1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 62-1539359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N. EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class June 30, 2001
Common Stock, par value $0.01 per share 77,107,764
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
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EXHIBIT INDEX ON PAGE 37
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TABLE OF CONTENTS
ITEM PAGE
PART I. FINANCIAL INFORMATION
1. Financial Statements 3-15
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16-30
PART II. OTHER INFORMATION
1. Legal Proceedings 31-32
4. Submission of Matters to a Vote of Security Holders 32-34
5. Other Information 34-35
6. Exhibits and Reports on Form 8-K 35
SIGNATURES
Signatures 36
2
3
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS), COMPREHENSIVE
INCOME (LOSS), AND RETAINED EARNINGS
(Dollars in millions, except per share amounts)
SECOND QUARTER FIRST SIX MONTHS
2001 2000 2001 2000
EARNINGS (LOSS)
Sales $ 1,402 $ 1,316 $ 2,746 $ 2,533
Cost of sales 1,149 1,026 2,261 1,993
Asset impairments and restructuring costs 290 -- 290 --
------- ------- ------- -------
Gross profit (loss) (37) 290 195 540
Selling and general administrative expenses 114 81 212 161
Research and development costs 41 36 79 74
Write-off of acquired in-process research
and development 8 -- 8 --
------- ------- ------- -------
Operating earnings (loss) (200) 173 (104) 305
Interest expense, net 37 32 72 64
Other (income) charges, net 6 13 12 11
------- ------- ------- -------
Earnings (loss) before income taxes (243) 128 (188) 230
Provision (benefit) for income taxes (96) 42 (78) 76
------- ------- ------- -------
Net earnings (loss) $ (147) $ 86 $ (110) $ 154
======= ======= ======= =======
Earnings (loss) per share
Basic $ (1.92) $ 1.12 $ (1.44) $ 2.00
======= ======= ======= =======
Diluted $ (1.92) $ 1.12 $ (1.44) $ 2.00
======= ======= ======= =======
COMPREHENSIVE INCOME (LOSS)
Net earnings (loss) $ (147) $ 86 $ (110) $ 154
Other comprehensive loss (31) (33) (38) (34)
------- ------- ------- -------
Comprehensive income (loss) $ (178) $ 53 $ (148) $ 120
======= ======= ======= =======
RETAINED EARNINGS
Retained earnings at beginning of period $ 2,269 $ 2,133 $ 2,266 $ 2,098
Net earnings (loss) (147) 86 (110) 154
Cash dividends declared (34) (34) (68) (67)
------- ------- ------- -------
Retained earnings at end of period $ 2,088 $ 2,185 $ 2,088 $ 2,185
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
3
4
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions)
JUNE 30, DECEMBER 31,
2001 2000
ASSETS
Current assets
Cash and cash equivalents $ 70 $ 101
Trade receivables, net of allowance of $21 and $16 673 650
Miscellaneous receivables 86 87
Inventories 731 580
Other current assets 96 105
------- -------
Total current assets 1,656 1,523
------- -------
Properties
Properties and equipment at cost 8,908 9,039
Less: Accumulated depreciation 5,160 5,114
------- -------
Net properties 3,748 3,925
------- -------
Goodwill, net of accumulated amortization of $35 and $28 336 344
Other intangibles, net of accumulated amortization of $29 and $20 268 277
Other noncurrent assets 426 481
------- -------
Total assets $ 6,434 $ 6,550
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 968 $ 1,152
Borrowings due within one year 179 106
------- -------
Total current liabilities 1,147 1,258
Long-term borrowings 2,185 1,914
Deferred income taxes 527 607
Postemployment obligations 849 829
Other long-term liabilities 116 130
------- -------
Total liabilities 4,824 4,738
------- -------
Commitments and contingencies
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued - 85,023,199 and 84,739,902) 1 1
Paid-in capital 118 100
Retained earnings 2,088 2,266
Other comprehensive loss (155) (117)
------- -------
2,052 2,250
Less: Treasury stock at cost (8,073,859 and 7,996,790 shares) 442 438
------- -------
Total shareowners' equity 1,610 1,812
------- -------
Total liabilities and shareowners' equity $ 6,434 $ 6,550
======= =======
The accompanying notes are an integral part of these financial statements.
4
5
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
FIRST SIX MONTHS
2001 2000
Cash flows from operating activities
Net earnings (loss) $ (110) $ 154
------- -------
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities, net of effect of acquisitions
Depreciation and amortization 214 199
Write-off of impaired assets 287 --
Write-off of acquired in-process research and development 8 --
Provision (benefit) for deferred income taxes (81) 6
Increase in receivables (22) (14)
Increase in inventories (86) (57)
Increase (decrease) in liabilities for employee benefits
and incentive pay (47) 3
Increase (decrease) in liabilities excluding borrowings and liabilities
for employee benefits and incentive pay (73) 57
Other items, net (26) 30
------- -------
Total adjustments 174 224
------- -------
Net cash provided by operating activities 64 378
------- -------
Cash flows from investing activities
Additions to properties and equipment (117) (78)
Acquisitions, net of cash acquired (250) (52)
Additions to capitalized software (15) (9)
Other investments (7) (23)
Proceeds from sales of fixed assets 4 60
------- -------
Net cash used in investing activities (385) (102)
------- -------
Cash flows from financing activities
Net increase in commercial paper and other short-term borrowings 348 51
Repayment of borrowings (4) (221)
Dividends paid to shareowners (68) (68)
Treasury stock purchases (4) (57)
Other items 18 2
------- -------
Net cash provided by (used in) financing activities 290 (293)
------- -------
Net change in cash and cash equivalents (31) (17)
Cash and cash equivalents at beginning of period 101 186
------- -------
Cash and cash equivalents at end of period $ 70 $ 169
======= =======
The accompanying notes are an integral part of these financial statements.
5
6
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared by the Company in accordance and consistent with the
accounting policies stated in the Company's 2000 Annual Report on Form
10-K and the Quarterly Report on Form 10-Q for the first quarter 2001
and should be read in conjunction with the consolidated financial
statements appearing therein. In the opinion of the Company, all
normally recurring adjustments necessary for a fair presentation have
been included in the unaudited interim consolidated financial
statements. The unaudited interim consolidated financial statements are
based in part on estimates made by management.
The Company has reclassified certain 2000 amounts to conform to the
2001 presentation.
2. INVENTORIES
JUNE 30, DECEMBER 31,
(Dollars in millions) 2001 2000
At FIFO or average cost (approximates current cost)
Finished goods $ 574 $ 482
Work in process 172 125
Raw materials and supplies 287 248
------- -------
Total inventories 1,033 855
Reduction to LIFO value (302) (275)
------- -------
Total inventories at LIFO value $ 731 $ 580
======= =======
Inventories valued on the LIFO method were approximately 70% of total
inventories in each of the periods.
3. PAYABLES AND OTHER CURRENT LIABILITIES
JUNE 30, DECEMBER 31,
(Dollars in millions) 2001 2000
Trade creditors $ 475 $ 526
Accrued payrolls, vacation, and variable-incentive compensation 143 201
Accrued taxes 103 95
Deferred gain on currency options -- 68
Other 247 262
------- -------
Total $ 968 $ 1,152
======= =======
6
7
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BORROWINGS
JUNE 30, DECEMBER 31,
(Dollars in millions) 2001 2000
SHORT-TERM BORROWINGS
Notes payable $ 174 $ 101
Other 5 5
------- -------
Total short-term borrowings 179 106
------- -------
LONG-TERM BORROWINGS
6 3/8% notes due 2004 500 500
7 1/4% debentures due 2024 496 496
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 297 297
Commercial paper 675 400
Other 17 21
------- -------
Total long-term borrowings 2,185 1,914
------- -------
Total borrowings $ 2,364 $ 2,020
======= =======
Eastman has access to an $800 million revolving credit facility (the
"Credit Facility") expiring in July 2005 and to a short-term $165
million credit agreement (the "Credit Agreement") expiring in December
2001. Although the Company does not have any amounts outstanding under
the Credit Facility or the Credit Agreement, any such borrowings would
be subject to interest at varying spreads above quoted market rates,
principally LIBOR. The Credit Facility and the Credit Agreement require
facility fees on the total commitment that vary based on Eastman's
credit rating. For the Credit Facility, the rate for such fees was
0.125% as of June 30, 2001 and December 31, 2000. For the Credit
Agreement, the rate for such fees was 0.125% as of June 30, 2001. The
Credit Facility and the Credit Agreement contain a number of covenants
and events of default, including the maintenance of certain financial
ratios. Eastman was in compliance with all such covenants for all
periods.
Eastman utilizes commercial paper, generally with maturities of 90 days
or less, to meet its liquidity needs. Because the Credit Facility which
provides liquidity support for the commercial paper expires in July
2005, the commercial paper borrowings are classified as long-term
borrowings because the Company has the ability to refinance such
borrowings long term. As of June 30, 2001, the Company's commercial
paper outstanding balance was $675 million at an effective interest
rate of 5.15%. At December 31, 2000, the Company's commercial paper
outstanding balance was $400 million at an effective interest rate of
7.12%.
7
8
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS (LOSS) AND DIVIDENDS PER SHARE
SECOND QUARTER FIRST SIX MONTHS
2001 2000 2001 2000
Shares used for earnings (loss) per share
calculation (in millions):
Basic 76.8 76.5 76.7 77.0
Diluted 76.8 76.9 76.7 77.2
As a result of the net loss reported for the second quarter and first
six months 2001, common shares underlying options have been excluded
from the calculation of diluted earnings (loss) per share. Excluded
from the second quarter and first six months 2001 calculations were
shares underlying options to purchase 5,581,894 shares of common stock
at a range of prices from $33.01 to $73.94. Excluded from the second
quarter and first six months 2000 calculations were shares underlying
options to purchase 2,332,231 shares of common stock at a range of
prices from $49.25 to $73.81 and 3,060,841 common shares at a range of
prices from $45.44 to $73.81, respectively, because the exercise price
of the options was greater than the average market price of the
underlying common shares.
In 1999, several key executive officers were awarded performance-based
stock options to further align their compensation with the return to
Eastman's shareowners and to provide additional incentive and
opportunity for reward to individuals in key positions having direct
influence over corporate actions that are expected to impact the market
price of Eastman's stock. Options to purchase a total of 574,000 shares
will become exercisable through December 31, 2001, if both the stock
price and time vesting conditions are met. The options will be
cancelled and forfeited on December 31, 2001 as to any shares for which
the applicable stock price target is not met. As a result of the net
loss reported for the second quarter and first six months 2001, 156,060
shares underlying such options were excluded from the calculation of
diluted earnings (loss) per share because their effect would be
anti-dilutive. At June 30, 2000, 149,240 shares underlying such options
were included in diluted earnings per share calculations as a result of
the stock price conditions for vesting being met.
Additionally, 200,000 shares underlying an option issued to the Chief
Executive Officer in third quarter 1997 were excluded from diluted
earnings (loss) per share calculations because the stock price vesting
conditions to exercise had not been met as to any of the shares as of
June 30, 2001 or June 30, 2000.
The Company declared cash dividends of $0.44 per share in the second
quarter 2001 and 2000 and $0.88 per share in the first six months of
2001 and 2000.
6. ACQUISITIONS
CERTAIN BUSINESSES OF HERCULES INCORPORATED
On May 1, 2001, the Company completed the asset acquisition of the
hydrocarbon resins and select portions of the rosin-based resins
business ("resins businesses") from Hercules Incorporated ("Hercules")
for approximately $250 million. Hercules' resins businesses facilities
acquired are located in the United States, the Netherlands, England,
and Mexico. Additionally, certain operating assets acquired will be
operated under contract with Hercules at shared facilities in the
United States.
The transaction, which was financed with available cash and commercial
paper borrowings was accounted for by the purchase method of accounting
and, accordingly, the results of operations of
8
9
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain Hercules resins businesses for the period from the acquisition
date are included in the accompanying consolidated financial
statements. Tangible assets acquired were recorded at their fair
values. Goodwill and other intangible assets totaling approximately $30
million are included in other noncurrent assets in the Consolidated
Statement of Financial Position and will be reclassified pending
completion of an independent appraisal currently underway. Acquired
in-process research and development of approximately $8 million was
written off during the second quarter 2001. Assuming this transaction
had been made at January 1, 2000 and 2001, the consolidated pro forma
results for the first six months 2000 and 2001 would not be materially
different from reported results.
MCWHORTER TECHNOLOGIES, INC.
In July 2000, the Company completed its acquisition of McWhorter
Technologies, Inc. ("McWhorter") for approximately $200 million in cash
and the assumption of $155 million in debt. McWhorter manufactures
specialty resins and colorants used in the production of consumer and
industrial coatings and reinforced fiberglass plastics.
This transaction, which was funded through available cash and
commercial paper borrowings, was accounted for by the purchase method
of accounting and, accordingly, the results of operations of McWhorter
for the period from the acquisition date are included in the
accompanying consolidated financial statements. Assets acquired and
liabilities assumed were recorded at their fair values. Goodwill and
other intangible assets of approximately $190 million, which represents
the excess of cost over the fair value of net tangible assets acquired,
are being amortized on a straight-line basis over 11-40 years. Acquired
in-process research and development of approximately $9 million was
written off after completion of purchase accounting. Assuming this
transaction had been made at January 1, 2000, the consolidated pro
forma results for the first six months 2000 would not be materially
different from reported results.
CHEMICKE ZAVODY SOKOLOV
As of February 21, 2000, the Company acquired 76% of the shares of
Chemicke Zavody Sokolov ("Sokolov"), a manufacturer of waterborne
polymer products, acrylic acid, and acrylic esters located in the Czech
Republic. During the second quarter 2000, the Company acquired an
additional 21% of the shares resulting in 97% ownership of Sokolov.
These transactions, for cash consideration totaling approximately $46
million (net of $3 million cash acquired) and the assumption of $21
million of Sokolov debt, were financed with available cash and
commercial paper borrowings.
The acquisition of Sokolov was accounted for by the purchase method of
accounting and, accordingly, the results of operations of Sokolov from
the acquisition date are included in the accompanying consolidated
financial statements. Assets acquired and liabilities assumed have been
recorded at their fair values. The minority interest, which is included
in other long-term liabilities in the Consolidated Statements of
Financial Position, is not significant. Assuming this transaction had
been made at January 1, 2000, the consolidated pro forma results for
the first six months 2000 would not be materially different from
reported results.
9
10
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CASH FLOW INFORMATION
FIRST SIX MONTHS
(Dollars in millions) 2001 2000
DETAILS OF ACQUISITIONS
Fair value of assets acquired, including goodwill $ 250 $ 96
Liabilities assumed -- 44
------- -------
Net cash paid for acquisitions $ 250 $ 52
======= =======
7. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, as amended by SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities," which
requires that all derivative instruments be reported on the balance
sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. Instruments with a fair market
value of $33 million, previously not required to be recorded and
primarily pertaining to the Company's raw materials and energy cost
hedging program, were recognized as miscellaneous receivables in the
Consolidated Statement of Financial Position on January 1, 2001.
Previously deferred gains of $68 million from the settlement of
currency options were reclassified from other current liabilities.
These amounts resulted in an after-tax credit of $58 million to other
comprehensive income, a component of shareholders' equity, and an
after-tax gain of $4 million included in net earnings as of January 1,
2001.
At June 30, 2001 the remaining mark-to-market gains and losses from
hedging activities included in other comprehensive income totaled
approximately $21 million. This balance is expected to be reclassified
into earnings during 2001. 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 (loss) during
the second quarter or first six months 2001.
The Company is exposed to market risk, such as changes in currency
exchange rates, raw material and energy costs, and interest rates. To
manage the volatility relating to these exposures, the Company nets the
exposures on a consolidated basis to take advantage of natural offsets.
For the residual portion, the Company uses various derivative financial
instruments pursuant to the Company's policies for hedging practices.
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.
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
currently utilize fair value hedges and does not hold nor issue
derivative financial instruments for trading purposes.
CURRENCY RATE HEDGING
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. 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 transactions
10
11
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expected within no more than 2 years and denominated in foreign
currencies (principally the British pound, French franc, German mark,
Italian lira, Canadian dollar, euro, and the Japanese yen). These
contracts are designated as cash flow hedges. The mark-to-market gain
or loss on qualifying hedges is included in other comprehensive income
to the extent effective, and reclassified into cost of sales in the
period during which the hedged transaction affects earnings.
COMMODITY HEDGING
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 gain or loss on
qualifying hedges is included in other comprehensive income to the
extent effective, and reclassified into cost of sales in the period
during which the hedged transaction affects earnings.
OTHER INSTRUMENTS
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. These instruments are typically 100%
effective. As a result, there is no current impact to earnings due to
hedge ineffectiveness. These instruments are recorded on the balance
sheet at fair value, but the impact was not material to the income
statement. During the second quarter 2001, an interest rate derivative
instrument held as a cash flow hedge was discontinued and resulted in
an immaterial loss. The loss was charged to earnings when incurred. No
other cash flow hedges were discontinued.
8. EMPLOYEE SEPARATIONS
In the fourth quarter 1999, the Company accrued costs associated with
employee terminations which resulted from voluntary and involuntary
employee separations that occurred during the fourth quarter 1999. The
voluntary and involuntary separations resulted in a reduction of about
1,200 employees. About 760 employees who were eligible for full
retirement benefits left the Company under a voluntary separation
program and approximately 400 additional employees were involuntarily
separated from the Company. Employees separated under these programs
each received a separation package equaling two weeks' pay for each
year of employment, up to a maximum of one year's pay and subject to
certain minimum payments. Approximately $71 million was accrued in 1999
for termination allowance payments associated with the separations, of
which $6 million was paid in 1999, $58 million was paid during 2000,
and approximately $5 million was paid in the first six months of 2001.
As of June 30, 2001, approximately $2 million remains to be paid.
9. ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES
WRITE-OFF OF PREPAID ASSET
During the second quarter 2001, Eastman terminated an agreement with a
supplier that guaranteed the Company's right to buy a specified
quantity of a certain raw material annually through 2007 at prices
determined by the pricing formula specified in the agreement. In prior
years, the Company paid a total of $239 million to the supplier and
deferred those costs to be amortized over the 15-year period during
which the product was to be received. The Company began amortizing
those costs in 1993 and had recorded accumulated amortization of $131
million at March 31, 2001. As a result of the termination of this
agreement, the remaining net book value of $108 million was charged to
the Polymers segment's earnings during the second quarter 2001 as no
continuing economic benefits will be received pertaining to this
contract.
11
12
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WRITE-OFF OF IMPAIRED POLYETHYLENE ASSETS
During the second quarter 2001, management identified and announced the
assets that are intended to be spun-off at year-end 2001 pursuant to a
previously announced plan to become two independent public companies by
the end of 2001, assuming all conditions to the previously announced
spin-off are met and it occurs. An indirect result of these decisions
is that the continuing operations, which consist primarily of the
Polymers and Fibers segments, will be required to purchase certain raw
materials and utilities that are currently produced internally for use
in the manufacture of polyethylene. Considering the purchase price for
these raw materials and utilities, the carrying value of certain assets
used in the manufacture of polyethylene exceeds the expected future
cash flows attributable to such assets. An impairment loss of $103
million, representing the excess of the carrying value over expected
future cash flows, was charged to the Polymers segment's earnings
during the second quarter 2001. The fair value of the impacted assets
was determined using the discounted estimated net cash flows related to
the products produced by the impacted assets.
RESTRUCTURING AND ASSET IMPAIRMENTS OF THE FINE CHEMICALS BUSINESS
During the second quarter 2001, the Company recorded a charge of
approximately $63 million related to certain fine chemicals product
lines that do not fit the Company's long-term strategic objectives and
for assets determined to be impaired. The ongoing restructuring
initiatives and related asset impairments involve the Company's
Performance Chemicals and Intermediates segment and include assets at
the Company's Tennessee and Arkansas sites within the United States, a
plant in Wales, and a plant in Hong Kong. The restructuring and asset
impairments at the domestic sites primarily pertain to write-downs of
fixed assets associated with product lines that the Company will no
longer pursue, and are net of the effect of a reversal of a customer
deposit related to the impacted assets. The assets will be used to meet
current contractual requirements and then be idled. The impairments at
the foreign sites include the write-down of fixed assets and other
long-term deposits. The fair value of the impacted assets was
determined using current market information where available or
discounted estimated net cash flows from contracts that are currently
in effect.
RESTRUCTURING OF THE COATINGS OPERATIONS
During the second quarter 2001, the Company recorded a restructuring
charge, including related asset write-downs, of approximately $16
million related to plans to close two plants in the United States. The
restructuring charge includes a write-down of the fixed assets at the
facilities, severance accruals for approximately 50 employees impacted
by the plant shut-downs, and other costs associated with closing the
facilities. The facilities are expected to be closed prior to December
31, 2001. In addition, a $4 million charge was included in selling and
general administrative expenses related to severance costs for other
employees impacted by the restructuring of the coatings operations.
10. SEGMENT INFORMATION
Effective with the second quarter 2001, the Company began reporting
financial results in five operating segments: the Coatings, Adhesives,
Specialty Polymers, and Inks segment; the Performance Chemicals and
Intermediates segment; the Specialty Plastics segment; the Polymers
segment; and the Fibers segment. As previously reported, the products
of the new Specialty Plastics segment have been moved
12
13
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
from the Polymers Group to the Chemicals Group effective with the
second quarter of 2001, and will be a part of the new Eastman Company
after the spin-off. Through first quarter 2001, the Company managed and
reported its operations in two segments -- Chemicals and Polymers.
Amounts for prior periods have been reclassified to conform to the
second quarter 2001 presentation.
Sales revenue presented below represents sales to third parties.
Intersegment transfers, recorded at cost, have been eliminated and have
no impact on earnings. Additional information related to the
resegmentation is included in Part II--Item 5--"Other Information"
and in Exhibit 99.03 to this Form 10-Q.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 2001 2000
------- ------- ------- -------
SALES
Chemicals Group Segments:
Coatings, Adhesives, Specialty
Polymers, and Inks $ 394 $ 252 $ 722 $ 480
Performance Chemicals and
Intermediates 296 334 595 650
Specialty Plastics 135 148 265 282
------- ------- ------- -------
Total Chemicals Group 825 734 1,582 1,412
------- ------- ------- -------
Polymers Group Segments:
Polymers 405 430 852 818
Fibers 172 152 312 303
------- ------- ------- -------
Total Polymers Group 577 582 1,164 1,121
------- ------- ------- -------
Total Eastman $ 1,402 $ 1,316 $ 2,746 $ 2,533
======= ======= ======= =======
OPERATING EARNINGS (LOSS)
Chemicals Group Segments:
Coatings, Adhesives, Specialty
Polymers, and Inks $ (9) $ 43 $ -- $ 77
Performance Chemicals and
Intermediates (63) 16 (55) 33
Specialty Plastics 15 34 40 64
------- ------- ------- -------
Total Chemicals Group (57) 93 (15) 174
------- ------- ------- -------
Polymers Group Segments:
Polymers (187) 46 (163) 61
Fibers 44 34 74 70
------- ------- ------- -------
Total Polymers Group (143) 80 (89) 131
------- ------- ------- -------
Total Eastman $ (200) $ 173 $ (104) $ 305
======= ======= ======= =======
13
14
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, DECEMBER 31,
(Dollars in millions) 2001 2000
-------- ------------
ASSETS
Chemicals Group Segments:
Coatings, Adhesives, Specialty
Polymers, and Inks $ 1,991 $ 1,856
Performance Chemicals and
Intermediates 1,364 1,443
Specialty Plastics 890 989
------- -------
Total Chemicals Group 4,245 4,288
------- -------
Polymers Group Segments:
Polymers 1,565 1,604
Fibers 624 658
------- -------
Total Polymers Group 2,189 2,262
------- -------
Total Eastman $ 6,434 $ 6,550
======= =======
11. LEGAL MATTERS
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of
business. While the Company is unable to predict the outcome of these
matters, it does not believe, based upon currently available facts,
that the ultimate resolution of any of such pending matters will have a
material adverse effect on the Company's overall financial position or
results of operations. However, adverse developments could negatively
impact earnings in a particular period. For further information
concerning certain pending legal matters, see Part II--Item 1--"Legal
Proceedings."
12. COMMITMENTS
In 1999, the Company entered into an agreement that allows it to sell
undivided interests in certain domestic trade accounts receivable under
a planned continuous sale program to a third party. Under this
agreement, receivables sold to the third party totaled $200 million at
June 30, 2001 and December 31, 2000. Undivided interests in designated
receivable pools were sold to the purchaser with recourse limited to
the receivables purchased. Fees paid by the Company under this
agreement are based on
14
15
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain variable market rate indices and totaled approximately $2
million in the second quarter 2001 and $3 million in the second quarter
2000. Average monthly proceeds from collections reinvested in the
continuous sale program were approximately $230 million in each of the
first six months 2001 and 2000.
13. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires business combinations
initiated after June 30, 2001 to be accounted for using the purchase
method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against this new criteria and may result
in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but
instead would be reviewed for impairment and written down and charged
to results of operations only in the periods in which the recorded
value of goodwill and certain intangibles is more than its fair value.
The provisions of each statement which apply to goodwill and intangible
assets acquired prior to June 30, 2001, will be adopted by the Company
on January 1, 2002. The Company expects the adoption of these
accounting standards to result in certain of its intangibles being
subsumed into goodwill and to have the impact of reducing annual
amortization of goodwill and intangibles, now included in results for
the Coatings, Adhesives, Specialty Polymers, and Inks segment, by
approximately $16 million commencing January 1, 2002. Impairment
reviews may result in future periodic write-downs.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
2000 Annual Report on Form 10-K, the Form 10-Q filed for the first quarter 2001,
and the unaudited interim consolidated financial statements included elsewhere
in this report. All references to earnings (loss) per share contained in this
report are diluted earnings (loss) per share unless otherwise noted.
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
Higher sales revenue for the second quarter and first six months 2001 reflected
increased sales volumes attributable to acquisitions in the Coatings, Adhesives,
Specialty Polymers, and Inks ("CASPI") segment and higher selling prices for
EASTAPAK PET polymers. For the second quarter 2001, significantly higher sales
volumes for the Fibers segment, primarily in Asia Pacific, also contributed to
higher sales revenue. Acquisitions affecting the comparison of 2001 to 2000
include the May 2001 asset acquisition of the hydrocarbon resins and select
portions of the rosin-based resins business ("resins businesses") from Hercules
Incorporated ("Hercules") and the July 2000 acquisition of McWhorter
Technologies, Inc. ("McWhorter"). Sales volumes for both periods increased
slightly including acquisitions but were down excluding acquisitions.
Although sales volumes were higher in both the second quarter and first six
months 2001, operating results in both periods were negatively impacted by lower
capacity utilization due to lower sales volumes excluding acquisitions, and
higher raw materials and energy costs. The decline in the value of the euro also
negatively impacted revenue for the second quarter and first six months 2001.
Both periods were impacted by certain nonrecurring items that are more fully
described below and in Note 9 to the consolidated financial statements.
The Company reported a loss of $1.92 per share in the second quarter 2001
compared with $1.12 earnings per share in the second quarter 2000. For first six
months 2001, the Company reported a loss of $1.44 per share compared with $2.00
earnings per share for the first six months of 2000.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
SALES $ 1,402 $ 1,316 6% $ 2,746 $ 2,533 8%
Sales for the second quarter and first six months 2001 were moderately higher
driven by volume attributable to acquisitions and higher selling prices,
particularly for EASTAPAK PET polymers. For the second quarter 2001,
significantly higher sales volumes for the Fibers segment, primarily in Asia
Pacific, also contributed to higher sales revenue. Volume was up 4% including
acquisitions and down approximately 7% without acquisitions for the second
quarter and first six months 2001. The lack of volume growth without
acquisitions is attributed to a slowing of economic demand worldwide and cooler
than normal weather in Europe and North America affecting EASTAPAK PET polymers
demand. Sales revenue for the second quarter and first six months 2001 was also
negatively affected by product mix. Foreign currency exchange rates had a
slightly negative impact on sales revenues in the second quarter and first six
months 2001, particularly in Europe.
16
17
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
GROSS PROFIT INCLUDING
NONRECURRING ITEMS $ (37) $ 290 (113)% $ 195 $ 540 (64)%
As a percentage of sales (2.6)% 22.0% 7.1% 21.3%
GROSS PROFIT EXCLUDING
NONRECURRING ITEMS $ 253 $ 290 (13)% $ 485 $ 540 (10)%
As a percentage of sales 18.0% 22.0% 17.7% 21.3%
For the second quarter and first six months 2001, nonrecurring charges totaling
$290 million resulted in substantially lower gross profit. These nonrecurring
charges included the write-off of a prepaid asset related to the termination of
a raw material supply agreement, the write-down of underperforming polyethylene
assets, charges related to the previously announced ongoing restructuring of the
Company's fine chemicals business, and charges related to the restructuring of
the coatings operations.
Although overall selling prices increased more than raw material and energy
costs, gross profit was negatively impacted in the second quarter and first six
months 2001 by the effect of lower capacity utilization.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
SELLING AND GENERAL
ADMINISTRATIVE EXPENSES $ 114 $ 81 41% $ 212 $ 161 32%
As a percentage of sales 8.1% 6.2% 7.7% 6.4%
Higher selling and general administrative expenses for the second quarter and
first six months 2001 reflected costs related to acquired businesses and costs
related to ShipChem's efforts to build capability to add new customers.
ShipChem, a wholly-owned subsidiary which began business in 2000, is a logistics
provider for the chemical industry and serves Eastman's bulk truck shipments.
ShipChem is expected to support the remainder of the Company's logistics
requirements by the end of 2001.
Also included in selling and general administrative expenses are nonrecurring
pre-tax charges totaling approximately $8 million which were recognized in the
second quarter and first six months 2001 for costs associated with restructuring
of the coatings operations and the pursuit of a plan to become two independent
public companies by year-end 2001.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
RESEARCH AND
DEVELOPMENT COSTS $ 41 $ 36 14% $ 79 $ 74 7%
As a percentage of sales 2.9% 2.7% 2.9% 2.9%
WRITE-OFF OF ACQUIRED
IN-PROCESS RESEARCH
AND DEVELOPMENT $ 8 $ -- N/A $ 8 $ -- N/A
Research and development costs increased for the second quarter and first six
months 2001 but were relatively unchanged as a percentage of sales. A
nonrecurring pre-tax charge of approximately $8 million was recognized in the
second quarter and first six months 2001 for the write-off of acquired
in-process research and development related to the acquisition of certain
Hercules' resins businesses.
17
18
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
GROSS INTEREST COSTS $ 41 $ 36 $ 78 $ 71
LESS CAPITALIZED INTEREST 2 2 3 4
------ ------ ------ ------
INTEREST EXPENSE 39 34 15% 75 67 12%
INTEREST INCOME 2 2 3 3
------ ------ ------ ------
NET INTEREST EXPENSE $ 37 $ 32 16% $ 72 $ 64 13%
====== ====== ====== ======
Higher interest expense in the second quarter and first six months 2001 reflects
higher average commercial paper and other short-term borrowings used to finance
the purchase of recent acquisitions.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
OTHER (INCOME) CHARGES,
NET $ 6 $ 13 (54)% $ 12 $ 11 9%
Other income and charges include foreign exchange transactions, results from
equity investments, royalty income, gains and losses on sales of nonoperating
assets, and other items. Second quarter and first six months 2001 results were
impacted by foreign exchange losses, results from equity investments, and other
items. Second quarter 2000 included a charge of approximately $10 million for
certain litigation.
(Dollars in millions, except per SECOND QUARTER FIRST SIX MONTHS
share amounts) 2001 2000 2001 2000
EARNINGS (LOSS)
Operating earnings (loss)
including nonrecurring items $ (200) $ 173 $ (104) $ 305
Operating earnings excluding
nonrecurring items 106 181 202 313
Net earnings (loss) (147) 86 (110) 154
Earnings (loss) per share
--Basic (1.92) 1.12 (1.44) 2.00
--Diluted (1.92) 1.12 (1.44) 2.00
18
19
SUMMARY BY OPERATING SEGMENT
As previously announced, Eastman is pursuing a plan to separate into two
independent public companies by the end of 2001 -- a specialty chemicals and
plastics company which will be named Eastman Company, and a PET plastics and
acetate fibers company which will be named Voridian Company. The planned
spin-off and related management changes have resulted in a realignment of the
Company's segment structure.
Assuming the spin-off occurs, Eastman Company will include three operating
segments -- the Coatings, Adhesives, Specialty Polymers, and Inks segment; the
Performance Chemicals and Intermediates segment; and the Specialty Plastics
segment. Voridian Company will include two operating segments -- the Polymers
segment and the Fibers segment. As previously reported, the products of the new
Specialty Plastics segment have been moved from the Polymers Group to the
Chemicals Group effective with the second quarter of 2001, and will be a part of
the new Eastman Company after the spin-off. Through first quarter 2001, the
Company managed and reported its operations in two operating segments --
Chemicals and Polymers. Amounts for prior periods have been reclassified to
conform to the second quarter 2001 presentation.
Sales revenue presented below represents sales to third parties. Intersegment
transfers, recorded at cost, have been eliminated and have no impact on
earnings. Additional information related to the resegmentation is included in
Part II--Item 5--"Other Information" and in Exhibit 99.03 to this Form 10-Q.
COATINGS, ADHESIVES, SPECIALTY POLYMERS, AND INKS SEGMENT
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
Sales $ 394 $ 252 56% $ 722 $ 480 51%
Operating earnings (loss)
including nonrecurring items (9) 43 (121) -- 77 (100)
Operating earnings excluding
nonrecurring items 21 43 (51) 30 77 (61)
For the second quarter and first six months 2001, sales revenue was
substantially higher due to increased sales volumes resulting from acquisitions
and higher selling prices. The McWhorter and Hercules acquisitions contributed
approximately $162 million to the change in second quarter 2001 sales revenue.
For the first six months 2001, the McWhorter, Hercules, and Sokolov acquisitions
contributed approximately $274 million to the change in sales revenue. Excluding
acquisitions, sales revenue and sales volume for the second quarter and first
six months 2001 declined due to weaker demand. Foreign currency exchange rates
had a slightly negative effect on revenue for the second quarter and first six
months 2001.
Despite higher sales volumes from acquisitions and higher selling prices,
operating results for the second quarter and first six months 2001 declined
significantly due to nonrecurring pre-tax charges of approximately $30 million,
lower capacity utilization due to lower sales excluding acquisitions, and higher
costs for raw materials and energy. The nonrecurring pre-tax charges primarily
related to the restructuring of the coatings operations and the write-off of
in-process research and development related to the acquisition of certain
Hercules' resins businesses.
19
20
PERFORMANCE CHEMICALS AND INTERMEDIATES SEGMENT
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
Sales $ 296 $ 334 (12)% $ 595 $ 650 (9)%
Operating earnings (loss)
including nonrecurring items (63) 16 (494) (55) 33 (267)
Operating earnings excluding
nonrecurring items 1 25 (96) 9 42 (79)
Although selling prices increased for the second quarter and first six months
2001, sales revenue declined significantly due to lower sales volumes attributed
to weaker demand and the mix of products sold.
Nonrecurring pre-tax charges of approximately $64 million, primarily resulting
from the restructuring of the Company's fine chemicals business, sharply
impacted results for the second quarter and first six months 2001. Higher
selling prices did not offset the negative impact of lower capacity utilization
due to lower sales volume, higher costs for raw materials and energy, and the
negative impact of product mix.
SPECIALTY PLASTICS SEGMENT
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
Sales $ 135 $ 148 (9)% $ 265 $ 282 (6)%
Operating earnings including
nonrecurring items 15 34 (56) 40 64 (38)
Operating earnings excluding
nonrecurring items 15 34 (56) 40 64 (38)
A decline in sales volume, driven mainly by lower demand for the cellulosics
product line, negatively impacted sales revenue for the second quarter and first
six months 2001.
Although operating earnings remained strong for the copolyester product lines
such as SPECTAR copolyester, results for the cellulosics product line declined
as capacity utilization decreased due to weaker demand. Higher costs for raw
materials and energy negatively impacted operating earnings.
20
21
POLYMERS SEGMENT
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
Sales $ 405 $ 430 (6)% $ 852 $ 818 4%
Operating earnings (loss)
including nonrecurring items (187) 46 (507) (163) 61 (367)
Operating earnings excluding
nonrecurring items 24 45 (47) 48 60 (20)
Sales revenue for the second quarter 2001 was negatively impacted by lower sales
volumes for EASTAPAK PET polymers in Europe and North America. The decrease in
volume reflected weaker than normal seasonal demand stemming from cooler than
normal weather. A decline in polyethylene selling prices also negatively
impacted sales revenue for the second quarter 2001. Sales revenue for the first
six months of 2001 was moderately higher, primarily due to significantly higher
selling prices for EASTAPAK PET polymers, offset by lower sales revenue for
polyethylene. An unfavorable move in foreign currency exchange rates negatively
affected revenue in both periods.
Nonrecurring pre-tax charges totaling approximately $211 million and higher
costs for raw materials and energy sharply impacted results for the second
quarter and first six months 2001. The nonrecurring pre-tax charges primarily
resulted from the write-off of a prepaid asset related to the termination of a
raw material supply agreement and the write-down of underperforming polyethylene
assets. Operating results for EASTAPAK PET polymers improved slightly for the
second quarter 2001, but were more than offset by lower earnings for
polyethylene products caused by lower selling prices and lower sales volumes.
FIBERS SEGMENT
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
Sales $ 172 $ 152 13% $ 312 $ 303 3%
Operating earnings including
nonrecurring items 44 34 29 74 70 6
Operating earnings excluding
nonrecurring items 45 34 32 75 70 7
Significantly higher sales volumes, mainly due to the timing of sales orders in
Asia Pacific, resulted in higher sales revenue for the second quarter 2001.
Operating earnings for the second quarter and first six months 2001 were higher
due to the increase in sales volume.
(For supplemental analysis of segment results, see Exhibits 99.01 and 99.02 to
this Form 10-Q.)
21
22
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2001 2000 CHANGE 2001 2000 CHANGE
United States and Canada $ 860 $ 810 6% $1,656 $1,557 6%
Europe, Middle East, and
Africa 275 275 -- 588 510 15
Asia Pacific 149 128 16 264 262 1
Latin America 118 103 15 238 204 17
In the United States and Canada, higher sales revenue in the second quarter and
first six months 2001 was primarily due to higher volumes resulting from recent
acquisitions. Excluding acquisitions, sales volumes declined. Second quarter
2001 results were also positively impacted by moderately higher selling prices.
Sales outside the United States and Canada for the second quarter 2001 were $542
million, up 7% from 2000 second quarter sales of $506 million, and were 39% of
total sales in the second quarter 2001 compared with 38% for the second quarter
2000. For the first six months 2001, sales revenue outside the United States and
Canada increased 12% to $1.1 billion compared to $1.0 billion in 2000. In second
quarter 2001, sales were flat in Europe, Middle East, and Africa as the effect
of volume growth resulting from acquisitions and overall higher selling prices
was offset by weaker demand for EASTAPAK PET polymers. For the first six months
2001, revenues for Europe, Middle East, and Africa reflected increased sales
volumes attributable to acquisitions and higher selling prices for EASTAPAK PET
polymers. In Asia Pacific, the timing of sales orders for fibers products
resulted in higher sales volumes and revenue in the second quarter 2001. For the
first six months 2001, slightly higher sales volumes in Asia Pacific was
partially offset by the impact of unfavorable foreign currency movements and a
shift in the mix of products sold. Strong demand and higher selling prices for
EASTAPAK PET polymers resulted in increased sales in Latin America for both the
second quarter and first six months 2001.
22
23
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
FIRST SIX MONTHS
(Dollars in millions) 2001 2000
CASH FLOW
Net cash provided by (used in)
Operating activities $ 64 $ 378
Investing activities (385) (102)
Financing activities 290 (293)
-------- --------
Net change in cash and cash equivalents $ (31) $ (17)
======== ========
Cash and cash equivalents at end of period $ 70 $ 169
======== ========
Cash provided by operating activities for the first six months of 2001 reflects
an increase in working capital related to a decrease in trade accounts payable,
an increase in inventories, and higher receivables related to the increase in
sales, and additionally reflects the payment of certain employee incentive
compensation expenses. In the first six months 2000, cash flows from operations
were positively impacted by settlement of strategic foreign currency hedging
transactions, partially offset by an increase in working capital. Cash used in
investing activities in the first six months 2001 reflects higher expenditures
for capital additions and the acquisition of certain Hercules' resins businesses
and, in the first six months 2000, reflects the acquisition of Sokolov and other
businesses. Cash used in investing activities also reflects lower proceeds from
sales of assets in the first six months 2001 compared to 2000. Cash provided by
financing activities in the first six months 2001 reflects an increase in
commercial paper and other short-term borrowings related to the acquisition of
certain Hercules' resins businesses and for general operating purposes and, in
first quarter 2000, a repayment of borrowings associated with acquisitions. Cash
provided by financing activities in the first six months 2001 includes the
effect of an increase in treasury stock resulting from a reverse/forward stock
split of the Company's common stock approved by the shareowners on May 3, 2001,
and the repurchase of shares of the Company's common stock in the first six
months 2000.
Available cash is expected to be used to fund dividends and to maintain a strong
balance sheet, including the repayment of debt.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 2001, the Company estimates that depreciation will be about $360 million and
that capital expenditures will be less than $250 million. Long-term commitments
related to planned capital expenditures are not material. The Company had
various purchase commitments at June 30, 2001, for materials, supplies, and
energy incident to the ordinary conduct of business. These commitments, over a
period of several years, approximate $1.4 billion.
LIQUIDITY
Eastman has access to an $800 million revolving credit facility (the "Credit
Facility") expiring in July 2005, and to a short-term $165 million credit
agreement (the "Credit Agreement") expiring in December 2001. Although the
Company does not have any amounts outstanding under the Credit Facility or the
Credit Agreement, any such borrowings would be subject to interest at varying
spreads above quoted market rates, principally LIBOR. The Credit Facility and
the Credit Agreement require facility fees on the total commitment that vary
based on Eastman's credit rating. The rate for such fees for the Credit Facility
was 0.125% as of June 30, 2001 and December 31, 2000. The rate for such fees for
the Credit Agreement was 0.125% as of June 30, 2001. The Credit Facility and the
Credit Agreement contain 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.
23
24
Eastman utilizes commercial paper, generally with maturities of 90 days or less,
to meet its liquidity needs. Because the Credit Facility that provides liquidity
support for the commercial paper expires in July 2005, the commercial paper
borrowings are classified as long-term borrowings as the Company has the ability
to refinance such borrowings long term. As of June 30, 2001, the Company's
commercial paper outstanding balance was $675 million at an effective interest
rate of 5.15%. At December 31, 2000, the Company's commercial paper outstanding
balance was $400 million at an effective interest rate of 7.12%.
The Company has an effective registration statement on file with the Securities
and Exchange Commission to issue up to $1 billion of debt or equity securities.
No securities have been sold from this shelf registration.
In 1999, the Company entered into an agreement that allows the Company to sell
undivided interests in certain domestic trade accounts receivable under a
planned continuous sale program to a third party. Under this agreement,
receivables sold to the third party totaled $200 million at June 30, 2001 and
December 31, 2000. Undivided interests in designated receivable pools were sold
to the purchaser with recourse limited to the receivables purchased. Fees to be
paid by the Company under this agreement are based on certain variable market
rate indices. For additional information concerning this agreement, see Note 12
to the Consolidated Financial Statements.
On May 1, 2001, the Company completed the asset acquisition of certain Hercules'
resins businesses for approximately $250 million. Hercules' facilities acquired
are located in the United States, the Netherlands, England, and Mexico.
Additionally, certain operating assets acquired will be operated under contract
with Hercules at shared facilities in the United States. The transaction was
financed with available cash and commercial paper borrowings.
The Company is currently authorized to repurchase up to $400 million of its
common stock. In the second quarter 2001, a total of 77,069 shares of common
stock at a total cost of approximately $4 million, or an average price of $53
per share, were repurchased. This repurchase was the result of a reverse/forward
stock split of the Company's common stock which was approved by the shareowners
on May 3, 2001. See Part II--Item 4--"Submission of Matters to a Vote of
Security Holders." During 2000, 1,575,000 shares of common stock at a total cost
of approximately $57 million, or an average price of approximately $36 per
share, were repurchased 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, has been repurchased under the authorization.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes.
The Company anticipates that no contribution to its defined benefit pension plan
will be required for 2001.
Available sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
24
25
DIVIDENDS
The Company declared cash dividends of $0.44 per share in the second quarter of
2001 and 2000 and $0.88 per share in the first six months of 2001 and 2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will
be evaluated against this new criteria and may result in certain intangibles
being subsumed into goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill. SFAS
No. 142 requires the use of a nonamortization approach to account for purchased
goodwill and certain intangibles. Under a nonamortization approach, goodwill and
certain intangibles will not be amortized into results of operations, but
instead would be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The provisions of each
statement which apply to goodwill and intangible assets acquired prior to June
30, 2001, will be adopted by the Company on January 1, 2002. The Company expects
the adoption of these accounting standards to result in certain of its
intangibles being subsumed into goodwill and to have the impact of reducing
annual amortization of goodwill and intangibles, now included in results for the
Coatings, Adhesives, Specialty Polymers, and Inks segment, by approximately $16
million commencing January 1, 2002. Impairment reviews may result in future
periodic write-downs.
OUTLOOK
For the remainder of 2001, the Company:
- Expects the macroeconomic environment will continue to have a negative
effect on earnings;
- Anticipates for the third quarter 2001 that total cost of purchasing
propane and energy will decrease over second quarter 2001;
- Expects that sales volumes for EASTAPAK PET polymers in the third
quarter 2001 will be higher than in the second quarter 2001, but
expects that selling prices in the third quarter 2001 will be flat
compared to the second quarter 2001;
- Expects to eliminate additional labor and non-labor costs, raising the
total cost reduction goal from $200 million at year-end 2000 to $300
million by year-end 2001;
- Expects costs for upgrading Eastman's enterprise resource planning
software system from SAP R2 to SAP R3 to continue as implementation is
planned to be essentially completed in all regions by year-end 2001;
- Expects, as part of the ongoing restructuring of the fine chemicals
business, to continue evaluating options regarding facilities in Wales
and Hong Kong;
- Expects to continue consolidation of operations acquired from McWhorter
and to announce additional restructuring plans;
- Expects to further integrate recent acquisitions into the Company's
processes and that the cost structure related to the acquired assets
will improve as integration efforts progress;
- Expects to continue to recognize costs related to ShipChem, a
wholly-owned subsidiary and logistics provider for the chemical
industry, as it builds capability to add new customers;
- Expects to continue to incur costs related to its plan to become two
independent companies and anticipates there could be additional
nonrecurring charges resulting from the ongoing analysis of the
division of assets between the two companies;
- Anticipates that its capital expenditures for 2001 will be less than
$250 million;
- Expects available cash to be used to fund dividends and maintain a
strong balance sheet, including the repayment of debt.
25
26
Based upon the expectations described above, as of July 26, 2001 (the date of
its second quarter 2001 sales and earnings press release) the Company
anticipated that earnings in the third quarter 2001 will be between $0.47 and
$0.53 per share and that earnings per share excluding nonrecurring items for the
second half of 2001 will be slightly less than for the first half of 2001
excluding nonrecurring items unless demand for products improves over the first
half of the year.
By the end of the fourth quarter 2001, the Company expects to become two
independent public companies -- a specialty chemicals and plastics company which
will be named Eastman Company, and a PET plastics and acetate fibers company
which will be named Voridian Company -- through a spin-off in the form of a
tax-free stock dividend. Although the completion of the spin-off is subject to
many conditions, including the approval by the holders of a majority of the
Company's common stock, and many issues are still pending in connection with the
spin-off, the Company:
- Expects to continue the $0.44 quarterly dividend until the spin-off;
- Expects that, immediately after the spin-off, Eastman shareowners will
own shares in both of the new entities;
- Expects that Eastman's Chairman of the Board and Chief Executive
Officer, Mr. Earnest W. Deavenport, Jr., will retire after the spin-off
is completed, and that Eastman's other leadership and Board of
Directors will be divided between the two new companies;
- Expects that Mr. J. Brian Ferguson, President of Eastman's Chemicals
Group, will become Chief Executive Officer of Eastman Company, and Mr.
Allan R. Rothwell, President of Eastman's Polymers Group, will become
Chief Executive Officer of Voridian Company;
- Expects Eastman Company to own approximately 70% of Eastman Chemical
Company's plant, property and equipment assets throughout the world,
with Voridian Company expected to own the remaining 30%;
- Expects that the asset allocation will enable each of the new companies
to maximize growth and efficiency, maintain the value inherent in their
current production facilities, provide flexibility to focus on
independent strategies for the future, and retain the strengths of
vertical integration;
- Expects Eastman Company to employ approximately 75% of the Company's
worldwide number of employees and Voridian Company to employ
approximately 25% of the Company's worldwide number of employees.
Beyond 2001, the Company:
- Anticipates that global PET capacity utilization rates, projected to
peak in 2002 and 2003, will be negatively impacted if known capacity
additions and fiber plant conversions materialize or if worldwide
demand growth for PET is less than the 10% projection. The Company also
anticipates that if some of the known capacity additions do not
materialize or if demand exceeds the 10% growth projections, capacity
utilization in 2003 could be the same or greater than 2002;
- Expects the separation of Eastman Company from Voridian Company will
allow the two companies to concentrate their respective efforts and
resources on specific strategies to create shareowner value, providing
shareowners with ownership interests in two highly focused entities;
- Believes that Eastman Company will be a world leader in the specialty
chemicals and plastics industry, with a strong focus on providing
customer solutions; that this company will experience accelerated
growth through increased management focus and execution of appropriate
strategies; and that value recognition for the technology and services
businesses that will become part of this company, such as Genencor and
ShipChem, will be enhanced;
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- Believes that Voridian Company will be a world market and cost position
leader in PET plastics and acetate fibers, and that consistently strong
cash flows and the integrated polyethylene business will allow this
company to remain financially strong throughout business cycles;
- Expects that the Board of Directors for each new company will determine
its own company's dividend policy, but anticipates that the initial
combined dividend of the two new companies will be equal to Eastman's
current dividend;
- Anticipates the capital structure of each new company will be
appropriate for the company's financial profile and that each company
will maintain investment-grade ratings.
FORWARD-LOOKING STATEMENTS
The expectations under "Outlook" and certain other statements in this report are
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 relate to such matters as
planned capacity increases and utilization; capital spending; expected
depreciation and amortization; environmental matters; legal proceedings; effects
of hedging raw material and energy costs and foreign currencies; global and
regional economic conditions, and their effect on manufacturing and chemical
industries and on Eastman; raw material and energy costs; overall demand for
chemicals, fibers, and plastics; future earnings from recently acquired
businesses and assets; supply and demand, volume, price, cost, margin, and sales
and earnings and cash flow expectations and strategies for individual products,
businesses, and segments as well as for the whole of Eastman Chemical Company;
cash requirements and uses of available cash; cost reduction targets;
development, production, commercialization, and acceptance of new products,
services, and technologies; acquisitions and the related successful integration,
as well as dispositions of certain businesses and assets, and product portfolio
changes; and the planned separation of Eastman's current businesses into two
independent companies by the end of 2001.
These plans and expectations are based upon certain underlying assumptions,
including those mentioned within the text of 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, all of which are subject to change at any time.
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 discussed in this report, the following are some of the important
factors that could cause the Company's actual results to differ materially from
those projected in any such forward-looking statements:
- The Company has announced that it will separate into two independent
companies by the end of the fourth quarter, 2001, through a spin-off in
the form of a tax-free stock dividend. The separation of Eastman's
business into two companies -- a specialty chemicals and plastics
company which will be named Eastman Company, and a PET plastics and
acetate fibers company which will be named Voridian Company -- is
expected to allow the two companies to concentrate their respective
efforts and resources on strategies specific to each business,
providing shareowners with ownership interests in two highly focused
entities. There can be no assurance that any or all of such goals or
expectations will be realized. Among the factors that could negatively
impact the financial performance and liquidity or either of the
companies is the allocation of the Company's indebtedness between
Eastman Company and Voridian Company resulting from the spin-off. If
either or both are substantially more leveraged than the Company was,
then this may result in greater risk of financial distress or
instability.
- The planned spin-off remains subject to governmental and other
approvals, including shareowner approval and other customary
conditions. While it is Eastman's expectation that the Internal Revenue
Service ("IRS") will agree that the spin-off as structured will be
tax-free, there can be no assurance that such determination will be
reached by the IRS.
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- The Company has manufacturing and marketing operations throughout the
world, with approximately 40% of the Company's revenues attributable to
sales outside the United States. Economic factors, including foreign
currency exchange rates could cause products to become relatively more
expensive for non-U.S. customers and reduce demand for products, which
could affect the Company's revenues, expenses, and results. Although
the Company utilizes risk management tools, including hedging, as
appropriate, to mitigate market fluctuations in foreign currencies, any
changes in strategy in regard to risk management tools could also
affect revenues, expenses, and results, and there can be no assurance
that such measures will result in cost savings or that all market
fluctuation exposure will be eliminated.
- The Company's businesses are subject to risks specific to the
international markets in which it operates such as changing economic
and political conditions, many of which are beyond its control. These
businesses are often subject to, among other matters, foreign
government policies and regulations, embargoes, U.S. government
policies relating to international markets and international
hostilities. In addition, changes in laws, regulations, or other
political factors, such as unexpected changes in regulatory
requirements, changes in import or export licensing requirements or
political instability in any of the countries in which the Company
operates could affect business in that country or region. Although
Eastman tries to reduce exposure to uncertain international market
conditions, it is unable to completely predict or control its amount
and mix of business and sales. To the extent that international
businesses are affected by unexpected international market conditions,
the Company's results of operations and financial condition could be
adversely affected. In addition, sales to international markets carry
risk in that the Company may face difficulty in enforcing its rights
and agreements through non-U.S. legal systems. In particular, the
Company faces reduced protection for intellectual property rights in
some countries. Further, the Company may face longer accounts
receivable collection periods and difficulties and costs of staffing
and managing foreign operations. Any of these factors expose Eastman to
risk and could reduce the Company's revenue from international sales
and could harm the Company's results of operations.
- The Company has made and may continue to make acquisitions,
divestitures, and investments, and enter into alliances, as part of its
growth strategy. The completion of such transactions are subject to the
timely receipt of necessary regulatory and other consents and approvals
needed to complete the transactions which could be delayed for a
variety of reasons, including the satisfactory negotiation of the
transaction documents and the fulfillment of all closing conditions to
the transactions. Further, due to its size or relative market position,
the Company may find it more difficult or expensive to find suitable
acquisition candidates, resulting in increased difficulties or expenses
in executing its business strategies. Additionally, after completion of
the transactions, there can be no assurance that such transactions will
be successfully integrated on a timely and cost-efficient basis or that
they will achieve projected operating earnings targets.
- The Company has made and may continue to make strategic e-business
investments, including formation of joint ventures and investments in
other e-commerce businesses, in order to build Eastman's E-business
capabilities. There can be no assurance that such investments will
achieve their objectives or that they will be beneficial to the
Company's results of operations.
- During 2001, the Company is integrating recent acquisitions into
the Company's processes and SAP R3 to enable cost-saving and synergy
opportunities. There can be no assurance that such cost-saving and
synergy opportunities will be realized or that the integration efforts
will be completed as planned.
- The Company owns assets in the form of equity in other companies,
including joint ventures, e-commerce investments, and Genencor. Such
investments, some of which are minority investments in companies which
are not managed or controlled by the Company, are subject to all of the
risks associated with changes in value of such investments including:
dilution of the Company's ownership interest due to subsequent
financings at lower per share prices; declines in the market value of
such investments due to the investee's inability to obtain additional
financing on favorable terms; and declines in the market valuation of
those companies whose shares are publicly traded.
- 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, beneficial, or that
estimated cost savings from such activities will be realized.
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- In addition to cost reduction initiatives, the Company is striving to
improve margins on its products through price increases, where
warranted and accepted by the market; however, the Company's earnings
could be negatively impacted should such increases be unrealized, not
be sufficient to cover increased raw material and energy costs, or
have a negative impact on demand and volume.
- 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 and energy costs. Eastman has entered into contracts for the
purchase of raw materials at fixed prices, which are designed to
protect the Company against raw material price increases during their
term. These contracts could cause the Company to pay higher prices for
its raw materials than would otherwise be available at the time it
utilizes the raw materials and there can be no assurance that any of
these measures will result in cost savings or that all market
fluctuation exposure will be eliminated. Further, Eastman purchases a
substantial portion of the Company's raw materials through long-term
contracts with a limited number of suppliers. While Eastman takes
measures to ensure that it maintains adequate supply or even oversupply
of raw materials, there can be no assurance that supply of raw
materials will not be delayed or interrupted, resulting in production
delays and decreased revenues.
- Eastman serves markets that are highly competitive and in which a large
number of multinational companies compete. Some of these competitors
are larger than Eastman and have greater financial resources than
Eastman does. Competition is based on many factors, including price,
product quality, product mix, and number of similar products.
Additionally, Eastman's competitive position in the markets in which it
participates is, in part, subject to external factors. For example,
supply and demand for certain of the Company's products is driven by
end-use markets and worldwide capacities which, in turn, impact demand
for and pricing of the Company's products. Eastman expects intense
competition to continue in its markets, presenting significant
challenges to its ability to achieve strong growth rates and acceptable
profit margins. If Eastman is unable to meet these competitive
challenges, its results of operations could be adversely affected.
- 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.
- Limitation of the Company's available manufacturing capacity due to
significant disruption in its manufacturing operations could have a
material adverse affect on revenues, expenses, and results.
- Eastman's facilities and businesses are subject to complex health,
safety, and environmental laws and regulations 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. The nature of the Company's existing and historical
operations exposes it to the risk of liabilities or claims with respect
to environmental matters, including on-site and off-site releases and
emissions of hazardous and non-hazardous substances and wastes. These
liabilities or claims may include costs associated with environmental
investigations and remediation activities, as well as plant closure and
restoration projects. Further, these liabilities or claims may include
capital and other costs associated with environmental compliance
matters at its numerous facilities. These laws and regulations require,
and will continue to require, significant expenditures to remain in
compliance, both currently and in the future. Ongoing operations can be
affected by unanticipated government enforcement actions, which in turn
are influenced by the nature of an allegation and the complexity of the
site. Likewise, changes in chemical control regulations and testing
requirements can increase costs or result in product discontinuation.
Remedial requirements at contaminated sites are dependent on the nature
of the remedy, the outcome of negotiations with regulatory agencies and
other potentially responsible parties at multi-party sites, as well as
the number and financial viability of other potentially responsible
parties. Further, it is impossible to predict the nature and impact of
future judicial, legislative, or regulatory developments relating to
the environmental protection, health, and safety requirements
applicable to Eastman's operations. Changes in existing laws or
regulations, or the discovery of additional environmental liabilities
associated with the Company's existing or historical operations, could
require Eastman to incur material costs or could otherwise
significantly harm the Company's business, results of operations, or
financial condition. The requirements to be met, as well as the
technology and length of time available to meet those requirements,
continue to develop and change. To the extent that the costs associated
with meeting any of these requirements are substantial and not
adequately provided for, there could be a material adverse effect on
the Company's results of operations and financial condition.
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- The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of
business. 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 other forward-looking
statements and related disclosures made by the Company in this filing and
elsewhere from time to time, represent 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. You are advised, however, to
consult any further public Company disclosures (such as in our filings with the
Securities and Exchange Commission or in Company press releases) on related
subjects.
-----------------
EASTAPAK and SPECTAR are registered trademarks of Eastman Chemical Company.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of business.
While the Company is unable to predict the outcome of these matters, it
does not believe, based upon currently available facts, that the ultimate
resolution of any of such pending matters, including the sorbates
litigation described in the following paragraphs, will have a material
adverse effect on the Company's overall financial position or results of
operations. However, adverse developments could negatively impact
earnings in a particular period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, 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 in third quarter 1998
and is paying 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 admitted that the same conduct that was the subject
of the September 30, 1998 plea in the United States had occurred with
respect to sorbates sold in Canada, and prohibited repetition of the
conduct and provides for future monitoring. The fine has been paid and
was recognized as a charge against earnings in the fourth quarter 1999.
In addition, the Company, along with other companies, has been named a
defendant in a number of antitrust lawsuits brought subsequent to the
Company's plea agreements as putative class actions on behalf of certain
purchasers of sorbates in the United States and Canada. In each lawsuit,
the plaintiffs allege that the defendants engaged in a conspiracy to fix
the price of sorbates and that the plaintiffs paid more for sorbates than
they would have paid absent the defendants' conspiracy. Seven of the
lawsuits are pending in California state court in a consolidated action
and allege state antitrust and consumer protection violations on behalf
of classes of indirect purchasers of sorbates; six of the lawsuits are
pending in the United States District Court for the Northern District of
California in a consolidated action and allege federal antitrust
violations on behalf of classes of direct purchasers of sorbates; two
lawsuits were filed in Tennessee state courts under Tennessee law, on
behalf of classes of indirect purchasers of sorbates in various states
that may permit indirect purchaser claims, and one of which actions also
included a claim under Tennessee law on behalf of a class of direct
purchasers of sorbates manufactured or distributed in Tennessee which has
been dismissed in light of the federal direct purchaser class settlement;
two lawsuits were filed in Wisconsin State Court under various state
antitrust laws on behalf of a class of indirect purchasers of sorbates in
those states; one lawsuit was filed in Kansas State Court under Kansas
antitrust laws on behalf of a class of indirect purchasers of sorbates in
that state; one lawsuit was filed in New Mexico State Court under New
Mexico antitrust laws on behalf of a class of indirect purchasers of
sorbates in that state; one lawsuit was filed in the Ontario Superior
Court of Justice under the federal competition law and pursuant to common
law causes of action on behalf of a class of direct and indirect
purchasers of sorbates in Canada; and one lawsuit was filed in
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the Quebec Superior Court under the federal competition law on behalf of
a class of direct and indirect purchasers of sorbates in the Province of
Quebec. The plaintiffs in most cases seek damages of unspecified amounts,
attorneys' fees and costs, and other unspecified relief; in addition,
certain of the actions claim restitution, injunction against alleged
illegal conduct, and other equitable relief. The Company reached
settlements in the direct and indirect purchaser class actions pending in
California. These settlements were finally approved by the court and the
Company was dismissed with prejudice. One of the two indirect purchaser
actions in Tennessee has been preliminarily approved by the trial court
in Davidson County, Tennessee, and the claims in the other Tennessee
indirect purchaser action have been stayed. The Company has also reached
preliminary settlements that would resolve the Wisconsin, New Mexico, and
Kansas indirect purchaser actions; however, these settlements require
further court approval. Each of the remaining class actions is in the
preliminary discovery stage, with no class having been certified to date.
The Company has also been included as a defendant in two separate
lawsuits concerning sorbates currently pending in the United States
District Court for the Northern District of California, one filed on
behalf of Dean Foods Company, Kraft Foods, Inc., Ralston Purina Company,
McKee Foods Corporation, and Nabisco, Inc; and the other filed on behalf
of Conopco, Inc. Both lawsuits allege that the defendants engaged in a
conspiracy to fix the price of sorbates in violation of Section One of
the Sherman Act and that the plaintiffs were direct purchasers of
sorbates from the defendants. These plaintiffs elected to opt out of the
final class action settlement of the federal direct purchaser cases in
California and are pursuing their claims individually. In addition,
several indirect purchasers of sorbates have recently opted out of the
proposed Kansas settlement, and have filed a separate action against the
Company and other sorbates producers in state court in Kansas.
The Company intends to continue vigorously to defend these actions unless
they can be settled on terms acceptable to the parties. These matters
could result in the Company being subject to monetary damages and
expenses. The Company recognized charges to earnings in the fourth
quarter 1998, the fourth quarter 1999, and the first and second quarters
of 2000 for estimated costs, including legal fees, related to the pending
sorbates litigation described above. The ultimate outcome of these
matters cannot presently be determined, however, and they may result in
greater or lesser liability than that currently provided for in the
Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of the Shareowners of Eastman Chemical Company
was held on May 3, 2001. There were 77,008,500 shares of common stock
entitled to be voted, and 65,822,975 shares represented in person or by
proxy, at the Annual Meeting.
Five items of business were acted upon by shareowners at the Annual
Meeting:
- the election of three directors to serve in the class for which the
term in office expires at the Annual Meeting of Shareowners in 2004
and until their successors are duly elected and qualified;
- the amendment of Eastman's Certificate of Incorporation to effect a
"reverse/forward split" of the Company's common stock, by which
registered holders of less than 10 shares would have such shares
cancelled and converted to the right to receive the fair market
value of such shares in cash;
- the ratification of the appointment of PricewaterhouseCoopers LLP
as independent accountants for the Company until the Annual Meeting
of Shareowners in 2002;
- a shareowner proposal requesting that management study health risks
from cellulose acetate fibers; and
- a shareowner proposal requesting that the Board of Directors issue
a report concerning emission of "greenhouse gases" and potential
climate change.
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The results of the voting for the election of directors were as follows:
-------------------------------------------------------------------------------------------
VOTES BROKER
NOMINEE VOTES FOR WITHHELD ABSTENTIONS NON-VOTES
-------------------------------------------------------------------------------------------
H. Jesse Arnelle 64,036,815 1,786,160 -0- -0-
John A. White 64,041,282 1,781,693 -0- -0-
Peter M. Wood 64,036,525 1,786,450 -0- -0-
Accordingly, the three nominees received a plurality of the votes cast in
the election of directors at the meeting and were elected.
The results of the voting on the amendment of the Certificate of
Incorporation to effect a 10:1 reverse/forward stock split were as
follows:
-------------------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
-------------------------------------------------------------------------------------------
57,260,309 1,890,371 373,227 6,299,068
Accordingly, the number of affirmative votes cast on the charter
amendment constituted more than a majority of the shares outstanding and
entitled to vote on the proposal at the meeting, and the amendment was
approved by shareowners. The reverse/forward stock split was effective on
May 10, 2001, upon filing with the Secretary of State of Delaware of the
Certificate of Amendment effecting the charter amendment.
The results of the voting on the ratification of the appointment of
PricewaterhouseCoopers LLP as independent accountants were as follows:
-------------------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
-------------------------------------------------------------------------------------------
64,889,775 632,443 300,757 -0-
Accordingly, the number of affirmative votes cast on the proposal
constituted more than a majority of the votes cast on the proposal at the
meeting, and the appointment of PricewaterhouseCoopers LLP as independent
accountants was ratified.
The results of the voting on the approval of the shareowner proposal to
study health risks from cellulose acetate fibers were as follows:
-------------------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
-------------------------------------------------------------------------------------------
4,487,129 51,749,446 3,287,453 6,298,947
Accordingly, the number of affirmative votes cast on the proposal
constituted less than a majority of the votes cast on the proposal at the
meeting, and the shareowner proposal was not approved.
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The results of the voting on the approval of the shareowner proposal to
issue a report concerning emission of "greenhouse gases" and potential
climate change were as follows:
-------------------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
-------------------------------------------------------------------------------------------
4,437,380 51,693,973 3,392,674 6,298,948
Accordingly, the number of affirmative votes cast on the proposal
constituted less than a majority of the votes cast on the proposal at
the meeting, and the shareowner proposal was not approved.
ITEM 5. OTHER INFORMATION
Eastman announced on July 13, 2001 that it had realigned its previously
reported sales and earnings to reflect changes in operating segments
that more closely align with the Company's previously announced pursuit
of a plan to become two independent public companies by the end of 2001
by creating and spinning off a new specialty chemicals and plastics
company.
Eastman has begun to transition the businesses, products, management,
operations and reporting of financial and other matters to be prepared
to support the two new companies upon completion of the spin-off.
Beginning with the second quarter of 2001, Eastman reports its financial
results in five segments: Coatings, Adhesives, Specialty Polymers, and
Inks; Performance Chemicals and Intermediates; Specialty Plastics;
Polymers; and Fibers. As previously reported, the products of the new
Specialty Plastics segment have been moved from the Polymers Group to
the Chemicals Group effective with the second quarter of 2001, and will
be a part of the new Eastman Company after the spin-off.
This realignment of segments reflects the recently restructured
management and internal financial reporting of the Company and is not a
restatement of previously reported total Eastman sales and earnings.
Sales and earnings for prior periods have been realigned to conform to
the new five-segment structure and are detailed in Exhibit 99.03 to this
Form 10-Q. Through the first quarter 2001, the Company presented its
results of operations in two segments -- Chemicals and Polymers -- as
reported in the Form 10-K for 2000.
CHEMICALS GROUP
The new segments within the Chemicals Group, and of the new Eastman
Company after the spin-off, are shown below.
- Coatings, Adhesives, Specialty Polymers, and Inks, which
includes raw materials and intermediates such as alkyds,
alcohols, esters, glycols, resins, specialty polymers and ink
vehicles supplied to the inks, coatings, adhesives, sealant and
textile industries, with sales revenue of $1,176 million in
2000.
- Performance Chemicals and Intermediates, which are used as
additives for fibers, food and beverage ingredients,
performance chemicals, photographic chemicals, pharmaceutical
intermediates, oxo chemicals, basic acetyls and plasticizers,
with sales revenue of $1,297 million in 2000.
- Specialty Plastics, including EASTALLOY, EASTAR, SPECTAR,
TSUNAMI copolyester, and TENITE cellulosic plastics for
value-added end uses such as toothbrushes, eyeglass frames,
medical devices, electrical connectors, tools, appliance
housings, food and medical packaging, heavy gauge sheeting,
fabricated boxes, specialty packaging films, fibers, tape and
injection molding, with sales revenue of $550 million in 2000.
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POLYMERS GROUP
The new segments within the Polymers Group, and of Voridian Company
after the spin-off, are:
- Polymers, including EASTAPAK PET polymers for packaging
applications, EASTMAN HIFOR and MXSTEN specialty polyethylene
products, EASTACOAT polymers and TENITE low density
polyethylene, with sales revenue of $1,636 million in 2000.
- Fibers, including acetate tow used by customers primarily in
the manufacture of cigarette filters and acetate yarn for the
textile industry, with sales revenue of $633 million in 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in the Exhibit
Index appearing on page 37.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 2001.
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EASTACOAT, EASTALLOY, EASTAPAK, EASTAR, EASTMAN HIFOR, MXSTEN, SPECTAR, TSUNAMI,
and TENITE are registered trademarks of Eastman Chemical Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastman Chemical Company
Date: August 8, 2001 By: /s/ James P. Rogers
-----------------------------
James P. Rogers
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
--------- --------------------------------------------------------------------------- -----------
3.01 Amended and Restated Certificate of Incorporation of Eastman Chemical
Company, as amended May 10, 2001 39-45
3.02 Amended and Restated Bylaws of Eastman Chemical Company, as amended
October 5, 2000 (incorporated herein by reference to Exhibit 3.02 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000)
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 (the "March 31, 2001 10-Q")
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"))
37
38
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
--------- --------------------------------------------------------------------------- -----------
4.09 Officer's Certificate pursuant to Sections 201 and 301 of the Indenture
related to 7.60% Debentures due February 1, 2027 (incorporated herein by
reference to Exhibit 4.09 to the 1996 10-K)
4.10 $200,000,000 Accounts Receivable Securitization agreement dated April 13,
1999 (amended April 11, 2000), between the Company and Bank One, NA, as
agent. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of
filing a copy of such agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
4.11 Credit Agreement, dated as of July 13, 2000 (the "Credit Agreement")
among Eastman Chemical Company, the Lenders named therein, and Citibank,
N.A. as Agent (incorporated herein by reference to Exhibit 4.11 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000)
*10.01 Eastman Unit Performance Plan, as amended May 2, 2001 46-52
*10.02 1999 Director Long-Term Compensation Plan, as amended March 1, 2001 53-60
*10.03 Eastman 2001-2003 Long-Term Performance Subplan of 1997 Omnibus Long-Term
Compensation Plan 61-69
*10.04 James L. Chitwood Severance Agreement 70
*10.05 Garland Williamson Severance Agreement 71
12.01 Statement re Computation of Ratios of Earnings (Loss) to Fixed Charges 72
99.01 Operating Segment Information (Sales Revenue Change, Volume Effect and
Price Effect) 73
99.02 Acquisition Information (Sales Revenue and Volume Growth Comparison --
With and Without Acquisitions) 74-75
99.03 Eastman Chemical Company Realigned Segment Information 76-79
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*Management contract or compensatory plan or arrangement filed pursuant to Item
601(b)(10)(iii) of Regulation S-K.
38