007 |
|
-- |
|
-- |
|
271 |
|
26 |
|
156 |
|
453 |
|
2008 |
|
250 |
|
-- |
|
166 |
|
15 |
|
118 |
|
549 |
|
2009 |
|
12 |
|
146 |
|
161 |
|
13 |
|
71 |
|
403 |
|
2010
and beyond |
|
1,649 |
|
-- |
|
776 |
|
52 |
|
653 |
|
3,130 |
|
Total |
$ |
1,916 |
$ |
146 |
$ |
1,927 |
$ |
183 |
$ |
1,288 |
$ |
5,460 |
(a)
Amounts represent the current estimated cash payments to be made by the Company
for pension and other post-employment benefits in the periods indicated. The
amount and timing of such payments is dependent upon interest rates, health care
trends, actual returns on plan assets, retirement and attrition rates of
employees, continuation or modification of the benefit plans, and other factors.
Such factors can significantly impact the amount and timing of any future
contributions by the Company.
On
January 15, 2004, the Company retired $500 million of 6 3/8% notes due in
2004.
The
Company also had outstanding guarantees at December 31, 2004. Additional
information related to these guarantees is included in Note 10 to the Company’s
consolidated financial statements.
Off
Balance Sheet and Other Financing Arrangements
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 December 31, 2004 totaled $90 million and consisted primarily of
leases for railcars, company aircraft, and other equipment.
As
described in Note 5 to the Company’s consolidated financial statements, Eastman
has a 50% interest in and serves as the operating partner in Primester, a joint
venture which manufactures cellulose acetate at its Kingsport, Tennessee plant.
Eastman also owns a 50% interest in Nanjing Yangzi Eastman Chemical Ltd, a
company which manufactures certain products for the adhesives market. The
Company guarantees up to $125 million and $6 million, respectively, of the
principal amount of these joint ventures’ third-party borrowings, but 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.
As
described in Note 10 to the Company’s consolidated financial statements, Eastman
entered into an agreement in 1999 that allows it to generate cash by reducing
its working capital through the sale of 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 December 31, 2004 and 2003. 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, including special purpose entities, for the
purpose of facilitating off-balance sheet arrangements with contractually
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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.
The
Company has evaluated material relationships including the guarantees related to
the third-party borrowings of joint ventures described above and has concluded
that the entities are not Variable Interest Entities (“VIEs”) or, in the case of
Primester, a joint venture that manufactures cellulose acetate at its Kingsport,
Tennessee plant, the Company is not the primary beneficiary of the VIE. As such,
in accordance with FIN 46R, the Company is not required to consolidate these
entities. In addition, the Company has evaluated long-term purchase obligations
with two entities that may be VIEs at December 31, 2004. These potential VIEs
are joint ventures from which the Company has purchased raw materials and
utilities for several years and purchases approximately $40 million of raw
materials and utilities on an annual basis. The Company has no equity interest
in these entities and has confirmed that one party to each of these joint
ventures does consolidate the potential VIE. However, due to competitive and
other reasons, the Company has not been able to obtain the necessary financial
information to determine whether the entities are VIEs, and if one or both are
VIEs, whether or not the Company is the primary beneficiary.
In
conjunction with the sale of certain businesses and product lines in the CASPI
segment as discussed in Note 17 to the consolidated financial statements, the
Company accepted a variable interest in the form of a $50 million note
receivable. The Company has evaluated the material relationships with the
purchasing entity and concluded the Company is not the primary beneficiary. The
Company’s maximum exposure to loss is limited to the $50 million book value of
the note receivable and unpaid interest, if any.
Guarantees
and claims also arise during the ordinary course of business from relationships
with suppliers, customers, and non-consolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others if specified
triggering events occur. Non-performance under a contract could trigger an
obligation of the Company. These potential claims include actions based upon
alleged exposures to products, intellectual property and environmental matters,
and other indemnifications. The ultimate effect on future financial results is
not subject to reasonable estimation because considerable uncertainty exists as
to the final outcome of these claims. However, while the ultimate liabilities
resulting from such claims may be significant to results of operations in the
period recognized, management does not anticipate they will have a material
adverse effect on the Company's consolidated financial position or
liquidity.
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
2004, 2003 and 2002. 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.
Dividends
The
Company declared cash dividends of $0.44 per share in the fourth quarters 2004,
2003 and 2002 and a total of $1.76 per share in 2004, 2003 and
2002.
ENVIRONMENTAL
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes of which
the treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP") by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be required to
incur costs for environmental remediation and closure and postclosure under the
Federal Resource Conservation and Recovery Act. Adequate
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
reserves
for environmental contingencies have been established in accordance with
Eastman’s policies as described in Note 1 to the Company’s consolidated
financial statements. Because of expected sharing of costs, the availability of
legal defenses, and the Company’s preliminary assessment of actions that may be
required, it does not believe its
liability
for these environmental matters, individually or in the aggregate, will be
material to the Company’s consolidated financial position, results of
operations, or cash flows.
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability and the amount can be reasonably estimated.
When a single amount cannot be reasonably estimated but the cost can be
estimated within a range, the Company accrues the minimum amount. This
undiscounted accrued amount reflects the Company’s assumptions about remediation
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, unanticipated government enforcement action, or changes in health,
safety, environmental, and chemical control regulations and testing requirements
could result in higher or lower costs. Estimated future environmental
expenditures for remediation costs range from the minimum or best estimate of
$25 million to the maximum of $45 million at December 31, 2004.
In
addition to remediation activities, the Company establishes reserves for
closure/postclosure costs associated with the environmental assets it maintains.
Environmental assets include but are not limited to landfills, water treatment
facilities, and ash ponds. When these types of assets are constructed, a reserve
is established for the anticipated future environmental costs associated with
the closure of the site asset based on its expected life. These future expenses
are charged into earnings over the estimated useful life of the assets. Reserves
related to environmental assets accounted for approximately 55% of the total
environmental reserve at December 31, 2004. Currently, the Company’s
environmental assets are expected to be no longer useable at various different
times over the next 50 years. If the Company were to invest in numerous new
environmental assets, or, these assets were to require closure a significant
number of years before the Company anticipated they would, the amortization on
them would increase, and could have a material negative impact on the Company’s
financial condition and results of operations. The Company views the likelihood
of this occurrence to be remote, and does not anticipate, based on its past
experience with this type of planned remediation, that an additional accrual
related to environmental assets will be necessary.
At
December 31, 2004 and 2003, the Company had recognized environmental
contingencies of approximately $56 million and $61 million, respectively,
representing the minimum or best estimate for remediation costs and, for
closure/postclosure costs, the amount accrued to date over the facilities’
estimated useful lives.
The
Company's estimated cash expenditures related to environmental protection and
improvement were approximately $184 million, $187 million, and $195 million in
2004, 2003, and 2002, respectively. Cash expenditures estimated for 2005 are
expected to remain at approximately $190 million. These amounts pertain
primarily to operating costs associated with environmental protection equipment
and facilities, but also include expenditures for construction and development.
The Company does not expect future environmental capital expenditures arising
from requirements of recently promulgated environmental laws and regulations to
materially increase the Company's planned level of capital expenditures for
environmental control facilities.
INFLATION
In recent
years, inflation has not had a material adverse impact on Eastman's costs. The
cost of raw materials is generally based on market price, although derivative
financial instruments may have been utilized, as appropriate, to mitigate
short-term market price fluctuations.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
November, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43,
Chapter 4”. The standard adopts the International Accounting Standards Board’s
view related to inventories that abnormal amounts of idle capacity and spoilage
costs should be excluded from the cost of inventory and expensed when incurred.
Additionally, the Statement clarifies the meaning of the term 'normal capacity'.
The provisions of this Statement will be effective for inventory costs incurred
during fiscal
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
years
beginning after June 15, 2005. The Company is currently evaluating the effect
SFAS No. 151 will have on its consolidated financial position, liquidity, or
results from operations.
In
December, 2004 the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of Accounting Principles Board Opinion No. 29”. SFAS No. 153 is
based on the principle that nonmonetary asset exchanges should be recorded and
measured at the fair value of the assets exchanged, with certain exceptions.
This Statement requires exchanges of productive assets to be accounted for at
fair value, rather than at carryover basis, unless neither the asset received
nor the asset surrendered has a fair value that is determinable within
reasonable limits or the transactions lack commercial
substance as defined by the Statement. In addition, the Board decided to retain
the guidance for assessing whether the fair value of a nonmonetary asset is
determinable within reasonable limits. The provisions of this Statement will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company is currently evaluating the effect SFAS No. 153
will have on its consolidated financial position, liquidity, or results from
operations.
In
December, 2004 the FASB issued SFAS No. 123R, “Share-Based Payment”. SFAS No.
123R revises SFAS No. 123, “Accounting for Stock-Based Compensation” and
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. The provisions of this Statement will be
effective for the Company as of the first reporting period beginning after June
15, 2005
SFAS No.
123R requires public companies to measure the cost of employee services received
in exchange for the award of equity instruments based upon a grant date fair
value using values obtained from public markets where such instruments are
traded, or if not available, a mathematical pricing model. The cost is
recognized over the period during which the employee is required to provide
services in exchange for the award. Effective with implementation, the Company
will reflect this cost in its financial statements as a component of net income
and earnings per share. Prior to implementation, public companies had the choice
of early adoption of the standard or to continue reporting under the current
requirements of APB Opinion No. 25 and to provide pro forma disclosure of this
cost within the category of Significant Accounting Policies as a footnote to the
financial statements. The Company is currently reporting under APB No. 25 until
implementation in third quarter 2005.
Due to
the concern for comparability of financial statements of prior years, SFAS No.
123R provides for two methods of implementation: (1) Modified Prospective
Application and (2) Modified Retrospective Application. Modified Prospective
Application provides for adoption of fair value cost recognition to all new,
modified, repurchased, or cancelled awards after the effective date of the
standard without retrospective application to prior interim and annual fiscal
periods. The Modified Retrospective Application method provides for
retrospective application to either the current fiscal year interim periods only
or all prior years for which comparative financial statements are provided.
While the Company has not yet decided which method of implementation will be
selected, adequate disclosure of all comparative fiscal periods covered by
financial statements will comply with requirements of the SFAS 123R.
OUTLOOK
For 2005,
the Company expects:
| · |
that
historically high raw material and energy costs will continue throughout
much of 2005, and that the Company will continue to implement price
increases intended to offset these higher
costs; |
| · |
strong
volumes will continue in 2005 due to a strengthening economy, continued
substitution of Eastman products for other materials, and new applications
for existing products; |
| · |
earnings
improvement through discipline in pricing practices, a continued focus on
profitable businesses and continued cost control initiatives;
|
| · |
that
pension and other postemployment benefit expenses in 2005 will be similar
to 2004 levels; |
| · |
to
contribute between $40 and $60 million to the Company’s U.S. defined
benefit pension plans in 2005; |
| · |
net
interest expense to decrease compared to 2004 as a result of anticipated
lower average borrowings; |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
| · |
that
SG&A and R&D costs within the DB segment combined with other
R&D costs will be approximately 3 percent of
revenue; |
| · |
the
effective tax rate to be approximately 30 percent, and certain tax
benefits from the extraterritorial income exclusion to continue through
2005 or be offset; |
| · |
to
continue to evaluate its portfolio, which could lead to further
restructuring, divestiture, or consolidations of product lines as it
continues to focus on profitability, primarily in Eastman
Division; |
| · |
capital
expenditures to increase to between $340 and $360 million and exceed
estimated depreciation and amortization of $310 million; in 2005, the
Company will pursue projects that include the new PET facility in South
Carolina, utilizing IntegRex
technology, as well as other targeted growth initiatives; |
| · |
to
complete the previously announced sale of Eastman’s equity interest in
Genencor to Danisco A/S targeted for first quarter 2005 with expected
completion no later than May 31, 2005; and |
| · |
that
priorities for use of available cash will be to pay the quarterly cash
dividend, reduce outstanding borrowings, and fund targeted growth
initiatives. |
See
“Forward-Looking Statements and Risk Factors below.”
FORWARD-LOOKING
STATEMENTS AND RISK FACTORS
The
expectations under "Outlook" and certain other statements in this Annual 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 expected financial conditions; expectations, strategies, and
plans for individual assets and 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 ratings; anticipated restructuring, divestiture, and
consolidation activities; 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;
asset, business and product portfolio changes; and expected tax rates and
net interest costs.
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 cause the Company's actual results to differ materially from
those in any such forward-looking statements:
| · |
The
Company has deferred tax assets related to capital and operating losses.
The Company establishes valuation allowances to reduce these deferred tax
assets to an amount that is more likely than not to be realized. The
Company’s ability to utilize these deferred tax assets depends on
projected future operating results, the reversal of existing temporary
differences, and the availability of tax planning strategies. Realization
of these assets is expected to occur over an extended period of time. As a
result, changes in tax laws, assumptions with respect to future taxable
income and tax planning strategies could result in adjustments to these
assets. |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
| · |
The
Company is endeavoring to exploit growth opportunities in certain core
businesses by developing new products, expanding into new markets, and
tailoring product offerings to customer needs. There can be no
assurance that such efforts will result in financially successful
commercialization of such products or acceptance by existing or new
customers or new markets. |
| · |
The
Company has made, and intends to continue making, strategic investments
and enter into strategic alliances in technology, services businesses, and
other ventures in order to build, diversify, and strengthen certain
Eastman capabilities and to maintain high utilization of manufacturing
assets. There can be no assurance that such investments will achieve their
underlying strategic business objectives or that they will be beneficial
to the Company's results of operations. |
| · |
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. In addition, there can
be no assurance that such investments will achieve the intended underlying
strategic business objectives. |
| · |
The
Company has entered into an agreement with Danisco A/S under which Danisco
will acquire all of Eastman's equity interest in Genencor as part of
Danisco's acquisition of all the outstanding common stock of
Genencor. In addition to being subject to the satisfaction of
certain customary conditions, closing of the sale is also subject to the
risk and uncertainties typically associated with such a public
change-in-control transaction. There can be no assurance that the
sale will close in a timely manner or at all. If the sale is not
completed, available cash, and the Company's priority for use thereof,
would be adversely impacted. |
| · |
The
Company has undertaken and will continue to undertake productivity and
cost reduction initiatives and organizational restructurings to improve
performance and generate cost savings. There can be no assurance that
these will be completed as planned or beneficial or that estimated cost
savings from such activities will be
realized. |
| · |
In
addition to productivity and 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. There can be no assurances
that price increases will be realized or will be realized within the
Company’s anticipated timeframe. |
| · |
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. |
| · |
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 impacted by plant interruptions occurring during periods of high
demand, domestic and world market and political conditions, changes in
government regulation, and war or other outbreak of hostilities. Eastman’s
operations or products may, at times, be adversely affected by these
factors. |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
| · |
The
Company's competitive position in the markets in which it participates is,
in part, subject to external factors in addition to those that the Company
can impact. 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. |
| · |
The
Company has an extensive customer base; however, loss of certain top
customers could adversely affect the Company's financial condition and
results of operations until such business is replaced and no assurances
can be made that the Company would be able to regain or replace any lost
customers. In addition, the Company's competitive position may be
adversely impacted by low cost competitors in certain regions and
customers developing internal or alternative sources of
supply. |
| · |
Limitation
of the Company's available manufacturing capacity due to significant
disruption in its manufacturing operations could have a material adverse
affect on sales revenue, expenses and results of operations and financial
condition. |
| · |
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, unanticipated
government enforcement action, or changes in health, safety,
environmental, chemical control regulations and testing requirements could
result in higher or lower costs. |
| · |
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. |
| · |
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
Annual 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.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT
MARKET
RISK
The
Company is exposed to changes in financial market conditions in the normal
course of its business due to its use of certain financial instruments as well
as transacting in various foreign currencies and funding foreign operations. To
mitigate the Company's exposure to these market risks, Eastman has established
policies, procedures, and internal processes governing its management of
financial market risks and the use of financial instruments to manage its
exposure to such risks.
The
Company determines its market risk utilizing sensitivity analysis, which
measures the potential losses in fair value resulting from one or more selected
hypothetical changes in interest rates, foreign currency exchange rates, and/or
commodity prices.
The
Company is exposed to changes in interest rates primarily as a result of its
borrowing activities, which include long-term borrowings used to maintain
liquidity and to fund its business operations and capital requirements.
Currently, these borrowings are predominately U.S. dollar denominated. The
nature and amount of the Company's long-term and short-term debt may vary as a
result of future business requirements, market conditions, and other factors.
For 2004 and 2003, the market risks associated with the fair value of
interest-rate-sensitive instruments, assuming an instantaneous parallel relative
shift in interest rates of 10% were approximately $91 million and $119 million,
respectively, and an additional $10 million for each one percentage point change
in interest rates thereafter. This exposure is primarily related to long-term
debt with fixed interest rates.
The
Company's operating cash flows denominated in foreign currencies are exposed to
changes in foreign currency exchange rates. The Company continually evaluates
its foreign currency exposure based on current market conditions and the
locations in which the Company conducts business. In order to mitigate the
effect of foreign currency risk, the Company enters into forward exchange
contracts to hedge certain firm commitments denominated in foreign currencies
and currency options to hedge probable anticipated but not yet committed export
sales and purchase transactions expected within no more than two years and
denominated in foreign currencies. The gains and losses on these contracts
offset changes in the value of related exposures. It is the Company's policy to
enter into foreign currency transactions only to the extent considered necessary
to meet its objectives as stated above. The Company does not enter into foreign
currency transactions for speculative purposes. For 2004, the market risks
associated with forward exchange contracts utilizing a modified Black-Scholes
option pricing model and a 10% adverse move in the U.S. dollar relative to each
foreign currency hedged by the Company were approximately $15 million and an
additional $1.4 million for each additional one percentage point adverse change
in foreign currency exchange rates. At December 31, 2003, the Company had no
outstanding forward exchange contracts or currency options. Further adverse
movements in foreign currencies would create losses in fair value; however, such
losses would not be linear to that disclosed above. This exposure, which is
primarily related to foreign currency options purchased by the Company to manage
fluctuations in foreign currencies, is limited to the dollar value of option
premiums payable by the Company for the related financial instruments.
Furthermore, since the Company utilizes currency-sensitive derivative
instruments for hedging anticipated foreign currency transactions, a loss in
fair value for those instruments is generally offset by increases in the value
of the underlying anticipated transactions.
The
Company is exposed to fluctuations in market prices for certain of its major raw
materials. To mitigate short-term fluctuations in market prices for certain
commodities, principally propane and natural gas, the Company enters into
forwards and options contracts. For 2004 and 2003, the market risks associated
with feedstock options and natural gas swaps assuming an instantaneous parallel
shift in the underlying commodity price of 10% were $1 million and $4 million,
respectively, and an additional $0.1 million and $0.3 million for each one
percentage point move in closing prices thereafter.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
ITEM |
Page |
| |
|
|
Management's
Responsibility for Financial Statements |
74 |
| |
|
|
Report
of Independent Registered Public Accounting Firm |
75 |
| |
|
|
Consolidated
Statements of Earnings (Loss), Comprehensive Income (Loss) and Retained
Earnings |
77 |
| |
|
|
Consolidated
Statements of Financial Position |
78 |
| |
|
|
Consolidated
Statements of Cash Flows |
79 |
| |
|
|
Notes
to Consolidated Financial Statements |
80 |
| |
|
|
Financial
Statement Schedules:
II
- Valuation and Qualifying Accounts |
132 |
MANAGEMENT'S
RESPONSIBILITY
FOR FINANCIAL STATEMENTS
Management
is responsible for the preparation and integrity of the accompanying
consolidated financial statements of Eastman appearing on pages 77 through 120.
Eastman has prepared these consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America, and
the statements of necessity include some amounts that are based on management's
best estimates and judgments.
Eastman's
accounting systems include extensive internal controls designed to provide
reasonable assurance of the reliability of its financial records and the proper
safeguarding and use of its assets. Such controls are based on established
policies and procedures, are implemented by trained, skilled personnel with an
appropriate segregation of duties, and are monitored through a comprehensive
internal audit program. The Company's policies and procedures prescribe that the
Company and all employees are to maintain the highest ethical standards and that
its business practices throughout the world are to be conducted in a manner that
is above reproach.
The
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, who were responsible for
conducting their audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Their report is included
herein.
The Board
of Directors exercises its responsibility for these financial statements through
its Audit Committee, which consists entirely of nonmanagement Board members. The
independent accountants and internal auditors have full and free access to the
Audit Committee. The Audit Committee meets periodically with
PricewaterhouseCoopers LLP and Eastman's director of internal auditing, both
privately and with management present, to discuss accounting, auditing, policies
and procedures, internal controls, and financial reporting matters.
|
/s/
J. Brian Ferguson |
|
/s/
Richard A. Lorraine |
|
J.
Brian Ferguson |
|
Richard
A. Lorraine |
|
Chairman
of the Board and |
|
Senior
Vice President and |
| |
Chief
Executive Officer |
|
|
Chief
Financial Officer |
| |
|
|
|
|
|
March
14, 2005 |
|
|
|
REPORT
OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Eastman
Chemical Company
We have
completed an integrated audit of Eastman Chemical Company’s 2004 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated
financial statements and financial statement schedule
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a) (1) on page 125 present fairly, in all material respects,
the financial position of Eastman Chemical Company and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a) (2) on page 125 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As
discussed in Note 23 to the consolidated financial statements, on January 1,
2003 Eastman Chemical Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations," and on January
1, 2002, adopted Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets.”
Internal
control over financial reporting
Also, in
our opinion, management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal
Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal
Control - Integrated Framework issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other
procedures
as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Philadelphia,
Pennsylvania
March 14,
2005
CONSOLIDATED
STATEMENTS OF EARNINGS (LOSS),
COMPREHENSIVE
INCOME (LOSS) and RETAINED EARNINGS
| |
For
years ended December 31, |
|
(Dollars
in millions, except per share amounts) |
|
2004 |
|
2003 |
|
2002 |
|
Earnings
(Loss) |
|
|
|
|
|
|
|
Sales |
$ |
6,580 |
$ |
5,800 |
$ |
5,320 |
|
Cost
of sales |
|
5,602 |
|
4,990 |
|
4,541 |
|
Gross
profit |
|
978 |
|
810 |
|
779 |
| |
|
|
|
|
|
|
|
Selling,
general and administrative expenses |
|
450 |
|
414 |
|
407 |
|
Research
and development expenses |
|
154 |
|
173 |
|
159 |
|
Asset
impairments and restructuring charges, net |
|
206 |
|
489 |
|
5 |
|
Goodwill
impairments |
|
-- |
|
34 |
|
-- |
|
Other
operating income |
|
(7) |
|
(33) |
|
-- |
|
Operating
earnings (loss) |
|
175 |
|
(267) |
|
208 |
| |
|
|
|
|
|
|
|
Interest
expense, net |
|
115 |
|
124 |
|
122 |
|
Other
(income) charges, net |
|
(4) |
|
(10) |
|
2 |
|
Earnings
(loss) before income taxes and cumulative effect of change in accounting
principles |
|
64 |
|
(381) |
|
84 |
|
Provision
(benefit) for income taxes |
|
(106) |
|
(108) |
|
5 |
| |
|
|
|
|
|
|
|
Earnings
(loss) before cumulative effect of change in accounting
principles |
|
170 |
|
(273) |
|
79 |
|
Cumulative
effect of change in accounting principles, net |
|
-- |
|
3 |
|
(18) |
|
Net
earnings (loss) |
$ |
170 |
$ |
(270) |
$ |
61 |
| |
|
|
|
|
|
|
|
Earnings
(loss) per share |
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
Before
cumulative effect of change in accounting principles |
$ |
2.20 |
$ |
(3.54) |
$ |
1.02 |
|
Cumulative
effect of change in accounting principles, net |
|
-- |
|
0.04 |
|
(0.23) |
|
Net
earnings (loss) per share |
$ |
2.20 |
$ |
(3.50) |
$ |
0.79 |
| |
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
Before
cumulative effect of change in accounting principles |
$ |
2.18 |
$ |
(3.54) |
$ |
1.02 |
|
Cumulative
effect of change in accounting principles, net |
|
-- |
|
0.04 |
|
(0.23) |
|
Net
earnings (loss) per share |
$ |
2.18 |
$ |
(3.50) |
$ |
0.79 |
| |
|
|
|
|
|
|
|
Comprehensive
Income (Loss) |
|
|
|
|
|
|
|
Net
earnings (loss) |
$ |
170 |
$ |
(270)
|
$ |
61
|
|
Other
comprehensive income (loss) |
|
|
|
|
|
|
|
Change
in cumulative translation adjustment |
|
36 |
|
150 |
|
102
|
|
Change
in minimum pension liability, net of tax |
|
(6) |
|
19 |
|
(145) |
|
Change
in unrealized gains (losses) on derivative instruments, net of
tax |
|
(12) |
|
5 |
|
1 |
|
Change
in unrealized gains (losses) on investments, net of tax |
|
-- |
|
-- |
|
(2) |
|
Total
other comprehensive income (loss) |
|
18 |
|
174 |
|
(44) |
|
Comprehensive
income (loss) |
$ |
188 |
$ |
(96) |
$ |
17 |
| |
|
|
|
|
|
|
|
Retained
Earnings |
|
|
|
|
|
|
|
Retained
earnings at beginning of period |
$ |
1,476 |
$ |
1,882 |
$ |
1,956 |
|
Net
earnings (loss) |
|
170 |
|
(270) |
|
61 |
|
Cash
dividends declared |
|
(137) |
|
(136) |
|
(135) |
|
Retained
earnings at end of period |
$ |
1,509 |
$ |
1,476 |
$ |
1,882 |
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
(Dollars
in millions, except per share amounts) |
December
31, |
|
Assets |
|
2004 |
|
2003 |
|
Current
assets |
|
|
|
|
|
Cash
and cash equivalents |
$ |
325 |
$ |
558 |
|
Trade
receivables, net of allowance of $15 and $28 |
|
675 |
|
614 |
|
Miscellaneous
receivables |
|
104 |
|
87 |
|
Inventories |
|
582 |
|
698 |
|
Other
current assets |
|
82 |
|
53 |
|
Total
current assets |
|
1,768 |
|
2,010 |
| |
|
|
|
|
|
Properties |
|
|
|
|
|
Properties
and equipment at cost |
|
9,628 |
|
9,861 |
|
Less:
Accumulated depreciation |
|
6,436 |
|
6,442 |
|
Net
properties |
|
3,192 |
|
3,419 |
| |
|
|
|
|
|
Goodwill |
|
314 |
|
317 |
|
Other
intangibles, net of accumulated amortization of $2 and $59
|
|
25 |
|
33 |
|
Other
noncurrent assets |
|
573 |
|
465 |
|
Total
assets |
$ |
5,872 |
$ |
6,244 |
| |
|
|
|
|
|
Liabilities
and Stockholders’ Equity |
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
Payables
and other current liabilities |
$ |
1,098 |
$ |
973 |
|
Borrowings
due within one year |
|
1 |
|
504 |
|
Total
current liabilities |
|
1,099 |
|
1,477 |
| |
|
|
|
|
|
Long-term
borrowings |
|
2,061 |
|
2,089 |
|
Deferred
income tax liabilities |
|
210 |
|
316 |
|
Postemployment
obligations |
|
1,145 |
|
1,140 |
|
Other
long-term liabilities |
|
173 |
|
179 |
|
Total
liabilities |
|
4,688 |
|
5,201 |
| |
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
| |
|
|
|
|
|
Stockholders’
equity |
|
|
|
|
|
Common
stock ($0.01 par value- 350,000,000 shares authorized; shares
issued
-87,125,532 and 85,177,467 for 2004 and 2003,
respectively) |
|
1 |
|
1 |
|
Additional
paid-in capital |
|
210 |
|
122 |
|
Retained
earnings |
|
1,509 |
|
1,476 |
|
Accumulated
other comprehensive loss |
|
(103) |
|
(121) |
| |
|
1,617 |
|
1,478 |
|
Less:
Treasury stock at cost (7,911,546 and 7,933,646 shares for 2004 and 2003,
respectively) |
|
433 |
|
435 |
| |
|
|
|
|
|
Total
stockholders’ equity |
|
1,184 |
|
1,043 |
| |
|
|
|
|
|
Total
liabilities and stockholders’ equity |
$ |
5,872 |
$ |
6,244 |
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
For
years ended December 31, |
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Cash
flows from operating activities |
|
|
|
|
|
|
|
Net
earnings (loss) |
$ |
170 |
$ |
(270) |
$ |
61 |
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net earnings (loss) to net cash provided by operating
activities: |
|
|
|
|
|
|
|
Depreciation
and amortization |
|
322 |
|
367 |
|
397 |
|
Cumulative
effect of change in accounting principles, net |
|
-- |
|
(3) |
|
18 |
|
Asset
impairments |
|
140 |
|
500 |
|
9 |
|
Gains
on sale of assets |
|
(8) |
|
(33) |
|
-- |
|
Provision
(benefit) for deferred income taxes |
|
(136) |
|
(137) |
|
95 |
|
Changes
in operating assets and liabilities, net of effect of acquisitions and
divestitures: |
|
|
|
|
|
|
|
(Increase)
decrease in trade receivables |
|
(133) |
|
(46) |
|
70 |
|
(Increase)
decrease in inventories |
|
18 |
|
41 |
|
(41) |
|
Increase
(decrease) in trade payables |
|
49 |
|
(2) |
|
87 |
|
Increase
(decrease) in liabilities for employee benefits and incentive
pay |
|
71 |
|
(214) |
|
81 |
|
Other
items, net |
|
1
|
|
41 |
|
24 |
| |
|
|
|
|
|
|
|
Net
cash provided by operating activities |
|
494 |
|
244 |
|
801 |
| |
|
|
|
|
|
|
|
Cash
flows from investing activities |
|
|
|
|
|
|
|
Additions
to properties and equipment |
|
(248) |
|
(230) |
|
(427) |
|
Proceeds
from sale of assets |
|
127 |
|
71 |
|
9 |
|
Additions
to capitalized software |
|
(14) |
|
(15) |
|
(18) |
|
Other
items, net |
|
(13)
|
|
14 |
|
(31) |
| |
|
|
|
|
|
|
|
Net
cash used in investing activities |
|
(148) |
|
(160) |
|
(467) |
| |
|
|
|
|
|
|
|
Cash
flows from financing activities |
|
|
|
|
|
|
|
Net
increase (decrease) in commercial paper, credit facility, and other
short-term borrowings |
|
(19) |
|
39 |
|
(573) |
|
Proceeds
from long-term borrowings |
|
-- |
|
495 |
|
394 |
|
Repayment
of borrowings |
|
(500) |
|
(5) |
|
(8) |
|
Dividends
paid to stockholders |
|
(137) |
|
(136) |
|
(135) |
|
Proceeds
from stock option exercises and other items |
|
77 |
|
4 |
|
(1) |
|
Net
cash provided by (used in) financing activities |
|
(579) |
|
397 |
|
(323) |
| |
|
|
|
|
|
|
|
Net
change in cash and cash equivalents |
|
(233) |
|
481 |
|
11 |
| |
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period |
|
558 |
|
77 |
|
66 |
| |
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period |
$ |
325 |
$ |
558 |
$ |
77 |
The
accompanying notes are an integral part of these consolidated financial
statements.
| 1. |
SIGNIFICANT
ACCOUNTING POLICIES |
Financial
Statement Presentation
The
consolidated financial statements of Eastman ("Eastman" or the "Company") are
prepared in conformity with accounting principles generally accepted in the
United States of America and of necessity include some amounts that are based
upon management estimates and judgments. Future actual results could differ from
such current estimates. The consolidated financial statements include assets,
liabilities, revenues, and expenses of all majority-owned subsidiaries. Eastman
accounts for joint ventures and investments in minority-owned companies where it
exercises significant influence on the equity basis. Intercompany transactions
and balances are eliminated in consolidation.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash, time deposits, and readily marketable securities
with maturities of three months or less at the purchase date.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company maintains allowances for doubtful accounts (the
"allowances") for estimated losses resulting from the inability of its customers
to make required payments. The allowances are based on the number of days an
individual receivable is delinquent and management’s regular assessment of the
financial condition of the Company’s customers. The Company considers that a
receivable is delinquent if it is unpaid after the terms of the related invoice
have expired. The Company evaluates the allowance based on a monthly
assessment of the aged receivables. Writeoffs are done at the time a customer
receivable is deemed uncollectible.
Inventories
Inventories
are valued at the lower of cost or market. The Company determines the cost of
most raw materials, work in process, and finished goods inventories in the
United States by the last-in, first-out ("LIFO") method. The cost of all other
inventories, including inventories outside the United States, is determined by
the average cost method, which approximates the first-in, first-out ("FIFO")
method. The Company writes down its inventories for estimated obsolescence or
unmarketable inventory equal to the difference between the carrying value of
inventory and the estimated market value based upon assumptions about future
demand and market conditions.
Properties
The
Company records properties at cost. Maintenance and repairs are charged to
earnings; replacements and betterments are capitalized. When Eastman retires or
otherwise disposes of assets, it removes the cost of such assets and related
accumulated depreciation from the accounts. The Company records any profit or
loss on retirement or other disposition in earnings. Asset impairments are
reflected as increases in accumulated depreciation.
Depreciation
Depreciation
expense is calculated based on historical cost and the estimated useful lives of
the assets (buildings and building equipment 20 to 50 years; machinery and
equipment 3 to 33 years), generally using the straight-line method.
Computer
Software Costs
Capitalized
software costs are amortized primarily on a straight-line basis over three
years, the expected useful life of such assets, beginning when the software
project is substantially complete and placed in service. Capitalized software in
2004, 2003 and 2002, was approximately $14 million, $15 million, and $18
million, respectively. During those same periods, approximately $18 million, $23
million, and $23 million,
respectively,
of previously capitalized costs were amortized. At December 31, 2004 and 2003,
the unamortized capitalized software costs were $29 million and $33 million,
respectively.
Impaired
Assets
The
Company evaluates the carrying value of long-lived assets to be held and used,
including definite-lived intangible assets, when events or changes in
circumstances indicate that the carrying value may not be
recoverable. Such
events and circumstances include, but are not limited to, significant decreases
in the market value of the asset, adverse change in the extent or manner in
which the asset is being used, significant changes in business climate, or
current or projected cash flow losses associated with the use of the
assets. The
carrying value of a long-lived asset is considered impaired when the total
projected undiscounted cash flows from such asset is separately identifiable and
is less than its carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the projected
cash flows discounted at a rate commensurate with the risk involved or by
appraisal. Losses on long-lived assets to be disposed of are determined in
a similar manner, except that fair values are reduced for disposal costs.
The
Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. The provisions of SFAS No. 142 require that
goodwill and indefinite-lived intangible assets be tested at least annually for
impairment and require reporting units to be identified for the purpose of
assessing potential future impairments of goodwill. The carrying value of
goodwill and indefinite lived intangibles is considered impaired when their fair
value, as established by appraisal or based on undiscounted future cash flows of
certain related products, is less than their carrying value. The Company
conducts 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.
Investments
The
consolidated financial statements include the accounts of the Company and all
its subsidiaries in which a controlling interest is maintained. For those
consolidated subsidiaries in which the Company’s ownership is less than 100%,
the outside stockholders’ interests are included in other long-term liabilities.
Investments
in affiliates over which the Company has significant influence but not a
controlling interest are carried on the equity basis. Under the equity method of
accounting, these investments are included in other noncurrent assets. Eastman's
negative investment in Primester, described in Note 5, is included in other
long-term liabilities. The Company includes its share of earnings and losses of
such investments in other income and charges and its share of other
comprehensive income (loss) in the appropriate component of other accumulated
comprehensive income (loss) in stockholders’ equity.
Marketable
securities held by the Company, currently common or preferred stock, are deemed
by management to be available-for-sale and are reported at fair value, with net
unrealized gains or losses reported as a component of other accumulated
comprehensive income (loss) in stockholders' equity. Realized gains and losses
are included in earnings and are derived using the specific identification
method for determining the cost of securities. The Company includes these
investments in other noncurrent assets.
Other
equity investments, for which fair values are not readily determinable, are
carried at historical cost and are included in other noncurrent
assets.
The
Company records an investment impairment charge when it believes an investment,
accounted for by the Company as a marketable security or recorded at historical
cost, has experienced a decline in value that is other than temporary.
Pension
and Other Postemployment Benefits
The
Company maintains defined benefit plans that provide eligible employees with
retirement benefits. Additionally, Eastman provides life insurance and health
care benefits for eligible retirees and health care benefits for retirees’
eligible survivors. The costs and obligations related to these benefits reflect
the
Company’s
assumptions related to general economic conditions (particularly interest
rates), expected return on plan assets, rate of compensation increase for
employees, and health care cost trends. The cost of providing plan benefits
depends on demographic assumptions including retirements, mortality, turnover,
and plan participation.
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability and the amount can be reasonably estimated.
When a single amount cannot be reasonably estimated
but the cost can be estimated within a range, the Company accrues the minimum
amount. This undiscounted accrued amount reflects the Company’s assumptions
about remediation 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, unanticipated government enforcement
action, or changes in health, safety, environmental, and chemical control
regulations and testing requirements could result in higher or lower costs.
The
Company also establishes reserves for closure/postclosure costs associated with
the environmental and other assets it maintains. Environmental assets include
but are not limited to land fills, water treatment facilities, and ash ponds.
When these types of assets are constructed, a reserve is established for the
future environmental costs anticipated to be associated with the closure of the
site based on an expected life of the environmental assets. These future
expenses are charged into earnings over the estimated useful life of the assets.
Currently, the Company estimates the useful life of each individual asset up to
50 years. If the Company changes its estimate of the asset retirement obligation
costs or its estimate of the useful lives of these assets, the future expenses
to be charged into earnings could increase or decrease.
Accruals
for environmental liabilities are included in other long-term liabilities and
exclude claims for recoveries from insurance companies or other third parties.
Environmental costs are capitalized if they extend the life of the related
property, increase its capacity, and/or mitigate or prevent future
contamination. The cost of operating and maintaining environmental control
facilities is charged to expense.
For
additional information see Note 11 and Schedule II, “Valuation and Qualifying
Accounts.”
Derivative
Financial Instruments
Derivative
financial instruments are used by the Company in the management of its exposures
to fluctuations in foreign currency, raw materials and energy costs, and
interest rates. Such instruments are used to mitigate the risk that changes in
exchange rates or raw materials and energy costs will adversely affect the
eventual dollar cash flows resulting from the hedged transactions.
The
Company enters into forward exchange contracts to hedge certain firm commitments
denominated in foreign currencies and currency options and forwards to hedge
probable anticipated, but not yet committed, export sales and purchase
transactions expected within no more than five years and denominated in foreign
currencies (principally the British pound, Canadian dollar, euro, and the
Japanese yen). To mitigate short-term fluctuations in market prices for propane
and natural gas (major raw materials and energy used in the manufacturing
process), the Company enters into forwards and options contracts. From time to
time, the Company also utilizes interest rate derivative instruments, primarily
swaps, to hedge the Company's exposure to movements in interest
rates.
The
Company's forwards and options contracts are accounted for as hedges because the
derivative instruments are designated and effective as hedges and reduce the
Company's exposure to identified risks. Gains and losses resulting from
effective hedges of existing assets, liabilities, firm commitments, or
anticipated transactions are deferred and recognized when the offsetting gains
and losses are recognized on the related hedged items and are reported as a
component of operating earnings.
Deferred
currency option premiums are generally included in other assets. The related
obligation for payment is generally included in other liabilities and is paid in
the period in which the options are exercised or expire and forward exchange
contracts mature.
Litigation
and Contingent Liabilities
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 accrues a
liability for such matters when it is probable that a liability has been
incurred and the amount can be reasonably estimated. When a single amount cannot
be reasonably estimated but the cost can be estimated within a range, the
Company accrues the minimum amount. The Company expenses legal costs, including
those expected to be incurred in connection with a loss contingency, as
incurred.
Revenue
Recognition and Customer Incentives
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price to the customer
is fixed or determinable, and collectability is reasonably assured.
The
Company records estimated obligations for customer programs and incentive
offerings, which consist primarily of revenue or volume-based amounts that a
customer must achieve over a specified period of time, as a reduction of revenue
to each underlying revenue transaction as the customer progresses toward
reaching goals specified in incentive agreements. These estimates are based on a
combination of forecast of customer sales and actual sales volumes and revenues
against established goals, the customer’s current level of purchases, and
Eastman’s knowledge of customer purchasing habits, and industry pricing
practice. The incentive payment rate may be variable, based upon the customer
reaching higher sales volume or revenue levels over a specified period of time
in order to receive an agreed upon incentive payment.
Shipping
and Handling Fees and Costs
Shipping
and handling fees related to sales transactions are billed to customers and are
recorded as sales revenue. Shipping and handling costs incurred are recorded in
cost of sales.
Restructuring
of Operations
The
Company records restructuring charges incurred in connection with consolidation
of operations, exited business lines, or shutdowns of specific sites that are
expected to be substantially completed within 12 months. These restructuring
charges are recognized as incurred, and are associated with site closures, legal
and environmental matters, demolition, contract terminations, or other costs
directly related to the restructuring. The Company records severance charges for
involuntary employee separations when the separation is probable and reasonably
estimable. The Company records severance charges for voluntary employee
separations ratably over the remaining service period of those employees.
Stock-based
Compensation
As
permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," Eastman
continues to apply intrinsic value accounting for its stock option plans.
Compensation cost for stock options, if any, is measured as the excess of the
quoted market price of the stock at the date of grant over the amount an
employee must pay to acquire the stock. Eastman has adopted disclosure-only
provisions of SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123.” The Company’s pro forma net earnings and pro forma earnings per share
based upon the fair value at the grant dates for awards under Eastman’s plans
are disclosed below.
The
Company applies intrinsic value accounting for its stock option plans. If the
Company had elected to recognize compensation expense based upon the fair value
at the grant dates for awards under these plans, the Company's net earnings
(loss) and earnings (loss) per share would have been reduced as
follows:
|
(Dollars
and shares in millions, except per share amounts) |
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
Net
earnings (loss), as reported |
$ |
170 |
$ |
(270) |
$ |
61 |
| |
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense included in net earnings, as
reported |
|
1 |
|
1 |
|
1 |
| |
|
|
|
|
|
|
Deduct:
Total additional stock-based employee compensation cost, net of tax, that
would have been included in net earnings (loss) under fair value
method |
|
6 |
|
11 |
|
12 |
|
Pro
forma net earnings (loss) |
$ |
165 |
$ |
(280) |
$ |
50 |
| |
|
|
|
|
|
|
|
Basic
earnings (loss) per share |
As
reported |
$
2.20 |
|
$(3.50) |
|
$0.79 |
| |
Pro
forma |
$
2.13 |
|
$(3.62) |
|
$0.65 |
| |
|
|
|
|
|
|
|
Diluted
earnings (loss) per share |
As
reported |
$2.18
|
|
$(3.50)
|
|
$
0.79 |
| |
Pro
forma |
$2.12 |
|
$(3.62) |
|
$0.65 |
Compensated
Absences
The
Company accrues compensated absences and related benefits as current charges to
earnings in the period earned.
Other
Income and Other Charges
Included
in other income and other charges are results from equity investments, royalty
income, gains or losses on foreign exchange transactions, certain litigation
costs, fees on securitized receivables and other miscellaneous items.
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company’s assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Provision has been made for income taxes on unremitted earnings of subsidiaries
and affiliates, except for subsidiaries in which earnings are deemed to be
permanently reinvested.
Reclassifications
The
Company has reclassified certain 2003 and 2002 amounts to conform to the 2004
presentation.
2.
| |
|
December
31, |
|
(Dollars
in millions) |
|
2004 |
|
2003 |
| |
|
|
|
|
|
At
FIFO or average cost (approximates current cost) |
|
|
|
|
|
Finished
goods |
$ |
570 |
$ |
583 |
|
Work
in process |
|
171 |
|
175 |
|
Raw
materials and supplies |
|
196 |
|
228 |
|
Total
inventories |
|
937 |
|
986 |
|
LIFO
Reserve |
|
(355) |
|
(288) |
|
Total
inventories |
$ |
582 |
$ |
698 |
Inventories
valued on the LIFO method were approximately 65% of total inventories in each of
the periods.
| 3. |
PROPERTIES
AND ACCUMULATED DEPRECIATION |
| |
|
December
31, |
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
Properties
at Cost |
|
|
|
|
|
Balance
at beginning of year |
$ |
9,861 |
$ |
9,660 |
|
Capital
expenditures |
|
248 |
|
230 |
|
Deductions |
|
(481) |
|
(29) |
|
Balance
at end of year |
$ |
9,628 |
$ |
9,861 |
| |
|
|
|
|
|
Properties |
|
|
|
|
|
Land |
$ |
52 |
$ |
77 |
|
Buildings
and building equipment |
|
888 |
|
953 |
|
Machinery
and equipment |
|
8,599 |
|
8,710 |
|
Construction
in progress |
|
89 |
|
121 |
|
Balance
at end of year |
$ |
9,628 |
$ |
9,861 |
| |
|
|
|
|
|
Accumulated
Depreciation |
|
|
|
|
|
Balance
at beginning of year |
$ |
6,442 |
$ |
5,907 |
|
Provision
for depreciation |
|
302 |
|
334 |
|
Fixed
asset impairments |
|
134 |
|
291 |
|
Deductions |
|
(442) |
|
(90) |
|
Balance
at end of year |
$ |
6,436 |
$ |
6,442 |
Construction-period
interest of $348 million and $347 million, reduced by accumulated depreciation
of $237 million and $224 million, is included in cost of properties at December
31, 2004 and 2003, respectively. Interest capitalized during 2004, 2003 and 2002
was $3 million, $3 million, and $4 million, respectively.
Depreciation
expense was $302 million, $334 million and $358 million, for 2004, 2003 and
2002, respectively.
Deductions
primarily relate to the sale of certain businesses and product lines and related
assets in the Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”).
segment as discussed in Note 17.
| 4. |
GOODWILL
AND OTHER INTANGIBLE ASSETS |
Following
are the Company’s amortizable intangible assets and indefinite-lived intangible
assets. The difference between the gross carrying amount and net carrying amount
for each item presented is attributable to impairments and accumulated
amortization.
| |
As
of December 31, 2004 |
|
As
of December 31, 2003 |
|
(Dollars
in millions) |
Gross
Carrying Amount |
|
Net
Carrying Amount |
|
Gross
Carrying Amount |
|
Net
Carrying Amount |
| |
|
|
|
|
|
|
|
|
Amortizable
intangible assets |
|
|
|
|
|
|
|
|
Developed
technology |
$ |
2 |
$ |
2 |
$ |
38 |
$ |
6 |
|
Customer
lists |
3 |
|
1 |
|
23 |
|
6 |
|
Patents |
8 |
|
8 |
|
-- |
|
-- |
|
Other |
-- |
|
-- |
|
6 |
|
2 |
|
Total |
$ |
$13 |
$ |
11 |
$ |
67 |
$ |
14 |
| |
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets |
|
|
|
|
|
|
|
|
Trademarks |
|
|
14 |
|
|
|
19 |
| |
|
|
|
|
|
|
|
|
Other
intangible assets |
|
$ |
25 |
|
|
$ |
33 |
In the
second quarter 2004, the Company recognized approximately $6 million in
intangible asset impairment charges related to assets held for sale. The assets
were part of the Company’s sale of certain businesses and product lines within
the CASPI segment, which was completed July 31, 2004. The charges reflect
adjustment of the recorded values of these assets to the expected sales
proceeds.
Changes
in the carrying amount of goodwill follow:
|
(Dollars
in millions) |
|
|
CASPI
Segment |
|
|
Other
Segments |
|
|
Total
Eastman Chemical |
|
| |
|
|
|
|
|
|
|
|
|
|
Reported
balance at December 31, 2002 |
|
$ |
335 |
|
$ |
9 |
|
$ |
344 |
|
Impairment of
goodwill |
|
|
(34 |
) |
|
-- |
|
|
(34 |
) |
|
Foreign
currency translation effect and adjustments |
|
|
7 |
|
|
-- |
|
|
7 |
|
Reported
balance at December 31, 2003 |
|
$ |
308 |
|
$ |
9 |
|
$ |
317 |
|
|
Divestitures |
|
|
-- |
|
|
(3 |
) |
|
(3 |
) |
|
Reported
balance at December 31, 2004 |
|
$ |
308 |
|
$ |
6 |
|
$ |
314 |
|
| |
|
|
|
|
|
|
|
|
|
|
Additional
information regarding the impairment of intangibles and goodwill and the
adoption of SFAS No. 142 is available in Note 15 and Note 23.
Amortization
expense for definite-lived intangible assets was approximately $2 million, $10
million, and $16 million, respectively, for 2004, 2003, and 2002. Estimated
amortization expense for the five succeeding years is approximately $1 million
per year.
| 5. |
EQUITY
INVESTMENTS AND OTHER NONCURRENT ASSETS AND
LIABILITIES |
As of
December 31, 2004, Eastman owned 25 million shares, or approximately 42%, of the
outstanding common shares of Genencor International, Inc. ("Genencor"), a
publicly traded biotechnology company engaged in the discovery, development,
manufacture, and marketing of biotechnology products for the industrial
chemicals, agricultural, and health care markets, and a developer of integrated
genomics technology. This investment is accounted for under the equity method
and is included in other noncurrent assets. At December 31, 2004 and 2003, the
Company’s investment in Genencor, including preferred stock and accumulated
dividends receivable, was $242 million and $221 million, respectively. At
December 31, 2004, the fair market value of the Company’s common stock
investment in Genencor was $16.40 per share or $410 million. See Note 24 for
further information regarding the intended disposition of this
investment.
Summarized
financial information for Genencor is shown on a 100 percent basis.
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Revenues |
$ |
410 |
$ |
383 |
$ |
350 |
|
Costs
of products sold |
|
226 |
|
207 |
|
186 |
|
Net
earnings (loss) |
|
26 |
|
23 |
|
6 |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Statement
of Financial Position Data |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Current
assets |
$ |
371 |
$ |
325 |
|
|
|
Noncurrent
assets |
|
381 |
|
387 |
|
|
|
Total
assets |
|
752 |
|
712 |
|
|
|
Current
liabilities |
|
114 |
|
102 |
|
|
|
Noncurrent
liabilities |
|
73 |
|
98 |
|
|
|
Total
liabilities |
|
187 |
|
200 |
|
|
|
Redeemable
preferred stock |
|
184 |
|
177 |
|
|
Eastman
has a 50% interest in and serves as the operating partner in Primester, a joint
venture which manufactures cellulose acetate at its Kingsport, Tennessee plant.
This investment is accounted for under the equity method. The Company guarantees
up to $125 million of the principal amount of the joint venture's third-party
borrowings; however, management believes, based on current facts and
circumstances and the structure of the venture, that the likelihood of a payment
pursuant to such guarantee is remote. Eastman had a negative investment in the
joint venture of approximately $40 million at December 31, 2004 and 2003,
representing the recognized portion of the venture's accumulated deficits that
it has a commitment to fund as necessary. Such amounts are included in other
long-term liabilities. The Company provides certain utilities and general plant
services to the joint venture. In return for Eastman providing those services,
the joint venture paid Eastman a total of $39 million in three equal
installments in 1991, 1992, and 1993. Eastman has amortized the deferred credit
to earnings over the 10-year period of the utilities and plant services
contract, which concluded in April 2004.
Eastman
owns a 50% interest in Nanjing Yangzi Eastman Chemical Ltd. (“Nanjing”), a
company which manufactures Eastotac™ hydrocarbon tackifying resins for the
adhesives market. This joint venture is accounted for under the equity method
and is included in other noncurrent assets. The Company guarantees up to $6
million of the principal amount of the joint venture's third-party borrowings;
however, management believes, based on current facts and circumstances and the
structure of the venture, that the likelihood of a payment pursuant to such
guarantee is remote. At December 31, 2004 and 2003, the Company’s investment in
Nanjing was approximately $4 million and $3 million, respectively.
| 6. |
PAYABLES
AND OTHER CURRENT LIABILITIES |
| |
|
December
31, |
|
(Dollars
in millions) |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Trade
creditors |
$ |
474 |
$ |
478 |
|
Accrued
payrolls, vacation, and variable-incentive compensation |
|
124 |
|
135 |
|
Accrued
taxes |
|
94 |
|
63 |
|
Interest
payable |
|
34 |
|
45 |
|
Current
portion of U.S. defined benefit pension plan liabilities |
|
61 |
|
-- |
|
Bank
overdrafts |
|
40 |
|
22 |
|
Other |
|
271 |
|
230 |
|
Total |
$ |
1,098 |
$ |
973 |
The
current portion of U.S. defined benefit pension plan liabilities is an estimate
of the Company’s anticipated funding through December 31, 2005.
| |
December
31, |
|
(Dollars
in millions) |
2004 |
|
2003 |
| |
|
|
|
|
Borrowings
consisted of: |
|
|
|
|
6
3/8% notes due 2004 |
$ |
-- |
$ |
504 |
|
3
1/4% notes due 2008 |
250 |
|
250 |
|
6.30%
notes due 2018 |
253 |
|
249 |
|
7%
notes due 2012 |
399 |
|
394 |
|
7
1/4% debentures due 2024 |
497 |
|
496 |
|
7
5/8% debentures due 2024 |
200 |
|
200 |
|
7.60%
debentures due 2027 |
297 |
|
297 |
|
Commercial
paper and credit facility borrowings |
146 |
|
196 |
|
Other |
20 |
|
7 |
|
Total
borrowings |
2,062 |
|
2,593 |
|
Borrowings
due within one year |
(1) |
|
(504) |
|
Long-term
borrowings |
$ |
2,061
|
$ |
2,089 |
Eastman
has access to a $700 million revolving credit facility (the "Credit Facility")
expiring in April 2009. 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 December 31,
2004, 2003, and 2002. The Credit Facility contains a number of covenants and
events of default, including the maintenance of certain financial
ratios.
Eastman
typically utilizes commercial paper 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. Since the Credit Facility
expires in April 2009, 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 December 31, 2004,
the Company’s commercial paper and revolving credit facility borrowings were
$146 million at an effective interest rate of 2.98%. At December 31, 2003, the
Company's commercial paper borrowings were $196 million at an effective interest
rate of 1.85%.
On
January 15, 2004, the Company repaid at maturity $500 million of notes bearing
interest at 6 3/8% per annum. These notes were reflected in borrowings due
within one year in the Consolidated Statements of Financial Position at December
31, 2003. These notes were repaid with cash generated from business activities,
new long-term borrowings, and available short-term borrowing
capacity.
In the
third quarter 2003, the Company entered into interest rate swaps that converted
the effective interest rate of $250 million of the $400 million 7% notes due in
2012 to variable rates. In the second quarter of 2004, the Company entered into
interest rate swaps that converted the effective interest rate of $100 million
of the $400 million 7% notes due in 2012 to variable rates. The average rate on
the variable portion was 5.18% at December 31, 2004 and 3.69% at December 31,
2003. The recording of the fair value of the interest rate swaps and the
corresponding debt resulted in an increase of $5 million in long-term borrowings
and other noncurrent assets at December 31, 2004. The fair values of the
interest rate swaps were an asset of $2 million at December 31, 2004 and a
liability of $3 million at December 31, 2003.
In the
fourth quarter 2003, the Company entered into interest rate swaps that converted
the effective interest rate of $150 million of the $250 million 6.30% notes due
in 2018 to variable rates such that the average rate on the variable portion was
3.71% at December 31, 2004 and 2.15% at December 31, 2003. The recording of the
fair value of the interest rate swaps and the corresponding debt resulted in an
increase of approximately $4 million in long-term borrowings and other
noncurrent assets at December 31, 2004. The fair values of the interest rate
swaps were assets of $5 million and $1 million at December 31, 2004, and
December 31, 2003, respectively.
| 8. |
FAIR
VALUE OF FINANCIAL INSTRUMENTS |
| |
|
December
31, 2004 |
|
December
31, 2003 |
|
(Dollars
in millions) |
|
Recorded
Amount |
|
Fair
Value |
|
Recorded
Amount |
|
Fair
Value |
| |
|
|
|
|
|
|
|
|
|
Long-term
borrowings |
$ |
2,061 |
$ |
2,300 |
$ |
2,089 |
$ |
2,247 |
The fair
value for fixed-rate borrowings is based on current interest rates for
comparable securities. The Company's floating-rate borrowings approximate fair
value.
Hedging
Programs
Financial
instruments held as part of the hedging programs discussed below are recorded at
fair value based upon comparable market transactions as quoted by the
broker.
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.
The
Company manufactures and sells its products in a number of countries throughout
the world and, as a result, is exposed to movements in foreign currency exchange
rates. To manage the volatility relating to these exposures, the Company nets
the exposures on a consolidated basis to take advantage of natural offsets. To
manage the remaining exposure, the Company enters into forward exchange
contracts to hedge certain firm commitments denominated in foreign currencies
and currency options and forwards to hedge probable anticipated, but not yet
committed, export sales transactions expected within no more than five years and
denominated in foreign currencies (principally the British pound, Canadian
dollar, euro and the Japanese yen). These contracts are designated as cash flow
hedges. The mark-to-market gains or losses on qualifying hedges are included in
accumulated other comprehensive income (loss) to the extent effective, and
reclassified into sales in the period during which the hedged transaction
affects earnings.
Raw
materials and energy sources used by the Company are subject to price volatility
caused by weather, supply conditions, economic variables and other unpredictable
factors. To mitigate short-term fluctuations in market prices for propane and
natural gas, the Company enters into forwards and options contracts. These
contracts are designated as cash flow hedges. The mark-to-market gains or losses
on qualifying hedges are included in accumulated other comprehensive income
(loss) to the extent effective, and reclassified into cost of sales in the
period during which the hedged transaction affects earnings. In evaluating
effectiveness, the Company excludes the time value of certain options.
The
Company's policy is to manage interest cost using a mix of fixed and variable
rate debt. To manage this mix in a cost-efficient manner, the Company enters
into interest rate swaps in which the Company agrees to exchange the difference
between fixed and variable interest amounts calculated by reference to an agreed
upon notional principal amount. These swaps are designated to hedge the fair
value of underlying debt obligations with the interest rate differential
reflected as an adjustment to interest expense over the life of the swaps. As
these instruments are 100% effective, there is no impact on earnings due to
hedge ineffectiveness.
From time
to time, the Company also utilizes interest rate derivative instruments,
primarily swaps, to hedge the Company’s exposure to movements in interest rates
on anticipated debt offerings. These instruments are designated as cash flow
hedges and are typically 100% effective. As a result, there is no current impact
on earnings due to hedge ineffectiveness. The mark-to-market gains or losses on
these hedges are included in accumulated other comprehensive income (loss) to
the extent effective, and are reclassified into interest expense over the period
of the related debt instruments.
The fair
value for fixed-rate borrowings is based upon current interest rates for
comparable securities. The Company’s floating-rate instruments have carrying
values that approximate fair value.
At
December 31, 2004, mark-to-market losses from raw material, currency, energy and
certain interest rate hedges that were included in accumulated other
comprehensive income (loss) totaled approximately $8 million. If
realized, substantially all of this loss 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 immediately recognized in cost
of sales or other income and charges. Such amounts had a negative $5 million
impact on earnings during 2004.
At
December 31, 2003, mark-to-market gains from raw material, energy, and certain
interest rate hedges that were included in accumulated other comprehensive
income (loss) totaled approximately $4 million. 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 during 2003.
Eastman
maintains defined benefit plans that provide eligible employees with retirement
benefits. Prior to 2000, benefits were calculated using a defined benefit
formula based on age, years of service, and employee’s final average
compensation as defined in the plans. Effective January 1, 2000, the defined
benefit pension plan, the Eastman Retirement Assistance Plan, was amended.
Employees' accrued pension benefits earned prior to January 1, 2000 are
calculated based on previous plan provisions using the employee's age, years of
service and final average compensation as defined in the plans. The amended
defined benefit pension plan uses a pension equity formula based on age, years
of service and final average compensation to calculate an employee's retirement
benefit from January 1, 2000 forward. Benefits payable will be the combined
pre-2000 and post-1999 benefits.
Benefits
are paid to employees from trust funds. Contributions to the plan are made as
permitted by laws and regulations. The pension trust fund does not directly own
any of the Company’s common stock.
Pension
coverage for employees of Eastman's international operations is provided, to the
extent deemed appropriate, through separate plans. The Company systematically
provides for obligations under such plans by depositing funds with trustees,
under insurance policies or by book reserves.
Below is
a summary balance sheet of the change in plan assets during 2004 and 2003, the
funded status of the plans, amounts recognized in the Statements of Financial
Position, and a Summary of Benefit Costs. The assumptions used to develop the
projected benefit obligation for the Company's significant defined benefit
pension plans are also provided in the following tables.
|
Summary
Balance Sheet |
|
|
|
|
| |
|
|
|
|
|
(Dollars
in millions) |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Change
in benefit obligation: |
|
|
|
|
|
Benefit
obligation, beginning of year |
$ |
1,346 |
$ |
1,222 |
|
Service
cost |
|
41 |
|
42 |
|
Interest
cost |
|
82 |
|
84 |
|
Actuarial
loss |
|
56 |
|
94 |
|
New
plans |
|
11 |
|
28 |
|
Plan
amendments |
|
11 |
|
-- |
|
Effect
of currency exchange |
|
17 |
|
10 |
|
Benefits
paid |
|
(182) |
|
(134) |
|
Benefit
obligation, end of year |
$ |
1,382 |
$ |
1,346 |
| |
|
|
|
|
|
Change
in plan assets: |
|
|
|
|
|
Fair
value of plan assets, beginning of year |
$ |
903 |
$ |
574 |
|
Actual
return on plan assets |
|
107 |
|
187 |
|
New
plans |
|
21 |
|
19 |
|
Effect
of currency exchange |
|
10 |
|
6 |
|
Company
contributions |
|
15 |
|
247 |
|
Benefits
paid |
|
(178) |
|
(130) |
|
Fair
value of plan assets, end of year |
$ |
878 |
$ |
903 |
| |
|
|
|
|
|
Benefit
obligation in excess of plan assets |
$ |
504 |
$ |
443 |
|
Unrecognized
actuarial loss |
|
(536) |
|
(535) |
|
Unrecognized
prior service credit |
|
54 |
|
73 |
|
Net
amount recognized, end of year |
$ |
22 |
$ |
(19) |
| |
|
|
|
|
|
Amounts
recognized in the Statements of Financial Position consist
of: |
|
|
|
|
|
Prepaid
benefit cost |
$ |
(2) |
$ |
(33) |
|
Intangible
assets |
|
(16) |
|
(14) |
|
Accrued
benefit cost |
|
24 |
|
14 |
|
Additional
minimum liability |
|
409 |
|
400 |
|
Accumulated
other comprehensive loss |
|
(393) |
|
(386) |
|
Net
amount recognized, end of year |
$ |
22 |
$ |
(19) |
| |
|
|
|
|
The
accumulated benefit obligation basis at the end of 2004 and 2003 was $1,309
million and $1,283 million, respectively. The Company uses a measurement date of
December 31 for the majority of its pension plans.
A summary
of the components of net periodic benefit cost recognized for Eastman's
significant defined benefit pension plans follows:
|
Summary
of Benefit Costs |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Components
of net periodic benefit cost: |
|
|
|
|
|
|
|
Service
cost |
$ |
41 |
$ |
42 |
$ |
36 |
|
Interest
cost |
|
82 |
|
84 |
|
80 |
|
Expected
return on assets |
|
(82) |
|
(82) |
|
(77) |
|
Curtailment
charge |
|
2 |
|
|
|
|
|
Amortization
of: |
|
|
|
|
|
|
|
Transition
asset |
|
-- |
|
-- |
|
(4) |
|
Prior
service credit |
|
(10) |
|
(11)
|
|
(12)
|
Actuarial
loss |
|
27 |
|
19 |
|
9 |
|
Net
periodic benefit cost |
$ |
60 |
$ |
52 |
$ |
32 |
| |
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
Weighted-average
assumptions used to determine benefit obligations for years ended December
31: |
|
|
|
|
|
|
Discount
rate |
5.67% |
|
6.18% |
|
6.72% |
|
Expected
return on assets |
8.65% |
|
8.88% |
|
8.94% |
|
Rate
of compensation increase |
3.78% |
|
3.77% |
|
4.00% |
| |
|
|
|
|
|
|
Weighted-average
assumptions used to determine net periodic pension cost for years ended
December 31: |
|
|
|
|
|
|
Discount
rate |
6.18% |
|
6.72% |
|
7.25% |
|
Expected
return on assets |
8.88% |
|
8.94% |
|
9.50% |
|
Rate
of compensation increase |
3.76% |
|
4.00% |
|
4.00% |
| |
|
|
|
|
|
The fair
value of plan assets for domestic plans at December 31, 2004 and 2003 was $773
million and $835 million, respectively, while the fair value of plan assets at
December 31, 2004 and 2003 for non-U.S. plans was $105 million and $68 million,
respectively. At December 31, 2004 and 2003, the expected long-term rate of
return on the U.S. plan assets was 9%, while the expected long-term rate of
return on non-U.S. plan assets was 6.12% and 7.36% at December 31, 2004 and
2003, respectively. The target allocation for the Company’s U.S. pension plans
for 2005 and the asset allocation at December 31, 2004 and 2003, by asset
category, is as follows:
|
(Dollars
in millions) |
Target
allocation for 2005 |
Plan
assets at December 31, 2004 |
Plan
assets at December 31, 2003 |
|
Asset
category |
|
|
|
| |
|
|
|
|
Equity
securities |
70% |
77% |
80% |
|
Debt
securities |
10% |
11% |
11% |
|
Real
estate |
5% |
4% |
4% |
|
Other
Investments |
15% |
8% |
5% |
|
Total |
100% |
100% |
100% |
The asset
allocation for the Company’s non -U.S. pension plans at December 31, 2004 and
2003, and the target allocation for 2005, by asset category, is as
follows:
|
(Dollars
in millions) |
Target
allocation for 2005 |
Plan
assets at December 31, 2004 |
Plan
assets at December 31, 2003 |
|
Asset
category |
|
|
|
| |
|
|
|
|
Equity
securities |
50% |
42% |
75% |
|
Debt
securities |
35% |
46% |
25% |
|
Real
estate |
5% |
5% |
--% |
|
Other
Investments |
10% |
7% |
--% |
|
Total |
100% |
100% |
100% |
The
Company’s investment strategy for its defined benefit pension plans is to
maximize long-term rate of return on plan assets within an acceptable level of
risk in order to minimize the cost of providing pension benefits. The investment
policy establishes a target allocation range for each asset class and the fund
is managed within those ranges. The plans use a number of investment approaches
including equity, real estate, and fixed income funds in which the underlying
securities are marketable in order to achieve this target allocation. The U.S.
plan also invests in private equity and other funds.
The
expected rate of return was determined by modeling the expected long-term rates
of return for broad categories of investments held by the plan against a number
of various potential economic scenarios.
The
Company anticipates pension contributions to its U.S. defined-benefit plans for
2005 to be approximately $60 million, including quarterly contributions as
required by the IRS code section 412. The Company anticipates pension
contributions to its international pension plans to be approximately $15
million.
Benefits
expected to be paid from pension plans are as follows:
(Dollars
in millions)
| |
2005 |
2006 |
2007 |
2008 |
2009 |
2010-2014 |
|
US
plans |
$81 |
$84 |
$88 |
$93 |
$88 |
$535 |
|
International
plans |
3 |
3 |
3 |
4 |
4 |
17 |
DEFINED
CONTRIBUTION PLANS
The
Company sponsors a defined contribution employee stock ownership plan (the
"ESOP"), a qualified plan under Section 401(a) of the Internal Revenue Code,
which is a component of the Eastman Investment Plan and Employee Stock Ownership
Plan ("EIP/ESOP"). Eastman anticipates that it will make annual contributions
for substantially all U.S. employees equal to 5% of eligible compensation to the
ESOP, or for employees who have five or more prior ESOP contributions, to either
the Eastman Stock Fund or other investment funds within the EIP. Employees may
diversify to other investment funds within the EIP from the ESOP at anytime
without restrictions. Allocated shares in the ESOP totaled 2,210,590 shares,
2,582,229, and 2,774,676 shares as of December 31, 2004, 2003 and 2002,
respectively. Dividends on shares held by the EIP/ESOP are charged to retained
earnings. All shares held by the EIP/ESOP are treated as outstanding in
computing earnings per share.
Charges
for domestic contributions to the EIP/ESOP were $34 million, $35 million and $33
million for 2004, 2003 and 2002, respectively.
POSTRETIREMENT
WELFARE PLANS
Eastman
provides life insurance and health care benefits for eligible retirees, and
health care benefits for retirees' eligible survivors. In general, Eastman
provides those benefits to retirees eligible under the Company's U.S. pension
plans. Similar benefits are also provided to retirees of Holston Defense
Corporation (“HDC”), a wholly-owned subsidiary of the Company that, prior to
January 1, 1999, operated
government-owned
ammunitions plant. HDC’s contract with the Department of Army (“DOA”) provided
for reimbursement of allowable costs incurred by HDC including certain
postretirement welfare costs, for as long as HDC operated the plant. After the
contract was terminated at the end of 1998, the Army has not contributed further
to these costs. The Company continues to accrue for the costs related to HDC
retirees while pursuing extraordinary relief from the DOA for reimbursement of
these and other previously expensed employee benefit costs. Given the uncertain
outcome of discussions with the DOA, the Company will recognize the impact of
any reimbursement in the period settled.
A few of
the Company's non-U.S. operations have supplemental health benefit plans for
certain retirees, the cost of which is not significant to the
Company.
During
the second quarter 2004, the Company announced an amendment to its health and
dental benefit plans such that future health and dental benefits to certain
retirees will be fixed at a certain contribution amount, not to be increased. As
a result, the Company remeasured these plans as of June 1, 2004 resulting in a
reduction of the Company’s benefit obligation by approximately $240 million. The
discount rate used at the time of the remeasurement was adjusted from 6.25% at
December 31, 2003 to 6.50% at June 1, 2004 based on increases in interest rates.
The effect of this change is reflected in the results below.
|
Summary
Balance Sheet |
|
|
|
|
| |
|
|
|
|
|
(Dollars
in millions) |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Change
in benefit obligation: |
|
|
|
|
|
Benefit
obligation, beginning of year |
$ |
977 |
$ |
896 |
|
Service
cost |
|
7 |
|
8 |
|
Interest
cost |
|
52 |
|
58 |
|
Plan
participants’ contributions |
|
8 |
|
4 |
|
Actuarial
loss |
|
37 |
|
70 |
|
Plan
amendments |
|
(240) |
|
(10) |
|
Benefits
paid |
|
(55) |
|
(49) |
|
Settlements
and curtailments |
|
9 |
|
-- |
|
Benefit
obligation, end of year |
$ |
795 |
$ |
977 |
| |
|
|
|
|
|
Change
in plan assets: |
|
|
|
|
|
Fair
value of plan assets, beginning of year |
$ |
19 |
$ |
26 |
|
Company
contributions |
|
41 |
|
38 |
|
Plan
participants’ contributions |
|
8 |
|
4 |
|
Benefits
paid |
|
(55) |
|
(49) |
|
Fair
value of plan assets, end of year |
$ |
13 |
$ |
19 |
| |
|
|
|
|
|
Benefit
obligation in excess of plan assets |
$ |
782 |
$ |
958 |
|
Unrecognized
actuarial loss |
|
(367) |
|
(338) |
|
Unrecognized
prior service credit |
|
258 |
|
36 |
|
Net
amount recognized, end of year |
$ |
673 |
$ |
656 |
| |
|
|
|
|
|
Amounts
recognized in the Statements of Financial Position consist
of: |
|
|
|
|
|
Accrued
benefit cost, current |
$ |
41 |
$ |
45 |
|
Accrued
benefit cost, non-current |
|
632 |
|
611 |
|
Net
amount recognized, end of year |
$ |
673 |
$ |
656 |
| |
|
|
|
|
|
Weighted-average
assumptions used to determine end of year benefit obligations:
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
Discount
rate |
5.75% |
|
6.25% |
|
6.75% |
|
Rate
of compensation increase |
3.75% |
|
3.75% |
|
4.00% |
|
Health
care cost trend |
|
|
|
|
|
|
Initial |
9.00% |
|
10.00% |
|
10.00% |
|
Decreasing
to ultimate trend of |
5.00% |
|
5.00% |
|
5.25% |
|
In
year |
2009 |
|
2009 |
|
2007 |
|
Weighted-average
assumptions used to determine end of year net benefit cost:
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
Discount
rate |
6.25% |
|
6.75% |
|
7.25% |
|
Rate
of compensation increase |
3.75% |
|
4.00% |
|
4.00% |
|
Health
care cost trend |
|
|
|
|
|
|
Initial |
10.00% |
|
10.00% |
|
10.00% |
|
Decreasing
to ultimate trend of |
5.00% |
|
5.25% |
|
5.00% |
|
In
year |
2009 |
|
2007 |
|
2006 |
The net
periodic postretirement benefit cost follows:
|
Summary
of Benefit Costs |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(Dollars
in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Components
of net periodic benefit cost: |
|
|
|
|
|
|
|
Service
cost |
$ |
7 |
$ |
8 |
$ |
6 |
|
Interest
cost |
|
52 |
|
58 |
|
57 |
|
Expected
return on assets |
|
(1) |
|
(1) |
|
(2) |
|
Curtailment
gain |
|
(3) |
|
-- |
|
-- |
|
Amortization
of: |
|
|
|
|
|
|
|
Prior
service credit |
|
(15) |
|
(4)
|
|
(3)
|
|
Actuarial
loss |
|
17 |
|
13 |
|
9 |
|
Net
periodic benefit cost |
$ |
57 |
$ |
74 |
$ |
67 |
| |
|
|
|
|
|
|
Benefits
expected to be paid for postemployment obligations are as follows:
(Dollars
in millions)
| |
2005 |
2006 |
2007 |
2008 |
2009 |
2010-2014 |
|
U.S
plans |
$61 |
$49 |
$49 |
$49 |
$49 |
$252 |
| |
|
|
|
|
|
|
A 9% rate
of increase in the per capita cost of covered health care benefits is assumed
for 2005. The rate is assumed to decrease gradually to 5% for 2009 and remain at
that level thereafter. A 1% increase in health care cost trend would have
increased the 2004 service and interest costs by $1.5 million, and the 2004
benefit obligation by $6 million. A 1% decrease in health care cost trend would
have decreased the 2004 service and interest costs by $1 million, and the 2004
accumulated post-retirement benefit obligation by $5 million.
In May
2004, the FASB issued FSP 106-2, providing final guidance on accounting for the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“the
Act”). Under the provisions of FSP 106-2, the Company determined that its health
care plans were not actuarially equivalent to Medicare Part
D, thus
the Act had no impact on the Company’s financial condition, liquidity, or
results of operations. On January 21, 2005, the Centers for Medicare and
Medicaid Services released final regulations implementing the Act. The Company
is currently evaluating the impact of the final regulations on its financial
condition, liquidity, and results of operations.
Purchase
Obligations and Lease Commitments
At
December 31, 2004, the Company had various purchase obligations totaling
approximately $1.9 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 $183 million over a period of several years. Of the total lease
commitments, approximately 20% relate to machinery and equipment, including
computer and communications equipment and production equipment; approximately
55% relate to real property, including office space, storage facilities and
land; and approximately 25% relate to railcars. Rental expense, net of sublease
income, was approximately $65 million, $64 million, and $80 million in 2004,
2003 and 2002, respectively.
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 |
| |
|
|
|
|
|
|
|
|
|
|
|
2005 |
$ |
1 |
$ |
-- |
$ |
279 |
$ |
43 |
$ |
323 |
|
2006 |
|
4 |
|
-- |
|
274 |
|
34 |
|
312 |
|
2007 |
|
-- |
|
-- |
|
271 |
|
26 |
|
297 |
|
2008 |
|
250 |
|
-- |
|
166 |
|
15 |
|
431 |
|
2009 |
|
12 |
|
146 |
|
161 |
|
13 |
|
332 |
|
2010
and beyond |
|
1,649 |
|
-- |
|
776 |
|
52 |
|
2,477 |
|
Total |
$ |
1,916 |
$ |
146 |
$ |
1,927 |
$ |
183 |
$ |
4,172 |
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
December 31, 2004 and December 31, 2003. Undivided interest in designated
receivable pools was sold to the purchaser with recourse limited to the
purchased interest in the receivable pools. Average monthly proceeds from
collections reinvested in the continuous sale program were approximately $268
million and $249 million in 2004 and 2003, respectively.
Guarantees
In
November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,” an interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN
45 clarifies the requirements of SFAS No. 5, “Accounting for
Contingencies,” relating to the guarantor’s accounting for, and disclosure of,
the issuance of certain types of guarantees. Disclosures about each group of
similar guarantees are provided below and summarized in the following
table:
(Dollars
in millions) |
|
December
31, 2004 |
| |
|
|
|
Obligations
of equity affiliates |
$ |
131 |
|
Residual
value guarantees |
|
90 |
|
Total |
$ |
221 |
Obligations
of Equity Affiliates
As
described in Note 5, Eastman has a 50% interest in and serves as the operating
partner in Primester, a joint venture engaged in the manufacture of cellulose
acetate at its Kingsport, Tennessee plant. Eastman also owns a 50% interest in
Nanjing Yangzi Eastman Chemical Ltd, a company that engages in the manufacture
of certain products for the adhesives market. The Company guarantees up to $125
million and $6 million, respectively, of the principal amount of these joint
ventures’ third-party borrowings, but 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
December 31, 2004 totaled $90 million and consisted primarily of leases for
railcars, company aircraft, and other equipment. The Company believes, based on
current facts and circumstances, that a material payment pursuant to such
guarantees is remote.
Guarantees
and claims also arise during the ordinary course of business from relationships
with suppliers, customers and non-consolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others if specified
triggering events occur. Non-performance under a contract could trigger an
obligation of the Company. These potential claims include actions based upon
alleged exposures to products, intellectual property and environmental matters,
and other indemnifications. The ultimate effect on future financial results is
not subject to reasonable estimation because considerable uncertainty exists as
to the final outcome of these claims. However, while the ultimate liabilities
resulting from such claims may be significant to results of operations in the
period recognized, management does not anticipate they will have a material
adverse effect on the Company's consolidated financial position or
liquidity.
Product
Warranty Liability
The
Company warrants to the original purchaser of its products that it will repair
or replace without charge products if they fail due to a manufacturing
defect. However,
the Company’s historical claims experience has not been material. The estimated
product warranty liability for the Company's products as of December 31, 2004 is
approximately $1 million. The Company accrues for product warranties when it is
probable that customers will make claims under warranties relating to products
that have been sold and a reasonable estimate of the costs can be
made.
Variable
Interest Entities
The
Company has evaluated material relationships including the guarantees related to
the third-party borrowings of joint ventures described above and has concluded
that the entities are not Variable Interest Entities (“VIEs”) or, in the case of
Primester, a joint venture that manufactures cellulose acetate at its
Kingsport,
Tennessee plant, the Company is not the primary beneficiary of the VIE. As such,
in accordance with FIN 46R, the Company is not required to consolidate these
entities. In addition, the Company has evaluated long-term purchase obligations
with two entities that may be VIEs at December 31, 2004. These potential VIEs
are joint ventures from which the Company has purchased raw materials and
utilities for several years and purchases approximately $40 million of raw
materials and utilities on an annual basis. The Company has no equity interest
in these entities and has confirmed that one party to each of these joint
ventures does consolidate the potential VIE. However, due to competitive and
other reasons, the Company has not been able to obtain the necessary financial
information to determine whether the entities are VIEs, and if one or both are
VIEs, whether or not the Company is the primary beneficiary.
In
conjunction with the sale of certain businesses and product lines in the
Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”) segment as discussed
in Note 17, the Company has a variable interest in the form of a $50 million
note receivable. The Company has evaluated the material relationships with the
acquiring entity and concluded the Company is not the primary beneficiary. The
Company’s maximum exposure to loss is limited to the $50 million book value of
the note receivable and unpaid interest, if any.
| 11. |
ENVIRONMENTAL
MATTERS |
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP"), by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be required to
incur costs for environmental remediation and closure and postclosure under the
federal Resource Conservation and Recovery Act. Adequate reserves for
environmental contingencies have been established in accordance with Eastman’s
policies described in Note 1. Because of expected sharing of costs, the
availability of legal defenses, and the Company’s preliminary assessment of
actions that may be required, it does not believe its liability for these
environmental matters, individually or in the aggregate, will be material to the
Company’s consolidated financial position, results of operations or cash flows.
The Company’s reserve for environmental contingencies was $56 million and $61
million at December 31, 2004 and 2003, respectively, representing the minimum or
best estimate for remediation costs and, for asset retirement obligation costs,
the amount accrued to date over the facilities’ estimated useful lives.
Estimated future environmental expenditures for remediation costs range from the
minimum or best estimate of $25 million to the maximum of $45 million at
December 31, 2004 and the minimum or best estimate of $34 million to the maximum
of $52 million at December 31, 2003.
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, asbestos, 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. Only two of these lawsuits have not been resolved via
settlement. One of those cases was dismissed for want of prosecution. In
the other case, an intermediate appellate court affirmed in 2004 a trial court
ruling that the case could not proceed as a class action. That decision has been
appealed and the issue will be decided by the state’s highest court. 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. Two of those six
cases have been settled; defense motions to dismiss were granted in three other
cases and those dismissals are now final A defense motion to dismiss
another state case was denied in September 2004. The
defendants are seeking reconsideration of that denial and have also appealed the
September ruling. In late 2004, seven
other states sued the Company and others. Those seven cases have now been
settled.
The
Company has recognized charges to earnings 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 two
sorbates actions unless they can be settled on acceptable terms, the ultimate
outcome of the matters still pending and of any 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 has been 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.
In
recently filed cases, plaintiffs allege exposure 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 plaintiffs worked with or
around any such product alleged to have been manufactured by the Company. The
Company intends to defend vigorously the approximately 3,000 pending claims or
to settle them on acceptable terms.
The
Company has finalized an agreement with an insurer that issued primary general
liability insurance to certain predecessors of the Company prior to the
mid-1970s, pursuant to which the insurer will provide coverage for a portion of
certain of the Company's costs of defending against, and paying for, settlements
or judgments in connection with asbestos-related lawsuits.
Evaluation
of the allegations and claims made in recent asbestos-related lawsuits continue
to be reviewed by the Company. 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.
A
reconciliation of the changes in stockholders’ equity for 2002, 2003, and 2004
is provided below:
|
(Dollars
in millions) |
Common
Stock at Par Value
$ |
Paid-in
Capital
$ |
Retained
Earnings
$ |
Accumulated
Other Comprehensive Income (Loss)
$ |
Treasury
Stock at Cost
$ |
Total
Stockholders’ Equity
$ |
| |
|
|
|
|
|
|
|
Balance
at January 1, 2002 |
1 |
118 |
1,956 |
(251) |
(442) |
1,382 |
| |
|
|
|
|
|
|
|
Net
Earnings |
|
|
61 |
|
|
61 |
|
Cash
Dividends |
|
|
(135) |
|
|
(135) |
|
Other
Comprehensive Loss |
|
|
|
(44) |
|
(44) |
|
Stock
Option Exercises and Other Items
(1) |
|
1 |
|
|
6 |
7 |
|
Balance
at December 31, 2002 |
1 |
119 |
1,882 |
(295) |
(436) |
1,271 |
| |
|
|
|
|
|
|
|
Net
Loss |
|
|
(270) |
|
|
(270) |
|
Cash
Dividends |
|
|
(136) |
|
|
(136) |
|
Other
Comprehensive Income |
|
|
|
174 |
|
174 |
|
Stock
Option Exercises and Other Items |
|
3 |
|
|
1 |
4 |
|
Balance
at December 31, 2003 |
1 |
122 |
1,476 |
(121) |
(435) |
1,043 |
| |
|
|
|
|
|
|
|
Net
Earnings |
|
|
170 |
|
|
170 |
|
Cash
Dividends |
|
|
(137) |
|
|
(137) |
|
Other
Comprehensive Income |
|
|
|
18 |
|
18 |
|
Stock
Option Exercises and Other Items (1) |
|
88 |
|
|
2 |
90 |
|
Balance
at December 31, 2004 |
1 |
210 |
1,509 |
(103) |
(433) |
1,184 |
(1) The tax
benefits relating to the difference between the amounts deductible for federal
income taxes over the amounts charged to income for book purposes have been
credited to paid-in capital.
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
|
(Dollars
in millions) |
|
Cumulative
Translation Adjustment |
|
Unfunded
Minimum Pension Liability |
|
Unrealized
Gains (Losses) on Cash Flow Hedges |
|
Unrealized
Losses on Investments |
|
Accumulated
Other Comprehensive Income (Loss) |
| |
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002 |
$ |
(31) |
$ |
(261) |
$ |
(1) |
$ |
(2) |
$ |
(295) |
|
Period
change |
|
150 |
|
19 |
|
5
|
|
-- |
|
174 |
|
Balance
at December 31, 2003 |
|
119 |
|
(242) |
|
4 |
|
(2) |
|
(121) |
|
Period
change |
|
36 |
|
(6)
|
|
(12) |
|
-- |
|
18 |
|
Balance
at December 31, 2004 |
$ |
155 |
$ |
(248) |
$ |
(8)
|
$ |
(2) |
$ |
(103) |
The $36
million period change includes a $50 million increase in cumulative
translation adjustment partially offset by $14 million that was included in
measuring the gain/loss on the sale of certain businesses and product lines
within the CASPI segment completed July 31, 2004.
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.
The
Company is authorized to issue 400 million shares of all classes of stock, of
which 50 million may be preferred stock, par value $0.01 per share, and 350
million may be common stock, par value $0.01 per share. The Company declared
dividends of $1.76 per share in 2004, 2003 and 2002.
The
Company established a benefit security trust in 1997 to provide a degree of
financial security for unfunded obligations under certain plans and contributed
to the trust a warrant to purchase up to 1,000,000 shares of common stock of the
Company for par value. The warrant, which remains outstanding, is exercisable by
the trustee if the Company does not meet certain funding obligations, which
obligations would be triggered by certain occurrences, including a change in
control or potential change in control, as defined, or failure by the Company to
meet its payment obligations under covered unfunded plans. Such warrant is
excluded from the computation of diluted earnings per share because the
conditions upon which the warrant is exercisable have not been met.
The
additions to paid-in capital for 2004 and 2002 are primarily the result of stock
option exercises by employees. The additions to paid-in capital for 2003
primarily reflect the vesting of restricted stock.
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
2004, 2003, and 2002 under any publicly announced plan. Repurchased shares may
be used to meet common stock requirements for compensation and benefit plans and
other corporate purposes.
The
Company's charitable foundation held 122,725 shares of Eastman common stock as
of December 31, 2004 and 144,825 at December 31, 2003 and 2002.
For 2004,
2003,and 2002, the weighted average number of common shares outstanding used to
compute basic earnings per share was 77.6 million, 77.1 million, and 77.1
million, respectively, and for diluted earnings per share was 78.3 million, 77.1
million, and 77.2 million, respectively, reflecting the effect of dilutive
options outstanding. Excluded from the 2004 calculation were shares underlying
options to purchase 5,667,339 shares of common stock at a range of prices from
$45.44 to $67.50, because the exercise price of the options was greater than the
average market price of the underlying common shares. As a result of the net
loss reported for 2003, common shares underlying options to purchase 10,338,100
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. Excluded
from the 2002 calculation were shares underlying
options
to purchase 8,208,355 shares of common stock at a range of prices from $42.75 to
$73.94, because the exercise price of the options was greater than the average
market price of the underlying common shares.
|
Shares
of common stock issued (1) |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
|
|
|
|
Balance
at beginning of year |
|
85,177,467 |
|
85,135,117 |
|
85,053,349 |
|
Issued
for employee compensation and benefit plans |
|
1,948,065 |
|
42,350 |
|
81,768 |
|
Balance
at end of year |
|
87,125,532 |
|
85,177,467 |
|
85,135,117 |
| |
|
|
|
|
|
|
|
(1)
Includes shares held in treasury |
|
|
|
|
|
|
| 14. |
STOCK
BASED COMPENSATION PLANS |
Omnibus
Plans
Eastman's
2002 Omnibus Long-Term Compensation Plan (the "2002 Omnibus Plan"), which is
substantially similar to and intended to replace the 1997 Omnibus Long-Term
Compensation Plan (the "1997 Omnibus Plan"), which formerly replaced the 1994
Omnibus Long-Term Compensation Plan (the “1994 Omnibus Plan”), provides for
grants to employees of nonqualified stock options, incentive stock options,
tandem and freestanding stock appreciation rights (“SAR’s”), performance shares
and various other stock and stock-based awards. Certain of these awards may be
based on criteria relating to Eastman performance as established by the
Compensation and Management Development Committee of the Board of Directors. No
new awards have been made under the 1994 Omnibus Plan or the 1997 Omnibus Plan
following the effectiveness of the 2002 Omnibus Plan. Outstanding grants and
awards under the 1994 Omnibus Plan or the 1997 Omnibus Plan are unaffected by
the replacement of the 1997 Omnibus Plan (and 1994 Omnibus Plan) with the 2002
Omnibus Plan. The 2002 Omnibus Plan provides that options can be granted through
May 2, 2007, for the purchase of Eastman common stock at an option price not
less than 100% of the per share fair market value on the date of the stock
option's grant. Substantially all grants awarded under the 1994 Omnibus Plan,
the 1997 Omnibus Plan, and the 2002 Omnibus Plan have been at option prices
equal to the fair market value on the date of grant. Options typically vest in
equal increments on either the first two or three anniversaries of the grant
date and expire ten years after grant. There is a maximum of 7.5 million shares
of common stock available for option grants and other awards during the term of
the 2002 Omnibus Plan. The maximum number of shares of common stock with respect
to one or more options and/or SAR’s that may be granted during any one calendar
year under the 2002 Omnibus Plan to the Chief Executive Officer or to any of the
next four most highly compensated executive officers (each a "Covered Employee")
is 300,000. The maximum fair market value of any awards (other than options and
SAR’s) that may be received by a Covered Employee during any one calendar year
under the 2002 Omnibus Plan is the equivalent value of 200,000 shares of common
stock as of the first business day of such calendar year.
Director
Long-Term Compensation Plan
Eastman's
2002 Director Long-Term Compensation Plan (the "2002 Director Plan"), which is
substantially similar to and intended to replace the 1999 Director Long-Term
Compensation Plan (the “1999 Director Plan”), which formerly replaced the 1994
Director Long-Term Compensation Plan (the “1994 Director Plan”), provides for
grants of nonqualified stock options and restricted shares to nonemployee
members of the Board of Directors. No new awards have been made under the 1994
Director Plan or the 1999 Director Plan, following the effectiveness of the 2002
Director Plan. Outstanding grants and awards under the 1994 Director Plan or the
1999 Director Plan are unaffected by the replacement of the 1999 Director Plan
(and the 1994 Director Plan) with the 2002 Director Plan. Shares of restricted
stock are granted upon the first
day of
the directors' initial term of service and nonqualified stock options and shares
of restricted stock are granted each year following the annual meeting of
stockholders. The 2002 Director Plan provides that options can be granted
through the later of May 1, 2007, or the date of the annual meeting of
stockholders in 2007 for the purchase of Eastman common stock at an option price
not less than the stock's fair market value on the date of the grant. The
options vest in 50% increments on the first two anniversaries of the
grant
date and expire ten years after grant. The maximum number of shares of common
stock that shall be available for grant of awards under the 2002 Director Plan
during its term is 200,000.
Stock
Option Balances and Activity
The fair
value of each option is estimated on the grant date using the
Black-Scholes-Merton option-pricing model, which requires input of highly
subjective assumptions. Some of these assumptions used for grants in 2004, 2003,
and 2002, respectively, include: average expected volatility of 28.0%, 27.90%
and 27.57%; average expected dividend yield of 3.80%, 5.90% and 3.71%; and
average risk-free interest rates of 3.46%, 3.50% and 5.06%. An expected option
term of six years for all periods was developed based on historical experience
information.
Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
A summary
of the status of the Company's stock option plans is presented
below:
| |
2004 |
|
2003 |
|
2002 |
| |
Options |
|
Weighted-Average
Exercise Price |
|
Options |
|
Weighted-Average
Exercise Price |
|
Options |
|
Weighted-Average
Exercise Price |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year |
10,338,100 |
$ |
45 |
|
8,511,597 |
$ |
49 |
|
7,006,410 |
$ |
50 |
|
Granted |
1,051,500 |
|
45 |
|
1,987,100 |
|
30 |
|
1,860,360 |
|
47 |
|
Exercised |
(1,954,200) |
|
41 |
|
-- |
|
-- |
|
(64,384) |
|
39 |
|
Forfeited
or canceled |
(1,280,300) |
|
44 |
|
(160,597) |
|
45 |
|
(290,789) |
|
57 |
|
Outstanding
at end of year |
8,155,100 |
$ |
47 |
|
10,338,100 |
$ |
45 |
|
8,511,597 |
$ |
49 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end |
6,091,100 |
|
|
|
7,412,800 |
|
|
|
5,965,433 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Available
for grant at year-end |
4,503,500 |
|
|
|
5,778,900 |
|
|
|
7,766,204 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
The
weighted average fair value of options granted during 2004, 2003 and 2002 were
$9.36 $4.55 and $11.16, respectively.
The
following table summarizes information about stock options outstanding at
December 31, 2004:
| |
|
Options
Outstanding |
|
Options
Exercisable |
|
Range
of Exercise Prices |
|
Number
Outstanding at December 31, 2004 |
|
Weighted-Average
Remaining Contractual Life |
|
Weighted-Average
Exercise Price |
|
Number
Exercisable at December 31, 2004 |
|
Weighted-Average
Exercise Price |
| |
|
|
|
|
|
|
|
|
|
|
|
$30-42 |
|
1,423,200 |
|
8.1 |
Years |
$ |
30 |
|
423,600 |
$ |
32 |
|
$43-46 |
|
1,635,800 |
|
6.1 |
“ |
|
45 |
|
1,169,800 |
|
46 |
|
$47-49 |
|
3,086,500 |
|
7.3 |
“ |
|
48 |
|
2,488,100 |
|
48 |
|
$50-74 |
|
2,009,600 |
|
2.4 |
“ |
|
58 |
|
2,009,600 |
|
58 |
| |
|
8,155,100 |
|
6.0 |
“ |
$ |
47 |
|
6,091,100 |
$ |
50 |
| 15. |
IMPAIRMENTS
AND RESTRUCTURING CHARGES, NET |
Impairments
and restructuring charges totaled $206 million during 2004, consisting of
non-cash asset impairments of $140 million and restructuring charges of $66
million. Effective
January 1, 2004, certain commodity product lines were transferred from the
Performance Chemicals and Intermediates (“PCI”) segment to the CASPI segment,
which resulted in the reclassification of asset impairment and severance charges
of approximately $42 million for 2003.
The
following table summarizes the 2004, 2003 and 2002 charges:
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Eastman
Division segments: |
|
|
|
|
|
|
|
|
|
|
CASPI
segment: |
|
|
|
|
|
|
|
|
|
|
Fixed
asset impairments |
|
$ |
57 |
|
$ |
235 |
|
$ |
2 |
|
Intangible
asset impairments |
|
|
6 |
|
|
175 |
|
|
-- |
|
Goodwill
impairments |
|
|
-- |
|
|
34 |
|
|
-- |
|
Severance
charges |
|
|
12 |
|
|
15 |
|
|
-- |
|
Site
closure costs |
|
|
6 |
|
|
3 |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
PCI
segment: |
|
|
|
|
|
|
|
|
|
|
Fixed
asset impairments |
|
|
27 |
|
|
55 |
|
|
(1 |
) |
Severance
charges |
|
|
10 |
|
|
2 |
|
|
-- |
|
Site
closure costs |
|
|
1 |
|
|
-- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Specialty
Plastics (“SP”) segment |
|
|
|
|
|
|
|
|
|
|
Fixed
asset impairments |
|
|
41 |
|
|
-- |
|
|
-- |
|
Severance
charges |
|
|
10 |
|
|
1 |
|
|
-- |
|
Site closure costs |
|
|
2 |
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
Eastman Division |
|
|
172 |
|
|
520 |
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Voridian
Division segments: |
|
|
|
|
|
|
|
|
|
|
Polymers
Segment: |
|
|
|
|
|
|
|
|
|
|
Fixed
asset impairments |
|
|
- |
|
|
1 |
|
|
1 |
|
Severance
charges |
|
|
13 |
|
|
1 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
Fibers
segment: |
|
|
|
|
|
|
|
|
|
|
Severance charges |
|
|
-- |
|
|
1 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
Voridian Division |
|
|
13 |
|
|
3 |
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Developing
Businesses Division segment: |
|
|
|
|
|
|
|
|
|
|
Fixed asset impairments |
|
|
9 |
|
|
-- |
|
|
-- |
|
Severance costs |
|
|
8 |
|
|
-- |
|
|
-- |
|
Restructuring charges |
|
|
4 |
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
Developing Businesses segment |
|
|
21 |
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
206 |
|
$ |
523 |
|
$ |
5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
asset impairments and restructuring charges, net |
|
|
206 |
|
|
489 |
|
|
5 |
|
|
Total
goodwill impairments |
|
|
-- |
|
|
34 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
206 |
|
$ |
523 |
|
$ |
5 |
|
2004
During
the fourth quarter 2004, the Company recorded asset impairments of $9 million
and site closure and other restructuring charges of $9 million. The non-cash
asset impairments relate to the adjustment to fair value of assets at Cendian
Corporation, the Company’s logistics subsidiary, impacting the Developing
Businesses (“DB”) segment, resulting from a decision to reintegrate Cendian’s
logistics activities. In addition, the Company recognized restructuring charges
of $9 million primarily related to actual and expected severance of Cendian and
other employees, as well as site closure charges primarily related to previously
announced manufacturing plant closures.
In the
third quarter 2004, the Company recognized asset impairments of approximately
$27 million, primarily related to assets at the Company’s Batesville, Arkansas
and Longview, Texas manufacturing facilities. These impairments primarily relate
to certain fixed assets in the performance chemicals product lines in the PCI
segment that management decided to rationalize due to increased foreign
competition. Also in third quarter, the CASPI segment incurred
approximately $2 million in site closure charges primarily related to previously
announced manufacturing plant closures, while the DB segment incurred
approximately $3 million in restructuring charges related to the reorganization
of Cendian.
In the
second quarter 2004, the Company recognized $62 million in asset impairment
charges related to assets held for sale. The assets were part of the Company’s
sale of certain businesses and product lines within the CASPI segment, which was
completed July 31, 2004. Those product lines include: certain acrylic monomers;
composites (unsaturated polyester resins); inks and graphic arts raw materials;
liquid resins; powder resins; and textile chemicals. The charges reflect
adjustment of the recorded values of these assets to the expected sales
proceeds. Also in second quarter 2004, the Company recognized an additional $4
million of site closure costs related primarily to previously announced
manufacturing plant closures. These charges had an impact of approximately $2
million each to the CASPI and Specialty Plastics (“SP”) segments.
In the
first quarter 2004, the Company recognized impairment charges of approximately
$41 million and severance charges of $5 million primarily related to the closure
of its copolyester manufacturing facility in Hartlepool, United Kingdom. The
decision to close the Hartlepool site, which manufactured products that are
within the Company’s SP segment’s product lines, was made in order to
consolidate production at other sites to create a more integrated and efficient
global manufacturing structure. Accordingly, the carrying value of the
manufacturing fixed assets was written down to fair value as established by
appraisal and available market data. In addition, the Company recognized $1
million of fixed asset impairments and $1 million of site closure costs related
to additional impairments within the CASPI reorganization and changes in
estimates for previously accrued amounts.
During
2004, the Company recognized $43 million in severance charges from ongoing cost
reduction efforts throughout the Company and costs related to the Company’s
employee separation programs announced in April 2004, resulting in severance
charges to the CASPI, PCI, SP, Polymers, and DB segments of $12 million, $10
million, $5 million, $13 million, and $3 million, respectively.
2003
CASPI
Segment
In the
third quarter, 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. Prior to the third quarter
2003, management was pursuing growth strategies aimed at significantly improving
the financial performance of these product groups. 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 groups, thus triggering the
impairments and certain restructuring charges.
The third
quarter fixed asset impairment charges of approximately $234 million primarily
related to assets associated with the above mentioned underperforming product
lines, and primarily impacted 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 intangible asset impairments charges related to definite-lived
intangible assets of approximately $128 million and indefinite-lived intangibles
of approximately $47 million. The definite-lived intangibles related primarily
to developed technology and customer lists, and the indefinite-lived intangibles
primarily related 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.
In the
fourth quarter, the Company recognized fixed asset impairments and site closure
costs of $1 million and $3 million, respectively. The fixed asset impairments
relate to additional impairments associated with the CASPI reorganization, as
discussed above. The site closure charges relate primarily to additional costs
related to the closure of the Company’s Dusseldorf manufacturing site.
Other
Segments
In the
second quarter, the Company recorded an asset impairmentcharge of approximately
$15 million related to the impairment of certain fixed assets used in certain of
the PCI segment’s performance 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.
In the
third and fourth quarter, the PCI segment incurred charges of $40 million
related to the impairment of fixed assets used in performance 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 specialty organic chemicals product lines, the fixed
asset impairments charge related to assets located at the Kingsport, Tennessee
facility.
In the
fourth quarter 2003, an asset impairment charge of $1 million was recorded
related to certain research and development assets classified as held for sale.
The fair value of these assets was determined using the estimated proceeds from
sale less cost to sell. These charges impacted the Polymers segment.
During
2003, the Company recognized $20 million in severance costs for the actual and
probable employee separations from consolidation and restructuring activities in
the CASPI segment and ongoing cost
reduction
efforts throughout the Company. These changes are reflected in CASPI, PCI, SP,
Polymers, and Fibers segments of $15 million, $2 million, $1 million, $1
million, and $1 million, respectively.
2002
CASPI
Segment
A change
in estimate for site closure costs for Philadelphia, Pennsylvania and Portland,
Oregon resulted in a $1 million credit to earnings in the third quarter. In the
fourth quarter, the Company recognized restructuring charges of approximately $4
million related to closure of plants in Duesseldorf, Germany; Rexdale, Canada;
and LaVergne, Tennessee; and additionally recognized an asset impairment charge
of approximately $2 million related to certain other European assets.
Other
Segments
In the
fourth quarter, a net $1 million credit to earnings was recorded for the PCI
segment due to a $2 million credit associated with previously impaired fine
chemicals product lines assets, and a charge of $1 million related to impaired
assets used in certain research and development activities.
During
2002, the Company recorded charges related to the write-down of underperforming
polyethylene assets in the Polymers segment totaling approximately $1
million.
The
following table summarizes the charges and changes in estimates described above,
other asset impairments and restructuring charges, the non-cash reductions
attributable to asset impairments, and the cash reductions in shutdown reserves
for severance costs and site closure costs paid:
|
|
|
|
Balance
at January 1, 2002 |
|
|
Provision/
Adjustments |
|
|
Non-cash
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 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions) |
|
|
Balance
at
January
1, 2003 |
|
|
Provision/
Adjustments |
|
|
Non-cash
Reductions |
|
|
Cash
Reductions |
|
|
Balance
at
December
31, 2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges |
|
$ |
-- |
|
$ |
500 |
|
$ |
(500 |
) |
$ |
-- |
|
$ |
-- |
|
Severance
costs |
|
|
2 |
|
|
20 |
|
|
-- |
|
|
(12 |
) |
|
10 |
|
|
Site
closure costs |
|
|
7 |
|
|
3 |
|
|
-- |
|
|
(5 |
) |
|
5 |
|
|
Total |
|
$ |
9 |
|
$ |
523 |
|
$ |
(500 |
) |
$ |
(17 |
) |
$ |
15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2004 |
|
|
Provision/
Adjustments |
|
|
Non-cash
Reductions |
|
|
Cash
Reductions |
|
|
Balance
at
December
31, 2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges |
|
$ |
-- |
|
$ |
140 |
|
$ |
(140 |
) |
$ |
-- |
|
$ |
-- |
|
Severance
costs |
|
|
10 |
|
|
53 |
|
|
-- |
|
|
(37 |
) |
|
26 |
|
|
Site
closure costs |
|
|
5 |
|
|
13 |
|
|
-- |
|
|
(9 |
) |
|
9 |
|
|
Total |
|
$ |
15 |
|
$ |
206 |
|
$ |
(140 |
) |
$ |
(46 |
) |
$ |
35 |
|
Substantially
all severance and site closure costs are expected to be applied to the reserves
within one year.
Actual
and probable involuntary separations totaled approximately 1,200 employees
during 2004. As of the end of 2004, substantially all separations accrued for
were completed.
During
2003, terminations related to actual and probable involuntary separations
totaled approximately 500 employees. As of the end of 2003, approximately 350 of
these terminations had occurred, with the remaining primarily relating to
previously announced consolidation and restructuring activities of certain
European CASPI manufacturing sites that were completed in early 2004.
| 16. |
OTHER
OPERATING INCOME AND OTHER (INCOME) CHARGES,
NET |
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other
operating income |
|
$ |
(7 |
) |
$ |
(33 |
) |
|
--
|
|
Other
operating income for 2004 totaled approximately $7 million resulting from a gain
on the sale of Ariel Research Corporation (“Ariel”) in the fourth quarter, which
was reflected in the DB segment.
Other
operating income for 2003 totaled approximately $33 million and reflected gains
of approximately $20 million on the sale of the Company’s high-performance
crystalline plastic assets in the first quarter, and approximately $13 million
on the sale of the Company’s colorant product lines and related assets in the
fourth quarter. These items were reflected within the SP and CASPI segments,
respectively.
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
2002
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other
income |
|
$ |
(24 |
) |
$ |
(28 |
) |
$ |
(14 |
) |
|
Other
charges |
|
|
20 |
|
|
18 |
|
|
16 |
|
|
Other
(income) charges, net |
|
$ |
(4 |
) |
$ |
(10 |
) |
$ |
2 |
|
Included
in other income are the Company’s portion of earnings from its equity
investments, royalty income, net gains on foreign exchange transactions, and
other miscellaneous items. Included in other charges are net losses on foreign
exchange transactions, the Company’s portion of losses from its equity
investments, fees on securitized receivables, and other miscellaneous items.
Other
income for 2004 primarily reflects the Company’s portion of earnings from its
equity investment in Genencor of $14 million. Other charges for 2004 consist
primarily of net losses on foreign exchange transactions of $7 million, fees on
securitized receivables of $4 million, writedowns to fair value of certain
technology business venture investments due to other than temporary declines in
value of $3 million, and other miscellaneous charges.
Other
income for 2003 primarily reflects net gains on foreign exchange transactions of
$13 million and the Company’s portion of earnings from its equity investment in
Genencor of $10 million. Other charges for 2003 consist primarily of write downs
to fair value of certain technology business venture investments due to other
than temporary declines in value of $4 million, fees on securitized receivables
of $3 million, and other miscellaneous charges.
Other
income for 2002 primarily reflects $9 million of earnings from the Company’s
equity investment in Genencor, net of a restructuring charge of $5 million.
Additionally, other income included a net gain on foreign exchange transactions
of $4 million. Other charges for 2002 primarily reflected a write-down to fair
value of certain technology business venture investments due to other than
temporary declines in value of $8 million and fees on securitized receivables of
$4 million.
On
January 27, 2005, the Company announced that it has entered into an agreement
with Danisco A/S under which Danisco will acquire all of Eastman’s equity
interest in Genencor. For more information on this transaction, see Note
24.
Certain
Businesses and Product Lines and Related Assets in CASPI
Segment
On July
31, 2004, the Company sold certain businesses and product lines and related
assets within its CASPI segment for net proceeds of approximately $165 million,
including a $50 million note receivable. The note receivable is due in
July 2011 and bears interest at a variable rate based upon Treasury yields
plus 350 basis points. The terms of the note allow the interest to be
rolled into the principal amount during the first three years. The Company
also retained approximately $40 million of accounts receivable related to these
businesses and product lines. The final purchase price is subject to change
based upon working capital adjustments and indebtedness targets. The Company
will continue to produce certain products for the buyer under ongoing supply
agreements with terms up to five years. In addition, the Company indemnified the
buyer against certain liabilities primarily related to taxes, legal matters,
environmental matters, and other representations and warranties. As of December
31, 2004, the Company has recorded a minimal loss related to this transaction.
However, changes in estimates to reserves for the above amount will be
reflected in future periods.
Components
of earnings (loss) before income taxes and the provision (benefit) for U.S. and
other income taxes follow:
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
United
States |
|
$ |
65 |
|
$ |
(309 |
) |
$ |
98 |
|
|
Outside
the United States |
|
|
(1 |
) |
|
(72 |
) |
|
(14 |
) |
|
Total |
|
$ |
64 |
|
$ |
(381 |
) |
$ |
84 |
|
| |
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes |
|
|
|
|
|
|
|
|
|
|
United
States |
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
16 |
|
$ |
16 |
|
$ |
(113 |
) |
Deferred |
|
|
(128 |
) |
|
(102 |
) |
|
100 |
|
Outside
the United States |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
8 |
|
|
10 |
|
|
16
|
|
Deferred |
|
|
(8 |
) |
|
(29 |
) |
|
(7 |
) |
State
and other |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
6 |
|
|
3 |
|
|
7 |
|
|
Deferred |
|
|
-- |
|
|
(6 |
) |
|
2 |
|
|
Total |
|
$ |
(106 |
) |
$ |
(108 |
) |
$ |
5 |
|
The
following represents the deferred tax charge (benefit) recorded as a component
of accumulated other comprehensive income (loss) in stockholders’
equity.
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability |
|
$ |
2 |
|
$ |
(12 |
) |
$ |
86 |
|
Unrealized
losses on investments |
|
|
-- |
|
|
-- |
|
|
1 |
|
|
Net
unrealized gains (losses) on derivative instruments |
|
|
7 |
|
|
(3 |
) |
|
(1 |
) |
|
Total |
|
$ |
9 |
|
$ |
(15 |
) |
$ |
86 |
|
Differences
between the provision (benefit) for income taxes and income taxes computed using
the U.S. federal statutory income tax rate follow:
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Amount
computed using the statutory rate |
|
$ |
23 |
|
$ |
(133 |
) |
$ |
29 |
|
State
income taxes, net |
|
|
(1 |
) |
|
(4 |
) |
|
6 |
|
Foreign
rate variance |
|
|
4 |
|
|
27 |
|
|
2 |
|
Extraterritorial
income exclusion |
|
|
(10 |
) |
|
(9 |
) |
|
(14 |
) |
ESOP
dividend payout |
|
|
(2 |
) |
|
(2 |
) |
|
(2 |
) |
Capital
loss benefits |
|
|
(116 |
) |
|
-- |
|
|
-- |
|
Change
in reserves for tax contingencies |
|
|
(2 |
) |
|
-- |
|
|
(17 |
) |
Goodwill
Impairment |
|
|
-- |
|
|
12 |
|
|
-- |
|
Donation
of intangibles |
|
|
(2 |
) |
|
-- |
|
|
-- |
|
|
Other
|
|
|
-- |
|
|
1 |
|
|
1 |
|
|
Provision
(benefit) for income taxes |
|
$ |
(106 |
) |
$ |
(108 |
) |
$ |
5 |
|
The 2004
effective tax rate was impacted by $90 million of deferred tax benefits
resulting from the expected utilization of a capital loss resulting from the
sale of certain businesses and product lines and related assets in the CASPI
segment and $26 million of tax benefit resulting from the favorable resolution
of a prior year capital loss refund claim.
The
significant components of deferred tax assets and liabilities
follow:
| |
|
December
31, |
|
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
Deferred
tax assets |
|
|
|
|
|
|
|
Postemployment
obligations |
|
$ |
444 |
|
$ |
393 |
|
Miscellaneous
reserves |
|
|
42 |
|
|
41 |
|
Net
operating loss carry forwards |
|
|
204 |
|
|
195 |
|
Capital
loss carry forwards |
|
|
130 |
|
|
24 |
|
|
Other |
|
|
121 |
|
|
102 |
|
Total
deferred tax assets |
|
|
941 |
|
|
755 |
|
|
Less
valuation allowance |
|
|
(221 |
) |
|
(175 |
) |
|
Deferred
tax assets less valuation allowance |
|
$ |
720 |
|
$ |
580 |
|
| |
|
|
|
|
|
|
|
Deferred
tax liabilities |
|
|
|
|
|
|
|
Depreciation |
|
$ |
(
677 |
) |
$ |
(
694 |
) |
|
Other |
|
|
(159 |
) |
|
(159 |
) |
|
Total
deferred tax liabilities |
|
$ |
(836 |
) |
$ |
(853 |
) |
| |
|
|
|
|
|
|
|
|
Net
deferred tax liabilities |
|
$ |
(116 |
) |
$ |
(273 |
) |
| |
|
|
|
|
|
|
|
As
recorded in the Consolidated Statements of Financial
Position: |
|
|
|
|
|
|
|
Other
current assets |
|
$ |
48 |
|
$ |
8 |
|
Other
noncurrent assets |
|
|
52 |
|
|
42 |
|
Payables
and other current liabilities |
|
|
(6 |
) |
|
(7 |
) |
|
Deferred
income tax liabilities |
|
|
(210 |
) |
|
(316 |
) |
|
Net
deferred tax liabilities |
|
$ |
(116 |
) |
$ |
(273 |
) |
Unremitted
earnings of subsidiaries outside the United States, considered to be reinvested
indefinitely, totaled $318 million at December 31, 2004. It is not practicable
to determine the deferred tax liability for temporary differences related to
those unremitted earnings.
For
certain consolidated foreign subsidiaries, income and losses directly flow
through to taxable income in the United States. These entities are also subject
to taxation in the foreign tax jurisdictions. Net operating loss carryforwards
exist to offset future taxable income in foreign tax jurisdictions and valuation
allowances are provided to reduce deferred related tax assets if it is more
likely than not that this benefit will not be realized. Changes in the estimated
realizable amount of deferred tax assets associated with net operating losses
for these entities could result in changes in the deferred tax asset valuation
allowance in the foreign tax jurisdiction. At the same time, because these
entities are also subject to tax in the United States, a deferred tax liability
for the expected future taxable income will be established concurrently.
Therefore, the impact of any reversal of valuation allowances on consolidated
income tax expense will only be to the extent that there are differences between
the United States statutory tax rate and the tax rate in the foreign
jurisdiction. A valuation allowance of $168 million at December 31, 2004, has
been provided against the deferred tax asset resulting from these operating loss
carryforwards.
At
December 31, 2004, foreign net operating loss carryforwards totaled $554
million. Of this total, $138 million will expire in 3 to 15 years; $416 million
will never expire.
Amounts
due to and from tax authorities as recorded in the Consolidated Statements of
Financial Position:
| |
|
December
31, |
|
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
Payables
and other current liabilities |
|
|
55 |
|
|
23 |
|
|
Other
long-term liabilities |
|
|
27 |
|
|
36 |
|
|
Total
income taxes payable |
|
$ |
82 |
|
$ |
59 |
|
On
October 22, 2004 the President of the United States signed the American Jobs
Creation Act of 2004 (the “Jobs Act”). The Jobs Act provides a deduction for
income from qualified domestic production activities, which will be phased in
from 2005 through 2010. The Jobs Act also provides for a two-year phase-out of
the extra-territorial income (“ETI”) exclusion. The domestic manufacturing
benefit has no effect on deferred tax assets or liabilities existing at the
enactment date. Rather, the impact of this deduction will be reported in the
period in which the deduction is claimed on the Company’s federal income tax
return. The Company is currently assessing the details of the Jobs Act and the
net effect of the phase out of the ETI exclusion and the phase in of this new
deduction. This analysis is expected to be completed in mid-2005. Until such
time, it is not possible to determine what impact this legislation will have on
the Company’s consolidated tax accruals or effective tax rate.
The Act
also creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign corporations. The
deduction is subject to a number of limitations. The Company is not yet in a
position to decide whether, and to what extent, foreign earnings might be
repatriated. Based upon analysis to date, however, it is reasonably possible
that some amount up to $500 million might be repatriated. The related income tax
effects of any such repatriation cannot be reasonably estimated at this time.
The Company has not provided for U.S. federal income and foreign withholding
taxes on $ 318 million of undistributed earnings from non-U.S. operations as of
December 31, 2004. Until the Company’s analysis of the Act is completed, the
Company will continue to permanently reinvest those earnings. The Company
expects to be in a position to finalize this assessment by mid 2005.
| 19. |
SUPPLEMENTAL
CASH FLOW INFORMATION |
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes is as follows: |
|
|
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized |
|
$ |
135 |
|
$ |
133 |
|
$ |
125 |
|
Income
taxes received |
|
|
(3 |
) |
|
(43 |
) |
|
(40 |
) |
Derivative
financial instruments and related gains and losses are included in cash flows
from operating activities. The effect on cash of foreign currency transactions
and exchange rate changes for all years presented was not material.
Non-cash
proceeds from investing activities included a $50 million note receivable
received in conjunction with the sale of certain businesses and product lines in
the CASPI segment as discussed in Note 17.
Non-cash
portion of earnings from the Company’s equity investments are $15 million, $12
million, and $11 million for 2004, 2003, and 2002, respectively.
The
Company’s products and operations are managed and reported in three divisions
comprising six operating segments. Segments are determined by the customer
markets in which we sell our products. Eastman Division consists of the CASPI
segment, the PCI segment, and the SP segment. Voridian Division contains the
Polymers segment and the Fibers segment. The Developing Businesses Division
consists of the DB Segment.
The
divisional structure has allowed the Company to align costs more directly with
the activities and businesses that generate them. Goods and services are
transferred between the divisions at predetermined prices that 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.
The CASPI
segment manufactures raw materials, additives and specialty polymers, primarily
for the paints and coatings, inks, and adhesives markets. The CASPI segment's
products consist of liquid vehicles, coatings additives, and hydrocarbon resins,
and rosins and rosin esters. Liquid vehicles, such as ester, ketone and alcohol
solvents, maintain the binders in liquid form for ease of application. Coatings
additives, such as cellulosic polymers, Texanol™ ester alcohol and chlorinated
polyolefins, enhance the rheological, film formation and adhesion properties of
paints, coatings and inks. Hydrocarbon resins and rosins and rosin esters are
used in adhesive, ink and polymers compounding applications. Additional products
are developed in response to, or in anticipation of, new applications where the
Company believes significant value can be achieved. On July 31, 2004, the
Company completed the sale of certain businesses, product lines and related
assets within the CASPI segment. The divested businesses and product lines were
composites (unsaturated polyester resins), certain acrylic monomers, inks and
graphic arts raw materials, liquid resins, powder resins, and textile
chemicals.
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 and cellulosic plastics that
possess unique performance properties for value-added end uses such as
appliances, store fixtures and displays, building and construction, electronic
packaging, medical packaging, personal care and cosmetics, performance films,
tape and labels, , fiber, photographic and optical film, 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 DB
segment includes new businesses and certain investments in 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, Centrus, a new
business in food safety diagnostics and Eastman’s gasification services. The DB
segment also includes the results of Cendian, which is being reintegrated back
into Eastman, and Ariel, which was sold in fourth quarter, 2004.
Effective
January 1, 2004, certain commodity product lines were transferred from the PCI
segment to the CASPI segment, which resulted in the reclassification of asset
impairment charges of approximately $42 million for 2003.
Effective
January 1, 2003, sales, operating results and assets for the Developing
Businesses Division were moved from the CASPI, PCI and SP segments to the DB
segment. During 2002, these amounts were included within the CASPI, PCI, and SP
segments. Accordingly, the prior year amounts for sales and operating earnings
have been reclassified for all periods presented.
|
(Dollars
in millions) |
|
2004 |
| |
|
|
|
|
|
|
|
|
|
|
|
Sales
by Division and Segment |
|
|
External
Sales |
|
|
Interdivisional
Sales |
|
|
Total
Sales |
|
Eastman
Division Segments |
|
|
|
|
|
|
|
|
|
|
CASPI
Segment |
|
$ |
1,554 |
|
$ |
1 |
|
$ |
1,555 |
|
PCI
Segment |
|
|
1,347 |
|
|
583 |
|
|
1,930 |
|
|
SP
segment |
|
|
644 |
|
|
51 |
|
|
695 |
|
|
Total |
|
|
3,545 |
|
|
635 |
|
|
4,180 |
|
| |
|
|
|
|
|
|
|
|
|
|
Voridian
Division Segments |
|
|
|
|
|
|
|
|
|
|
Polymers |
|
|
2,183 |
|
|
69 |
|
|
2,252 |
|
|
Fibers |
|
|
731 |
|
|
88 |
|
|
819 |
|
|
Total |
|
|
2,914 |
|
|
157 |
|
|
3,071 |
|
| |
|
|
|
|
|
|
|
|
|
|
Developing
Businesses Division |
|
|
|
|
|
|
|
|
|
|
|
Developing
Businesses |
|
|
121 |
|
|
424 |
|
|
545 |
|
|
Total
|
|
|
121 |
|
|
424 |
|
|
545
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
6,580 |
|
$ |
1,216 |
|
$ |
7,796 |
|
| |
|
|
|
|
(Dollars
in millions) |
|
2003* |
| |
|
|
|
|
|
|
|
|
|
|
|
Sales
by Division and Segment |
|
|
External
Sales |
|
|
Interdivisional
Sales |
|
|
Total
Sales |
|
Eastman
Division Segments |
|
|
|
|
|
|
|
|
|
|
CASPI
Segment |
|
$ |
1,683 |
|
$ |
-- |
|
$ |
1,683 |
|
PCI
Segment |
|
|
1,098 |
|
|
495 |
|
|
1,593 |
|
|
SP
segment |
|
|
559 |
|
|
49 |
|
|
608 |
|
|
Total |
|
|
3,340 |
|
|
544 |
|
|
3,884 |
|
| |
|
|
|
|
|
|
|
|
|
|
Voridian
Division Segments |
|
|
|
|
|
|
|
|
|
|
Polymers |
|
|
1,756 |
|
|
68 |
|
|
1,824 |
|
|
Fibers |
|
|
635 |
|
|
80 |
|
|
715 |
|
|
Total |
|
|
2,391 |
|
|
148 |
|
|
2,539 |
|
| |
|
|
|
|
|
|
|
|
|
|
Developing
Businesses Division |
|
|
|
|
|
|
|
|
|
|
|
Developing
Businesses |
|
|
69 |
|
|
396 |
|
|
465 |
|
|
Total
|
|
|
69 |
|
|
396 |
|
|
465 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
5,800 |
|
$ |
1,088 |
|
$ |
6,888 |
|
* Sales
revenue for 2003 has been realigned to reflect certain product movements between
CASPI and PCI segments effective in the first quarter 2004.
|
(Dollars
in millions) |
|
2002* |
| |
|
|
|
|
|
|
|
|
|
|
|
Sales
by Division and Segment |
|
|
External
Sales |
|
|
Interdivisional
Sales |
|
|
Total
Sales |
|
Eastman
Division Segments |
|
|
|
|
|
|
|
|
|
|
CASPI
Segment |
|
$ |
1,601 |
|
$ |
-- |
|
$ |
1,601 |
|
PCI
Segment |
|
|
1,023 |
|
|
383 |
|
|
1,406 |
|
|
SP
segment |
|
|
528 |
|
|
45 |
|
|
573 |
|
|
Total |
|
|
3,152 |
|
|
428 |
|
|
3,580 |
|
| |
|
|
|
|
|
|
|
|
|
|
Voridian
Division Segments |
|
|
|
|
|
|
|
|
|
|
Polymers |
|
|
1,510 |
|
|
55 |
|
|
1,565 |
|
|
Fibers |
|
|
642 |
|
|
72 |
|
|
714 |
|
|
Total |
|
|
2,152 |
|
|
127 |
|
|
2,279 |
|
| |
|
|
|
|
|
|
|
|
|
|
Developing
Businesses Division |
|
|
|
|
|
|
|
|
|
|
|
Developing
Businesses |
|
|
16 |
|
|
330 |
|
|
346 |
|
|
Total
|
|
|
16
|
|
|
330 |
|
|
346
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
5,320 |
|
$ |
885 |
|
$ |
6,205 |
|
* Sales
revenue for 2002 has been realigned to reflect certain product movements between
CASPI and PCI segments effective in the first quarter 2004.
|
Operating
Earnings (Loss) (1) |
|
|
2004 |
|
|
2003 |
|
|
2002(2 |
) |
Eastman
Division Segments |
|
|
|
|
|
|
|
|
|
|
CASPI
Segment |
|
$ |
67 |
|
$ |
(402 |
) |
$ |
51 |
|
PCI
Segment |
|
|
16 |
|
|
(45 |
) |
|
21 |
|
|
SP
segment |
|
|
13 |
|
|
63 |
|
|
34 |
|
|
Total |
|
|
96 |
|
|
(384 |
) |
|
106 |
|
| |
|
|
|
|
|
|
|
|
|
|
Voridian
Division Segments |
|
|
|
|
|
|
|
|
|
|
Polymers |
|
|
25 |
|
|
62 |
|
|
35 |
|
|
Fibers |
|
|
146 |
|
|
125 |
|
|
133 |
|
|
Total |
|
|
171 |
|
|
187 |
|
|
168 |
|
| |
|
|
|
|
|
|
|
|
|
|
Developing
Businesses Division |
|
|
|
|
|
|
|
|
|
|
|
Developing
Businesses |
|
|
(86 |
) |
|
(65 |
) |
|
(70 |
) |
|
Total
|
|
|
(86 |
) |
|
(65 |
) |
|
(70 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
(6 |
) |
|
(5 |
) |
|
4 |
|
|
Total
Eastman Chemical Company |
|
$ |
175 |
|
$ |
(267 |
) |
$ |
208 |
|
| (1) |
Operating
earnings (loss) includes the impact of asset impairments and restructuring
charges, goodwill impairments, and other operating income and expense as
described in Notes 15 and 16. |
| (2) |
Operating
earnings (loss) for 2002 has been realigned to reflect certain product
movements between CASPI and PCI segments effective in the first quarter
2004. |
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003* |
|
|
2002* |
|
| |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
Eastman
Division Segments |
|
|
|
|
|
|
|
|
|
|
CASPI
Segment |
|
$ |
1,495 |
|
$ |
1,792 |
|
$ |
2,045 |
|
PCI
Segment |
|
|
1,640 |
|
|
1,685 |
|
|
1,617 |
|
|
SP
segment |
|
|
709 |
|
|
762 |
|
|
763 |
|
|
Total |
|
|
3,844 |
|
|
4,239 |
|
|
4,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Voridian
Division Segments |
|
|
|
|
|
|
|
|
|
|
Polymers |
|
|
1,418 |
|
|
1,351 |
|
|
1,208 |
|
|
Fibers |
|
|
580 |
|
|
614 |
|
|
612 |
|
|
Total |
|
|
1,998 |
|
|
1,965 |
|
|
1,820 |
|
| |
|
|
|
|
|
|
|
|
|
|
Developing
Businesses Division |
|
|
|
|
|
|
|
|
|
|
|
Developing
Businesses |
|
|
30 |
|
|
40 |
|
|
42 |
|
|
Total
|
|
|
30 |
|
|
40 |
|
|
42 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
5,872 |
|
$ |
6,244 |
|
$ |
6,287 |
|
| |
|
|
|
|
|
|
|
|
|
|
Depreciation
Expense |
|
|
|
|
|
|
|
|
|
|
Eastman
Division Segments |
|
|
|
|
|
|
|
|
|
|
CASPI
Segment |
|
$ |
57 |
|
$ |
79 |
|
$ |
98 |
|
PCI
Segment |
|
|
87 |
|
|
94 |
|
|
97 |
|
|
SP
segment |
|
|
43 |
|
|
41 |
|
|
49 |
|
|
Total |
|
|
187 |
|
|
214 |
|
|
244 |
|
| |
|
|
|
|
|
|
|
|
|
|
Voridian
Division Segments |
|
|
|
|
|
|
|
|
|
|
Polymers |
|
|
72 |
|
|
69 |
|
|
69 |
|
|
Fibers |
|
|
39 |
|
|
37 |
|
|
37 |
|
|
Total |
|
|
111 |
|
|
106 |
|
|
106 |
|
| |
|
|
|
|
|
|
|
|
|
|
Developing
Businesses Division |
|
|
|
|
|
|
|
|
|
|
|
Developing
Businesses |
|
|
4 |
|
|
14 |
|
|
8 |
|
|
Total
|
|
|
4 |
|
|
14 |
|
|
8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
302 |
|
$ |
334 |
|
$ |
358 |
|
| |
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures |
|
|
|
|
|
|
|
|
|
|
Eastman
Division Segments |
|
|
|
|
|
|
|
|
|
|
CASPI
Segment |
|
$ |
50 |
|
$ |
77 |
|
$ |
147 |
|
PCI
Segment |
|
|
65 |
|
|
56 |
|
|
140 |
|
|
SP
segment |
|
|
36 |
|
|
7 |
|
|
61 |
|
|
Total |
|
|
151 |
|
|
140 |
|
|
348 |
|
| |
|
|
|
|
|
|
|
|
|
|
Voridian
Division Segments |
|
|
|
|
|
|
|
|
|
|
Polymers |
|
|
67 |
|
|
52 |
|
|
49 |
|
|
Fibers |
|
|
14 |
|
|
34 |
|
|
24 |
|
|
Total |
|
|
81 |
|
|
86 |
|
|
73 |
|
| |
|
|
|
|
|
|
|
|
|
|
Developing
Businesses Division |
|
|
|
|
|
|
|
|
|
|
|
Developing
Businesses |
|
|
16 |
|
|
4 |
|
|
6 |
|
|
Total
|
|
|
16 |
|
|
4 |
|
|
6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Eastman Chemical Company |
|
$ |
248 |
|
$ |
230 |
|
$ |
427 |
|
* Assets
for 2002 and 2003 have been realigned to reflect certain product movements
between CASPI and PCI segments effective in the first quarter 2004.
|
(Dollars
in millions) |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Geographic
Information |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
United
States |
|
$ |
3,456 |
|
$ |
3,074 |
|
$ |
2,887 |
|
|
All
foreign countries |
|
|
3,124 |
|
|
2,726 |
|
|
2,433 |
|
|
Total |
|
$ |
6,580 |
|
$ |
5,800 |
|
$ |
5,320 |
|
| |
|
|
|
|
|
|
|
|
|
|
Long-Lived
Assets, Net |
|
|
|
|
|
|
|
|
|
|
United
States |
|
$ |
2,481 |
|
$ |
2,542 |
|
$ |
2,805 |
|
|
All
foreign countries |
|
|
711 |
|
|
877 |
|
|
948 |
|
|
Total |
|
$ |
3,192 |
|
$ |
3,419 |
|
$ |
3,753 |
|
| 21. |
QUARTERLY
SALES AND EARNINGS DATA - UNAUDITED |
|
(Dollars
in millions, except per share amounts) |
|
|
First
Quarter |
|
|
Second
Quarter |
|
|
Third
Quarter2 |
|
|
Fourth
Quarter2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,597 |
|
$ |
1,676 |
|
$ |
1,
649 |
|
$ |
1,658 |
|
Gross
profit |
|
|
235 |
|
|
270 |
|
|
257 |
|
|
216 |
|
Asset
impairment and restructuring charges |
|
|
67 |
|
|
79 |
|
|
42 |
|
|
18 |
|
Net
earnings (loss) |
|
|
(6 |
) |
|
84 |
|
|
38 |
|
|
54 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.07 |
) |
$ |
1.08 |
|
$ |
0.50 |
|
$ |
0.69 |
|
Diluted |
|
$ |
(0.07 |
) |
$ |
1.07 |
|
$ |
0.49 |
|
$ |
0.68 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Each
quarter is calculated as a discrete period; the sum of the four quarters may not
equal the calculated full-year amount.
(2)
On July
31, 2004, the Company completed the sale of certain businesses, product lines
and related assets within the CASPI segment. See Note 17 and Part II, Item 7 -
Management Discussion & Analysis under “Summary by Operating Segment” for
additional information.
|
(Dollars
in millions, except per share amounts) |
|
|
First
Quarter |
|
|
Second
Quarter |
|
|
Third
Quarter |
|
|
Fourth
Quarter |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,441 |
|
$ |
1
481 |
|
$ |
1,444 |
|
$ |
1,434 |
|
Gross
profit |
|
|
184 |
|
|
241 |
|
|
200 |
|
|
185 |
|
Asset
impairment and restructuring charges |
|
|
2 |
|
|
16 |
|
|
462 |
|
|
9 |
|
Goodwill
impairment |
|
|
-- |
|
|
-- |
|
|
34 |
|
|
-- |
|
Earnings
(loss) before cumulative effect of change in accounting
principles |
|
|
18 |
|
|
35 |
|
|
(336 |
) |
|
10 |
|
Net
earnings (loss) |
|
|
21 |
|
|
35 |
|
|
(336 |
) |
|
10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share before cumulative effect of change in accounting
principles |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
$ |
0.46 |
|
$ |
(4.35 |
) |
$ |
0.13 |
|
Diluted |
|
$ |
0.23 |
|
$ |
0.46 |
|
$ |
(4.35 |
) |
$ |
0.13 |
|
(1)
Each
quarter is calculated as a discrete period; the sum of the four quarters may not
equal the calculated full-year amount.
| 22. |
RECENTLY
ISSUED ACCOUNTING STANDARDS |
In
November, 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
Accounting Research Bulletin No. 43, Chapter 4”. The standard adopts the
International Accounting Standards Board’s view related to inventories that
abnormal amounts of idle capacity and spoilage costs should be excluded from the
cost of inventory and expensed when incurred. Additionally, the Statement
clarifies the meaning of the term 'normal capacity'. The provisions of this
Statement will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is currently evaluating the effect
SFAS No. 151 will have on its consolidated financial position, liquidity, or
results from operations.
In
December, 2004 the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of Accounting Principles Board Opinion No. 29”. SFAS No. 153 is
based on the principle that nonmonetary asset exchanges should be recorded and
measured at the fair value of the assets exchanged, with certain exceptions.
This Statement requires exchanges of productive assets to be accounted for at
fair value, rather than at carryover basis, unless neither the asset received
nor the asset surrendered has a fair value that is determinable within
reasonable limits or the transactions lack commercial substance as defined by
the Statement. In addition, the Board decided to retain the guidance for
assessing whether the fair value of a nonmonetary asset is determinable within
reasonable limits. The provisions of this Statement will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Company is currently evaluating the effect SFAS No. 153 will have on
its consolidated financial position, liquidity, or results from
operations.
In
December, 2004 the FASB issued SFAS No. 123R, “Share-Based Payment”. SFAS No.
123R revises SFAS No. 123, “Accounting for Stock-Based Compensation” and
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. The provisions of this Statement will be
effective for the Company as of the first reporting period beginning after June
15, 2005.
SFAS No.
123R requires public companies to measure the cost of employee services received
in exchange for the award of equity instruments based upon a grant date fair
value using values obtained from public markets where such instruments are
traded, or if not available, a mathematical pricing model. The cost is
recognized over the period during which the employee is required to provide
services in exchange for the award. Effective with implementation, the Company
will reflect this cost in its financial statements and will be reflected as a
component included in net income and earnings per share. Prior to
implementation, public companies had the choice of early adoption of the
standard or to continue reporting under the current requirements of APB Opinion
No. 25 and to provide pro forma disclosure of this cost within the category of
Significant Accounting Policies as a footnote to the financial statements. The
Company is currently reporting under APB No. 25 until implementation in third
quarter 2005.
Due to
the concern for comparability of financial statements of prior years, SFAS No.
123R provides for two methods of implementation: (1) Modified Prospective
Application and (2) Modified Retrospective Application. Modified Prospective
Application provides for adoption of fair value cost recognition to all new,
modified, repurchased, or cancelled awards after the effective date of the
standard without retrospective application to prior interim and annual fiscal
periods. The Modified Retrospective Application method provides for
retrospective application to either the current fiscal year interim periods only
or all prior years for which SFAS No. 123 was effective. While the Company has
not yet decided which method of implementation will be selected, adequate
disclosure of all comparative fiscal periods covered by financial statements
will comply with requirements of the SFAS 123R.
| 23. |
CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF
TAX |
SFAS
No. 143
Effective
January 1, 2003, the Company’s method of accounting for environmental
closure and postclosure costs changed as a result of the adoption of SFAS
No. 143, “Accounting for Asset Retirement Obligations.” Upon the initial
adoption of the provision, entities are required to recognize a liability for
any existing asset retirement obligations adjusted for cumulative accretion to
the date of adoption of this Statement, an asset retirement cost capitalized as
an increase to the carrying amount of the associated long-lived asset, and
accumulated depreciation on that capitalized cost. In accordance with SFAS No.
143, the Company
recorded
asset retirement obligations primarily related to closure and postclosure
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.
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” 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.
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 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.
On
January 27, 2005, the Company announced that it has entered into an agreement
with Danisco A/S under which Danisco will acquire all of Eastman’s equity
interest in Genencor for $419 million in cash as part of Danisco’s acquisition
of all the outstanding common stock of Genencor. Closing of this sale, which is
subject to satisfaction of certain customary conditions, is targeted for first
quarter 2005 and is expected to be completed by May 31, 2005. Following public
announcement of Danisco’s agreements to acquire Genencor, several purported
class action complaints, two naming Eastman as a party, have been filed in state
courts of Delaware and California, in each case seeking, among other things, to
enjoin the proposed acquisition of Genencor by Danisco. On March 9, 2005,
the parties to the complaints pending in Delaware executed a memorandum of
understanding that, subject to court approval, will result in a dismissal of
such complaints and a release with respect to the alleged claims. 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 will have a material adverse effect on its overall
financial condition, results of operations, or cash flows.
| ITEM |
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
None.
| ITEM |
9A.
CONTROLS
AND PROCEDURES |
Disclosure
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 the Company’s 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 December 31,
2004.
Management’s
Report on Internal Control Over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s principal
executive and principal financial officers to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company’s financial statements for external purposes in accordance with U.S.
generally accepted accounting principles.
The
Company’s internal control over financial reporting includes policies and
procedures that:
| · |
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets of the
Company; |
| · |
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and the directors of the Company;
and |
| · |
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the Company’s financial
statements. |
Management
has assessed the effectiveness of its internal control over financial reporting
as of December 31, 2004 based on the framework established in Internal
Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on this assessment, management has determined that the Company’s
internal control over financial reporting was effective as of December 31,
2004.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
which appears herein.
Changes
in Internal Control Over Financial Reporting
There has
been no change in the Company’s internal control over financial reporting that
occurred during the fourth quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
| ITEM |
9B.
OTHER
INFORMATION |
None.
PART
III
| ITEM |
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The
material under the heading "Proposals to be Voted Upon at the Annual
Meeting--Item 1--Election of Directors" up to (but not including) the subheading
"Director Independence," the material under the subheading "Board
Committees--Audit Committee" (except for the material under the subheading
"Board Committees--Audit Committee--Audit Committee Report", which is not
incorporated by reference herein), and the material in Note (13) to the Summary
Compensation Table under the heading "Executive Compensation--Compensation
Tables", each to be filed in the 2005 Proxy Statement, is
incorporated by reference herein in response to this Item. Certain
information concerning executive officers of the Company is set forth under the
heading "Executive Officers of the Company" in Part I of this Annual
Report.
The
Company has adopted a code of ethics and business conduct applicable to the
chief executive officer, chief financial officer and the controller of the
Company. See “Part I - Item 1. Business - Available Information - SEC Filings
and Corporate Governance Materials”.
| ITEM |
11. EXECUTIVE
COMPENSATION |
The
material under the headings "Proposals to be Voted Upon at the Annual
Meeting--Item 1--Election of Directors--Director Compensation" to be filed in
the 2005 Proxy Statement is incorporated by reference herein in response to this
Item. In addition, the material under the heading "Executive Compensation" to be
filed in the 2005 Proxy Statement is incorporated by reference herein in
response to this Item, except for the material under the subheadings " --
Compensation and Management Development Committee Report on Executive
Compensation" and " -- Performance Graph," which are not incorporated by
reference herein.
| ITEM |
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS |
AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
material under the headings "Stock Ownership of Directors and Executive
Officers--Common Stock" and "Stock Ownership of Certain Beneficial Owners" to be
filed in the 2005 Proxy Statement is incorporated by reference herein in
response to this Item.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity
Compensation Plans Approved by Stockholders
Stockholders
approved the Company’s 1994, 1997, and 2002 Omnibus Long-Term Compensation
Plans; the 1994, 1999, and 2002 Director Long-Term Compensation Plans; and the
1996 Non-Employee Director Stock Option Plan. Although stock and stock-based
awards are still outstanding under the 1994 and 1997 Omnibus Long-Term
Compensation Plans, as well as the 1994 and 1999 Director Long-Term Compensation
Plans, no new shares are available under these plans for future grants.
Equity
Compensation Plans Not Approved by Stockholders
Stockholders
have approved all compensation plans under which shares of Eastman common stock
may be issued.
Summary
Equity Compensation Plan Information Table
The
following table sets forth certain information as of December 31, 2004 with
respect to compensation plans under which shares of Eastman common stock may be
issued.
|
Plan
Category |
|
Number
of Securities to be Issued upon Exercise of Outstanding Options
(a) |
|
Weighted-Average
Exercise Price of Outstanding Options
(b) |
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding securities reflected in Column (a))
(c) |
|
| |
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders |
|
8,155,100 |
(1) |
$47 |
|
4,503,500 |
(2) |
| |
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by stockholders |
|
-- |
|
-- |
|
-- |
|
| |
|
|
|
|
|
|
|
|
TOTAL |
|
8,155,100 |
|
$47 |
|
4,503,500 |
|
(1)
Represents
shares of common stock issuable upon exercise of outstanding options granted
under Eastman Chemical Company’s 1994, 1997, and 2002 Omnibus Long-Term
Compensation Plans; the 1994, 1999, and 2002 Director Long-Term Compensation
Plans; and the 1996 Non-Employee Director Stock Option Plan.
(2)
Includes
shares of common stock available for future grants under the Company’s 2002
Omnibus Long-Term Compensation Plan, the 2002 Director Long-Term Compensation
Plan, and the 1996 Non-Employee Director Stock Option Plan.
| ITEM |
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS |
There are
no transactions or relationships since the beginning of the last completed
fiscal year required to be reported in response to this Item.
| ITEM |
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES |
The
information concerning amounts billed for professional services rendered by the
principal accountant and pre-approval of such services by the Audit Committee of
the Company’s Board of Directors under the heading "Item 2 - Ratification of
Appointment of Independent Accountants" to be filed in the 2005 Proxy
Statement is incorporated by reference herein in response to this Item.
PART
IV
|
ITEM
15. |
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES |
| |
|
|
|
Page |
|
(a) |
1. |
Consolidated
Financial Statements: |
|
|
| |
|
|
|
|
| |
|
Management's
Responsibility for Financial Statements |
|
74 |
| |
|
|
|
|
| |
|
Report
of Independent Registered Public Accounting Firm |
|
75 |
| |
|
|
|
|
| |
|
Consolidated
Statements of Earnings (Loss), Comprehensive Income (Loss), and Retained
Earnings |
|
77 |
| |
|
|
|
|
| |
|
Consolidated
Statements of Financial Position |
|
78 |
| |
|
|
|
|
| |
|
Consolidated
Statements of Cash Flows |
|
79 |
| |
|
|
|
|
| |
|
Notes
to Company’s Consolidated Financial Statements |
|
80 |
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2. |
Financial
Statement Schedule |
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| |
|
II
- Valuation and Qualifying Accounts |
|
132 |
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| |
3. |
Exhibits
filed as part of this report are listed in the Exhibit Index beginning at
page 128 |
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128 |
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(b) |
The
Exhibit Index and required Exhibits to this report are included beginning
at page 128 |
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(c) |
II
- Valuation and Qualifying Accounts |
|
132 |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
| |
Eastman
Chemical Company |
| |
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| |
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| |
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By: |
/s/
J. Brian Ferguson |
| |
J.
Brian Ferguson |
| |
Chairman
of the Board and Chief Executive Officer |
| |
|
|
Date: |
March
14, 2005 |
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
|
SIGNATURE |
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TITLE |
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DATE |
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PRINCIPAL
EXECUTIVE OFFICER: |
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/s/
J. Brian Ferguson |
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Chairman
of the Board of Directors |
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March
14, 2005 |
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J.
Brian Ferguson |
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and
Chief Executive Officer |
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PRINCIPAL
FINANCIAL OFFICER: |
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/s/
Richard A. Lorraine |
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Senior
Vice President and |
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March
14, 2005 |
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Richard
A. Lorraine |
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Chief
Financial Officer |
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PRINCIPAL
ACCOUNTING OFFICER: |
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/s/
Curtis E. Espeland |
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Vice
President and Controller |
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March
14, 2005 |
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Curtis
E. Espeland |
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SIGNATURE |
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TITLE |
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DATE |
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DIRECTORS: |
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/s/
Calvin A. Campbell, Jr. |
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Director |
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March
14, 2005 |
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Calvin
A. Campbell, Jr. |
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/s/
Stephen R. Demeritt |
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Director |
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March
14, 2005 |
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Stephen
R. Demeritt |
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/s/
Donald W. Griffin |
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Director |
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March
14, 2005 |
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Donald
W. Griffin |
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/s/
Robert M. Hernandez |
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Director |
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March
14, 2005 |
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Robert
M. Hernandez |
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/s/
Renee J. Hornbaker |
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Director |
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March
14, 2005 |
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Renẻe
J. Hornbaker |
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/s/
Thomas H. McLain |
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Director |
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March
14, 2005 |
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Thomas
H. McLain |
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/s/
David W. Raisbeck |
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Director |
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March
14, 2005 |
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David
W. Raisbeck |
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/s/
Peter M. Wood |
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Director |
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March
14, 2005 |
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Peter
M. Wood |
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EXHIBIT
INDEX |
|
Sequential |
|
Exhibit |
|
|
|
Page |
Number |
|
Description |
|
Number |
| |
|
|
|
|
|
3.01 |
|
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 (the "June 30, 2001 10-Q")) |
|
|
| |
|
|
|
|
|
3.02 |
|
Amended
and Restated Bylaws of Eastman Chemical Company, as amended December 4,
2003 (incorporated herein by referenced to Exhibit 3.02 to Eastman
Chemical Company’s Annual Report on Form 10-K for the year ended December
31, 2003 (the “2003 10-K”)) |
|
|
| |
|
|
|
|
|
4.01 |
|
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) |
|
|
| |
|
|
|
|
|
4.02 |
|
Stockholder
Protection Rights Agreement dated as of December 13, 1993, between Eastman
Chemical Company and First Chicago Trust Company of New York, as Rights
Agent (incorporated herein by reference to Exhibit 4.4 to Eastman Chemical
Company's Registration Statement on Form S-8 relating to the Eastman
Investment Plan, File No. 33-73810) |
|
|
| |
|
|
|
|
|
4.03 |
|
Indenture,
dated as of January 10, 1994, between Eastman Chemical Company and The
Bank of New York, as Trustee (the "Indenture") (incorporated herein by
reference to Exhibit 4(a) to Eastman Chemical Company's current report on
Form 8-K dated January 10, 1994 (the "8-K")) |
|
|
| |
|
|
|
|
|
4.04 |
|
Form
of 6 3/8% Notes due January 15, 2004 (incorporated herein by reference to
Exhibit 4(c) to the 8-K) |
|
|
| |
|
|
|
|
|
4.05 |
|
Form
of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K) |
|
|
| |
|
|
|
|
|
4.06 |
|
Officers’
Certificate pursuant to Sections 201 and 301 of the Indenture
(incorporated herein by reference to Exhibit 4(a) to Eastman Chemical
Company's Current Report on Form 8-K dated June 8, 1994 (the "June
8-K")) |
|
|
| |
|
|
|
|
|
4.07 |
|
Form
of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference
to Exhibit 4(b) to the June 8-K) |
|
|
| |
|
|
|
|
|
4.08 |
|
Form
of 7.60% 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")) |
|
|
| |
|
|
|
|
|
4.09 |
|
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) |
|
|
| |
|
|
|
|
|
4.10 |
|
Officer's
Certificate pursuant to Sections 201 and 301 of the Indenture related to
7.60% Debentures due February 1, 2027 (incorporated herein by reference to
Exhibit 4.09 to the 1996 10-K) |
|
|
| |
|
|
|
|
|
4.11 |
|
$200,000,000
Accounts Receivable Securitization agreement dated April 13, 1999 (amended
April 11, 2000), between the Company and Bank One, N.A., 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. |
|
|
| |
|
|
|
|
|
4.12 |
|
Amended
and Restated Credit Agreement, dated as of April 7, 2004 (the "Credit
Agreement") among Eastman Chemical Company, the Lenders named therein, and
Citicorp USA, Inc., as Agent (incorporated herein by reference to Exhibit
4.12 to Eastman Chemical Company's Quarterly Report on Form 10-Q for the
quarter ending March 31, 2004) |
|
|
| |
|
|
|
|
| |
|
EXHIBIT
INDEX |
|
Sequential |
|
Exhibit |
|
|
|
Page |
Number |
|
Description |
|
Number |
| |
|
|
|
|
|
4.13 |
|
Form
of 3 ¼% 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) |
|
|
| |
|
|
|
|
|
4.14 |
|
Form
of 6.30% notes due 2018 (incorporated herein by reference to Exhibit 4.14
to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the
quarter ending September 30, 2003) |
|
|
| |
|
|
|
|
|
4.15 |
|
Amendments
to Stockholder Protection Rights Agreement (incorporated herein by
reference to Exhibits 4.1 and 4.2 to Eastman Chemical Company’s current
report on Form 8-K dated December 4, 2003) |
|
|
| |
|
|
|
|
|
10.01* |
|
Eastman
Chemical Company Benefit Security Trust dated January 2, 2002
(incorporated herein by reference to Exhibit 10.04 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002) |
|
|
| |
|
|
|
|
|
10.02* |
|
Eastman
Unit Performance Plan as amended January 1, 2004 (incorporated herein by
reference to Exhibit 10.09 to the 2003 10-K) |
|
|
| |
|
|
|
|
|
10.03* |
|
2002
Director Long-Term Compensation Plan, as amended (incorporated herein by
reference to Appendix A to Eastman Chemical Company’s definitive 2002
Annual Meeting Proxy Statement filed pursuant to Regulation
14A) |
|
|
| |
|
|
|
|
|
10.04* |
|
Amended
Eastman Executive Deferred Compensation Plan (incorporated herein by
referenced to Exhibit 10.02 to Eastman Chemical Company’s Annual Report on
Form 10-K for the year ended December 31, 2002) |
|
|
| |
|
|
|
|
|
10.05* |
|
Eastman
Excess Retirement Income Plan, amended and restated effective January 1,
2002 (incorporated herein by reference to Exhibit 10.10 to Eastman
Chemical Company's Annual Report on Form 10-K for the year ended December
31, 2001) |
|
|
| |
|
|
|
|
|
10.06* |
|
Eastman
Unfunded Retirement Income Plan, amended and restated effective January 1,
2002 (incorporated herein by reference to Exhibit 10.11 to Eastman
Chemical Company's Annual Report on Form 10-K for the year ended December
31, 2001) |
|
|
| |
|
|
|
|
|
10.07* |
|
Form
of Executive Severance Agreements (incorporated herein by reference to
Exhibit 10.12 to Eastman Chemical Company's Annual Report on Form 10-K for
the year ended December 31, 2001) |
|
|
| |
|
|
|
|
|
10.08* |
|
Unit
Performance Plan ("UPP") performance measures and goals, specific target
objectives with respect to such performance goals, the method for
computing the amount of the UPP award allocated to the award pool if the
performance goals are attained, and the eligibility criteria for employee
participation in the UPP, for the 2005 performance year (incorporated
herein by reference to Eastman Chemical Company’s current report on Form
8-K dated December 2, 2004) |
|
|
| |
|
|
|
|
|
10.09* |
|
2002
Omnibus Long-Term Compensation Plan (incorporated herein by reference to
Appendix A to Eastman Chemical Company’s definitive 2002 Annual Meeting
Proxy Statement filed pursuant to Regulation 14A) |
|
|
| |
|
|
|
|
|
10.10* |
|
1996
Non-Employee Director Stock Option Plan (incorporated herein by reference
to Exhibit 10.02 to Eastman Chemical Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996) |
|
|
| |
|
|
|
|
|
10.11* |
|
Amended
Director Deferred Compensation Plan (incorporated herein by referenced to
Exhibit 10.02 to Eastman Chemical Company’s Annual Report on Form 10-K for
the year ended December 31, 2002) |
|
|
| |
|
|
|
|
| |
|
EXHIBIT
INDEX |
|
Sequential |
|
Exhibit |
|
|
|
Page |
Number |
|
Description |
|
Number |
| |
|
|
|
|
| |
|
|
|
|
|
10.12* |
|
Employment
Agreement between Eastman Chemical Company and James P. Rogers
(incorporated herein by reference to Exhibit 10.02 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999) |
|
|
| |
|
|
|
|
|
10.13* |
|
Eastman
2000-2002 Long-Term Performance Subplan of 1997 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.20 to
Eastman Chemical Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (the "1999 10-K")) |
|
|
| |
|
|
|
|
|
10.14* |
|
Form
of Award Notice for Stock Options Granted to Managers under Omnibus
Long-Term Compensation Plan (incorporated herein by reference to Exhibit
10.21 to the 1999 10-K) |
|
|
| |
|
|
|
|
|
10.15* |
|
Form
of Indemnification Agreements between Theresa K. Lee, Gregory O. Nelson,
James P. Rogers and Eastman Chemical for service as directors of Genencor
International, Inc. (incorporated herein by reference to Exhibit 10.01 to
the June 30, 2000 10-Q) |
|
|
| |
|
|
|
|
|
10.16* |
|
Notice
of Restricted Stock Granted Pursuant to the Eastman Chemical Company 2002
Omnibus Long-Term Compensation Plan, dated October 7, 2002 (incorporated
herein by reference to Exhibit 10.01 to Eastman Chemical Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002) |
|
|
| |
|
|
|
|
|
10.17* |
|
Amended
and Restated Warrant to Purchase Shares of Common Stock of Eastman
Chemical Company, dated January 2, 2002 (incorporated herein by reference
to Exhibit 10.02 to Eastman Chemical Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002) |
|
|
| |
|
|
|
|
|
10.18* |
|
Amended
and Restated Registration Rights Agreement, dated January 2, 2002
(incorporated herein by reference to Exhibit 10.03 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2002) |
|
|
| |
|
|
|
|
|
10.19* |
|
Form
of Indemnification Agreements with Directors and Executive Officers
Agreements (incorporated herein by reference to Exhibit 10.25 to the 2003
10-K) |
|
|
| |
|
|
|
|
|
10.20* |
|
Notice
of Restricted Stock Granted Pursuant to the Eastman Chemical Company 2002
Omnibus Long-Term Compensation Plan, dated February 5, 2004 (incorporated
herein by reference to Exhibit 10.26 to the 2003 10-K) |
|
|
| |
|
|
|
|
|
10.21* |
|
Notice
of Restricted Stock Granted Pursuant to the Eastman Chemical Company 2002
Omnibus Long-Term Compensation Plan, dated January 1, 2004 (incorporated
herein by reference to Exhibit 10.27 to the 2003 10-K) |
|
|
| |
|
|
|
|
|
10.22* |
|
Notice
of Restricted Stock Granted Pursuant to the Eastman Chemical Company 2002
Omnibus Long-Term Compensation Plan, dated January 1, 2004 (incorporated
herein by reference to Exhibit 10.28 to the 2003 10-K) |
|
|
| |
|
|
|
|
|
10.23* |
|
Notice
of Restricted Stock Granted Pursuant to the Eastman Chemical Company 2002
Omnibus Long-Term Compensation Plan, dated December 3, 2003 (incorporated
herein by reference to Exhibit 10.29 to the 2003 10-K) |
|
|
| |
|
|
|
|
| |
|
EXHIBIT
INDEX |
|
Sequential |
|
Exhibit |
|
|
|
Page |
|
Number |
|
Description |
|
Number |
| |
|
|
|
|
|
10.24* |
|
Notice
of Performance Shares Granted Pursuant to the Eastman Chemical Company
2002 Omnibus Long-Term Compensation Plan, dated January 1, 2004
(incorporated herein by reference to Exhibit 10.30 to the 2003
10-K) |
|
|
| |
|
|
|
|
|
10.25* |
|
Notice
of Performance Shares Granted Pursuant to the Eastman Chemical Company
2002 Omnibus Long-Term Compensation Plan, dated January 1, 2004
(incorporated herein by reference to Exhibit 10.31 to the 2003
10-K) |
|
|
| |
|
|
|
|
|
10.26* |
|
Eastman
2004-2005 Performance Share Award Subplan of the 2002 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.32 to
the 2003 10-K) |
|
|
| |
|
|
|
|
|
10.27* |
|
Eastman
2004-2006 Performance Share Award Subplan of the 2002 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.33 to
the 2003 10-K) |
|
|
| |
|
|
|
|
|
10.28* |
|
Form
of Award Notice of Nonqualified Stock Option Granted to Executive Officers
Pursuant to the Eastman Chemical Company 2002 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.01 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004 (the “September 30, 2004 10-Q”) |
|
|
| |
|
|
|
|
|
10.29* |
|
Form
of Performance Share Award Subplan of the 2002 Omnibus Long-Term
Compensation Plan 2005 - 2007 Performance Period Effective January 1, 2005
(incorporated herein by reference to Exhibit 10.02 to the September 30,
2004 10-Q) |
|
|
| |
|
|
|
|
|
12.01 |
|
Statement
re: Computation of Ratios of Earnings (Loss) to Fixed
Charges |
|
133 |
| |
|
|
|
|
|
21.01 |
|
Subsidiaries
of the Company |
|
134
- 137 |
| |
|
|
|
|
|
23.01 |
|
Consent
of Independent Registered Public Accounting Firm |
|
138 |
| |
|
|
|
|
|
31.01 |
|
Rule
13a - 14(a) Certification by J. Brian Ferguson, Chairman of the Board and
Chief Executive Officer, for the year ended December 31,
2004 |
|
139 |
| |
|
|
|
|
|
31.02 |
|
Rule
13a - 14(a) Certification by Richard A. Lorraine, Senior Vice President
and Chief Financial Officer, for the year ended December 31,
2004 |
|
140 |
| |
|
|
|
|
|
32.01 |
|
Section
1350 Certification by J. Brian Ferguson, Chairman of the Board and Chief
Executive Officer, for the year ended December 31, 2004 |
|
141 |
| |
|
|
|
|
|
32.02 |
|
Section
1350 Certification by Richard A. Lorraine, Senior Vice President and Chief
Financial Officer, for the year ended December 31, 2004 |
|
142 |
| |
|
|
|
|
|
99.01 |
|
CASPI
segment detail of sales revenue, operating earnings (loss) and asset
impairments and restructuring charges |
|
143 |
| |
|
|
|
|
|
99.02 |
|
Eastman
Chemical Company detail of sales revenue and Eastman Division detail of
sales revenue |
|
144 |
| |
|
|
|
|
|
*
Management
contract or compensatory plan or arrangement filed pursuant to Item 601(b)
(10) (iii) of Regulation S-K. |
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
| |
|
|
|
Additions |
|
|
|
|
|
|
(Dollars
in millions) |
|
|
Balance
at January 1, 2002 |
|
|
Charged
to Cost and Expense |
|
|
Charged
to Other Accounts |
|
|
Deductions |
|
|
Balance
at December 31, 2002 |
|
Reserve
for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns |
|
$ |
35 |
|
$ |
18 |
|
$ |
-- |
|
$ |
21 |
|
$ |
32 |
|
Environmental
contingencies |
|
|
54 |
|
|
6 |
|
|
-- |
|
|
--
|
|
|
60 |
|
|
Deferred
tax valuation allowance |
|
|
155 |
|
|
(23 |
) |
|
-- |
|
|
-- |
|
|
132 |
|
| |
|
$ |
244 |
|
$ |
1 |
|
$ |
-- |
|
$ |
21 |
|
$ |
224 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2003 |
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns |
|
$ |
32 |
|
$ |
8 |
|
$ |
-- |
|
$ |
12 |
|
$ |
28 |
|
Environmental
contingencies |
|
|
60 |
|
|
1 |
|
|
-- |
|
|
-- |
|
|
61 |
|
|
Deferred
tax valuation allowance |
|
|
132 |
|
|
43 |
|
|
-- |
|
|
-- |
|
|
175 |
|
| |
|
$ |
224 |
|
$ |
52 |
|
$ |
-- |
|
$ |
12 |
|
$ |
264 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful
accounts and returns |
|
$ |
28 |
|
$ |
4 |
|
$ |
-- |
|
$ |
17 |
|
$ |
15 |
|
Environmental
contingencies |
|
|
61 |
|
|
-- |
|
|
-- |
|
|
5 |
|
|
56 |
|
|
Deferred
tax valuation allowance |
|
|
175 |
|
|
39 |
|
|
7 |
|
|
-- |
|
|
221 |
|
| |
|
$ |
264 |
|
$ |
43 |
|
$ |
7 |
|
$ |
22 |
|
$ |
292 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132