UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 62-1539359
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
100 N. Eastman Road
Kingsport, Tennessee 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $0.01 per share New York Stock Exchange
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
Securities registered pursuant to Section 12(g) of the Act: None
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PAGE 1 OF 151 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 96
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value (based upon the closing price on the New York Stock
Exchange on January 31, 2002) of the 76,875,418 shares of voting stock held by
nonaffiliates as of December 31, 2001 was approximately $3,087,316,787, using
beneficial ownership rules adopted pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended, to exclude stock that may be deemed
beneficially owned as of December 31, 2001 by the current directors and
executive officers, and the Company's charitable foundation, some of whom might
not be held to be affiliates upon judicial determination. At December 31, 2001,
77,137,914 shares of common stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 2002
Annual Meeting of Stockholders (the "2002 Proxy Statement"), to be filed with
the Securities and Exchange Commission, are incorporated by reference in Part
III, Items 10-12 of this Annual Report on Form 10-K (the "Annual Report") as
indicated herein.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual 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 and expected
capacity increases and utilization; anticipated 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; competition; growth opportunities; supply and
demand, volume, price, cost, margin, and sales; earnings, cash flow, dividends
and other expected financial conditions; 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;
financing plans; pension expenses and funding; credit rating; cost reduction
targets; integration of recently acquired businesses; development, production,
commercialization, and acceptance of new products, services, and technologies;
asset and product portfolio changes.
These plans and expectations are based upon certain underlying assumptions,
including those mentioned with the specific statements. Such assumptions are in
turn based upon internal estimates and analyses of current market conditions and
trends, management plans and strategies, economic conditions, and other factors.
These plans and expectations and the assumptions underlying them are necessarily
subject to risks and uncertainties inherent in projecting future conditions and
results. Actual results could differ materially from expectations expressed in
the forward-looking statements if one or more of the underlying assumptions and
expectations proves to be inaccurate or is unrealized. Certain important factors
that could cause actual results to differ materially from those in the
forward-looking statements are included with such forward-looking statements and
in Part II--Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Forward-Looking Statements."
2
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
1. Business 4-22
Executive Officers of the Company 23
2. Properties 24-25
3. Legal Proceedings 26
4. Submission of Matters to a Vote of Security Holders 27
PART II
5. Market for the Registrant's Common Stock and Related Stockholder Matters 28
6. Selected Financial Data 29
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 30-52
7A. Quantitative and Qualitative Disclosures About Market Risk 53
8. Financial Statements and Supplementary Data 54-90
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 91
PART III
10. Directors and Executive Officers of the Registrant 92
11. Executive Compensation 92
12. Security Ownership of Certain Beneficial Owners and Management 92
13. Certain Relationships and Related Transactions 92
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 93
SIGNATURES
Signatures 94-95
3
PART I
ITEM 1. BUSINESS
CORPORATE PROFILE
Eastman Chemical Company ("Eastman" or the "Company"), a global chemical company
engaged in the manufacture and sale of a broad portfolio of chemicals, plastics,
and fibers, began business in 1920 for the purpose of producing chemicals for
Eastman Kodak Company's ("Kodak's") photographic business. The Company was
incorporated in Delaware in 1993 and became an independent entity as of December
31, 1993, when Kodak spun off its chemicals business. The Company's headquarters
and largest manufacturing site are located in Kingsport, Tennessee.
Eastman is the largest producer of polyethylene terephthalate ("PET") polymers
for packaging based on market share and is a leading supplier of raw materials
for paints and coatings, inks and graphic arts, adhesives, textile sizes, and
other formulated products, and of cellulose acetate fibers. Eastman has 41
manufacturing sites in 17 countries that supply major chemicals, fibers, and
plastics products to customers throughout the world. In 2001, the Company had
sales revenue of $5.4 billion, an operating loss of $126 million, and a net loss
of $179 million. Loss per diluted share was $2.33.
On February 11, 2002, the Company announced that it was canceling its previously
disclosed plan to spin off its specialty chemicals and plastics businesses. The
Company originally announced its plan for the spin-off in February 2001 and then
later reported that the planned spin-off would be delayed due to adverse market
conditions and the lack of near-term visibility. Much of 2001 was spent pursuing
the planned spin-off, the goal of which was to separate Eastman's businesses so
that each could set its own course for growth, resource allocation and
strategies, ultimately maximizing stockholder value. Although the spin-off was
canceled, the work that the Company did internally to separate the businesses
allowed it to set up a divisional structure that provides focus on being a
low-cost producer of market-leading products in its Voridian Division and
concentration on development of new products and services in its Eastman
Division.
The Company's products and operations are managed and reported in five operating
segments. Eastman Division, previously called the Chemicals Group, contains the
Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment; the
Performance Chemicals and Intermediates ("PCI") segment; and the Specialty
Plastics ("SP") segment. Voridian Division ("Voridian"), previously called the
Polymers Group, contains the Polymers segment and the Fibers segment.
In 2001, Eastman Division accounted for 58% of total Company revenues and
Voridian accounted for 42% of total Company revenues. Within Eastman Division,
revenues were attributable 48% to the CASPI segment, 36% to the PCI segment, and
16% to the SP segment. Within Voridian, revenues were attributable 72% to the
Polymers segment and 28% to the Fibers segment.
EASTMAN DIVISION
BUSINESS AND INDUSTRY OVERVIEW
Operating in a variety of markets with varying growth prospects and competitive
factors, the segments in Eastman Division manufacture a diverse portfolio of
specialty chemicals and plastics that are used in a wide range of consumer and
industrial markets. With 36 manufacturing sites in 16 countries, Eastman
Division is focused on providing its customers with chemicals and plastics
products that meet their evolving needs.
The CASPI segment generally competes in the markets for raw materials for paints
and coatings, inks and graphic arts and adhesives. Growth in these markets in
North America and Europe typically coincides with economic growth in general,
due to the wide variety of end uses for these applications and the particular
dependence on the economic conditions of the market for durable goods. Higher
growth sub-markets exist within North America and Europe, driven primarily by
increasing governmental regulation. Industry participants are promoting, for
example, products and technologies primarily designed to reduce air emissions.
Growth outside of North America and Europe is substantially higher, driven
primarily by the increasing requirements of industrializing economies.
4
The adhesives raw materials market is an approximately $10 billion market,
according to Company estimates. Historically, this market's growth rate has been
consistent with general economic growth. In addition to steady overall market
growth, Eastman believes that greater growth opportunities exist for hot melt
adhesives due to their superior performance characteristics and the resulting
ability to displace other adhesives.
The PCI segment competes in diverse markets for its intermediates, specialty
organic and custom manufacturing chemicals offerings. Specialty organic
chemicals products are specifically developed based on product performance
criteria, which make market quantification difficult. Instead, the focus in this
market is on specific opportunities for value added products, and market size,
growth opportunities and other industry characteristics are a function of the
level and extent to which a producer chooses to participate in niche
opportunities driven by these customer specifications. For other PCI products,
the markets are varied, from durables to food products to pharmaceuticals and,
although opportunities for differentiation on service and product offerings
exist, these products compete primarily on price.
The SP segment competes in the market for the development of plastics that meet
specific performance criteria, typically determined on an
application-by-application basis. Development is dependent upon a manufacturer's
ability to design products that achieve specific performance characteristics
determined by the customer, while doing so either more effectively or more
efficiently than alternative materials such as polycarbonate and acrylic, metals
or glass. Increases in market share are gained through the development of new
applications, substitution of plastic for other materials and, particularly,
displacement by plastic resins in existing applications. The Company estimates
that the market growth for copolyesters, which has historically been high due to
the relatively small market size, will be substantially higher than general
economic growth due to displacement opportunities. Eastman believes the
cellulosic plastics markets have been growing, and will continue to grow, at or
near the rate of the economy in general.
STRATEGY
The Company's objectives for Eastman Division are to improve gross margins,
accelerate revenues and earnings growth through exploiting growth opportunities
in its core businesses, and build capabilities for future growth. The key
elements of this strategy include:
- IMPROVE GROSS MARGINS
- INTEGRATE ACQUISITIONS
The Company recently completed a number of acquisitions in its Eastman
Division and is currently integrating these acquired businesses into
its operations. As part of its integration process, the Company is
applying its historical expertise in manufacturing process improvements
and supply chain management to these businesses. In particular, the
Company has completed the deployment of its management teams among the
businesses it has acquired as part of the CASPI growth strategy, and
expects to complete the worldwide implementation of its enterprise
resource planning systems among these operations in mid-2002.
- REDUCE COSTS AND IMPROVE CAPACITY UTILIZATION
The Company intends to continue to implement historically successful
initiatives to eliminate inefficiencies and unnecessary costs, as well
as improve manufacturing processes, all with the goal of improving the
cost structure of Eastman Division segments. The economic downturn in
2001 reduced demand for Eastman Division's products, but the Company is
well positioned to achieve benefits from improved capacity utilization
without the need for significant incremental capital investment, a
result of recent investments in additional capacity, particularly in
oxo chemicals and coatings products.
- EXPLOIT GROWTH OPPORTUNITIES IN CORE BUSINESS
- DEVELOP NEW SPECIALTY PRODUCTS AND EXPAND INTO NEW MARKETS
Eastman believes that it is a market leader based on sales in a number
of Eastman Division's product lines, and is focused on growth through
continued innovation and displacement of competitive products with
offerings that provide greater functionality or better value. Recent
examples of the continued focus on the development of
5
new and innovative products are DuraStar(R), Embrace(R), and
Provista(R) in the SP segment. Recent examples of efforts to enter new
markets include the aggressive introduction by the CASPI segment of
coatings products using waterborne, powder and pigment dispersion
technologies to meet the growing requirement for environmentally
friendly products.
- LEVERAGE OPPORTUNITIES CREATED BY THE BROAD PRODUCT LINE
The CASPI segment is organized as an integrated platform that combines
its leading products and technologies in order to develop additional
customer-specific applications. This integrated platform should allow
Eastman Division to further benefit from, for instance, its ability to
use technology from the adhesives market in applications for the
coatings and inks market. Further, Eastman Division is able to offer a
broad array of complementary products that customers would otherwise
need to obtain from multiple manufacturers, increasing cross-selling
opportunities.
- BUILD CAPABILITIES FOR FUTURE GROWTH
- DEVELOP CUSTOMER SERVICE ORIENTED INITIATIVES TO LEVERAGE
UNIQUE CAPABILITIES
Within Eastman Division, the Company is expanding beyond the core
business of chemicals and plastics manufacturing to develop less
capital-intensive service businesses that allow it to take advantage of
its long-term customer relationships, operational skills and
technological capabilities. One example is Cendian Corporation
("Cendian"), formerly ShipChem, Inc., a wholly owned logistics provider
for small to mid-sized chemicals manufacturers which the Company
launched in 2000. Cendian combines the Company's long-standing
distribution and logistics capabilities and its strong reputation and
brand in the chemicals industry with recent information technologies to
create a full-scale outsourcing logistics provider for chemicals
industry participants. Cendian supports substantially all of the
Company's worldwide logistics requirements, as well as providing
logistics outsourcing services to other chemicals manufacturers
globally.
Also within Eastman Division, the Company is developing a service
business model for coal gasification operations as an alternative clean
technology for producing electric power. Recognized as an industry
leader in reliability and efficiency of gasification operations,
Eastman has operated a coal gasification plant in Kingsport, Tennessee
for approximately 19 years. Eastman Division plans to leverage its
expertise in gasification by offering operations and maintenance
services to third party gasification facilities.
- PURSUE OPPORTUNITIES FOR BUSINESS DEVELOPMENT AND
DIVERSIFICATION
Eastman Division currently has in place and continues to pursue
opportunities for joint ventures, equity investments and other
alliances. These strategic initiatives are expected to diversify and
strengthen Eastman Division businesses by providing access to new
markets and high-growth areas as well as providing an efficient means
of ensuring that Eastman is involved in and supportive of technological
innovation in or related to the chemicals industry. The Company is
committed to pursuing these initiatives in order to capitalize on new
business concepts that differentiate Eastman from other chemical
manufacturers and that will provide incremental growth beyond that
which is inherent in the chemicals industry and at lesser capital
investment requirements. In addition to Cendian and coal gasification
services, Eastman Division's current initiatives also include the
following:
- GENENCOR
Eastman owns a 42% equity interest in Genencor International,
Inc. ("Genencor"), a publicly-traded biotechnology company
engaged in the discovery, development, manufacture, and
marketing of biotechnology products for the industrial
chemicals, agricultural, and health care markets, and a
developer of integrated genomics technology. The Company,
which was an early stage investor and held a 50% interest
prior to Genencor's initial public offering in 2000, believes
this investment provides the opportunity for a financial
return as well as access to complementary technologies that
may result in expanded product offerings and additional market
penetration. Genencor's common stock is registered under the
Securities Exchange Act of 1934 and is listed on the NASDAQ
National Market System under the symbol GCOR.
6
- ARIEL RESEARCH CORPORATION
In January 2002, Eastman acquired Ariel Research Corporation
("Ariel"). Ariel, headquartered in Bethesda, Maryland, is a
leading provider of worldwide regulatory information and
software products that enable corporations to manage product
safety and stewardship functions, including requirements for
workplace, environmental, and dangerous goods compliance. Its
customers include major global corporations for chemical,
pharmaceutical, consumer products, aerospace, electronics and
telecommunications markets. The addition of Ariel's
capabilities should result in better product stewardship
information solutions for the Company's customers.
CASPI SEGMENT
- OVERVIEW
Through the CASPI segment, Eastman Division manufactures binders,
liquid vehicles, pigment concentrates and additives, unsaturated
polyester resins and polyester and acrylic emulsions, which are
integral to the production of paints and coatings, inks and graphic
arts, adhesives, textile sizes and other formulated products. The
Company focuses on raw materials rather than finished products in order
to develop long-term, strategic relationships and achieve preferred
supplier status with its customers. In 2001, the CASPI segment had
sales of approximately $1.5 billion, which represented approximately
28% of Eastman's total sales and approximately 48% of Eastman
Division's total sales.
Success in the CASPI segment is dependent upon Eastman Division's
ability to realize value from the successful integration of recent
acquisitions and to capitalize on organic growth opportunities by
offering existing products and technologies to new markets and new
products and technologies to customers in multiple markets. For these
reasons, activities within the CASPI segment are focused on
capitalizing on the higher growth rates in environmentally friendly
products such as waterborne, powder and pigment dispersion
technologies, and on higher growth geographical markets, such as the
Asia Pacific region. With the addition of its recent acquisitions, the
CASPI segment has stronger technology capabilities and an international
presence that better position it to take advantage of new product
growth and international opportunities.
- PRODUCTS
The CASPI segment's products consist of binders and resins, liquid
vehicles, pigment concentrates and additives, unsaturated polyester
resins and polyester and acrylic emulsions. Binders and resins, such as
alkyd and polyester resins, hydrocarbon resins and rosins and rosin
esters, are used in adhesives as a key component in paints and inks to
form a protective coating or film and bind color to the substrate.
Liquid vehicles, such as ester, ketone and alcohol solvents, maintain
the binders in liquid form for ease of application. Pigment
concentrates and additives, such as cellulosic polymers, Texanol(R)
coalescing aid and chlorinated polyolefins, provide different
properties or performance enhancements to the end product. Unsaturated
polyester resins are used primarily in gel coats and fiberglass
reinforced plastics. Polyester and acrylic emulsions are traditionally
used as textile sizes to protect fibers during processing in textile
manufacturing, and the technology is being extended for use in
water-based paints, coatings and inks. Additional products are
developed in response to, or in anticipation of, new applications where
significant value can be achieved.
The following table describes the CASPI segment's major product groups
and the primary (P) and secondary (S) markets into which those products
are sold:
MARKETS
--------------------------------------------------------------
PAINTS AND INKS AND OTHER
COATINGS GRAPHIC ARTS ADHESIVES MARKETS
PRODUCT GROUPS
Binders and resins P P P S
Liquid vehicles (solvents) P P S S
Pigment concentrates and additives P P -- S
Unsaturated polyester resins -- -- -- P
Polyester and acrylic emulsions P S S P
7
- GROWTH STRATEGY
The CASPI segment's market position has been enhanced through a
combination of internal product development and strategic acquisitions
of products and technology.
A key element of the CASPI segment's growth strategy is the continued
development and implementation of innovative product offerings in
high-growth areas that meet customers' evolving needs and improve the
quality and performance of customers' end products. Eastman Division
believes that its ability to leverage its broad product line and
industry-leading research and development capabilities across the CASPI
segment make it uniquely capable of offering a broad array of solutions
for new and emerging markets. One example of this type of offering is
CMCAB, a new product designed for use in water-based coatings.
Eastman Division also intends to focus on the expansion of the CASPI
segment's product offerings into other high growth areas. These include
areas with growth due to specific product developments, such as
adhesion promoters, high solids coatings, and water-based products, as
well as growth in geographic areas due to the level and timing of
industrial development. Due to the Company's global manufacturing
presence, it is strategically positioned to take advantage of areas of
high industrial growth.
Eastman Division also seeks to capitalize on the growth potential in
the consolidation of recent acquisitions. Over the last several years,
the Company has made several strategic acquisitions in the CASPI
segment to strengthen its technology and asset position. In 1999, the
Company acquired Lawter International, Inc. to strengthen its position
in the inks and graphic arts market. In 2000, Eastman acquired
McWhorter Technologies Inc. and Chemicke Zavody Sokolov to strengthen
its position in specialty resins and colorants, waterborne polymers
products, acrylic acid, acrylic esters and other specialty products. In
2001, the acquisition of specified assets of Hercules Incorporated made
Eastman the most diversified manufacturer of adhesive raw materials
worldwide. The integration of these acquisitions is expected to
continue to be a fundamental component of Eastman Division's growth
strategy for the CASPI segment, as it believes integration will serve
to provide greater access to new customers, technologies and markets.
Additionally, successful integration will continue to result in
benefits from further operational efficiencies in areas such as
manufacturing, supply chain and cost management.
In the future, the Company intends to continue to leverage its
resources by sharing best practices, both internal and those acquired
and integrated, across the CASPI segment and throughout the entire
company. Although sales and application development is often
specialized by end use market, developments in technology may be
successfully shared across all end uses. In addition, new product
offerings and manufacturing assets will be shared across multiple end
uses.
- CUSTOMERS AND MARKETS
As a result of the variety of end uses for its products, the customer
base in the CASPI segment is broad and diverse. Eastman Division
focuses on establishing long-term, customer service oriented
relationships with its strategic customers in order to become their
preferred supplier. Eastman Division sees significant growth potential
in its ability to leverage these relationships to provide sales
opportunities in previously underserved markets, as well as expand the
scope of its value-added services.
- COMPETITION
Competition within the CASPI segment markets varies widely depending on
the specific product or product group. Because of the depth and breadth
of its product offerings, Eastman does not believe that any one of its
competitors presently offers all of the products that it manufactures
within the CASPI segment. Additionally, Eastman believes that, based on
estimated sales revenue, it is the largest producer of raw materials
for the inks and graphic arts market that it serves and the second
largest producer of resins for adhesives. However, many of the
Company's competitors within portions of its CASPI segment are
substantially larger companies, such as The Dow Chemical Company, BASF
Corporation, Exxon Mobil Corporation and Rohm and Haas Company, with
greater financial and other resources than those of Eastman.
Additionally, within each market in this segment, the Company competes
with other smaller, regionally focused companies who may have
advantages based on location, local market knowledge, manufacturing
strength in a specific product or other factors. At any
8
time, any one or more of these competitors could develop additional
products to compete with, or that may make obsolete, some of Eastman's
current product offerings.
Eastman does not believe that any of its competitors is dominant within
the CASPI segment's markets. Further, the Company attempts to maintain
competitive advantages through its level of vertical integration,
breadth of product and technology offerings, low-cost position,
consistent product quality and process and market knowledge. In
addition, Eastman attempts to leverage its strong customer base and
long-standing customer relationships to promote substantial recurring
business, further strengthening its competitive position.
PCI SEGMENT
- OVERVIEW
The Company's PCI segment manufactures diversified products that are
used in a variety of environments, including chemicals for agricultural
products, fibers, food and beverage ingredients, photographic
chemicals, pharmaceutical intermediates, polymer compounding and custom
synthesis and chemical manufacturing intermediates. Custom synthesis
and photographic chemicals were historically managed as part of
Eastman's fine chemicals product line. The Company believes it has one
of the industry's broadest product offerings, offering custom
manufacturing and high volume manufacturing of complex organic
molecules for customers. In 2001, the PCI segment had sales of
approximately $1.1 billion, which represented approximately 21% of
Eastman's total sales and approximately 36% of Eastman Division's total
sales.
Because a substantial portion of the PCI segment's sales are derived
from higher margin, highly specialized products with niche
applications, success in the PCI segment will require the Company to
continue to innovate and develop new products and find new applications
for its existing products. Eastman Division intends to invest in high
growth specialty products, such as additives for food and
pharmaceuticals, where the highest returns can be generated. Eastman
Division is also concentrating its efforts on new uses for existing
products, such as optical brighteners and specialty anhydrides. Some of
Eastman Division's products in this segment are more substitutable and
price sensitive in nature, requiring the Company to operate on a lower
cost basis while maintaining high quality products and customer
service.
- PRODUCTS
The PCI segment offers over 150 products to customers, many of whom are
major producers in a broad range of markets. The following is a summary
of key products:
- SPECIALTY ORGANIC CHEMICALS
Eastman manufactures complex organic molecules such as diketene
derivatives, specialty ketones, specialty acetyls, optical brighteners
and color developers for fiber, food and beverage ingredients and
photographic chemicals, which are typically used in market niche
applications. The Company also engages in custom manufacturing of
complex organic chemicals where business is developed on a
customer-by-customer basis after significant consultation and analysis.
These niche and custom manufacturing products are typically priced
based on the amount of value added rather than supply and demand
factors, and are often characterized by higher margins and steady
growth rates.
- OTHER CHEMICALS PRIMARILY FOR CHEMICAL MANUFACTURING, POLYMER
COMPOUNDING AND PHARMACEUTICAL APPLICATIONS
Eastman manufactures a variety of intermediate chemicals based on oxo
and acetyl chemistries. The Company is the largest marketer of acetic
anhydride in the United States, a critical component of analgesics and
other pharmaceutical and agricultural products, and is the only U.S.
producer of acetaldehyde, another key intermediate in the production of
vitamins and other specialty products. Eastman manufactures the
broadest range of oxo aldehyde derivatives products in the world and
owns proprietary technology for the production of epoxybutene
("EpB(R)") oxirane, an intermediate with growing use in pharmaceuticals
and other small volume, high value specialty products. The Company's
other products include plasticizers, glycols and polymer intermediates.
Many of the products in this portion of the PCI segment are priced
based on supply and demand of substitute and competing products. In
order to maintain a competitive position, the Company strives to
operate with a low cost manufacturing base.
9
- GROWTH STRATEGY
A two-pronged strategy for success in the PCI segment focuses on
continuing to develop and access markets with high growth potential for
its specialty organic chemicals, while maintaining its competitive
advantage as a low-cost, high quality and customer service oriented
supplier of products to other chemicals customers. The Company engages
in customer focused research and development initiatives in order to
develop new products and find additional applications for existing
products, both in response to, and in anticipation of, customer needs.
The Company believes that this strategy will enable it to remain a
leader in application-specific, high margin PCI products. For example,
Eastman is leveraging its expertise in chemicals manufacturing to
jointly develop with Genencor a new process for making ascorbic acid,
or Vitamin C, which should significantly lower manufacturing costs over
current processes. Additionally, Eastman has been successful in
developing new applications for some of its existing PCI products. For
instance, SAIB, which has long been used as a coatings additive and for
inks end-uses, has a new application in the U.S. as a stabilizer in
citrus flavored drinks. Food and Drug Administration regulations now
allow the use of SAIB for this application and this market is beginning
to emerge. In the future, the Company expects to continue to capitalize
on applications such as these in biotechnology and in other industries,
and intends to seek to create additional opportunities to apply its
products in new and innovative ways.
In order to build on and maintain its status as a low cost producer,
Eastman continuously focuses on cost control, operational efficiency
and capacity utilization in order to maximize earnings. The Company's
highly integrated and world-scale manufacturing facilities position it
to achieve its strategic goals. For example, the Kingsport, Tennessee
manufacturing facilities allow the PCI segment to produce acetic
anhydride and other acetyl derivatives from coal rather than natural
gas or other petroleum feedstocks. Similarly, at the Longview, Texas
facility, the PCI segment utilizes local ethane and propane supplies
along with Eastman's proprietary oxo-technology in the world's largest
single-site oxo-aldehyde manufacturing facility to produce a wide range
of alcohols, esters and other derivatives products. These integrated
facilities, combined with large scale production processes and
continuous focus on additional process improvements, allow the Company
to remain cost competitive with, and for many products cost-advantaged
over, its competitors.
- CUSTOMERS AND MARKETS
Because of the niche applications of the PCI segment's organic chemical
products, each individual product offering is tailored to specific end
uses. Other performance chemicals and intermediates are more readily
substitutable, and have a more identifiable potential customer base. In
order to obtain a better understanding of its customers' requirements,
which in turn allows it to focus on developing application-specific
products, the Company focuses on establishing long-term,
partnership-oriented relationships with its customers. From time to
time, customers decide to vertically integrate their own processes and
internally develop products or diversify their sources of supply that
had been provided by Eastman. Although historically Eastman has been
able to replace business lost under these circumstances through
expanding relationships with other customers or expanding product
offerings, there can be no assurance that it will be able to continue
to do so in a timely manner, or at all. Based upon indications from a
large customer of the PCI segment that it does not intend to renew its
contract for a custom synthesis product beyond 2002, Eastman does not
expect to pursue that product in the future. Sales of that product
represented approximately 2% of Eastman's sales for 2000 and
approximately 5% of Eastman's operating earnings for 2000. Financial
results reported after June 30, 2001 reflect a minimal contribution to
operating earnings from this contract.
The markets for products with market-based pricing in the PCI segment
are cyclical. This cyclicality is caused by periods of supply and
demand imbalance, either when incremental capacity additions are not
offset by corresponding increases in demand, or when demand exceeds
existing supply. Demand, in turn, is based on general economic
conditions, energy prices, consumer demand and other factors beyond the
Company's control. Eastman may be unable to increase or maintain its
level of sales in periods of economic stagnation or downturn, and its
future financial results may experience fluctuations from period to
period due to these economic conditions. The Company believes these
markets are currently in the "trough" of the cycle. Cyclicality is
expected to remain a significant factor in the PCI segment,
particularly in the near term, as existing capacity becomes absorbed
and utilization rates increase from current levels. The Company
believes that, as excess capacity disappears, this market cycle will
improve.
10
- COMPETITION
For specialty organic chemicals and other niche applications, there are
typically few equivalent products, as the products and their
applications are very specialized. For this reason, producers compete
with others only to the extent they attempt to manufacture similar or
enhanced products that share performance characteristics. Barriers to
entry in this market have typically been cost, either due to raw
material, integration, size or capacity issues, technology and customer
service. On a general level, the primary competitors of Eastman for
specialty organic chemicals are multinational specialty chemical
manufacturers such as Ciba Specialty Chemicals Holding Inc., Clariant
International Ltd. and Lonza Group Ltd. Recently, an increasing number
of producers, primarily from China and India, have been entering the
market primarily on price, benefiting from low-cost labor, less
stringent environmental regulations and government support. These
producers may later focus on improving their product quality and
customer service. Although the entry of new competitors is impacting
the pricing of existing products, Eastman believes it currently
maintains a competitive advantage over these competitors due to the
combination of its successful research and development applications,
its low-cost manufacturing base due to vertical integration, its
long-term customer relations and related customer service focus, as
well as the fact that these suppliers are frequently unable to produce
products of consistently high quality.
For the majority of the PCI segment's products with market-based
pricing, there have historically been significant barriers to entry,
namely the fact that the relevant technology has been held by a small
number of companies. As this technology has become more readily
available, competition from multinational chemicals manufacturers has
intensified. Eastman competes with these and other producers primarily
based on price, as products are interchangeable, and, to a lesser
extent, based on technology, marketing and other resources. While some
of the Company's competitors within the PCI segment have greater
financial resources than Eastman does, which may better enable them to
compete on price, the Company believes it maintains a strong position
due to a combination of its scale of operations, breadth of product
line, level of integration and technology leadership. For manufacturers
of products with market-based pricing, there continues to be increasing
consolidation, as evidenced by the combination of Dow and Union Carbide
Corporation in 2001. Additionally, manufacturers in other raw
material-rich nations, such as Saudi Arabia, have begun to compete in
these markets.
SP SEGMENT
- OVERVIEW
The SP segment produces highly specialized copolyesters and cellulosic
plastics that possess unique performance properties for value-added end
uses such as consumer products, medical devices, electrical connectors,
medical packaging, heavy gauge sheeting for signs and displays,
specialty packaging films and tape. In 2001, the SP segment had sales
of approximately $500 million, which represented approximately 9% of
Eastman's total sales and approximately 16% of Eastman Division's total
sales.
Specialty copolyesters products within the SP segment, including
modified specialty copolyesters such as Eastar(R) and Spectar(R), have
higher than industry average growth rates. Eastman's specialty
copolyesters, which generally are based on Eastman's market leading
supply of CHDM modified polymers, typically fill a market position
between polycarbonates and acrylics. While polycarbonates traditionally
have had superior performance characteristics, acrylics have been less
expensive. Specialty copolyesters combine superior performance with
competitive pricing and are taking market share from both
polycarbonates and acrylics as their performance characteristics
continue to improve and their pricing remains competitive.
The specialty copolyesters market also includes environmentally
friendly specialty copolyesters and plastic sheeting that allow for
flexibility in designing signs and displays. The SP segment includes
cellulosic plastics, which has historically been a steady business with
strong operating margins for the Company, and also includes what
Eastman believes is a North American market leading position in
cellulose esters for tape and film products and cellulose plastics for
molding applications.
Eastman has the ability within its SP segment to modify its polymers
and plastics to control and customize their final properties, creating
numerous opportunities for new application development, including the
expertise to develop new materials and new applications starting from
the molecular level in the research laboratory to the final designed
application in the customer's plant. In addition, the SP segment has a
long history of manufacturing excellence with strong process
improvement programs providing continuing cost reduction.
11
Manufacturing process models and information technology systems support
global manufacturing sites and provide monitoring and information
transfer capability that speed up the innovation process.
- PRODUCTS
The SP segment's key products are:
- COPOLYESTERS
Copolyesters are designed to meet customer needs in a wide range of
markets from film and sheet to injection-molded consumer goods. The
strengths of copolyesters are toughness, ease of fabrication,
transparency, and chemical resistance.
- CELLULOSIC PLASTICS
The Company's cellulosic plastics fill several niches in consumer
products where clarity and chemical resistance are key performance
characteristics.
Typically, products in the SP segment progress through a "life cycle"
from introduction to maturity. At introduction, products are highly
specialized, have been created in response to customer desires for
specific performance and have higher margins and lower volumes. As
products progress into the growth phase, sales volumes accelerate and
growth rates are maximized due to market acceptance and lack of
competitive products. As these products mature, competitive products at
lower prices or with superior performance characteristics are developed
by Eastman and others, thereby reducing both volumes and margin on the
original product.
Eastman Division's primary emerging products include: Eastar Bio(R)
copolyester for new film and packaging applications; Kelvx(TM) resins
for higher temperature sheet applications; and Titan(TM) LCP resins for
electronic components. Eastman Division's primary products in the
growth phase include: Embrace(R) copolyester for shrink label
applications; Provista(R) polyester for retail displays; and
DuraStar(R) polyester for cosmetic and household appliance
applications. Eastman Division attempts to continuously develop and
introduce new products with enhanced performance characteristics to
capitalize on high growth opportunities.
- GROWTH STRATEGY
The SP segment is focused on innovation and marketing and, within the
past three years, has commercialized over 15 new products. Eastman
Division believes that the continued differentiation of its current
offerings, and introduction of new products will provide access to
previously underserved markets, such as its introduction of polymers
with higher heat resistance and products designed to be environmentally
friendly. Additionally, the SP segment develops product enhancements in
order to respond to specific market needs, and expects this to result
in increased market penetration for existing products.
The Company expects to continue to pursue profitable alliances with
strategic customers to engage in branding in order to increase name
recognition, to offer one of the industry's widest varieties of
products and to maintain its focus on high growth markets, all with the
intent of maximizing the return from its recognized brand position in
its SP products.
- CUSTOMERS AND MARKETS
The customer base in the SP segment is broad and diverse, consisting of
over 900 companies worldwide in a variety of industries. Particularly
in the SP segment, Eastman Division seeks to develop mutually
beneficial relationships with its customers throughout various stages
of product life cycles. By doing so, Eastman Division is better able to
understand its customers' needs as those customers develop new
products, and more effectively bring new solutions to market.
Additionally, Eastman Division builds additional brand loyalty,
lengthening the time before its products compete based entirely on
price.
12
- COMPETITION
Competition for Eastman Division's products in the SP segment varies as
a function of where the products are in their life cycle. For example,
the SP segment's products in the introduction phase of the life cycle
compete mainly on the basis of performance. As products begin to
advance in the life cycle, and substitute products come into existence,
the basis of competition begins to shift, taking into account factors
such as price, customer service and brand loyalty. At maturity, where
one or more competitors may have equivalent products in the market,
competition is based primarily on price. Many large, well-recognized
manufacturers produce substitute products of different materials, some
of which may offer better performance characteristics than those of the
Company, and some of which may be offered at a lower price. Eastman
Division has a full array of products moving across the SP life cycle.
For example, two commonly used plastics materials in the heavy gauge
sheet market are acrylic and polycarbonate. In general, acrylics are
lower in cost, but polycarbonates provide higher performance. Eastman's
products capture portions of both markets. Customers of the SP segment
can select from products that offer improved performance over acrylics
at a slightly higher cost, or products that are lower cost than
polycarbonates while still possessing excellent performance properties.
In this way, the SP segment is able to meet the industry need for low
cost, high performance plastics materials and maintain a significant
advantage over its competitors.
Eastman Division believes that it maintains competitive advantages over
its competitors in the SP segment throughout the product life cycle. At
product introduction, Eastman Division's breadth of offerings combined
with its research and development capabilities and customer service
orientation enable it to quickly bring a wide variety of products to
market. As products enter the growth phase of the life cycle, Eastman
Division is able to continue to leverage its product breadth by
receiving revenues from multiple sources, as well as retaining
customers from long-term relationships. As products become price
sensitive, Eastman Division can take advantage of its scale of
operations and vertical integration to remain profitable as a low cost
manufacturer.
Eastman Division believes it has competitive advantages in copolyester
and cellulose ester plastics. However, new competitors have begun to
enter the copolyester marketplace. These new competitors cannot yet
produce the wide variety of specialty copolyesters offered by Eastman
Division or offer the same level of technical assistance. Additionally,
Eastman Division believes that it continues to maintain cost advantages
because of its scale of operations and manufacturing experience. There
can be no assurance, however, that the Company will be able to maintain
this competitive advantage, and if it is unable to do so, its financial
condition and results of operations could be adversely affected.
EASTMAN DIVISION GENERAL INFORMATION
SALES, MARKETING, AND DISTRIBUTION
The Company markets Eastman Division products primarily through a global sales
organization, which has a presence in the United States as well as in over 35
other countries around the world. Eastman Division has a number of broad product
lines which require a sales and marketing strategy that is tailored to specific
customers in order to deliver high quality products and high levels of service
to all of its customers worldwide. Judgment and process knowledge are critical
in determining the application of Eastman Division's products for a particular
customer. Through a highly skilled and specialized sales force that is capable
of providing customized business solutions for each of its three strategic
business segments, Eastman Division is able to establish long-term customer
relationships and strives to become the preferred supplier of specialty
chemicals and plastics.
Eastman Division's products are marketed through a variety of selling channels,
with the majority of sales being direct and the balance sold primarily through
indirect channels such as distributors. International sales tend to be made more
frequently through distributors than domestic sales. Eastman Division's
customers throughout the world have the choice of obtaining products and
services through Eastman's website, www.eastman.com, through any of the global
customer service centers, or through any of Eastman's direct sales force or
independent distributors. Customers who choose to use the Company's website can
conduct a wide range of business transactions such as ordering online, accessing
account and order status and obtaining product and technical data.
Eastman is an industry leader in the implementation and utilization of
e-business technology for marketing products to customers and was one of the
first chemical companies to offer this capability to its customers. Eastman
views
13
this as an opportunity to increase supply chain efficiency by having an
enterprise resource-planning platform with connectivity to customers. These
sales and marketing capabilities combine to reduce costs and provide a platform
for growth opportunities for the Company by providing potential customers new
methods to access Eastman's products.
Eastman Division's products are shipped to customers directly from Eastman's
manufacturing plants as well as from distribution centers worldwide, with the
method of shipment generally determined by the customer. In order to further
capitalize on its expertise and minimize its costs, the Company completed the
outsourcing of all of its North American logistics needs to Cendian in 2001.
Cendian now supports substantially all of the Company's worldwide logistics
requirements, as well as providing logistics outsourcing services to other
chemicals manufacturers globally.
INTELLECTUAL PROPERTY AND TRADEMARKS
The Company considers its Eastman Division-related intellectual property
portfolio to be a valuable corporate asset which it expands and vigorously
protects globally through a combination of patents that expire at various times,
trademarks, copyrights, and trade secrets. The Company's primary strategy
regarding its Eastman Division-related intellectual property portfolio is to
protect all innovations that provide its segments with a significant competitive
advantage. The Company also derives significant value from its intellectual
property by actively licensing and selling patents and expertise worldwide and
by donating patents to educational institutions. In addition, when appropriate,
the Company licenses technology from third parties that complement Eastman
Division's strategic business objectives. As the laws of many foreign countries
do not protect intellectual property to the same extent as the laws of the
United States, Eastman cannot assure that it will be able to adequately protect
its intellectual property assets.
RESEARCH AND DEVELOPMENT
Eastman Division devotes significant resources to its research and development
programs, which are primarily targeted towards three objectives:
- improving existing products and processes to lower costs, improving
product quality, and reducing environmental impact;
- developing new products and processes; and
- developing new product lines and markets through applications research.
Achievements in research and development during the last several years include
enhancements of the oxo chemistry technology, development of new copolyesters
for specific market applications, improved specialty polyester manufacturing
expertise and a significant expansion in coatings technologies. More recently,
Eastman Division has discovered and is developing a series of catalysts that
produce single enantiomer molecules, either left or right handed, that have
large market potential in the pharmaceutical and other industries.
VORIDIAN DIVISION
BUSINESS AND INDUSTRY OVERVIEW
The Company's Voridian Division is the largest producer of PET polymers for
packaging based on market share and is one of the two largest producers of
acetate tow worldwide. With nine manufacturing plants in seven countries and two
contract manufacturing arrangements in Asia and one in North America, Voridian
is globally positioned to serve its growing markets.
PET polymers are clear, lightweight plastics used principally in packaging
applications such as containers for beverages, edible oils, and other foods.
To a lesser extent, they are also used in films and sheet for packaging and
consumer and industrial applications. Defining characteristics include high
strength, light weight, durability, clarity, versatility, low cost, safety,
and recyclability.
PET polymer capacity is more concentrated than for many plastics. The top eight
PET polymer producers account for approximately 55% of global capacity, and in
North America, the top five producers account for 90% of total
14
capacity, according to industry estimates. The European market is less
concentrated than North America, with the top five producers accounting for 60%
of total capacity. The Company's Voridian Division has been the world's leading
PET polymer producer for over ten years.
In 2001, the worldwide market for PET polymers, including containers, film and
sheet, was over 7.5 million metric tons, representing about $8.0 billion in
sales. Demand for PET polymers has grown briskly over the past several years,
driven by its popularity as a substitute for glass in packaging and consumer
applications. PET polymers have already made significant inroads in soft drink
and water bottles, and producers are currently targeting markets such as
hot-fill and barrier containers for beer, soups and sauces. Industry analysts
report that PET polymers consumption grew worldwide from 1.0 million metric tons
in 1989 to 4.4 million in 1998, a compound annual growth rate of 17.7%. Global
demand for PET polymers is expected to grow approximately 10% annually over the
next four years. The strong growth in demand, coupled with ease of access to
manufacturing technology, has resulted in the presence of approximately fifty
suppliers in this market, up from fewer than twenty in 1995. Capacity
utilization rates in Western Europe and the Americas are expected to remain
steady in 2002 and decline slightly in 2003 if expected additions to capacity
materialize.
Voridian's polyethylene products consist of both low density polyethylene, or
LDPE, and linear low density polyethylene, or LLDPE. According to industry
analysts, growth in this combined polyethylene market in North America is
expected to be from 2% to 3% through 2005. Competitive advantages in this market
will be gained through increased operating efficiencies and new product
offerings.
Cellulose acetate fiber is used primarily in the manufacture of acetate tow for
cigarette filters. Cellulose acetate fiber is also used in acetate yarn for
apparel and home furnishings. The acetate tow market, which Voridian believes is
approximately a $2 billion market annually, grew at a rate of 1.5% annually from
1998 to 2000. Voridian estimates that, for 2001, the acetate tow market grew by
4-5% as compared to 2000. Two trends are contributing to the current increase in
demand and are expected to do so in future years:
- a decline in the use of polypropylene tow in China and its replacement
by acetate tow; and
- legislation in the European Union, Brazil and China to reduce tar
deliveries in cigarettes, which result in cigarette filter
manufacturers producing longer cigarette filters.
If polypropylene tow usage in China were totally replaced by acetate tow over
the next five years, the world market for acetate tow could grow at a rate of up
to 2.1% per year. Increased filter lengths due to legislated lower tar
deliveries in the European Union, Brazil and China would increase the expected
growth rate above the estimated 2.1% per year for the next few years. After
polypropylene tow is replaced in China, the expected growth rate for worldwide
demand is approximately 0.5% - 1.0% per year. Included within these estimates
are adjustments for the expected decrease in cigarette consumption in the United
States, which is expected to be more than offset by a corresponding increase in
consumption overseas.
Voridian estimates that the market for acetate yarn was approximately $400
million to $450 million in 2001. The demand for acetate yarn is declining and is
projected to continue to do so due in part to the availability of less expensive
fibers. This decline has led to associated decreases in price and profitability
throughout the market.
The industries utilizing PET polymers, polyethylene products, acetate tow and
acetate yarn compete to a large extent on price and can be characterized as
capital intensive. Success in these industries depends largely on attaining
scale-related benefits by keeping manufacturing costs at a minimum through the
use of efficient processes at high levels of capacity utilization and obtaining
access to low cost utilities, energy and raw materials.
STRATEGY
Voridian focuses on strategic goals that are appropriate for a company operating
in a price-sensitive industry. Voridian will continue to take advantage of its
global position as one of the most efficient producers of PET polymers and
acetate tow, while maintaining its reputation for market leading quality
products at competitive prices. To achieve these objectives, Voridian employs
operational strategies on both a division-wide and segment-by-segment basis. The
key elements of the division-wide strategy include:
15
- CONTINUE TO FOCUS ON OPERATIONAL EFFICIENCY
Voridian is a global leader in market share in two of its major product
markets and expects to leverage its product knowledge, experience and
scale to further reduce production costs and increase output. As a
highly integrated major PET polymers producer and one of only a few
integrated acetate fiber producers, Voridian intends to develop further
efficiencies to enhance its cost position.
- MAINTAIN SUPERIOR PROCESS TECHNOLOGIES
Voridian is a leader in developing and implementing improved process
technologies through efficient use of research and development.
Voridian intends to develop increasingly efficient technologies to
improve its cost position with the goal of improving operating margins.
- LEVERAGE REPUTATION FOR QUALITY AND INNOVATION
Voridian's product quality and innovation make it a recognized industry
leader in the manufacture of PET polymers and acetate fibers products.
Voridian will continue to commercialize new PET polymers products
driven by customer needs and consumer preference.
- EXPAND INTELLIGENTLY IN RESPONSE TO EXPECTED GROWTH IN THE PET POLYMERS
MARKET
The PET polymers market is expected to grow at a compound annual growth
rate of approximately 10% over the next four years. In response to this
expected demand growth, Voridian intends to expand its production
capabilities in a capital efficient manner. Voridian intends to focus
on utilizing excess capacity at existing manufacturing sites, adding
capacity by reducing bottlenecks in its current production lines to
increase productivity and participating in strategic manufacturing
alliances.
POLYMERS SEGMENT
- OVERVIEW
The Polymers segment offers the world's largest, most global and
vertically integrated PET polymers product line with a broad formula
capability. Voridian is the largest producer of PET polymers for
beverage bottles and sheet for thermoforming. PET polymers serve as
source products for containers for, among other things, carbonated soft
drinks, water, beer, personal care items, and food containers that are
suitable for both conventional and microwave oven use. Voridian has PET
polymers manufacturing sites strategically positioned around the world,
and competes primarily in North America, Latin America and Europe.
Voridian manufactures polymers at facilities in Argentina, Mexico,
Spain, the Netherlands, and England, as well as the United States. In
addition, Voridian has contract manufacturing arrangements in Asia and
the United States. In 2001, the Polymers segment had sales of $1.6
billion, which represented approximately 30% of the Company's total
sales and approximately 72% of Voridian's total sales.
The Polymers segment also offers a polyethylene product line including
low density polyethylene and linear low density polyethylene, which is
manufactured with the Company's proprietary technology. Polyethylene
products are used primarily for packaging and film applications and in
extrusion coated containers such as milk and juice cartons.
The Polymers segment's product line benefits from a global asset base,
which Voridian intends to grow in a capital efficient manner through
the elimination of production bottlenecks and the use of business
models such as contract manufacturing.
- PRODUCTS
The Polymers segment's products are integral to a broad range of
end-markets, which provides Voridian a number of growth opportunities.
The Polymers segment manufactures and supplies PET polymers and both
low density and linear low density polyethylene.
16
- PET POLYMERS
Voridian's broad PET polymers product line consists of 22 product
offerings, which accounted for approximately 70% of Polymers segment
sales in 2001. PET polymers are used in beverage and food packaging and
other applications such as custom-care and cosmetics packaging, health
care and pharmaceutical uses, household products and industrial and
automotive uses. Voridian's polymers offer fast and easy processing,
superb clarity, excellent colorability and color consistency,
durability and strength, impact and chemical resistance and high heat
stability.
- LOW DENSITY AND LINEAR LOW DENSITY POLYETHYLENE
Voridian is a market-leading supplier of low density polyethylene for
extrusion coatings in North America and is a manufacturer of linear low
density polyethylene through utilization of Voridian's proprietary
Energx(R) technology for gas phase polyethylene production. The low
density and linear low density polyethylene product lines consist of 10
product categories, which accounted for approximately 30% of the
Polymers segment sales in 2001.
- GROWTH STRATEGY
- INCREASE CAPACITY TO MEET MARKET DEMAND IN A CAPITAL EFFICIENT
MANNER
Voridian intends to capitalize on PET polymers industry growth with
timely and efficient capacity additions resulting from debottlenecking
production processes, asset expansions, contract manufacturing
arrangements, and manufacturing alliances.
- MAINTAIN LEADERSHIP IN INNOVATION THROUGH RESEARCH AND
DEVELOPMENT
Voridian expects to continue to make efficient research and development
expenditures in the Polymers segment in order to provide customers with
incremental improvements in existing products and innovative new
products. For example, Voridian has introduced eleven new products
since the beginning of 2000 including two Eastapak(TM) polymer formulas
for the water market, two Elegante(R) polymer formulas for the personal
care/cosmetics market, AmberGuard(TM) polymer for the beer market,
Heatwave(TM) polymer for hot-fill beverage applications that require
ultra-violet (UV) protection and VersaTray(R) polymer for food
packaging and cooking that is suitable for both conventional and
microwave oven use.
- MAINTAIN AND EXPAND TECHNOLOGY LICENSING
The Company believes that the licensing of certain of its Polymers
technologies, such as its purified terephthalic acid ("PTA") and
Energx(R) technologies, provides significant revenue opportunities and
intends to seek additional licensing opportunities.
- CUSTOMERS AND MARKETS
The Polymers segment has a diverse customer base consisting of over 150
companies worldwide. The largest 74 customers within the Polymers
segment accounted for 80% of the segment's total sales in 2001. The
Polymers segment's largest customers typically have a small percentage
of the overall market share in their geographic region. These customers
are primarily PET polymer container suppliers whose primary business is
in the large volume beverage segments such as carbonated soft drinks,
water and juice, with strong participation in custom areas such as
food, liquor, sport and fruit beverages, health and beauty aids and
household products.
Voridian's PET polymers product line has broad formula capabilities,
which has helped it to successfully respond to market changes.
Voridian's PET polymers have become preferred by customers, and have
significantly replaced metal and glass as the industry standard, due to
these capabilities and other benefits, such as resealability and
aseptic nature. As a result, Voridian has been able to achieve brand
strength with its customers.
PET polymers supply has significantly exceeded demand since 1997 as a
result of excess capacity being introduced into the market. While the
demand for PET polymers has steadily increased since then, some excess
17
capacity still remains. As a result of this imbalance, the Company may
be unable to maintain sales volume at desired price levels.
- COMPETITION
Within the PET resin industry, competition varies by region. There are
a substantial number of competitors worldwide, with no PET polymers
competitors having any dominant role or any significant competitive
advantage over Voridian. These competitors, such as KoSa, Mossi &
Ghisolfi Group and Wellman, Inc. are typically smaller than Voridian
and do not have the same level of integration or global operations as
Voridian. Competition is primarily on the basis of price, as well as
product performance and quality, service and reliability. Industry
pricing, in turn, is strongly affected by industry capacity
utilization. For this reason, the Company believes that the combination
of its size and scale of operations enables Voridian to be a low cost
PET polymers producer, providing a significant advantage.
In the marketing of PET resin, the Company believes it maintains a
distinct competitive advantage due to its breadth of product line and
formula capability. Voridian is considered to be a technology leader in
PET polymers and strives to remain at the forefront of new product
development.
Voridian is a niche polyethylene producer due to its size and ability
to target specific markets. In the low density polyethylene product
line, Voridian is a significant producer in extrusion coatings and is
one of only two North American producers of acrylate copolymers. In the
linear low density polyethylene market, Voridian employs its
proprietary Energx(R) technology, which offers ease of processability,
to compete in higher strength film markets. Some polyethylene producers
are substantially larger than Voridian, and have greater market
presence and resources devoted to polyethylene than Voridian. This may
allow them, or other competitors, to price competing products at lower
levels, or devote substantial resources to product development, that
Voridian is unable or unwilling to match, which may substantially
impair Voridian's polyethylene revenues.
FIBERS SEGMENT
- OVERVIEW
The Fibers segment manufactures Estron(R) acetate tow and Estrobond(R)
triacetin plasticizers, which are used primarily in cigarette filters;
Estron(R) and Chromspun(R) acetate yarns for use in apparel, home
furnishings and industrial fabrics; and acetate flake and acetyl raw
materials for other acetate fiber producers. Voridian is one of the
world's two largest suppliers of acetate tow and has been a market
leader in the manufacture and sale of acetate tow since it began
producing the product in the early 1950s. Voridian is also one of the
three largest producers of acetate yarn worldwide. In 2001, the Fibers
segment had sales of approximately $600 million, which represented
approximately 12% of the Company's total sales and approximately 28% of
Voridian's total sales.
Voridian's long history and experience in the fibers markets are
reflected in its operating expertise, both within the Company and in
support of its customers' processes. Voridian's expertise in internal
operating processes allows it to achieve a consistently high level of
product quality, a differentiating factor in the industry. Further,
Voridian's fully integrated facilities allow it to reduce its
dependence on necessary petrochemicals from third parties. Voridian
believes that all of these factors combine to make it a leader in
performance and cost position.
Voridian's high quality products, technical expertise and superior
customer service in the Fibers segment are its key competitive
strengths. Voridian's industry knowledge and knowledge of its Fibers
segment customers' processes allow it to assist its customers in
maximizing their processing efficiencies, promoting repeat sales and
mutually beneficial, long-term customer relationships. In addition,
Voridian is well known for its expert technical service. Voridian's
scale, strong customer base and these long-standing customer
relationships contribute to its market leading position. Voridian's
goal is to build on these strengths to improve its strategic position.
- PRODUCTS
Voridian's main products in the Fibers segment are acetate tow, acetate
yarn and acetate flake.
18
- ACETATE TOW
Voridian is one of the two largest producers of acetate tow worldwide.
Voridian manufactures acetate tow to various specifications which its
customers use to produce different filtration patterns for cigarette
filters. In addition, Voridian manufactures triacetin plasticizers for
use by cigarette manufacturers as a bonding agent in these filters.
- ACETATE YARN
Voridian is one of the three largest producers of acetate yarn
worldwide. Voridian is a market leader in this product line, offering
over 300 types of acetate yarn. These products are used primarily in
apparel, home furnishings and industrial applications. The primary
benefit of Voridian's acetate yarn products is their ease of
processability. These yarns allow for fabrics with properties such as
excellent breathability and comfort, silky feel, stability for
shrinkage and stretch and mildew resistance. Chromspun(R) acetate yarn
is available in over 60 colors.
- ACETATE FLAKE AND ACETYL RAW MATERIALS
Voridian produces acetate flake as part of its highly integrated
production chain and sells flake to other acetate fiber producers.
Acetyl raw materials are acetylation grade acetic acid and acetic
anhydride for fiber production purposes.
- GROWTH STRATEGY
Voridian's growth strategy in the Fibers segment is set forth below:
- POSITION FOR GROWTH
In the Fibers segment, Voridian intends to emphasize its high quality
products, excellent customer service, and operational efficiencies to
take advantage of global market growth.
- CONTINUE TO CAPITALIZE ON OPERATING EXPERTISE
The Fibers segment emphasizes incremental product and process
improvements to continue to meet customers' evolving needs and to
maximize efficiencies in the supply chain through collaborative
planning. Voridian intends to further focus on refining its processes
to lower manufacturing costs and provide additional operations
improvements.
- MAINTAIN COST-EFFECTIVE OPERATIONS
The Fibers segment expects to continue to operate in a cost effective
manner, capitalizing on its scale and vertical integration, and intends
to make further productivity and efficiency improvements through
continued investments in research and development. The Company plans to
reinvest in the Fibers business to continue to improve product
performance and productivity in order to generate consistently strong
cash flows.
- CUSTOMERS AND MARKETS
The customer base in the Fibers segment is relatively concentrated, consisting
of about 150 companies, primarily those involved in the production of cigarettes
and in the textiles industry. The largest customers within the Fibers segment
are multinational as well as regional cigarette producers and textile industry
fabric manufacturers. The largest twenty customers within the Fibers segment
accounted for greater than 80% of the segment's total sales in 2001.
Voridian is well known for its expert technical service. Voridian periodically
reviews customers' processes and provides process training to some of its
customers' employees to assist them in the efficient use of Voridian's products.
Voridian also engages in collaborative planning with its customers to maximize
supply chain management. These customer-focused efforts, combined with
Voridian's long history and product quality reputation, have resulted in many
long-term customer relationships, a key competitive advantage.
19
- COMPETITION
Competition in the fibers industry is based primarily on product quality,
technical and customer service, reliability, long-term customer relationships
and price. To be successful, Voridian is required to minimize costs and maximize
production efficiency. Competitors in the fibers market include one global
supplier, Celanese AG, in both the acetate tow and yarn markets, and several
regional competitors in each market. The supply and demand balance at a given
time affects pricing in the market. Currently the acetate yarn market has an
excess supply of products due to manufacturing capacity remaining high while
demand has declined, resulting in lower prices. Voridian believes it is well
positioned to respond to competitive price pressures due to its scale of
operations and level of integration.
In the acetate tow market, Voridian's principal competitor has added and is
considering additional production facilities in China through joint ventures
with the government-owned China National Tobacco Corporation. Further, local
production in China may diminish Voridian's access to this market.
Within the acetate yarn market, product quality, technical service and global
distribution are also key factors on which Voridian competes. Particularly with
respect to textile customers, a majority of the customer base and production
capacity has moved to regions where Voridian does not have manufacturing
capabilities. This shift in worldwide customer base challenges Voridian to
capitalize upon its global distribution and product quality.
VORIDIAN DIVISION GENERAL INFORMATION
SALES, MARKETING, AND DISTRIBUTION
Voridian primarily markets its products through direct sales channels; however,
it employs contract representatives and resellers where beneficial. As part of
its commitment to customer and technical service which is believed to lead to
increased repeat sales, Voridian periodically provides audits of customers'
processes, as well as process training to some of its customers' employees.
Voridian is committed to maintaining its high level of customer service by
remaining current with customer needs, market trends and performance
requirements.
Through the use of e-business platforms which improve connectivity and reduce
costs, Voridian offers its customers an Internet option, www.voridian.com, for
placing and tracking orders, generating reports and online auction capabilities.
Voridian also provides integrated direct capabilities to some customers,
allowing enhanced collaborative planning to improve supply chain efficiencies.
INTELLECTUAL PROPERTY AND TRADEMARKS
The Company believes that significant advantages can be obtained through the
continued focus on branding its products and, for this reason, protects its
Voridian Division-related intellectual property through a combination of patents
that expire at various times, trademarks and licenses. The Company expects to
expand its portfolio of technologies licensed to other companies in the future.
To date, the Company has selectively licensed a fairly extensive portfolio of
patented Voridian technologies, including PTA technology, which has been
licensed to a major engineering company in the chemicals industry, and Energx(R)
polyethylene technology, which has been licensed to BP Amoco under an agreement
that allows BP to market and sub-license the technology to other gas-phase
producers. In this instance, the Company chose BP as the licensee due to BP's
ability to access the market in connection with some of its current technology.
RESEARCH AND DEVELOPMENT
Voridian directs its research and development programs for the Polymers segment
toward four key objectives:
- developing new products and services in PET polymers through
applications research and customer feedback;
- developing new products and processes that are compatible with
Voridian's commitment to producing more environmentally friendly
products;
- lowering manufacturing costs through process improvement; and
- enhancing product quality by improvement in manufacturing technology
and processes.
20
Voridian's research and development efforts in the Polymers segment have
resulted in new products that have met with wide acceptance in the marketplace.
In the PET polymers business, Voridian has introduced eleven new products since
the beginning of 2000 including two Eastapak Aqua(R) polymer formulas for the
water market, two Elegante(R) polymer formulas for the personal care/cosmetics
market, AmberGuard(TM) polymer for the beer market, Heatwave(TM) polymer for
hot-fill beverage applications that require ultra-violet (UV) protection and
VersaTray(R) polymer for food packaging and cooking that is suitable for both
conventional and microwave oven use. In the polyethylene business, Voridian has
recently commercialized a group of new, higher-value polyethylene products with
increased tear strength and impact performance such as Mxsten(R) and Eastman
Hifor(R).
Research and development efforts for the Fibers segment are primarily focused on
incremental process and product improvements, as well as cost reduction, with
the goal of increasing sales and reducing costs. Recent achievements have
included fiber product advancements that allow improved processability on
customers' equipment and improved packaging design.
EASTMAN CHEMICAL COMPANY GENERAL INFORMATION
SOURCES AND AVAILABILITY OF RAW MATERIALS AND ENERGY
Eastman purchases a substantial portion, approximately 70%, of its key raw
materials and energy through long-term contracts, generally of three to five
years initial duration with renewal or cancellation options for each party. Most
of those agreements do not require the Company to purchase materials or energy
if its operations are reduced or idle. The cost of raw materials and energy is
generally based on market price at the time of purchase, although derivative
financial instruments, valued at quoted market prices, have been utilized to
mitigate the impact of short-term market price fluctuations. Key raw materials
and energy purchased include paraxylene, ethylene glycol, PTA, propane and
ethane, cellulose, methanol, coal, natural gas, electricity, and a wide variety
of precursors for specialty organic chemicals. The Company has multiple
suppliers for most key raw materials and energy and uses quality management
principles, such as the establishment of long-term relationships with suppliers
and on-going performance assessment and benchmarking, as part of the supplier
selection process. When appropriate, the Company purchases raw materials from a
single source supplier to maximize quality and cost improvements, and has
developed contingency plans that would minimize the impact of any supply
disruptions from single source suppliers.
While temporary shortages of raw materials and energy may occasionally occur,
these items are generally sufficiently available to cover current and projected
requirements. However, their continuous availability and price are subject to
unscheduled plant interruptions occurring during periods of high demand, or due
to domestic or world market and political conditions, and changes in government
regulations. Operations or products may, at times, be adversely affected by
legislation, shortages, or other events.
CAPITAL EXPENDITURES
The completion of several significant capital investment projects in the late
1990s and Eastman's strategy of growth through strategic acquisitions resulted
in reduced capital expenditures in recent years. Capital expenditures were $234
million, $226 million and $292 million in 2001, 2000, and 1999, respectively. In
2002, Eastman expects that capital expenditures and other directed investments
for small acquisitions and other ventures will be no more than expected
depreciation and amortization of $370 million. Efficiency of capital utilization
is a key element of the Company's strategy to improve gross margins and, where
appropriate, alliances, joint ventures, acquisitions of existing businesses, and
tolling arrangements are used to expand available capacity using less capital.
EMPLOYEES
Eastman employs approximately 15,800 men and women worldwide. Approximately 11%
of the total worldwide labor force is represented by unions, mostly outside the
United States.
CUSTOMERS
Eastman has an extensive customer base and, while it is not dependent on any one
customer, loss of certain top customers could adversely affect the Company until
such business is replaced. The top 100 customers account for approximately 55%
of the Company's business.
21
RESEARCH AND DEVELOPMENT
For 2001, 2000, and 1999, Eastman's research and development expenditures
totaled $160 million, $149 million, and $187 million, respectively. Expenditures
for 2002 are expected to be approximately $170 million.
SEASONALITY
Although seasonality is not a significant factor for Eastman overall, demand in
the CASPI segment is typically higher in the second and third quarters due to
increased use of coatings products in the building and construction industries
and weaker during the winter months because of seasonal construction downturns.
The Polymers segment typically experiences stronger demand for PET polymers for
beverage plastics during the second quarter due to higher consumption of
beverages, while demand typically weakens during the third quarter.
ENVIRONMENTAL
Eastman is subject to laws, regulations and legal requirements relating to the
use, storage, handling, generation, transportation, emission, discharge,
disposal and remediation of, and exposure to, hazardous and non-hazardous
substances and wastes in all of the countries in which it does business. These
health, safety, and environmental considerations are a priority in the Company's
planning for all existing and new products and processes. The Health, Safety, &
Environmental and Public Policy Committee of Eastman's Board of Directors
reviews the Company's policies and practices concerning health, safety and the
environment, and its processes for complying with related laws and regulations,
as well as monitors related matters.
The Company's policy is to operate its plants and facilities in a manner that
protects the environment and the health and safety of its employees and the
public. The Company intends to continue to make expenditures for environmental
protection and improvements in a timely manner consistent with its policies and
with the technology available. In some cases, applicable environmental
regulations such as those adopted under the U.S. Clean Air Act and Resource
Conservation and Recovery Act, and related actions of regulatory agencies,
determine the timing and amount of environmental costs incurred by the Company.
Other matters pertaining to health, safety, and the environment are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 20 to the consolidated financial statements.
BACKLOG
On January 1, 2002, Eastman's backlog of firm orders was approximately $244
million compared with approximately $400 million at January 1, 2001. The Company
adjusts its inventory policy to control the backlog of products depending on
customers' needs. In areas where the Company is the single source of supply, or
competitive forces or customers' needs dictate, the Company may carry additional
inventory to meet customer requirements. Backlog is also affected by utilization
of manufacturing capacity.
22
EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the Company's executive officers is provided below:
J. Brian Ferguson, age 47, was elected Chairman of the Board and Chief Executive
Officer effective in January 2002. Mr. Ferguson joined the Company in 1977. He
was named Vice President, Industry and Federal Affairs in 1994, became Managing
Director, Greater China in 1997, was named President, Eastman Chemical Asia
Pacific in 1998, became President, Polymers Group in 1999, and became President,
Chemicals Group in 2001.
Allan R. Rothwell, age 54, was appointed Executive Vice President of the Company
and President of Voridian Division, effective in January 2002. Mr. Rothwell
joined the Company in 1969, became Vice President and General Manager, Container
Plastics Business Organization in 1994, and was appointed Vice President,
Corporate Development and Strategy in 1997. He was named Senior Vice President
and Chief Financial Officer in 1998, became President, Chemicals Group in 1999
and became President, Polymers Group in 2001.
James P. Rogers, age 50, joined Eastman in 1999 as Senior Vice President and
Chief Financial Officer and effective in January 2002, was also appointed Chief
Operations Officer of Eastman Division. Mr. Rogers served previously as
Executive Vice President and Chief Financial Officer of GAF Materials
Corporation. He also served as Executive Vice President, Finance, of
International Specialty Products, Inc., which was spun off from GAF in 1997.
Betty W. DeVinney, age 57, is Senior Vice President, Human Resources,
Communications and Public Affairs. Mrs. DeVinney joined Eastman in 1973. She
became Manager, Employment in 1991, Manager, Community Relations in 1995,
Manager, Corporate Relations in 1997, Vice President, Communications and Public
Affairs in 1998, and was appointed to her current position in January 2002.
Theresa K. Lee, age 49, is Senior Vice President, General Counsel and Secretary
of the Company. Ms. Lee joined Eastman as a staff attorney in 1987, served as
Assistant General Counsel for the health, safety, and environmental legal staff
from 1993 to 1995, and served as Assistant General Counsel for the corporate
legal staff from 1995 until her appointment as Vice President, Associate General
Counsel and Secretary in 1997. She became Vice President, General Counsel, and
Secretary of Eastman in 2000 and was appointed to her current position effective
in January 2002.
Roger K. Mowen, Jr., age 56, is Senior Vice President, Global Customer Services
Group and Chief Information Officer of the Company. Mr. Mowen joined Eastman in
1971. He was named Vice President and General Manager, Polymer Modifiers in
1991, Superintendent of the Polymers Division in 1994, President, Carolina
Operations in 1996, Vice President, Customer Demand Chain in 1998, Vice
President, CustomerFirst and Chief Information Officer in 1999 and Vice
President, Global Customer Services Group and Chief Information Officer in 2000.
He was appointed to his current position in 2001.
B. Fielding Rolston, age 60, was appointed Senior Vice President in January
2002. Mr. Rolston joined Eastman in 1964, was appointed Vice President, Customer
Service and Materials Management in 1987, Vice President, Human Resources and
Health, Safety, Environment, and Security in 1998, and Vice President, Human
Resources and Quality in 1999.
Mark W. Joslin, age 42, is Vice President and Controller of the Company. Mr.
Joslin joined Eastman in 1999 as Vice President, Finance. Mr. Joslin previously
served as Chief Financial Officer, Treasurer, and Secretary of Lawter
International, Inc. Prior to joining Lawter in 1996, he was employed by Arthur
Andersen LLP, an international accounting and consulting firm, Baxter
International, Inc., a medical products and services company, and ANGUS Chemical
Company, a manufacturer and marketer of nitroparaffin-based chemicals. He was
appointed to his current position in 2000.
23
ITEM 2. PROPERTIES
PROPERTIES
At December 31, 2001 Eastman operated 41 manufacturing sites in 17 countries.
Utilization of these facilities may vary with product mix and economic,
seasonal, and other business conditions, but none of the principal plants are
substantially idle. The Company's plants, including approved expansions,
generally have sufficient capacity for existing needs and expected near-term
growth. These plants are generally well maintained, in good operating condition,
and suitable and adequate for their use. Unless otherwise indicated, all of the
properties are owned. The locations and general character of the major
manufacturing facilities are:
SEGMENT USING MANUFACTURING FACILITY
-------------------------------------------
LOCATION CASPI PCI SP POLYMERS FIBERS
USA and Canada
Batesville, Arkansas x x
Lynwood, California x
Columbus, Georgia x
Forest Park, Georgia x
Carpentersville, Illinois x
South Holland, Illinois x
Jefferson, Pennsylvania x
Columbia, South Carolina x x
Roebuck, South Carolina x
Kingsport, Tennessee x x x x
La Vergne, Tennessee x
Ennis, Texas x
Longview, Texas x x x
Franklin, Virginia* x
Pleasant Prairie, Wisconsin x
Rexdale, Ontario, Canada x
Europe
Kallo, Belgium x
Sokolov, Czech Republic x x
Bury, England* x
Banbury, England x
Hartlepool, England x
Workington, England x x
Hamburg, Germany x
Waterford, Ireland x
Cola' di Lazise, Italy x
Sant' Albano, Italy x
Middelburg, Netherlands x
Rotterdam, Netherlands x
San Roque, Spain x x x
Molndal, Sweden x
Llangefni, Wales x
Asia Pacific
Funing, China x
Nanping, China x
Tianjin, China x
Kuantan, Malaysia** x
Jurong Island, Singapore** x
Jurong Town, Singapore** x
Latin America
Zarate, Argentina x
Cosoleacaque, Mexico x
Uruapan, Mexico x
* indicates a location that Eastman leases from a third party.
** indicates a location that Eastman leases from a third party under a long-term
ground lease.
Eastman has a 50% interest in Primester, a joint venture that manufactures
cellulose esters at its Kingsport, Tennessee plant. The production of cellulose
esters is an intermediate step in the manufacture of acetate tow and other
cellulose-based products. The Company also has a 50% interest in a manufacturing
facility in Nanjing,
24
People's Republic of China. This joint venture produces Eastotac(R) hydrocarbon
tackifying resins for pressure-sensitive adhesives, caulks, and sealants.
Eastotac(R) hydrocarbon resins are also used to produce hot melt adhesives for
packaging applications in addition to glue sticks, tapes, labels, and other
adhesive applications.
Eastman has distribution facilities at all of its plant sites. In addition, the
Company owns or leases over 120 stand-alone distribution facilities in the
United States and 17 other countries. Corporate headquarters are in Kingsport,
Tennessee. The Company's regional headquarters are in Coral Gables, Florida; The
Hague, The Netherlands; Singapore; and Kingsport, Tennessee. Technical service
is provided to the Company's customers from technical service centers in Kallo,
Belgium; Kingsport, Tennessee; Kirkby, England; Osaka, Japan; Pleasant Prairie,
Wisconsin; and Singapore. Customer service centers are located in Kingsport,
Tennessee; Rotterdam, The Netherlands; Coral Gables, Florida; and Singapore.
A summary of properties, classified by type, is contained in Note 3 to the
consolidated financial statements.
25
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Company and its operations from time to time 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 its overall financial
condition or results of operations. However, adverse developments could
negatively impact earnings in a particular future period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, the Company entered into a
voluntary plea agreement with the U.S. Department of Justice and agreed to pay
an $11 million fine to resolve a charge brought against the Company for
violation of Section One of the Sherman Act. Under the agreement, the Company
entered a plea of guilty to one count of price-fixing for sorbates, a class of
food preservatives, from January 1995 through June 1997. The plea agreement was
approved by the United States District Court for the Northern District of
California on October 21, 1998. The Company recognized the entire fine in the
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 26 antitrust lawsuits, in various federal and state courts, brought
subsequent to the Company's plea agreements as putative class actions on behalf
of certain direct and indirect 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. 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 has reached final or preliminary settlements in 20
of the 26 direct and indirect purchaser class actions. The six remaining class
actions are in the preliminary discovery stage, with no litigation class having
been certified to date.
Of the 26 antitrust lawsuits, the Company was included as one of several
defendants in two separate lawsuits concerning sorbates 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.
All of these plaintiffs were direct purchasers of sorbates from one or more of
the defendants and had elected to opt out of the direct purchaser class action
settlement and pursue their claims on their own. The Company has reached
settlements in these two actions as well. In addition, several indirect
purchasers of products containing sorbates have recently opted out of the
indirect purchaser class action settlement, finally approved in Kansas and have
filed a separate action against the Company and other sorbates producers in
Kansas state court.
The Company recognized charges to earnings in each of the past four years for
estimated costs, including legal fees, related to the sorbates litigation
described above. While the Company intends to continue vigorously to defend the
remaining sorbates actions unless they can be settled on terms acceptable to the
parties, the ultimate outcome of the matters still pending is not expected to
have a material impact on the Company's financial condition or results of
operations although these matters could result in the Company being subject to
additional monetary damages, costs or expenses and additional charges against
earnings.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's stockholders during
the fourth quarter of 2001.
27
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol EMN. The following table presents the high and low closing
sales prices of the common stock on the NYSE and the cash dividends per share
declared by the Company's Board of Directors for each quarterly period of 2000
and 2001.
CASH
DIVIDENDS
HIGH LOW DECLARED
-------- --------- ---------
2000
First Quarter $50.56 $34.19 $0.44
Second Quarter 54.13 44.13 0.44
Third Quarter 49.81 36.56 0.44
Fourth Quarter 51.00 35.69 0.44
2001
First Quarter $53.88 $43.19 $0.44
Second Quarter 55.25 47.00 0.44
Third Quarter 46.92 30.25 0.44
Fourth Quarter 39.51 33.91 0.44
As of December 31, 2001, there were 77,137,914 shares of the Company's common
stock issued and outstanding, which shares were held by 41,917 stockholders of
record. These shares include 158,424 shares held by the Company's charitable
foundation. The Company has declared a cash dividend of $0.44 per share during
the first quarter of 2002. Quarterly dividends on common stock, if declared by
the Company's Board of Directors, are usually paid on or about the first
business day of the month following the end of each quarter. The payment of
dividends is a business decision to be made by the Board of Directors from time
to time based on the Company's earnings, financial position and prospects, and
such other considerations as the Board considers relevant. Accordingly, the
Company's dividend policy may change at any time.
For information concerning issuance of shares and option grants in 2001 under
compensation and benefit plans and shares held by the Company's charitable
foundation, see Part II--Item 8--"Financial Statements and Supplementary Data"
-- Notes 7 and 11 to the consolidated financial statements.
28
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts) 2001 2000 1999 1998 1997
------ ------ ------ ------ ------
SUMMARY OF OPERATING DATA
Sales $5,384 $5,292 $4,590 $4,481 $4,678
Operating earnings (loss) (126) 562 202 434 506
Earnings (loss) from operations before
income taxes (297) 452 72 360 446
Net earnings (loss) (179) 303 48 249 286
Basic earnings (loss) per share (2.33) 3.95 0.61 3.15 3.66
Diluted earnings (loss) per share (2.33) 3.94 0.61 3.13 3.63
STATEMENT OF FINANCIAL POSITION DATA
Current assets $1,458 $1,523 $1,489 $1,398 $1,490
Properties at cost 9,302 9,039 8,820 8,594 8,104
Accumulated depreciation 5,675 5,114 4,870 4,560 4,223
Total assets 6,086 6,550 6,303 5,850 5,778
Current liabilities 958 1,258 1,608 959 954
Long-term borrowings 2,143 1,914 1,506 1,649 1,714
Total liabilities 4,708 4,738 4,544 3,916 4,025
Total stockholders' equity 1,378 1,812 1,759 1,934 1,753
Dividends declared per share 1.76 1.76 1.76 1.76 1.76
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the consolidated financial statements for Eastman
Chemical Company ("Eastman" or the "Company"), which have been prepared in
accordance with accounting principles generally accepted in the United States,
and should be read in conjunction with the Company's consolidated financial
statements included elsewhere in this report. All references to earnings per
share contained in this report are diluted earnings per share unless otherwise
noted.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements requires its management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to customer programs and incentives, doubtful accounts,
inventory valuation, impaired assets, restructuring of operations, investments,
environmental costs, pensions and other postemployment benefits, goodwill and
intangible assets, and litigation and contingencies. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The Company believes
the following critical accounting policies are the most important to the
portrayal of the Company's financial condition and results and require
management's more significant judgments and estimates in the preparation of the
Company's consolidated financial statements.
CUSTOMER PROGRAMS AND INCENTIVES
The Company records estimated reductions to revenue for customer programs and
incentive offerings including special pricing agreements, price protection,
promotions, and other volume-based incentives. These estimates are based on a
combination of forecast and actual sales volumes and revenues against
established goals. If market conditions were to decline, the Company may take
actions to increase customer incentive offerings to maintain market share and
capacity utilization.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Management continuously assesses the financial condition of the Company's
customers and the markets in which these customers participate. If the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
In response to the recent economic developments in Argentina, at December 31,
2001, management recorded an $18 million reserve for credit risks related to
devaluation of the peso. A change in market conditions within Argentina could
result in a significant increase or decrease in the reserve.
INVENTORIES
Inventories are valued at the lower of cost or market. The Company determines
the cost of most raw materials, work in process, and finished goods inventories
in the United States by the last-in, first-out ("LIFO") method. The cost of all
other inventories, including inventories outside the United States, is
determined by the first-in, first-out ("FIFO") or average cost method. The
Company writes down its inventories for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
IMPAIRED ASSETS
The Company reviews the carrying values of long-lived assets and amortizable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
for an asset to be held and used is recognized when the fair value of the asset
is less than the
30
carrying value of the asset, and for assets to be disposed of, is
recognized when the fair value of the asset, less costs to dispose, is less than
the carrying value of the asset. The fair value of the assets is generally based
on discounted estimated cash flows using annual discount rates of 7% to 9%. The
estimates reflect the Company's assumptions about selling prices, production and
sales volume levels, costs, and market conditions over the estimated remaining
operating period which can range from three months to over fifteen years. If the
Company's assumptions related to assets to be held and used are inaccurate,
additional write-downs may be required in the future. If estimates of fair value
less costs to sell are revised, the carrying amount of the related assets is
adjusted, resulting in recognition of a credit or debit to earnings.
RESTRUCTURING OF OPERATIONS
The Company records restructuring charges incurred in connection with
consolidation or relocation of operations, exited business lines, or shutdowns
of specific sites. These restructuring charges, which reflect management's
commitment to a termination or exit plan that will begin within twelve months,
are based on estimates of the expected costs associated with site closure, legal
and environmental matters, demolition, contract terminations, or other costs
directly related to the restructuring. If the actual cost incurred exceeds the
estimated cost, an additional charge to earnings will result. If the actual cost
is less than the estimated cost, a credit to earnings will be recognized.
INVESTMENTS
Marketable securities held by the Company, currently common or preferred stock,
are deemed by management to be available-for-sale and are reported at fair
value, with net unrealized gains or losses reported as a component of other
comprehensive income in stockholders' equity. Realized gains and losses are
included in earnings and are derived using the specific identification method
for determining the cost of securities.
The Company records an investment impairment charge when it believes a business
venture investment, accounted for by the Company as a marketable security, has
experienced a decline in value that is other than temporary. Eastman has made a
number of minority investments in technology businesses that the Company
believes have potential to significantly impact the way business is conducted in
the chemical industry. At December 31, 2001, the carrying value of the Company's
investments in technology business ventures totaled approximately $30 million.
Declines in the value of these or any other investment, or subsequent additional
adverse changes in market conditions or poor operating results of the underlying
investment, could result in impairment charges in the future.
ENVIRONMENTAL COSTS
The Company accrues environmental costs when it is probable that the Company has
incurred a liability and the amount can be reasonably estimated. When a single
amount cannot be reasonably estimated but the cost can be estimated within a
range, the Company accrues the minimum amount unless another amount within the
range appears to be a better estimate. The amount accrued reflects the Company's
assumptions about remedial requirements at the contaminated site, the nature of
the remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties. Changes in the
estimates on which the accruals are based, unanticipated government enforcement
action, or changes in chemical control regulations and testing requirements
could result in higher or lower costs.
PENSION AND OTHER POSTEMPLOYMENT BENEFITS
The Company maintains defined benefit plans that provide eligible employees with
retirement benefits. Additionally, Eastman provides life insurance and health
care benefits for eligible retirees and health care benefits for retirees'
eligible survivors. The costs and obligations related to these benefits reflect
the Company's assumptions related to general economic conditions (particularly
interest rates), expected return on plan assets, and rate of compensation
increase for employees. Projected health care benefits additionally reflect the
Company's assumptions about health care cost trends. The cost of providing plan
benefits also depends on demographic assumptions including retirements,
mortality, turnover, and plan participation. If actual experience differs from
these assumptions, the cost of providing these benefits could increase or
decrease.
GOODWILL AND OTHER INTANGIBLES
Through December 31, 2001, the Company amortized certain intangible assets on a
straight-line basis over the expected useful lives of the underlying assets.
Under the provisions of Statement of Financial Accounting Standard
31
("SFAS") No. 142, "Goodwill and Other Intangible Assets", beginning January 1,
2002, the Company ceased amortization of purchased goodwill and indefinite-lived
intangibles. In the future, the Company will review the assets for impairment,
and when required, the assets will be written down and charged to results of
operations in the periods in which the recorded value is more than the fair
value. At December 31, 2001, the Company had net goodwill of $339 million and
net other intangibles of $275 million. Management continues to assess the impact
of SFAS No. 142 which could result in a material charge to earnings in 2002. The
useful life of an intangible asset is based on the Company's assumptions
regarding expected use of the asset; the relationship of the intangible asset to
another asset or group of assets; any legal, regulatory or contractual
provisions that may limit the useful life of the asset or that enable renewal or
extension of the asset's legal or contractual life without substantial cost; the
effects of obsolescence, demand, competition and other economic factors; and the
level of maintenance expenditures required to obtain the expected future cash
flows from the asset and their related impact on the asset's useful life. If
events or circumstances indicate that the life of an intangible asset has
changed, it could result in higher future amortization charges or recognition of
an impairment loss.
LITIGATION AND CONTINGENT LIABILITIES
The Company's operations from time to time are parties to, or targets of
lawsuits, claims, investigations, and proceedings, including product liability,
personal injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
handled and defended in the ordinary course of business. The Company accrues a
liability for such matters when it is probable that a liability has been
incurred and the amount can be reasonably estimated. The Company believes the
amounts reserved are adequate for such pending matters; however, results of
operations could be affected by significant litigation adverse to the Company.
NONRECURRING ITEMS
It is the Company's policy to identify as a "nonrecurring item" a material
charge or gain that is not associated with on-going operations or that is caused
by unique events not reflective of the Company's normal business activities in
the period if such items individually or in the aggregate have a material impact
on a specific line item in the Consolidated Statements of Earnings (Loss) or
have a material impact on results overall. The Company believes that separately
reporting such charges or gains enhances transparency and comparability of
results by removing distortion that would otherwise occur. Examples of such
items that have been separately identified in the past under this policy include
material charges or gains resulting from asset impairments and restructuring of
operations, including employee terminations; litigation not related to on-going
operations; discontinued businesses; and acquisition charges including those
related to acquired in-process research and development. Nonrecurring items are
appropriately identified in the Consolidated Statements of Earnings (Loss).
RESULTS OF OPERATIONS
The Company's results of operations as presented beginning on page 57 of this
Form 10-K are discussed below.
SUMMARY OF CONSOLIDATED RESULTS - 2001 COMPARED WITH 2000
Sales revenue increased 2% including acquisitions but decreased 6% excluding
acquisitions. The asset acquisition of the hydrocarbon resins and select
portions of the rosin-based resins businesses from Hercules Incorporated
("Hercules Businesses") and the acquisitions of McWhorter Technologies, Inc.
("McWhorter") and Chemicke Zavody Sokolov ("Sokolov"), primarily reflected in
the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment,
contributed 8% to the increase in sales revenue. Decreased sales volumes in
existing businesses, attributed to weaker economic demand worldwide, had a
negative impact on sales revenue of 5%. Foreign currency exchange rates had a 1%
negative impact on sales revenue while overall selling prices remained flat
compared to 2000.
Operating earnings for 2001 and 2000 were impacted by nonrecurring items
totaling approximately $446 million and $21 million, respectively. These
nonrecurring items are more fully described below and in Notes 8 and 9 to the
consolidated financial statements.
In 2001, the decrease in operating earnings excluding nonrecurring items was due
to lower sales volumes excluding acquisitions, higher unit costs driven by lower
capacity utilization, and additional selling and general administrative
32
expenses and research and development costs from acquisitions. The decline in
sales volumes in existing businesses was attributed to weaker economic demand
worldwide.
For 2001, the Company reported a loss of $2.33 per share compared with $3.94
earnings per share for 2000. Excluding the effect of nonrecurring items,
earnings per share were $1.43 in 2001 compared to $3.88 in 2000.
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
SALES $5,384 $5,292 2%
Revenue from acquisitions contributed 8% to the increase in sales revenue,
partially offset by decreased sales volumes in existing businesses, which had a
negative impact of 5% on sales revenue. The decline in sales volumes in existing
businesses was attributed to weaker economic demand worldwide. Foreign currency
exchange rates had a 1% negative impact on sales revenue. Overall, selling
prices remained flat compared to 2000.
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
GROSS PROFIT $ 887 $1,078 (18)%
As a percentage of sales 16.5% 20.4%
In 2001, gross profit was negatively impacted by lower sales volumes in existing
businesses attributed to weaker economic demand worldwide. Higher unit costs
driven by lower capacity utilization also had a negative impact on gross profit.
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 407 $ 346 18%
As a percentage of sales 7.6% 6.5%
Higher selling and general administrative expenses primarily reflected
additional costs associated with recent acquisitions, including integration
costs, and costs incurred by Cendian Corporation ("Cendian") to develop its
capacity to establish new customers in the chemicals logistics business.
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
RESEARCH AND DEVELOPMENT COSTS $ 160 $ 149 7%
As a percentage of sales 3.0% 2.8%
Research and development costs increased for 2001 compared to 2000 mainly due to
costs associated with the Hercules Businesses and McWhorter.
ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES
In 2001, nonrecurring charges totaling $396 million related to asset impairments
and restructuring costs were recognized.
33
(Dollars in millions) 2001 2000
----- -----
Termination of raw material supply agreement $ 108 $ --
Under-performing polyethylene assets 103 --
Consolidation and restructuring of CASPI operations 77 --
Restructuring of fine chemicals product lines 70 --
Under-utilized specialty plastics assets 15 --
Discontinuation of precolored-green PET 10 --
Cessation of production at solid-stating facility 10 --
Impaired PCI European assets 3 --
Sorbates manufacturing exit costs -- 8
Distillation Products Industries exit costs -- 5
----- -----
$ 396 $ 13
===== =====
In 2001, approximately $231 million of asset impairment and restructuring
charges were incurred in the Polymers segment. A charge of $108 million was
recognized for the write-off of a prepaid asset related to the termination of a
raw material supply agreement and a charge of $103 million was recognized for
the write-down of underperforming polyethylene assets. A $10 million charge
related to discontinuation of the precolored-green polyethylene terephthalate
("PET") product line in Kingsport, Tennessee and a $10 million charge related to
cessation of production at the Company's solid-stating facility in Toronto,
Ontario were also recognized.
The consolidation and restructuring of the operations of the CASPI segment
resulted in restructuring charges, including related asset write-downs, totaling
$77 million. Of these charges, $27 million related to the closure of an
operating site in Dusseldorf, Germany that was obtained in the acquisition of
Jager and $21 million related to the closure of a Moundville, Alabama plant
that was obtained in the acquisition of Lawter International, Inc. ("Lawter").
The closure of plants in Philadelphia, Pennsylvania and Portland, Oregon that
were obtained in the acquisition of McWhorter resulted in charges of $20 million
being recognized. These restructuring charges included write-downs of the fixed
assets at these facilities, severance accruals for employees impacted by the
plant shutdowns, and other costs associated with closing the facilities. Charges
of $6 million and $3 million were recorded for the write-down of impaired
operating assets in North America and Europe, respectively.
The Performance Chemicals and Intermediates ("PCI") segment incurred total
nonrecurring charges of $73 million in 2001. Approximately $70 million of these
charges resulted from the Company's on-going restructuring of its fine chemicals
product line to reduce costs and to write down assets determined to be impaired.
The restructuring initiative and related asset impairments include assets at the
Company's Tennessee and Arkansas sites within the United States, a plant in
Wales, and a plant in Hong Kong. A charge of $63 million pertained primarily to
write-downs of fixed assets associated with product lines that the Company will
no longer pursue, net of the effect of a reversal of a customer deposit related
to the impacted assets, and write-downs of other long-term deposits. A charge of
$7 million pertained primarily to severance accruals for employees impacted by
the plant shutdowns, closure costs, and write-downs of fixed assets. An
additional charge of $3 million was recognized for impaired assets in the
European region.
The Company recorded asset impairment charges of approximately $15 million
associated with under-utilized assets in the Specialty Plastics ("SP") segment.
These charges related to deterioration of demand for certain specialty plastics
products produced in Kingsport, Tennessee.
Approximately $75 million of the charges discussed above were recognized in the
fourth quarter 2001. Of this total, $36 million related to the consolidation and
restructuring of the operations of the CASPI segment; $20 million related to
asset impairment charges associated with under-utilized assets in the Polymers
segment; $15 million related to under-utilized specialty plastics assets; $3
million related to impaired PCI European assets; and $1 million related to the
Company's on-going restructuring of its fine chemicals product line.
In 2000, nonrecurring charges totaling $13 million were recognized, of which $8
million related to costs associated with exiting the sorbates manufacturing site
at Chocolate Bayou, Texas, and $5 million related to the shutdown of facilities
at Distillation Products Industries in Rochester, New York. These charges are
reflected in the PCI segment.
For additional information regarding these asset impairments and restructuring
costs, see Note 8 to the consolidated financial statements.
34
(Dollars in millions) 2001 2000
----- -----
OTHER NONRECURRING OPERATING ITEMS
Costs associated with efforts to spin-off specialty chemicals and plastics businesses $ 20 $ --
Write-down of accounts receivable resulting from economic crisis in Argentina 18 --
Pension settlement charge 7 --
Write-off of Hercules Businesses in-process research and development costs 5 --
Write-off of McWhorter in-process research and development costs -- 9
Gain on sale of assets -- (1)
----- -----
$ 50 $ 8
===== =====
Other nonrecurring operating items totaling $50 million were recognized in 2001.
These items consisted of approximately $20 million in charges associated with
efforts to spin-off the specialty chemicals and plastics businesses; an $18
million write-down of accounts receivable for credit risks resulting from the
economic crisis in Argentina; a $7 million pension settlement charge; and a $5
million write-off of acquired in-process research and development costs related
to the acquisition of the Hercules Businesses. Approximately $26 million of
these items were reflected in the Polymers segment, $11 million in the CASPI
segment, $7 million in the PCI segment, $4 million in the SP segment, and $2
million in the Fibers segment. Total charges recognized during the fourth
quarter 2001 were $36 million.
Other nonrecurring operating items totaling approximately $8 million were
recorded in 2000. Reflected in the CASPI segment was a $9 million charge for
costs associated with the write-off of in-process research and development
related to the McWhorter acquisition, partially offset by a $1 million gain on
the sale of certain assets, reflected in the Polymers segment.
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
GROSS INTEREST COSTS $ 151 $ 148
LESS CAPITALIZED INTEREST 5 6
------ ------
INTEREST EXPENSE 146 142 3%
INTEREST INCOME 6 7
------ ------
NET INTEREST EXPENSE $ 140 $ 135 4%
====== ======
Higher interest expense reflected higher average commercial paper and other
short-term borrowings used to finance the purchase of recent acquisitions and
for general financing and investing activities, partially offset by lower
average borrowing rates of approximately 6.5% for 2001 compared to approximately
7.25% for 2000.
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
OTHER INCOME $ (11) $ (31) (65)%
OTHER CHARGES 22 34 (35)%
GAIN RECOGNIZED ON INITIAL PUBLIC OFFERING OF GENENCOR -- (38) N/A
Included in other income are gains from equity investments, gains on sales of
nonoperating assets, royalty income, gains on foreign exchange transactions, and
other miscellaneous items. Other income for 2001 primarily reflected gains from
equity investments. Other income for 2000 primarily reflected gains on sales of
nonoperating assets and gains from equity investments.
Included in other charges are losses from foreign exchange transactions, certain
litigation costs, losses from equity investments, losses on sales of
nonoperating assets, fees on securitized receivables, and other miscellaneous
items. Other charges declined mainly due to a decrease in certain litigation
costs and lower fees related to securitized receivables.
In 2000, a nonrecurring gain of approximately $38 million resulted from the
initial public offering of common shares of Genencor International, Inc.
("Genencor"). This transaction is more fully described in Note 4 to the
consolidated financial statements.
35
(Dollars in millions) 2001 2000
----- -----
OTHER NONRECURRING ITEMS $ 20 $ 10
===== =====
Other nonrecurring items for 2001 totaling $20 million consisted of a $12
million charge for currency losses resulting from the economic crisis in
Argentina and $8 million of sorbates civil litigation settlement costs and other
professional fees.
Other nonrecurring items for 2000 totaling $10 million were recognized for costs
related to sorbates civil litigation.
SUMMARY BY OPERATING SEGMENT
The Company's products and operations are managed and reported in five operating
segments. The Chemicals Group includes the CASPI segment, the PCI segment, and
the SP segment. The Polymers Group includes the Polymers segment and the Fibers
segment. During the first quarter 2002, the Company began managing the Chemicals
Group as Eastman Division and the Polymers Group as Voridian Division
("Voridian").
CHEMICALS GROUP
CASPI SEGMENT
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
Sales $1,508 $1,176 28 %
Operating earnings (loss) including nonrecurring items (35) 123 (128)%
Operating earnings excluding nonrecurring items 53 132 (60)%
2001 COMPARED WITH 2000
Sales revenue from acquisitions had a positive impact on sales revenue of 35%,
which was partially offset by a 7% decrease in sales volumes for existing
businesses. The decline in sales volumes for existing businesses was attributed
to weaker economic demand worldwide. Increased selling prices had a 1% positive
impact on sales revenue, offset by the negative effect of foreign currency
exchange rates.
Operating results for 2001 and 2000 were negatively impacted by nonrecurring
items of approximately $88 million and $9 million, respectively, as more fully
described above and in Notes 8 and 9 to the consolidated financial statements.
The decrease in operating earnings excluding nonrecurring items was due to lower
sales volumes excluding acquisitions, higher unit costs driven by lower capacity
utilization and additional selling and general administrative expenses and
research and development costs from acquisitions.
PCI SEGMENT
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
Sales $1,132 $1,297 (13)%
Operating earnings (loss) including nonrecurring items (76) 87 (187)%
Operating earnings excluding nonrecurring items 4 100 (96)%
2001 COMPARED WITH 2000
Sales revenue declined 10% due to lower sales volumes attributed to weaker
economic demand worldwide. Other factors which negatively impacted sales revenue
for 2001 by 1% each included a decline in selling prices, the negative effect of
foreign currency exchange rates, and product mix.
36
Results for 2001 and 2000 were impacted by nonrecurring items of approximately
$80 million and $13 million, respectively, as more fully described above and in
Notes 8 and 9 to the consolidated financial statements.
The decrease in operating earnings excluding nonrecurring items was mainly due
to higher unit costs driven by lower capacity utilization and decreased sales
volumes resulting from weaker economic demand worldwide. In addition, lower
selling prices had an $11 million negative impact on results for 2001 when
compared to 2000.
Based upon indications from a large customer of this segment that it does not
intend to renew its contract for a custom synthesis product beyond 2002, the
Company does not expect to pursue that product in the future. Sales of that
product represented approximately 2% of Eastman's sales for 2000 and
approximately 5% of Eastman's operating earnings for 2000. Financial results
reported after June 30, 2001 reflect a minimal contribution to operating
earnings from this contract.
SP SEGMENT
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
Sales $ 505 $ 550 (8)%
Operating earnings including nonrecurring items 40 103 (61)%
Operating earnings excluding nonrecurring items 59 103 (43)%
2001 COMPARED WITH 2000
Sales revenue declined mainly due to lower sales volumes which had a negative
impact on sales revenue of 7%. Foreign currency exchange rates had a 1% negative
effect on sales revenue while selling prices remained relatively flat compared
to 2000.
Results for 2001 were negatively impacted by nonrecurring items totaling
approximately $19 million, as more fully described above and in Notes 8 and 9 to
the consolidated financial statements.
The decrease in operating earnings excluding nonrecurring items was primarily
due to higher unit costs driven by lower capacity utilization and decreased
sales volumes resulting from weaker demand, primarily for cellulosic products.
POLYMERS GROUP
POLYMERS SEGMENT
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
Sales $1,611 $1,636 (2)%
Operating earnings (loss) including nonrecurring items (201) 99 (303)%
Operating earnings excluding nonrecurring items 56 98 (43)%
2001 COMPARED WITH 2000
Decreased selling prices for polyethylene had a negative impact of 3% on sales
revenue, partially offset by a 2% increase in sales volumes for PET polymers.
Foreign currency exchange rates had a 2% negative impact on sales revenue.
Results for 2001 were sharply impacted by nonrecurring items totaling
approximately $257 million, while results for 2000 were positively impacted by a
$1 million gain on the sale of certain assets. These items are more fully
described above and in Notes 8 and 9 to the consolidated financial statements.
The decrease in operating earnings excluding nonrecurring items was primarily
due to lower operating earnings for polyethylene, which was attributed to lower
selling prices. Operating earnings and revenues for PET polymers excluding
nonrecurring items were virtually flat when compared to 2000.
37
FIBERS SEGMENT
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
Sales $ 628 $ 633 (1)%
Operating earnings including nonrecurring items 146 150 (3)%
Operating earnings excluding nonrecurring items 148 150 (1)%
2001 COMPARED WITH 2000
Decreased sales volumes had a negative impact on sales revenue of 2%. The sales
volume decrease was offset by increased selling prices, primarily related to
acetate tow. Foreign currency exchange rates had a 1% negative effect on sales
revenue.
Operating earnings were impacted by nonrecurring items of approximately $2
million, as more fully described above and in Note 9 to the consolidated
financial statements.
Operating earnings excluding nonrecurring items remained flat in 2001 as a
slight decline in sales volumes was offset by a slight increase in selling
prices.
For supplemental analysis of segment results and the impact of recent
acquisitions on revenue, see Exhibits 99.01 and 99.02 to this Annual Report on
Form 10-K. For additional information concerning the Company's operating
segments, see Note 18 to the consolidated financial statements.
SUMMARY BY CUSTOMER LOCATION -- 2001 COMPARED WITH 2000
(Dollars in millions) 2001 2000 CHANGE
------ ------ ------
United States and Canada $3,196 $3,229 (1)%
Europe, Middle East, and Africa 1,148 1,062 8 %
Asia Pacific 555 547 1 %
Latin America 485 454 7 %
------ ------
$5,384 $5,292
====== ======
In the United States and Canada, sales revenue decreased slightly mainly due to
lower sales volumes for existing businesses, attributed to weaker economic
demand, which had a negative impact of 8% on sales revenue. Lower selling
prices, primarily for polyethylene, also had a negative impact on sales revenue
of 2%. These decreases were partially offset by revenue contributed by
acquisitions, which had a positive impact on sales revenue of 9%.
Sales revenue outside the United States and Canada increased 6% to $2.2 billion
compared to $2.1 billion in 2000. Increased sales volumes resulting from
acquisitions and increased selling prices, mainly for PET polymers, had a
positive impact on sales revenue of 6% and 2%, respectively. These increases
were partially offset by foreign currency exchange rates which had a negative
impact on sales revenue of 3%.
In Europe, Middle East and Africa, sales revenue increased mainly due to revenue
contributed by acquisitions, which had a positive impact on sales revenue of
11%. Increased selling prices had a positive impact on sales revenue of 5%,
offset by decreased sales volumes for existing businesses. PET polymers were the
primary reason for the change in selling prices and sales volumes. Foreign
currency exchange rates had a negative impact of 3% on sales revenue.
The slight increase in sales revenue in Asia Pacific was due to higher sales
volumes, mainly for PET polymers, which had a positive impact on sales revenue
of 7%. This increase was partially offset by lower selling prices and foreign
currency exchange rates, which had a negative impact on sales revenue of 4% and
2%, respectively.
In Latin America, sales revenue increased primarily due to increased sales
volumes, mainly for PET polymers, which had a positive impact on sales revenue
of 7%. Higher selling prices had a positive impact on sales revenue of 2%,
offset by the negative impact of foreign currency exchange rates.
38
With a substantial portion of 2001 sales to customers outside the United States,
Eastman is subject to the risks associated with operating in international
markets. To mitigate its exchange rate risks, the Company frequently seeks to
negotiate payment terms in U.S. dollars. In addition, where it deems such
actions advisable, the Company engages in foreign currency hedging transactions
and requires letters of credit and prepayment for shipments where its assessment
of individual customer and country risks indicates their use is appropriate. See
Note 13 to the consolidated financial statements and Part II--Item
7A--"Quantitative and Qualitative Disclosures About Market Risk."
SUMMARY OF CONSOLIDATED RESULTS -- 2000 COMPARED WITH 1999
Eastman's record sales revenue of $5.3 billion represented an increase of 15%
over 1999 sales revenue. Higher selling prices accounted for 11% of the increase
in sales revenue and improved sales volumes had a positive impact of 8% on sales
revenue. The increase in selling prices was driven by substantially higher
selling prices for PET polymers and higher selling prices in the PCI and CASPI
segments. Significant sales volume growth in the CASPI segment, mainly
attributable to acquisitions, accounted for the increase in sales volumes.
Substantially higher operating earnings reflected improving market conditions
for PET polymers, growth through acquisitions, and an on-going emphasis on lower
cost structure.
Operating earnings for 2000 and 1999 were negatively impacted by nonrecurring
items totaling approximately $21 million and $117 million, respectively, as more
fully described below and in Notes 8 and 9 to the consolidated financial
statements.
In 2000, significant factors that impacted operating earnings excluding
nonrecurring items included the improving supply and demand balance for PET
polymers accompanied by the Company's firm stance on pricing for PET polymers,
lower cost structure resulting from employee separations that occurred late in
1999 and additional non-labor cost reductions implemented in 2000, and overall
higher selling prices. Lower pension expense of approximately $30 million
resulted from mid-1999 amendments to the Company's defined benefit pension plan.
Costs for major raw materials and energy were approximately $380 million higher,
net of the Company's feedstock and energy cost hedging program.
Operating earnings excluding nonrecurring items for 1999 were negatively
impacted by charges totaling approximately $17 million related to the write-up
of Lawter's inventory required by purchase accounting; a decrement recognized
using the last-in, first-out inventory valuation method; loss on sales of excess
spare parts; and two months of unplanned downtime at the Company's Malaysia
facility. Amendments to Eastman's defined benefit pension plan resulted in a
decrease in pension expense for 1999 of approximately $37 million. As a result
of the adoption of AICPA Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use", Eastman
capitalized $24 million, of which $2 million was amortized, of certain
internal-use software costs which otherwise would have been expensed.
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
SALES $5,292 $4,590 15%
The increase in sales revenue is mainly due to higher selling prices for PET
polymers and higher selling prices in the PCI and CASPI segments, which had a
positive impact on sales revenue of 11%. Increased sales volumes had a positive
impact of 8% on sales revenue. Significant sales volume growth in the CASPI
segment, mainly attributable to acquisitions, accounted for the increase in
sales volumes. Overall, foreign currency exchange rates had a negative impact on
sales revenue of 3%, although the impact in Europe, Middle East and Africa was
more significant due to the strength of the U.S. dollar against the euro.
Acquisitions contributed approximately $360 million to the increase in sales
revenue. While sales volumes including acquisitions were up, volume in existing
businesses declined 1% due to a slowing of economic demand in the second half of
2000, the Company's firm stance on pricing for PET polymers, and the
discontinuation of certain products.
39
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
GROSS PROFIT $1,078 $ 861 25%
As a percentage of sales 20.4% 18.8%
Gross profit improved substantially as a result of higher selling prices that
were driven by increased raw materials costs, the Company's lower cost structure
resulting from voluntary and involuntary employee separations that occurred late
in 1999, and additional cost reductions implemented in 2000. Significantly
higher costs for raw materials and energy negatively impacted gross profit, even
with the Company's hedging of certain feedstock and energy costs. For the year,
raw materials and energy costs were up approximately $380 million. Lower pension
expense of approximately $30 million in 2000 resulted from mid-1999 amendments
to the Company's defined benefit plan.
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 346 $ 355 (3)%
As a percentage of sales 6.5% 7.7%
Benefits derived from a lower cost structure resulted in significantly lower
selling and general administrative expenses, even with the addition of costs for
acquired businesses and costs related to Cendian.
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
RESEARCH AND DEVELOPMENT COSTS $ 149 $ 187 (20)%
As a percentage of sales 2.8% 4.1%
Research and development costs were significantly lower during 2000 due to lower
cost structure, although costs from acquired companies partially offset this
decrease.
(Dollars in millions) 2000 1999
----- -----
ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES $ 13 $ 52
In 2000, nonrecurring charges of $13 million were recognized, of which, $8
million related to costs associated with exiting the sorbates manufacturing site
at Chocolate Bayou, Texas, and $5 million related to the shutdown of facilities
at Distillation Products Industries in Rochester, New York. These charges are
reflected in the PCI segment.
In 1999, nonrecurring charges totaling $36 million related to asset impairments
and restructuring of operations were recorded in the PCI segment. A charge of
approximately $17 million was recognized in association with a decision to
discontinue production at the Company's sorbates facilities in Chocolate Bayou,
Texas, which resulted in a write-down of plant and equipment used at the site. A
charge of approximately $9 million was recognized in relation to the phase-out
of operations at Distillation Products Industries in Rochester, New York,
including costs associated with employee termination benefits and the write-down
of plant and equipment used at the site. A charge of approximately $10 million
was recognized for the write-off of construction in progress related to an
epoxybutene ("EpB(R)") plant project that was terminated and determined to have
no future value.
Also in 1999, a charge of approximately $16 million, reflected in the Polymers
segment, was recognized for the write-off of construction in progress associated
with a purified terephthalic acid ("PTA") plant project in Columbia, South
Carolina. This project was terminated due to unfavorable market conditions and
unsuccessful discussions with several potential buyers of this product.
These nonrecurring charges are described in more detail in Note 8 to the
consolidated financial statements.
(Dollars in millions) 2000 1999
----- -----
OTHER NONRECURRING OPERATING ITEMS $ 8 $ 65
40
Other nonrecurring operating items totaling $8 million were recorded in 2000.
Reflected in the CASPI segment was a $9 million charge for costs associated with
the write-off of in-process research and development related to the McWhorter
acquisition, partially offset by a $1 million gain on the sale of certain
assets, reflected in the Polymers segment.
In 1999, other nonrecurring operating items totaling $65 million were
recognized. Of these items, approximately $53 million related to employee
separation and pension settlement charges and $25 million related to the
write-off of acquired in-process research and development costs associated with
the acquisition of Lawter. Nonrecurring operating items totaling approximately
$8 million were recorded related to an increase in the reserve for sorbates
civil litigation and other matters, a loss recognized on an investment, the
write-off of purchased technology which was determined to have no future value,
and other items. A gain of approximately $21 million, reflected in the PCI
segment, was recognized as a result of the reimbursement of previously expensed
pension costs related to Holston Defense Corporation. These items are reflected
in the Company's segments as follows: CASPI $30 million, SP $10 million,
Polymers $21 million, Fibers $8 million, and PCI ($4) million.
These other nonrecurring operating items are described in more detail in Note 9
to the consolidated financial statements.
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
GROSS INTEREST COSTS $ 148 $ 139
LESS CAPITALIZED INTEREST 6 13
------ ------
INTEREST EXPENSE 142 126 13%
INTEREST INCOME 7 5
------ ------
NET INTEREST EXPENSE $ 135 $ 121 12%
====== ======
Higher net interest expense reflects decreased capitalized interest resulting
from the completion of certain capital expansion projects during 1999, higher
average commercial paper borrowings due to acquisitions, and higher interest
rates on commercial paper borrowings.
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
OTHER INCOME $ (31) $ (12) 158%
OTHER CHARGES 34 29 17%
GAIN RECOGNIZED ON INITIAL
PUBLIC OFFERING OF GENENCOR (38) -- N/A
Included in other income are gains from equity investments, gains on sales of
nonoperating assets, royalty income, gains on foreign exchange transactions, and
other miscellaneous items. Other income increased mainly due to higher income
from equity investments and gains on sales of nonoperating assets.
Included in other charges are losses from foreign exchange transactions, certain
litigation costs, losses from equity investments, losses on sales of
nonoperating assets, fees on securitized receivables, and other miscellaneous
items. Other charges increased mainly due to an increase in certain litigation
costs and higher fees related to securitized receivables.
In 2000, a nonrecurring gain of approximately $38 million resulted from the
initial public offering of common shares of Genencor. This transaction is more
fully described in Note 4 to the consolidated financial statements.
(Dollars in millions) 2000 1999
----- -----
OTHER NONRECURRING ITEMS $ 10 $ (8)
Other nonrecurring items for 2000 totaling $10 million were recognized for costs
related to sorbates civil litigation.
Other nonrecurring items for 1999 reflected a gain of $8 million from the sale
of certain nonoperating assets.
41
SUMMARY BY OPERATING SEGMENT
CHEMICALS GROUP
CASPI SEGMENT
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
Sales $1,176 $ 836 41 %
Operating earnings including nonrecurring items 123 121 2 %
Operating earnings excluding nonrecurring items 132 151 (13)%
2000 COMPARED WITH 1999
Sales revenue for the CASPI segment increased 41%, reflecting higher sales
volumes attributable to the Lawter, Sokolov, and McWhorter acquisitions, and
overall higher selling prices. Sales revenue increased 40% due to increased
sales volumes and 6% due to higher selling prices. Foreign currency exchange
rates and product mix had a negative impact on sales revenue of 4% and 1%,
respectively.
Results for 2000 and 1999 were negatively impacted by nonrecurring items
totaling $9 million and $30 million, respectively, as more fully described above
and in Note 9 to the consolidated financial statements.
In 2000, raw materials cost increases exceeded selling price increases, and
margins eroded for many products. Lower cost structure resulting from employee
separations that occurred late in 1999 and non-labor cost reductions implemented
in 2000 did not offset the reduction in margins. Operating earnings were
positively affected by decreased pension expense in 2000 and 1999 that resulted
from the mid-1999 amendments to Eastman's defined benefit pension plan.
PCI SEGMENT
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
Sales $1,297 $1,245 4 %
Operating earnings (loss) including nonrecurring items 87 (2) N/A
Operating earnings excluding nonrecurring items 100 30 233 %
2000 COMPARED WITH 1999
Sales revenue for the PCI segment increased 4% due to moderately higher selling
prices. Increased selling prices, driven by higher raw materials costs, had a
positive impact on sales revenue of 7%. Sales revenue for fine chemicals
declined, partially due to lower volume associated with discontinued products
that were part of the fine chemicals product line. Decreased sales volumes,
foreign currency exchange rates, and product mix had a negative impact on sales
revenue of 1% each.
Operating earnings for 2000 were negatively impacted by nonrecurring items
totaling approximately $13 million, as more fully described above and in Note 8
to the consolidated financial statements.
The operating loss for 1999 included nonrecurring items totaling approximately
$32 million as more fully described above and in Notes 8 and 9 to the
consolidated financial statements.
In 2000, operating earnings were positively impacted by lower cost structure, in
part due to dependence on coal rather than oil or natural gas for acetyl-based
products, and higher selling prices. Decreased pension expense in 2000 and 1999
that resulted from the mid-1999 amendments to Eastman's defined benefit pension
plan also had a positive impact on results.
42
SP SEGMENT
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
Sales $ 550 $ 531 4%
Operating earnings including nonrecurring items 103 80 29%
Operating earnings excluding nonrecurring items 103 90 14%
2000 COMPARED WITH 1999
Sales revenue for the SP segment increased 4% as higher sales volumes and
increased selling prices had a positive impact on revenues of 6% and 2%,
respectively. These increases were partially offset by the effects of foreign
currency exchange rates and product mix which negatively impacted sales revenue
by 3% and 1%, respectively.
Operating earnings for 1999 included other nonrecurring operating items totaling
approximately $10 million, as more fully described above and in Note 9 to the
consolidated financial statements.
For 2000, operating earnings were positively impacted by lower cost structure
and by decreased pension expense in 2000 and 1999 resulting from the mid-1999
amendments to Eastman's defined benefit pension plan.
POLYMERS GROUP
POLYMERS SEGMENT
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
Sales $1,636 $1,344 22 %
Operating earnings (loss) including nonrecurring items 99 (104) N/A
Operating earnings (loss) excluding nonrecurring items 98 (67) N/A
2000 COMPARED WITH 1999
Sales revenue for the Polymers segment increased 22% due to higher selling
prices which had a positive impact on sales revenue of 26%. The increase in
selling prices was attributable to higher selling prices for PET polymers,
driven by an improved supply and demand balance. Sales volumes for PET polymers
used in beverage containers were level due to the Company's firm stance on
selling prices and a maturing carbonated soft drink market in North America.
Foreign currency exchange rates had a negative impact on sales revenue of 4%,
although the impact in Europe was more significant due to the strength of the
U.S. dollar against the euro.
Operating earnings for 2000 were positively impacted by a nonrecurring gain of
$1 million related to the sale of certain assets. Operating earnings for 1999
were negatively impacted by nonrecurring charges totaling approximately $37
million, as more fully described above and in Notes 8 and 9 to the consolidated
financial statements.
Operating earnings were sharply higher for the year primarily due to the
Company's lower cost structure and substantially higher selling prices for PET
polymers. Margins on polyethylene products were pressured by higher raw material
costs and lower selling prices that resulted from slowing demand. The Polymers
segment's operating earnings were positively affected by decreased pension
expense in 2000 and 1999 resulting from the mid-1999 amendments to the Company's
defined benefit pension plan.
FIBERS SEGMENT
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
Sales $ 633 $ 634 0 %
Operating earnings including nonrecurring items 150 107 40 %
Operating earnings excluding nonrecurring items 150 115 30 %
43
2000 COMPARED WITH 1999
Sales revenue for the Fibers segment was level. Higher sales volumes, which had
a positive impact on sales revenue of 3%, were offset by the impact of lower
selling prices and unfavorable foreign currency exchange rates.
Operating earnings for 1999 were negatively impacted by nonrecurring items
totaling $8 million, as more fully described above and in Note 9 to the
consolidated financial statements.
Operating earnings increased sharply for the year primarily due to lower cost
structure and by decreased pension expense in 2000 and 1999 resulting from
mid-1999 amendments to the Company's defined benefit pension plan.
SUMMARY BY CUSTOMER LOCATION -- 2000 COMPARED WITH 1999
(Dollars in millions) 2000 1999 CHANGE
------ ------ ------
United States and Canada $3,229 $2,869 13%
Europe, Middle East, and Africa 1,062 849 25%
Asia Pacific 547 486 13%
Latin America 454 386 18%
------ ------
$5,292 $4,590
====== ======
Sales revenue in the United States and Canada for 2000 was $3.2 billion, up 13%
from 1999 sales revenue of $2.9 billion. The improvement was primarily
attributable to higher selling prices, mainly for PET polymers, which had a
positive impact on sales revenue of 8%. Increased sales volumes resulting from
acquisitions had a positive impact on revenues of 5%.
Sales revenue outside the United States and Canada increased 20% to $2.1
billion, compared to $1.7 billion in 1999. Higher selling prices, mainly for PET
polymers, had a positive impact on sales revenue of 15%. Increased sales volumes
resulting from acquisitions had a positive impact on revenues of 13%. These
increases were partially offset by the negative effects of foreign currency
exchange rates and product mix, which had a negative impact on revenues of 7%
and 1%, respectively.
In Europe, Middle East and Africa, sales revenue increased 25% in 2000 compared
with 1999. Increased selling prices, primarily for PET polymers, had a positive
impact on revenues of 22%. Higher sales volumes resulting from acquisitions had
a positive impact on sales revenue of 19%. A strong U.S. dollar against the euro
resulted in a significantly unfavorable foreign currency exchange effect of 15%.
Sales revenue in Asia Pacific increased 13%, mainly due to increased sales
volumes, which had a positive impact on sales revenue of 11%. The increase in
sales volumes was driven by higher volumes for fibers. Other factors which
positively impacted sales revenue included higher selling prices for performance
chemicals and intermediates and PET polymers, which resulted in a positive
impact on revenues of 3%, and foreign currency exchange rates, which had a 1%
positive impact on revenues. Product mix had a negative impact of 2% on sales
revenue in 2000.
Sales revenue in Latin America increased 18%, mainly due to higher selling
prices, primarily for PET polymers, which had a positive impact on revenues of
16%. Increased sales volumes had a positive impact on revenues of 2%.
44
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
(Dollars in millions) 2001 2000 1999
------ ------ ------
Net cash provided by (used in)
Operating activities $ 431 $ 831 $ 744
Investing activities (523) (465) (715)
Financing activities 57 (451) 128
------ ------ ------
Net change in cash and cash equivalents $ (35) $ (85) $ 157
====== ====== ======
Cash and cash equivalents at end of period $ 66 $ 101 $ 186
====== ====== ======
Cash provided by operating activities for 2001 reflected an increase in working
capital related to a decrease in trade accounts payable, partially offset by a
decrease in receivables, and additionally reflected the payment of certain
employee incentive compensation expenses. In 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 provided
by operating activities in 2000 and 1999 also reflected $50 million and $150
million, respectively, provided by a continuous sale of accounts receivable
program.
Cash used in investing activities in 2001 and 2000 reflected decreased
expenditures for capital additions and acquisitions compared to 1999. In 2001,
cash paid for the Hercules Businesses was approximately $252 million; in 2000,
cash paid for McWhorter was approximately $200 million and for Sokolov was
approximately $46 million; and in 1999, cash paid for Lawter was approximately
$370 million. Cash used in investing activities in 2001, 2000, and 1999
additionally reflects other small acquisitions. Cash used in investing
activities in 2000 reflected higher proceeds from sales of assets.
Cash provided by financing activities in 2001 reflected an increase in
commercial paper and other short-term borrowings to fund the acquisition of the
Hercules Businesses and for general operating purposes. In 2000, cash used in
financing activities reflected a repayment of borrowings associated with
acquisitions. In 1999, cash provided by financing activities reflected an
increase in borrowings primarily related to funding the Lawter acquisition and
additional borrowings at year end as a precautionary measure related to the Year
2000 issue. Cash provided by (used in) financing activities in 2001 included the
effect of an increase in treasury stock resulting from a reverse/forward stock
split of the Company's common stock approved by the stockholders on May 3, 2001
and the repurchase of shares of the Company's common stock in 2000 and 1999.
The Company expects to continue to pay a quarterly cash dividend. Priorities for
use of available excess cash are to reduce outstanding borrowings, fund targeted
growth initiatives such as small acquisitions and other ventures, and repurchase
shares.
CAPITAL EXPENDITURES
Capital expenditures were $234 million, $226 million, and $292 million for 2001,
2000, and 1999, respectively. For 2002, the Company estimates that capital
spending and other directed investments for small acquisitions and other
ventures will be no more than expected depreciation and amortization of $370
million. Long-term commitments related to planned capital expenditures are not
material.
45
OTHER COMMITMENTS
At December 31, 2001, the Company's obligations related to long-term notes and
debentures totaled $1.5 billion to be paid over a period extending 25 years.
Other borrowings, related primarily to Credit Facility and commercial paper
borrowings, totaled approximately $700 million.
The Company had various purchase obligations at December 31, 2001, totaling
approximately $1.9 billion over a period of approximately 15 years for
materials, supplies, and energy incident to the ordinary conduct of business.
The Company also had various lease commitments for property and equipment under
cancelable, noncancelable, and month-to-month operating leases totaling $239
million over a period of several years. Of the total lease commitments,
approximately 40% relates to machinery and equipment, including computer and
communications equipment and production equipment; approximately 35% relates to
real property, including office space, storage facilities, and land; and
approximately 25% relates to railcars. The obligations described above are
summarized in the following table:
(DOLLARS IN MILLIONS) PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
More Than
Total 1 Year 2-5 Years 6-10 Years 10 Years
------- ------- --------- ---------- ---------
Long-term notes and debentures $ 1,493 $ -- $ 500 $ -- $ 993
Credit facility, commercial paper, and
other borrowings 704 54 650 -- --
Purchase obligations 1,861 230 806 524 301
Operating leases 239 55 95 50 39
------- ------- ------- ------- -------
$ 4,297 $ 339 $ 2,051 $ 574 $ 1,333
======= ======= ======= ======= =======
If certain operating leases are terminated by the Company, it guarantees a
portion of the residual value loss, if any, incurred by the lessors in disposing
of the related assets. The Company believes, based on current facts and
circumstances, that a material payment pursuant to such guarantees is remote.
The Company maintains defined benefit plans that provide eligible employees with
retirement benefits. Benefits are paid to employees from trust funds. The
Company contributes to the plans as permitted by laws and regulations. No
contribution to the plans was required in 2001 and the Company anticipates that
none will be required in 2002. As disclosed in Note 15 to the consolidated
financial statements, during 2001 the Company increased its minimum pension
liability from $16 million to $187 million in accordance with generally accepted
accounting principles. While this amount does not correspond directly to cash
funding requirements, it is an indication the Company will be required to
contribute cash to the plans in future years. The amount and timing of such
contributions is dependent upon interest rates, actual returns on plan assets,
retirement and attrition rates of employees, and other factors. Such factors can
significantly impact the amount and timing of any future contributions by the
Company. For example, a 1% change in interest rates could impact future funding
requirements by approximately $50 million.
The Company has long-term commitments relating to a joint venture as described
in Note 4 to the consolidated financial statements. The Company guarantees up to
$125 million of the principal amount of the joint venture's third-party
borrowings, but believes, based on current facts and circumstances and the
structure of the venture, that the likelihood of a payment pursuant to such
guarantee is remote.
As described in Note 14 to the consolidated financial statements, Eastman
entered into an agreement in 1999 that allows it to sell undivided interests in
certain domestic trade accounts receivable under a planned continuous sale
program to a third party. Under this agreement, receivables sold to the third
party totaled $200 million at December 31, 2001 and 2000, respectively.
Undivided interests in designated receivable pools were sold to the purchaser
with recourse limited to the receivables purchased.
The Company did not have any other material relationships with unconsolidated
entities or financial partnerships, often referred to as special purpose
entities, for the purpose of facilitating off-balance sheet arrangements with
contractually narrow or limited purposes. Thus, Eastman is not materially
exposed to any financing, liquidity, market, or credit risk related to the above
or any other such relationships.
46
LIQUIDITY
Eastman has access to an $800 million revolving credit facility (the "Credit
Facility") expiring in July 2005, and to a short-term $130 million credit
agreement (the "Credit Agreement") expiring in July 2002. Any borrowings under
the Credit Facility or the Credit Agreement are 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 on the Credit Facility
was 0.15% and 0.125% as of December 31, 2001 and 2000, respectively. The rate
for such fees on the Credit Agreement is 0.15%. 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. Management believes the likelihood of failure to
comply with such covenants is remote.
Eastman typically utilizes commercial paper, generally with maturities of 90
days or less, to meet its liquidity needs. The Credit Facility provides
liquidity support for commercial paper borrowings and general corporate
purposes. Accordingly, outstanding commercial paper borrowings reduce borrowings
available under the Credit Facility. Because the Credit Facility expires in July
2005, the commercial paper borrowings are classified as long-term borrowings
because the Company has the ability to refinance such borrowings long term. As
of December 31, 2001, the Company's Credit Facility and commercial paper
borrowings were $637 million at an effective interest rate of 3.17%. At December
31, 2000, the Company's outstanding balance of commercial paper 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.
Access to public debt markets, however, is dependent on a variety of factors
including general market conditions and investors' perceptions regarding the
chemical industry and the Company's expected performance. No securities have
been sold from this shelf registration.
A downgrade of one level in the Company's credit rating is not anticipated, but
should it occur, would not cause a significant impact on the commitments or
sources of capital described above and would not have a material impact on the
Company's results of operations. However, an adverse change in the Company's
credit rating could affect the renewal of existing credit facilities or the
Company's ability to obtain access to new credit facilities in the future, could
adversely affect the terms under which the Company can borrow, and could
increase the cost of borrowings under such facilities.
Cash flows from operations and the sources of capital described above are
expected to be available and sufficient to meet foreseeable cash flow
requirements. However, the Company's cash flows from operations can be affected
by numerous factors including risks associated with global operations, raw
materials availability and cost, demand for and pricing of Eastman's products,
capacity utilization, and other factors described in the forward-looking
statements beginning on page 50.
STOCK REPURCHASES
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 stockholders
on May 3, 2001 in order to consolidate small shareholdings and reduce
administrative costs. 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.
DIVIDENDS
The Company declared cash dividends of $0.44 per share in the fourth quarters of
2001, 2000, and 1999 and $1.76 per share in 2001, 2000, and 1999.
47
ENVIRONMENTAL
Certain of the Company's manufacturing sites generate hazardous and nonhazardous
wastes, the treatment, storage, transportation, and disposal of which are
regulated by various governmental agencies. In connection with the cleanup of
various hazardous waste sites, the Company, along with many other entities, has
been designated a potentially responsible party ("PRP") by the U.S.
Environmental Protection Agency under the Comprehensive Environmental Response,
Compensation and Liability Act, which potentially subjects PRPs to joint and
several liability for such cleanup costs. In addition, the Company will be
required to incur closure/postclosure costs relating to environmental
remediation pursuant to the federal Resource Conservation and Recovery Act.
Because of expected sharing of costs, the availability of legal defenses, and
the Company's preliminary assessment of actions that may be required, the
Company does not believe its liability for these environmental matters,
individually or in the aggregate, will be material to Eastman's consolidated
financial position, results of operations, or competitive position.
The Company accrues environmental costs when it is probable that the Company has
incurred a liability and the amount can be reasonably estimated. Estimated costs
associated with closure/postclosure are accrued over the facilities' estimated
remaining useful lives which are currently estimated to extend over 50 years.
The amount accrued reflects the Company's assumptions about remedial
requirements at the contaminated site, the nature of the remedy, the outcome of
discussions with regulatory agencies and other potentially responsible parties
at multi-party sites, and the number and financial viability of other
potentially responsible parties. Changes in the estimates on which the accruals
are based, unanticipated government enforcement action, or changes in chemical
control regulations and testing requirements could result in higher or lower
costs.
When a single amount cannot be reasonably estimated but the cost can be
estimated within a range, the Company accrues the minimum amount unless another
amount within the range appears to be a better estimate. At December 31, 2001
and 2000, the minimum or best estimate of environmental contingencies was
approximately $80 million. At December 31, 2001 and 2000, the Company had
recognized environmental contingencies of approximately $54 million and $49
million, respectively, representing the minimum or best estimate for remediation
costs and for closure/postclosure costs accrued to date over the facilities'
estimated useful lives.
The Company's cash expenditures related to environmental protection and
improvement were approximately $216 million, $195 million, and $220 million in
2001, 2000, and 1999, respectively. These amounts pertain primarily to operating
costs associated with environmental protection equipment and facilities, but
also include expenditures for construction and development. The Company does not
expect future environmental capital expenditures arising from requirements of
recently promulgated environmental laws and regulations to materially increase
the Company's planned level of capital expenditures for environmental control
facilities.
INFLATION
In recent years, inflation has not had a material adverse impact on Eastman's
costs, primarily because of price competition among suppliers of raw materials.
The cost of raw materials is generally based on market price, although
derivative financial instruments may be utilized, as appropriate, to mitigate
short-term market price fluctuations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets," collectively referred to as the "Standards." SFAS No. 141 supersedes
Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations."
The provisions of SFAS No. 141 require the purchase method of accounting to be
used for all business combinations initiated after June 30, 2001; provide
specific criteria for the initial recognition and measurement of intangible
assets apart from goodwill; and require that unamortized negative goodwill be
written off immediately as an extraordinary gain instead of being deferred and
amortized. SFAS No. 141 also requires that upon adoption of SFAS No. 142, the
Company reclassify the carrying amounts of certain intangible assets into or
out of goodwill, based on certain criteria. SFAS No. 142 supersedes APB No. 17,
"Intangible Assets," and is effective for fiscal years beginning after December
15, 2001. SFAS No. 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions of
SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived
intangible assets; require that goodwill and indefinite-lived intangible assets
be tested annually for impairment, and in interim periods if certain events
occur indicating that the carrying value of goodwill and/or indefinite-lived
intangible assets may be impaired; require that reporting units be identified
for the purpose of assessing potential future impairments of goodwill; and
remove the forty-year limitation on the amortization period of intangible
assets that have finite lives.
48
The Company will adopt the provisions of SFAS No. 142 in its first quarter
ended March 31, 2002. The Company is in the process of preparing for its
adoption of SFAS No. 142 and is making the determinations as to what its
reporting units are and what amounts of goodwill, intangible assets, other
assets, and liabilities should be allocated to those reporting units. In
connection with the adoption of SFAS No. 142, the Company expects to reclassify
$12 million of its intangibles assets and the related deferred tax liabilities
of approximately $5 million to goodwill. The Company expects that it will no
longer record $20 million of amortization relating to its existing goodwill and
indefinite-lived intangibles, as adjusted for the reclassifications just
mentioned. The Company will also evaluate the useful lives assigned to its
intangible assets and anticipates no significant changes to the useful lives or
the related amortization expense.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The Company expects to complete that first step of the goodwill
impairment test during the first half of 2002. The second step of the goodwill
impairment test measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be completed by the end
of the Company's fiscal year. Intangible assets deemed to have an indefinite
life will be tested for impairment using a one-step process which compares the
fair value to the carrying amount of the asset as of the beginning of the
fiscal year, and pursuant to the requirements of SFAS No. 142 will be completed
during the first quarter of 2002. Any impairment loss resulting from the
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principle. The Company has not yet determined what effect
these impairment tests will have on the Company's earnings and financial
position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and/or normal use of the asset.
The Company is required and plans to adopt the provisions of SFAS No. 143
January 1, 2003. Upon initial application of the provisions of SFAS No. 143,
entities are required to recognize a liability for any existing asset retirement
obligations adjusted for cumulative accretion to the date of adoption of this
Statement, an asset retirement cost capitalized as an increase to the carrying
amount of the associated long-lived asset, and accumulated depreciation on that
capitalized cost. The cumulative effect, if any, of initially applying this
Statement will be recognized as a change in accounting principle. The Company
has not yet assessed the impact of this Statement on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for assets to be disposed
of and broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of this Statement, which were adopted by
the Company January 1, 2002, have not had a material impact on its financial
condition or results of operations.
OUTLOOK
For 2002, the Company:
- Expects capital spending and other directed investments for small
acquisitions and other ventures to be no more than expected
depreciation and amortization of approximately $370 million;
- Expects research and development expenditures to be approximately $170
million, and combined costs related to selling and general
administrative expenses and research and development costs to be
approximately 11% of sales;
- Expects pension and other postemployment benefit expenses to increase
over 2001 and expects that no contribution to the Company's pension
plan will be required in 2002;
49
- Expects to further integrate recent acquisitions into the Company's
processes and SAP R3 and expects that costs related to such
implementation will be minimal;
- Expects to continue to recognize costs related to Cendian, formerly
ShipChem, as it builds capability to add new customers;
- Expects to continue to pay a quarterly cash dividend and anticipates
that excess available cash will be used to reduce outstanding
borrowings, fund targeted growth initiatives for small acquisitions and
other ventures, and repurchase shares.
The Company further expects:
- Global demand for PET polymers to grow approximately 10% annually over
the next four years;
- To take actions necessary to improve within three years the Company's
credit rating to BBB+;
- Significant cash contributions to the Company's defined benefit pension
plans will be required in future years; the amount and timing of such
contributions is unknown and significantly impacted by interest rates,
actual returns on plan assets, retirement and attrition rates of
employees, and other factors.
FORWARD-LOOKING STATEMENTS
The expectations under "Outlook" and certain other statements in this report may
be forward-looking in nature as defined in the Private Securities Litigation
Reform Act of 1995. These statements and other written and oral forward-looking
statements made by the Company from time to time relate to such matters as
planned and expected capacity increases and utilization; anticipated 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; competition; growth
opportunities; supply and demand, volume, price, cost, margin, and sales;
earnings, cash flow, dividends and other expected financial conditions;
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; financing plans; pension expenses and funding; credit rating;
cost reduction targets; integration of recently acquired businesses;
development, production, commercialization, and acceptance of new products,
services, and technologies; asset and product portfolio changes.
These plans and expectations are based upon certain underlying assumptions,
including those mentioned with the specific statements. Such assumptions are in
turn based upon internal estimates and analyses of current market conditions and
trends, management plans and strategies, economic conditions, and other factors.
These plans and expectations and the assumptions underlying them are necessarily
subject to risks and uncertainties inherent in projecting future conditions and
results. Actual results could differ materially from expectations expressed in
the forward-looking statements if one or more of the underlying assumptions and
expectations proves to be inaccurate or is unrealized. In addition to the
factors 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 in any such forward-looking statements:
- The Company began operating its Chemicals Group as Eastman Division and
its Polymers Group as Voridian Division effective January 1, 2002. The
divisional structure for the businesses is expected to allow each to
concentrate its respective efforts and resources on strategies specific
to the business. There can be no assurance that any or all of such
goals or expectations will be realized.
- The Company has manufacturing and marketing operations throughout the
world, with approximately 45% of the Company's revenues attributable to
sales outside the United States. Economic factors, including foreign
currency exchange rates, 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 can 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. In
addition, changes in laws, regulations, or other political factors in
any of the countries in which the Company operates could affect
business in that country or region, as well as the Company's results of
operations.
50
- 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. 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 strategic technology investments, including
formation of joint ventures and investments in other technology
businesses, in order to build certain Eastman capabilities. There
can be no assurance that such investments will achieve their objectives
or that they will be beneficial to the Company's results of operations.
- During 2002, the Company will continue 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, technology investments and Genencor. Such
investments are minority investments in companies which are not managed
or controlled by the Company and are subject to all of the risks
associated with changes in value of such investments including the
market valuation of those companies whose shares are publicly traded.
- The Company has undertaken and will continue to undertake productivity
and cost reduction initiatives and organizational restructurings to
improve performance and generate cost savings. There can be no
assurance that these will be completed as planned or beneficial or that
estimated cost savings from such activities will be realized.
- In addition to 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 materials 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
materials costs. There can be no assurance, however, that such measures
will result in cost savings or that all market fluctuation exposure
will be eliminated.
- The Company's competitive position in the markets in which it
participates is, in part, subject to external factors. For example,
supply and demand for certain of the Company's products is driven by
end-use markets and worldwide capacities which, in turn, impact demand
for and pricing of the Company's products.
- 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.
- The Company's facilities and businesses are subject to complex health,
safety, and environmental laws and regulations, which require and will
continue to require significant expenditures to remain in compliance
with such laws and regulations currently and in the future. The
Company's accruals for such costs and associated liabilities are
believed to be adequate, but are subject to changes in estimates on
which the accruals are based. The estimates depend on a number of
factors including those associated with on-going operations and
remedial requirements. On-going operations can be affected by
unanticipated government enforcement action, which in turn is
influenced by the nature of the allegation and the complexity of the
site. Likewise, changes in chemical control regulations and testing
requirements can increase costs or result in product deselection.
Remedial requirements at contaminated sites are dependent on the nature
of the remedy, the outcome of discussions with regulatory agencies and
other potentially responsible parties at multi-party sites, and the
number and financial viability of other potentially responsible
parties.
51
- The Company's operations from time to time 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.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in financial market conditions in the normal
course of its business due to its use of certain financial instruments as well
as transacting in various foreign currencies and funding of foreign operations.
To mitigate the Company's exposure to these market risks, Eastman has
established policies, procedures, and internal processes governing its
management of financial market risks and the use of financial instruments to
manage its exposure to such risks.
The Company is exposed to changes in interest rates primarily as a result of its
borrowing activities, which include short-term commercial paper and long-term
borrowings used to maintain liquidity and to fund its business operations and
capital requirements. Currently, these borrowings are predominately U.S. dollar
denominated. The nature and amount of the Company's long-term and short-term
debt may vary as a result of future business requirements, market conditions,
and other factors.
The Company's operating cash flows denominated in foreign currencies are exposed
to changes in foreign currency exchange rates. The Company continually evaluates
its foreign currency exposure based on current market conditions and the
locations in which the Company conducts business. In order to mitigate the
effect of foreign currency risk, the Company enters into forward exchange
contracts to hedge certain firm commitments denominated in foreign currencies
and currency options to hedge probable anticipated but not yet committed export
sales and purchase transactions expected within no more than two years and
denominated in foreign currencies. The gains and losses on these contracts
offset changes in the value of related exposures. It is the Company's policy to
enter into foreign currency transactions only to the extent considered necessary
to meet its objectives as stated above. The Company does not enter into foreign
currency transactions for speculative purposes.
The Company is exposed to fluctuations in market prices for certain of its major
raw materials. To mitigate short-term fluctuations in market prices for certain
commodities, principally propane, ethane, and natural gas, the Company enters
into forwards and options contracts.
The Company determines its market risk utilizing sensitivity analysis, which
measures the potential losses in fair value resulting from one or more selected
hypothetical changes in interest rates, foreign currency exchange rates, and/or
commodity prices. For 2001 and 2000, respectively, the market risk associated
with the fair value of interest-rate-sensitive instruments, assuming an
instantaneous parallel shift in interest rates of 10% are approximately $81
million and $86 million and an additional $10 million and $9 million for each
one percentage point change in interest rates thereafter. This exposure is
primarily related to long-term debt with fixed interest rates. The market risk
associated with foreign currency-sensitive instruments utilizing a modified
Black-Scholes option pricing model and a 10% adverse move in the U.S. dollar
relative to each foreign currency hedged by the Company is approximately $2
million and $8 million and an additional $0.1 million and $0.5 million for 2001
and 2000, respectively, for an additional one percentage point adverse change in
foreign currency exchange rates. Further adverse movements in foreign currencies
would create losses in fair value; however, such losses would not be linear to
that disclosed above. This exposure, which is primarily related to foreign
currency options purchased by the Company to manage fluctuations in foreign
currencies, is limited to the dollar value of option premiums payable by the
Company for the related financial instruments. Furthermore, since the Company
utilizes currency-sensitive derivative instruments for hedging anticipated
foreign currency transactions, a loss in fair value for those instruments is
generally offset by increases in the value of the underlying anticipated
transactions. The market risk associated with feedstock options and natural gas
swaps assuming an instantaneous parallel shift in the underlying commodity price
of 10% is approximately $2 million and $9 million and an additional $0.2 million
and $0.8 million for 2001 and 2000, respectively, for each one percentage point
move in closing prices thereafter.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM PAGE
---- -------
Management's responsibility for financial statements 55
Report of independent accountants 56
Consolidated statements of earnings (loss), comprehensive income (loss), and retained earnings 57
Consolidated statements of financial position 58
Consolidated statements of cash flows 59
Notes to consolidated financial statements 60-90
Financial statement schedules:
II - Valuation and Qualifying Accounts 151
54
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the accompanying
consolidated financial statements of Eastman Chemical Company and subsidiaries
appearing on pages 57 through 90. Eastman has prepared these consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America, and the statements of necessity include some
amounts that are based on management's best estimates and judgments.
Eastman's accounting systems include extensive internal controls designed to
provide reasonable assurance of the reliability of its financial records and the
proper safeguarding and use of its assets. Such controls are based on
established policies and procedures, are implemented by trained, skilled
personnel with an appropriate segregation of duties, and are monitored through a
comprehensive internal audit program. The Company's policies and procedures
prescribe that the Company and all employees are to maintain the highest ethical
standards and that its business practices throughout the world are to be
conducted in a manner that is above reproach.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, who were responsible for
conducting their audits in accordance with auditing standards generally accepted
in the United States of America. Their report is included herein.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of nonmanagement
Board members. The independent accountants and internal auditors have full and
free access to the Audit Committee. The Audit Committee meets periodically with
PricewaterhouseCoopers LLP and Eastman's director of internal auditing, both
privately and with management present, to discuss accounting, auditing, policies
and procedures, internal controls, and financial reporting matters.
/s/ J. Brian Ferguson /s/ James P. Rogers
---------------------------------- -------------------------------------
J. Brian Ferguson James P. Rogers
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
January 29, 2002
55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Eastman Chemical Company
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 93 present fairly, in all material
respects, the financial position of Eastman Chemical Company and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) on page 93 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on January 1,
2001, Eastman Chemical Company adopted Statement of Financial Accounting
Standard No. 133, as amended by Statement of Financial Accounting Standard No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities."
/s/ PricewaterhouseCoopers LLP
-------------------------------------------
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
January 29, 2002
56
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS),
COMPREHENSIVE INCOME (LOSS), AND RETAINED EARNINGS
(Dollars in millions, except per share amounts) 2001 2000 1999
------- ------- -------
EARNINGS (LOSS)
Sales $ 5,384 $ 5,292 $ 4,590
Cost of sales 4,497 4,214 3,729
------- ------- -------
Gross profit 887 1,078 861
Selling and general administrative expenses 407 346 355
Research and development costs 160 149 187
Asset impairments and restructuring charges (See Note 8) 396 13 52
Other nonrecurring operating items (See Note 9) 50 8 65
------- ------- -------
Operating earnings (loss) (126) 562 202
Interest expense, net 140 135 121
Gain recognized on initial public offering of equity investment -- (38) --
Other income (11) (31) (12)
Other charges 22 34 29
Other nonrecurring items (See Note 9) 20 10 (8)
------- ------- -------
Earnings (loss) before income taxes (297) 452 72
Provision (benefit) for income taxes (118) 149 24
------- ------- -------
Net earnings (loss) $ (179) $ 303 $ 48
======= ======= =======
Earnings (loss) per share
Basic $ (2.33) $ 3.95 $ 0.61
======= ======= =======
Diluted $ (2.33) $ 3.94 $ 0.61
======= ======= =======
COMPREHENSIVE INCOME (LOSS)
Net earnings (loss) $ (179) $ 303 $ 48
Other comprehensive loss (134) (63) (36)
------- ------- -------
Comprehensive income (loss) $ (313) $ 240 $ 12
======= ======= =======
RETAINED EARNINGS
Retained earnings at beginning of period $ 2,266 $ 2,098 $ 2,188
Net earnings (loss) (179) 303 48
Cash dividends declared (135) (135) (138)
------- ------- -------
Retained earnings at end of period $ 1,952 $ 2,266 $ 2,098
======= ======= =======
The accompanying notes are an integral part of these financial statements.
57
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31,
(Dollars in millions) 2001 2000
------- -------
ASSETS
Current assets
Cash and cash equivalents $ 66 $ 101
Trade receivables, net of allowance of $35 and $16 570 650
Miscellaneous receivables 86 87
Inventories 659 580
Other current assets 77 105
------- -------
Total current assets 1,458 1,523
------- -------
Properties
Properties and equipment at cost 9,302 9,039
Less: Accumulated depreciation 5,675 5,114
------- -------
Net properties 3,627 3,925
------- -------
Goodwill, net of accumulated amortization of $43 and $28 339 344
Other intangibles, net of accumulated amortization of $38 and $20 275 277
Other noncurrent assets 387 481
------- -------
Total assets $ 6,086 $ 6,550
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Payables and other current liabilities $ 904 $ 1,152
Borrowings due within one year 54 106
------- -------
Total current liabilities 958 1,258
Long-term borrowings 2,143 1,914
Deferred income tax credits 452 607
Postemployment obligations 1,043 829
Other long-term liabilities 112 130
------- -------
Total liabilities 4,708 4,738
------- -------
Commitments and contingencies
Stockholders' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued - 85,053,349 and 84,739,902) 1 1
Paid-in capital 118 100
Retained earnings 1,952 2,266
Other comprehensive loss (251) (117)
------- -------
1,820 2,250
Less: Treasury stock at cost (8,073,859 and 7,996,790 shares) 442 438
------- -------
Total stockholders' equity 1,378 1,812
------- -------
Total liabilities and stockholders' equity $ 6,086 $ 6,550
======= =======
The accompanying notes are an integral part of these financial statements.
58
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions) 2001 2000 1999
----- ----- -----
Cash flows from operating activities
Net earnings (loss) $(179) $ 303 $ 48
----- ----- -----
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities, net of effect of acquisitions
Depreciation and amortization 435 418 383
Write-off of impaired assets 373 -- 52
Gain recognized on initial public offering of equity investment -- (38) --
Write-off of acquired in-process research and development 5 9 25
Provision (benefit) for deferred income taxes (148) 64 (18)
(Increase) decrease in receivables 90 (1) 163
(Increase) decrease in inventories (8) (43) 63
Increase (decrease) in liabilities for employee benefits and
incentive pay (8) 28 (69)
Increase (decrease) in liabilities excluding borrowings and
liabilities for employee benefits and incentive pay (163) 9 115
Other items, net 34 82 (18)
----- ----- -----
Total adjustments 610 528 696
----- ----- -----
Net cash provided by operating activities 431 831 744
----- ----- -----
Cash flows from investing activities
Additions to properties and equipment (234) (226) (292)
Acquisitions, net of cash acquired (257) (261) (381)
Additions to capitalized software (28) (21) (24)
Other investments (8) (30) --
Proceeds from sales of fixed assets 4 61 --
Other items -- 12 (18)
----- ----- -----
Net cash used in investing activities (523) (465) (715)
----- ----- -----
Cash flows from financing activities
Net increase (decrease) in commercial paper and other short-term
borrowings 187 (98) 338
Repayment of borrowings (11) (165) (24)
Dividends paid to stockholders (135) (135) (138)
Treasury stock purchases (4) (57) (51)
Stock options and other items 20 4 3
----- ----- -----
Net cash provided by (used in) financing activities 57 (451) 128
----- ----- -----
Net change in cash and cash equivalents (35) (85) 157
Cash and cash equivalents at beginning of period 101 186 29
----- ----- -----
Cash and cash equivalents at end of period $ 66 $ 101 $ 186
===== ===== =====
The accompanying notes are an integral part of these financial statements.
59
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of Eastman Chemical Company and
subsidiaries ("Eastman" or the "Company") are prepared in conformity with
accounting principles generally accepted in the United States of America and of
necessity include some amounts that are based upon management estimates and
judgments. Future actual results could differ from such current estimates. The
consolidated financial statements include assets, liabilities, revenues, and
expenses of all wholly owned subsidiaries. Eastman accounts for joint ventures
and investments in minority-owned companies where it exercises significant
influence on the equity basis. Intercompany transactions and balances are
eliminated in consolidation.
TRANSLATION OF NON-U.S. CURRENCIES
Eastman uses the local currency as the "functional currency" to translate the
accounts of all consolidated entities outside the United States where cash flows
are primarily denominated in local currencies. The effects of translating those
operations that use the local currency as the functional currency are included
as a component of comprehensive income and stockholders' equity. The effects of
remeasuring those operations where the U.S. dollar is used as the functional
currency and all transaction gains and losses are reflected in current earnings.
REVENUE RECOGNITION AND CUSTOMER INCENTIVES
In 2000, the Company implemented Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition in Financial Statements" which specifies the criteria that must be
met before revenue is realized or realizable and earned. In accordance with SAB
101, the Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price to the
customer is fixed or determinable, and collectibility is reasonably assured. The
implementation of SAB 101 did not have a material impact on sales, operating
earnings (loss), or net earnings (loss) for 2001 or prior years.
The Company records estimated reductions to revenue for customer programs and
incentive offerings including special pricing agreements, price protection,
promotions, and other volume-based incentives. These estimates are based on a
combination of forecast and actual sales volumes and revenues against
established goals.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
SHIPPING AND HANDLING FEES AND COSTS
Shipping and handling fees related to sales transactions are billed to customers
and are recorded as sales revenue. Shipping and handling costs incurred are
recorded in cost of sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits, and readily marketable
securities with maturities of three months or less at the purchase date.
ACCOUNTS RECEIVABLE SALES
Under a planned continuous sale program agreement entered into in 1999, the
Company sells to a third party undivided interests in certain domestic accounts
receivable. Undivided interests in designated receivable pools are sold to the
purchaser with recourse limited to the receivables purchased. The Company's
retained interests in the designated receivable pools are measured at fair
value, based on expected future cash flows, using management's best estimates of
returns and credit losses commensurate with the risks involved. The Company's
retained interests in receivables sold are recorded as trade receivables in the
consolidated financial statements. Fees paid by the
60
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company under this agreement are based on certain variable market rate indices
and are included in other charges in the consolidated financial statements.
INVENTORIES
Inventories are valued at the lower of cost or market. The Company determines
the cost of most raw materials, work in process, and finished goods inventories
in the United States by the last-in, first-out ("LIFO") method. The cost of all
other inventories, including inventories outside the United States, is
determined by the first-in, first-out ("FIFO") or average cost method. The
Company writes down its inventories for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions.
PROPERTIES
The Company records properties at cost. Maintenance and repairs are charged to
earnings; replacements and betterments are capitalized. When Eastman retires or
otherwise disposes of assets, it removes the cost of such assets and related
accumulated depreciation from the accounts. The Company records any profit or
loss on retirement or other disposition in earnings.
DEPRECIATION
Depreciation expense is calculated based on historical cost and the estimated
useful lives of the assets (buildings and building equipment 20 to 50 years;
machinery and equipment 3 to 33 years), generally using the straight-line
method.
GOODWILL AND OTHER INTANGIBLES
The Company amortizes certain intangible assets totaling approximately $186
million on a straight-line basis over the expected useful lives of the
underlying assets, generally 11 to 20 years. The useful life of an intangible
asset is based on the Company's assumptions regarding expected use of the asset;
the relationship of the intangible asset to another asset or group of assets;
any legal, regulatory or contractual provisions that may limit the useful life
of the asset or that enable renewal or extension of the asset's legal or
contractual life without substantial cost; the effects of obsolescence, demand,
competition and other economic factors; and the level of maintenance
expenditures required to obtain the expected future cash flows from the asset
and their related impact on the asset's useful life.
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards ("SFAS") Nos. 141 "Business Combinations," and 142 "Goodwill and Other
Intangible Assets," which require the use of a nonamortization approach to
account for purchased goodwill and indefinite-lived intangibles. Under the
nonamortization approach, purchased goodwill and indefinite-lived intangibles,
including trademarks, are reviewed for impairment and written down and charged
to results of operations in the periods in which the recorded value is more than
the fair value. Additionally under these Standards, assembled workforce is not
recognized as an intangible asset apart from goodwill. Prior to the adoption of
these Standards, goodwill and assembled workforce were amortized over the
expected useful lives of the underlying assets, generally 5 to 40 years. The
adoption of these Standards resulted in approximately $12 million attributable
to assembled workforce being subsumed into goodwill; and also had the impact of
reducing annual amortization of goodwill and intangibles with indefinite lives,
primarily included in results for the Coatings, Adhesives, Specialty Polymers
and Inks ("CASPI") segment, by approximately $20 million.
IMPAIRED ASSETS
The Company reviews the carrying values of long-lived assets, identifiable
intangibles and goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Eastman reviews these assets for impairment based first on
estimated future undiscounted cash flows attributable to the assets. An
impairment loss for an asset to be held and used is recognized when the fair
value of the asset, generally based on discounted estimated future cash flows,
is less than the carrying value of the asset. An impairment loss for assets to
be disposed of is recognized when the fair value of the asset, less costs to
dispose, is less than the carrying value of the asset.
61
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTRUCTURING OF OPERATIONS
The Company records restructuring charges incurred in connection with
consolidation or relocation of operations, discontinued product lines, or
shutdowns of specific sites. These restructuring charges include estimates of
the expected costs associated with site closure, legal and environmental
matters, demolition, contract terminations, or other costs directly related to
the restructuring. If the actual costs incurred exceed the estimated costs,
additional charges will result. If the actual costs are less than the estimated
costs, a gain will be recognized.
PENSION AND OTHER POSTEMPLOYMENT BENEFITS
The Company maintains defined benefit plans that provide eligible employees with
retirement benefits. Additionally, Eastman provides life insurance and health
care benefits for eligible retirees and health care benefits for retirees'
eligible survivors. The costs and obligations related to these benefits reflect
the Company's assumptions related to general economic conditions (particularly
interest rates), expected return on plan assets, and rate of compensation
increase for employees. Projected health care benefits additionally reflect the
Company's assumptions about health care cost trends. The cost of providing plan
benefits depends on demographic assumptions including retirements, mortality,
turnover, and plan participation. If actual experience differs from these
assumptions, the cost of providing these benefits could increase or decrease.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the management of
its exposures to fluctuations in foreign currency, raw materials and energy
costs, and interest rates. Such instruments are used to mitigate the risk that
changes in exchange rates or raw materials and energy costs will adversely
affect the eventual dollar cash flows resulting from the hedged transactions.
The Company enters into forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies and currency options to hedge
probable anticipated, but not yet committed, export sales and purchase
transactions expected within no more than 2 years and denominated in foreign
currencies (principally the British pound, Canadian dollar, euro, and the
Japanese yen). To mitigate short-term fluctuations in market prices for propane
and natural gas (major raw materials and energy used in the manufacturing
process), the Company enters into forwards and options contracts. From time to
time, the Company also utilizes interest rate derivative instruments, primarily
swaps, to hedge the Company's exposure to movements in interest rates.
The Company's forwards and options contracts are accounted for as hedges because
the derivative instruments are designated and effective as hedges and reduce the
Company's exposure to identified risks. Gains and losses resulting from
effective hedges of existing assets, liabilities, firm commitments, or
anticipated transactions are deferred and recognized when the offsetting gains
and losses are recognized on the related hedged items and are reported as a
component of operating earnings.
Deferred currency option premiums are generally included in other noncurrent
assets and are amortized over the life of the contract. The related obligation
for payment is generally included in other liabilities and is paid in the period
in which the options are exercised or expire and forward exchange contracts
mature.
On January 1, 2001 the Company adopted SFAS No. 133, as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The adoption of SFAS No. 133, as amended by SFAS No. 138, has not had a material
impact on the results of operations. Instruments with a fair value of
approximately $30 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. In addition, 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 stockholders' equity, and
an after-tax gain of $4 million included in net earnings as of January 1, 2001.
62
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS
The Company includes in other noncurrent assets its investments in joint
ventures which are managed as integral parts of the Company's operations and
accounted for on the equity basis. Eastman's negative investment in Primester,
described in Note 4 to the consolidated financial statements, is included in
other long-term liabilities. The Company includes its share of earnings and
losses of such joint ventures in other income and charges.
Marketable securities held by the Company, currently common or preferred stock,
are deemed by management to be available-for-sale and are reported at fair
value, with net unrealized gains or losses reported as a component of other
comprehensive income (loss) in stockholders' equity. Realized gains and losses
are included in earnings and are derived using the specific identification
method for determining the cost of securities. The Company includes these
investments in other noncurrent assets.
Other equity investments, for which fair values are not readily determinable,
are carried at historical cost and are included in other noncurrent assets.
The Company records an investment impairment charge when it believes a business
venture investment, accounted for by the Company as a marketable security or
recorded at historical cost, has experienced a decline in value that is other
than temporary.
OTHER INCOME AND OTHER CHARGES
Included in other income and other charges are results from equity investments,
gains or losses on sales of nonoperating assets, royalty income, gains or losses
on foreign exchange transactions, certain litigation costs, fees on securitized
receivables, and other miscellaneous items. Material amounts are separately
presented in the Consolidated Statements of Earnings (Loss) and Comprehensive
Income (Loss).
EARNINGS PER SHARE
Basic earnings (loss) per share reflect reported earnings divided by the
weighted average number of common shares outstanding. Diluted earnings per share
include the effect of dilutive stock options outstanding during the year.
INCOME TAXES
Deferred income taxes, reflecting the impact of temporary differences between
the assets and liabilities recognized for financial reporting purposes and
amounts recognized for tax purposes, are based on tax laws currently enacted.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," Eastman
continues to apply intrinsic value accounting for its stock option plans.
Compensation cost for stock options, if any, is measured as the excess of the
quoted market price of the stock at the date of grant over the amount an
employee must pay to acquire the stock. The Company's pro forma net earnings and
pro forma earnings per share based upon the fair value at the grant dates for
awards under Eastman's plans are disclosed in Note 11.
RECOGNITION OF GAINS OR LOSSES ON SUBSIDIARY OR AFFILIATE STOCK SALES
Gain and losses on subsidiary or affiliate stock sales are recorded in other
income or other charges and are separately disclosed in the Statements of
Earnings (Loss) and Comprehensive Income (Loss).
COMPENSATED ABSENCES
The Company accrues compensated absences and related benefits as current charges
to earnings.
63
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPUTER SOFTWARE COSTS
Capitalized software costs are amortized on a straight-line basis over three
years, the expected useful life of such assets, beginning when the software
project is substantially complete and placed in service. In 2001, 2000, and
1999, approximately $28 million, $21 million, and $24 million, respectively,
were capitalized. Of those amounts, approximately $16 million, $9 million, and
$2 million, respectively, were amortized.
ENVIRONMENTAL COSTS
The Company accrues environmental costs when it is probable that the Company has
incurred a liability and the amount can be reasonably estimated. Estimated costs
associated with closure/postclosure are accrued over the facilities' estimated
remaining useful lives which are currently estimated to extend over 50 years.
The amount accrued reflects the Company's assumptions about remedial
requirements at the contaminated site, the nature of the remedy, the outcome of
discussions with regulatory agencies and other potentially responsible parties
at multi-party sites, and the number and financial viability of other
potentially responsible parties. Changes in the estimates on which the accruals
are based, unanticipated government enforcement action, or changes in chemical
control regulations and testing requirements could result in higher or lower
costs.
When a single amount cannot be reasonably estimated but the cost can be
estimated within a range, the Company accrues the minimum amount unless another
amount within the range appears to be a better estimate. At December 31, 2001
and 2000, the minimum or best estimate of environmental contingencies was
approximately $80 million. At December 31, 2001 and 2000, the Company had
recognized environmental contingencies of approximately $54 million and $49
million, respectively, representing the minimum or best estimate for remediation
costs and closure/postclosure costs accrued to date over the facilities'
estimated useful lives.
Accruals for environmental liabilities are included in other long-term
liabilities at undiscounted amounts and exclude claims for recoveries from
insurance companies or other third parties. Environmental costs are capitalized
if they extend the life of the related property, increase its capacity, and/or
mitigate or prevent future contamination. The cost of operating and maintaining
environmental control facilities is charged to expense.
LITIGATION AND CONTINGENT LIABILITIES
The Company's operations from time to time are parties to or targets of
lawsuits, claims, investigations, and proceedings, including product liability,
personal injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
handled and defended in the ordinary course of business. The Company accrues a
liability for such matters when it is probable that a liability has been
incurred and the amount can be reasonably estimated.
COMPREHENSIVE INCOME
Components of other comprehensive income (loss) include cumulative translation
adjustments, additional minimum pension liabilities, unrecognized gains or
losses on investments, and mark-to-market gains or losses on qualifying foreign
exchange contracts and commodity contracts. Amounts of other comprehensive
income (loss) are presented net of applicable taxes. Because cumulative
translation adjustments are considered a component of permanently invested
unremitted earnings of subsidiaries outside the United States, no taxes are
provided on such amounts.
64
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NONRECURRING ITEMS
It is the Company's policy to identify as a "nonrecurring item" a material
charge or gain that is not associated with on-going operations or that is caused
by unique events not reflective of the Company's normal business activities in
the period if such items individually or in the aggregate have a material impact
on a specific line item in the Consolidated Statements of Earnings (Loss) or
have a material impact on results overall. The Company believes that separately
reporting such charges or gains enhances transparency and comparability of
results by removing distortion that would otherwise occur. Examples of such
items that have been separately identified in the past under this policy include
material charges or gains resulting from asset impairments and restructuring of
operations, including employee terminations; litigation not related to on-going
operations; discontinued businesses; and acquisition charges including those
related to acquired in-process research and development. Nonrecurring items are
appropriately identified in the Consolidated Statements of Earnings (Loss).
RECLASSIFICATIONS
The Company has reclassified certain 2000 and 1999 amounts to conform to the
2001 presentation.
2. INVENTORIES
DECEMBER 31,
(Dollars in millions) 2001 2000
----- -----
At FIFO or average cost (approximates current cost)
Finished goods $ 569 $ 496
Work in process 168 150
Raw materials and supplies 210 209
----- -----
Total inventories 947 855
Reduction to LIFO value (288) (275)
----- -----
Total inventories at LIFO value $ 659 $ 580
===== =====
Inventories valued on the LIFO method were approximately 70% of total
inventories in each of the periods.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
DECEMBER 31,
(Dollars in millions) 2001 2000
------- -------
Balance at beginning of year $ 9,039 $ 8,820
Additions
Capital expenditures 234 226
Acquisitions 257 261
Deductions (228) (268)
------- -------
Balance at end of year $ 9,302 $ 9,039
======= =======
Properties
Land $ 74 $ 64
Buildings and building equipment 894 846
Machinery and equipment 8,161 7,985
Construction in progress 173 144
------- -------
Balance at end of year $ 9,302 $ 9,039
======= =======
65
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED DEPRECIATION
DECEMBER 31,
(Dollars in millions) 2001 2000
------ -------
Balance at beginning of year $5,114 $ 4,870
Provision for depreciation 385 382
Additions (deductions) 176 (138)
------ -------
Balance at end of year $5,675 $ 5,114
====== =======
Construction-period interest of $345 million and $340 million, reduced by
accumulated depreciation of $198 million and $171 million, is included in cost
of properties at December 31, 2001 and 2000, respectively.
Depreciation expense was $385 million, $382 million, and $368 million, for 2001,
2000, and 1999, respectively.
4. EQUITY INVESTMENTS AND OTHER NONCURRENT ASSETS AND LIABILITIES
Eastman owns 25 million shares, or approximately 42%, of the outstanding common
shares of Genencor International, Inc. ("Genencor") a company engaged in the
discovery, development, manufacture, and marketing of biotechnology products for
the industrial chemicals, agricultural, and health care markets. Prior to its
initial public offering in July 2000, Genencor was a joint venture in which
Eastman owned a 50% interest.
In the second quarter 2000, Genencor completed an initial public offering of
8,050,000 shares of its common stock at a price of $18 per share. Net proceeds
to Genencor from the sale of the shares of common stock were approximately $135
million.
As a result of this initial public offering, Eastman recorded a gain of $38
million due to the change in the Company's percentage ownership interest in
Genencor. This investment is accounted for under the equity method and is
included in other noncurrent assets. At December 31, 2001, 2000, and 1999, the
Company's investment in Genencor, including preferred stock, was $217 million,
$209 million, and $157 million, respectively.
Eastman has a 50% interest in and serves as the operating partner in Primester,
a joint venture engaged in the manufacture of cellulose esters at its Kingsport,
Tennessee plant, accounted for by the equity method. The Company guarantees up
to $125 million of the principal amount of the joint venture's third-party
borrowings; however, management believes, based on current facts and
circumstances and the structure of the venture, that the likelihood of a payment
pursuant to such guarantee is remote. Eastman had a negative investment in the
joint venture of approximately $40 million at December 31, 2001 and 2000,
representing the recognized portion of the venture's accumulated deficits that
it has a commitment to fund as necessary. Such amounts are included in other
long-term liabilities. The Company provides certain utilities and general plant
services to the joint venture. In return for Eastman providing those services,
the joint venture paid Eastman a total of $39 million in three equal
installments in 1991, 1992, and 1993. Eastman is amortizing the deferred credit
to earnings over the 10-year period of the utilities and plant services
contract.
66
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PAYABLES AND OTHER CURRENT LIABILITIES
DECEMBER 31,
(Dollars in millions) 2001 2000
---- ------
Trade creditors $438 $ 526
Accrued payrolls, vacation, and variable-incentive
compensation 160 201
Accrued taxes 70 95
Interest payable 45 51
Deferred gain on currency options -- 72
Other 191 207
---- ------
Total $904 $1,152
==== ======
6. BORROWINGS
DECEMBER 31,
(Dollars in millions) 2001 2000
------ ------
Short-term borrowings
Notes payable $ 54 $ 106
------ ------
Total short-term borrowings 54 106
------ ------
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
Credit facility and commercial paper borrowings 637 400
Other 13 21
------ ------
Total long-term borrowings 2,143 1,914
------ ------
Total borrowings $2,197 $2,020
====== ======
Eastman has access to an $800 million revolving credit facility (the "Credit
Facility") expiring in July 2005. Any borrowings under the Credit Facility are
subject to interest at varying spreads above quoted market rates, principally
LIBOR. The Credit Facility requires facility fees on the total commitment that
vary based on Eastman's credit rating. The rate for such fees was 0.15% and
0.125% as of December 31, 2001 and December 31, 2000, respectively. The Credit
Facility contains a number of covenants and events of default, including the
maintenance of certain financial ratios. Eastman was in compliance with all such
covenants for all periods.
Eastman typically utilizes commercial paper, generally with maturities of 90
days or less, to meet its liquidity needs. The Credit Facility provides
liquidity support for commercial paper borrowings and general corporate
purposes. Accordingly, outstanding commercial paper borrowings reduce borrowings
available under the Credit Facility. Because the Credit Facility expires in July
2005, the commercial paper borrowings are classified as long-term borrowings
because the Company has the ability to refinance such borrowings long term. As
of December 31, 2001, the Company's Credit Facility and commercial paper
borrowings were $637 million at an effective interest rate of 3.17%. At December
31, 2000, the Company's outstanding balance of commercial paper was $400 million
at an effective interest rate of 7.12%.
67
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY
(Dollars in millions) 2001 2000 1999
------------ ------------ ------------
Common stock at par value $ 1 $ 1 $ 1
------------ ------------ ------------
Paid-in capital
Balance at beginning of year 100 95 94
Additions 18 5 1
------------ ------------ ------------
Balance at end of year 118 100 95
Retained earnings 1,952 2,266 2,098
------------ ------------ ------------
Accumulated other comprehensive income (loss)
Balance at beginning of year (117) (54) (18)
Change in cumulative translation adjustment (24) (66) (46)
Change in unfunded minimum pension liability (106) 4 7
Change in other items (4) (1) 3
------------ ------------ ------------
Balance at end of year (251) (117) (54)
Treasury stock at cost (442) (438) (381)
------------ ------------ ------------
Total $ 1,378 $ 1,812 $ 1,759
============ ============ ============
Shares of common stock issued(1)
Balance at beginning of year 84,739,902 84,512,004 84,432,114
Issued for employee compensation and benefit plans 313,447 227,898 79,890
------------ ------------ ------------
Balance at end of year 85,053,349 84,739,902 84,512,004
============ ============ ============
(1) Includes shares held in treasury.
The Company has authority to issue 400 million shares of all classes of stock,
of which 50 million may be preferred stock, par value $0.01 per share, and 350
million may be common stock, par value $0.01 per share. The Company declared
dividends of $1.76 per share in 2001, 2000, and 1999, respectively.
The Company established a benefit security trust in 1997 to provide a degree of
financial security for unfunded obligations under certain plans. At December 31,
2001, the Company had contributed to the trust a warrant to purchase up to
1,000,000 shares of common stock of the Company for par value. The warrant is
exercisable by the trustee if the Company does not meet certain funding
obligations, which obligations would be triggered by certain occurrences,
including a change in control or potential change in control, as defined, or
failure by the Company to meet its payment obligations under covered unfunded
plans. Such warrant is excluded from the computation of diluted earnings per
share because the conditions upon which the warrant is exercisable have not been
met.
The additions to paid-in capital for the three years are primarily the result of
exercises of stock options by employees.
The Company repurchased 77,069 shares of Eastman common stock at a cost of
approximately $4 million, or an average price of approximately $53 per share, in
2001. This repurchase was the result of a reverse/forward stock split of the
Company's common stock which was approved by the stockholders on May 3, 2001 in
order to consolidate small shareholdings and reduce administrative costs. The
Company also repurchased 1,575,000 shares at a cost of approximately $57
million, or an average price of approximately $36 per share, in 2000 and
1,094,800 shares at a cost of approximately $50 million, or an average price of
approximately $46 per share, in 1999. Repurchased common shares may be used to
meet common stock requirements for benefit plans and other corporate purposes.
68
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's charitable foundation held 158,424 shares of Eastman common stock
at December 31, 2001, 2000, and 1999.
For 2001, 2000, and 1999, respectively, the weighted average number of common
shares outstanding used to compute basic earnings per share was 76.8 million,
76.8 million, and 78.2 million, and for diluted earnings per share was 76.8
million, 77.0 million, and 78.4 million, reflecting the effect of dilutive
options outstanding. As a result of the net loss reported for 2001, common
shares underlying all options were excluded from the calculation of diluted
earnings (loss) per share. Excluded from the 2001 calculation were shares
underlying options to purchase 7,006,410 shares of common stock at a range of
prices from $33.01 to $73.94. Excluded from the 2000 and 1999 calculations were
shares underlying options to purchase 3,899,076 shares of common stock at a
range of prices from $45.34 to $74.25 and 2,331,341 shares of common stock at a
range of prices from $48.44 to $74.25, 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
stockholders 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. As a result of the
net loss reported for 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 December 31, 2000 and 1999, respectively, 149,240
shares and 45,920 shares underlying such options were included in diluted
earnings per share calculations as a result of the stock price conditions for
vesting being met. These performance-based stock options expired on December 31,
2001.
Additionally, 200,000 shares underlying an option issued to the Chief Executive
Officer in 1997 were excluded from diluted earnings per share calculations
because the stock price conditions to exercise had not been met as to any of the
shares as of December 31, 2001, 2000, and 1999.
8. ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES
(Dollars in millions) 2001 2000 1999
---- ---- ----
ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES $396 $13 $52
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, a
charge of $108 million, representing the remaining net book value, 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.
WRITE-OFF OF IMPAIRED POLYETHYLENE ASSETS
During the second quarter 2001, management identified and announced certain
assets that were intended to be spun-off at year-end 2001 related to the
Company's efforts to spin-off the specialty chemicals and plastics businesses.
An indirect result of these decisions would have been that the continuing
operations would have been required to purchase certain raw materials and
utilities that were historically produced internally for use in the manufacture
of polyethylene. Considering the purchase price of these raw materials and
utilities, the carrying value of certain assets used to consume ethylene at the
Longview facility in the manufacture of polyethylene exceeded the expected
future cash flows attributable to such assets.
Subsequent to the second quarter, the spin-off was canceled. However,
management determined that the continued operation of these assets was not
economically attractive and is anticipating reversing the flow of pipelines at
69
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Longview facility to provide an alternate outlet for the excess ethylene,
and allowing for the shutdown of the impaired assets. Based upon the resulting
cash flows from the probable future use of these assets, an impairment loss of
$103 million was charged to the Polymers segment's earnings during the second
quarter 2001. The impairment represents the excess of the carrying value over
the discounted estimated future cash flows related to the products produced by
the impacted assets.
RESTRUCTURING AND ASSET IMPAIRMENTS OF THE FINE CHEMICALS PRODUCT LINE
As a result of the on-going restructuring of the Company's fine chemicals
product line, Eastman recorded restructuring charges, including related asset
write-downs, totaling approximately $70 million in 2001. These charges resulted
from the Company's on-going restructuring of its fine chemicals product line to
reduce costs and to write down assets determined to be impaired. The
restructuring initiative and related asset impairments involve the Company's
Performance Chemicals and Intermediates ("PCI") 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.
Charges in the fourth quarter and the third quarter 2001 of $1 million and $6
million, respectively, pertained primarily to severance accruals for employees
impacted by the plant shutdowns, closure costs, and write-downs of fixed assets.
In the second quarter 2001, a charge of $63 million pertained primarily to
write-downs of fixed assets associated with product lines that the Company will
no longer pursue, net of the effect of a reversal of a customer deposit related
to the impacted assets, and write-downs of other long-term deposits. The assets
will be used to meet current contractual requirements and then be idled. 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 AND ASSET IMPAIRMENTS OF THE CASPI SEGMENT
Consolidation and restructuring of the operations of the CASPI segment resulted
in restructuring charges, including related asset write-downs, of approximately
$77 million in 2001. In the fourth quarter 2001, the Company recognized a charge
of approximately $27 million related to the closure of an operating site in
Duesseldorf, Germany that was obtained in the acquisition of Jager. Also in the
fourth quarter 2001, charges of approximately $6 million and $3 million,
respectively, were recognized related to the impairment of other operating
assets in North America and Europe. In the third quarter 2001, the Company
recognized a charge of approximately $21 million related to the closure of a
Moundville, Alabama plant that was obtained in the acquisition of Lawter
International, Inc. ("Lawter"). In the second quarter 2001, the Company
recognized a charge of approximately $20 million related to the closure of
plants in Philadelphia, Pennsylvania and Portland, Oregon that were obtained in
the acquisition of McWhorter Technologies, Inc. ("McWhorter").
The restructuring charges include write-downs of the fixed assets at these
facilities, severance accruals for employees impacted by the plant shutdowns,
and other costs associated with closing the facilities. The Philadelphia and
Portland facilities were closed in 2001, and the Moundville, Duesseldorf, and
European sites are expected to close in the first half of 2002. The North
American site is expected to close in mid-2003. 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.
OTHER ASSET IMPAIRMENTS AND RESTRUCTURING COSTS
During 2001, the Company recorded asset impairment charges related to
under-utilized assets including $10 million related to the discontinuation of
the precolored-green PET product line in Kingsport, Tennessee; $10 million
related to cessation of production at the Company's solid-stating facility in
Toronto, Ontario; $15 million related to deterioration of demand for certain
specialty plastics products produced in Kingsport, Tennessee; and $3 million
related to impaired assets in Europe. Approximately $20 million of these charges
are reflected in the Polymers segment, $15 million in the Specialty Plastics
("SP") segment, and $3 million in the PCI segment. 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.
70
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter 1999, the Company decided to discontinue production at
its sorbates facilities in Chocolate Bayou, Texas. The projected economic
performance and cash flows for this product line were determined to be
insufficient for remaining in this business. In 1999, the Company recorded a
charge to earnings of $17 million for the write-down of plant and equipment used
at the site. In 2000, the Company recorded additional charges of $8 million for
costs associated with exiting this business. Property and equipment used at this
site have been disposed of. These charges were recorded in cost of sales for the
PCI segment.
During 1999, the Company recorded a charge of $10 million for the write-off of
construction in progress related to an epoxybutene ("EpB(R)") plant project that
was terminated and determined to have no future value. This charge was recorded
in cost of sales for the PCI segment.
In the fourth quarter 1999, the Company recorded a charge to earnings of $16
million for the write-off of construction in progress related to a purified
terephthalic acid ("PTA") plant project. This project was terminated due to
unfavorable market conditions and unsuccessful discussions with several
potential buyers of this product. A significant portion of the construction in
progress was determined to have no alternative use and no future value. This
charge was recorded in cost of sales for the Polymers segment.
In first quarter 1999, the Company announced a phase-out of operations at
Distillation Products Industries in Rochester, New York. In 1999, the Company
recorded a charge to earnings of $9 million for costs associated with employee
termination benefits and the write-down of plant and equipment used at the site.
In 2000, the Company recorded an additional charge of $5 million for costs
associated with exiting this site. The property and equipment used at this site
was disposed of during 2001. These charges were recorded in cost of sales for
the PCI segment.
The following table summarizes the charges described above and other less
significant asset impairments and restructuring charges:
BALANCE AT PROVISION/ NONCASH CASH BALANCE AT
(Dollars in millions) JANUARY 1, 1999 ADJUSTMENTS REDUCTIONS REDUCTIONS DECEMBER 31, 1999
--------------- ----------- ---------- ---------- -----------------
Noncash charges $ -- $ 52 $(52) $ -- $ --
Severance costs -- 3 -- -- 3
Site closure costs 8 -- -- (2) 6
---- ---- ---- ---- ----
Total $ 8 $ 55 $(52) $ (2) $ 9
==== ==== ==== ==== ====
BALANCE AT PROVISION/ NONCASH CASH BALANCE AT
JANUARY 1, 2000 ADJUSTMENTS REDUCTIONS REDUCTIONS DECEMBER 31, 2000
--------------- ----------- ---------- ---------- -----------------
Noncash charges $ -- $ -- $ -- $ -- $ --
Severance costs 3 -- -- (3) --
Site closure costs 6 14 -- (10) 10
---- ---- ---- ---- ----
Total $ 9 $ 14 $ -- $(13) $ 10
==== ==== ==== ==== ====
BALANCE AT PROVISION/ NONCASH CASH BALANCE AT
JANUARY 1, 2001 ADJUSTMENTS REDUCTIONS REDUCTIONS DECEMBER 31, 2001
--------------- ----------- ---------- ---------- -----------------
Noncash charges $ -- $373 $(373) $ -- $ --
Severance costs -- 16 -- (6) 10
Site closure costs 10 10 -- (7) 13
---- ---- ----- ---- ----
Total $ 10 $399 $(373) $(13) $ 23
==== ==== ===== ==== ====
71
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. OTHER NONRECURRING ITEMS
As described in Note 1 to the consolidated financial statements, Eastman
identifies as nonrecurring items certain material charges or gains that are not
associated with on-going operations or that are caused by unique events not
reflective of the Company's normal business activities in the period.
Accordingly, certain nonrecurring operating items as well as certain other
nonrecurring items are separately reported for the years 2001, 2000 and 1999.
(Dollars in millions) 2001 2000 1999
---- ---- ----
OTHER NONRECURRING OPERATING ITEMS $ 50 $ 8 $ 65
Other nonrecurring operating items totaling $50 million were recognized in 2001.
These items consisted of approximately $20 million in charges associated with
efforts to spin-off the specialty chemicals and plastics businesses; an $18
million write-down of accounts receivable for credit risks resulting from the
economic crisis in Argentina; a $7 million pension settlement charge; and a $5
million write-off of acquired in-process research and development costs related
to the acquisition of the hydrocarbon resins and select portions of the
rosin-based resins business from Hercules Incorporated ("Hercules Businesses").
Approximately $26 million of these items were reflected in the Polymers segment,
$11 million in the CASPI segment, $7 million in the PCI segment, $4 million in
the SP segment, and $2 million in the Fibers segment.
Other nonrecurring operating items totaling $8 million were recorded in 2000.
Reflected in the CASPI segment was a $9 million charge for costs associated with
the write-off of in-process research and development related to the McWhorter
acquisition, partially offset by a $1 million gain on the sale of certain
assets, reflected in the Polymers segment.
In 1999, other nonrecurring operating items totaling $65 million were
recognized. Of these items, approximately $53 million related to employee
separation and pension settlement charges and $25 million related to the
write-off of acquired in-process research and development costs associated with
the acquisition of Lawter. Nonrecurring operating items totaling approximately
$8 million were recorded related to an increase in the reserve for sorbates
civil litigation and other matters, a loss recognized on an investment, the
write-off of purchased technology which was determined to have no future value,
and other items. A gain of approximately $21 million, reflected in the PCI
segment, was recognized as a result of the reimbursement of previously expensed
pension costs related to Holston Defense Corporation ("Holston"). These items
are reflected in the Company's segments as follows: CASPI $30 million, SP $10
million, Polymers $21 million, Fibers $8 million, and PCI ($4) million.
(Dollars in millions) 2001 2000 1999
---- ---- ----
OTHER NONRECURRING ITEMS $ 20 $ 10 $ (8)
Other nonrecurring items for 2001 totaling $20 million consisted of a $12
million charge for currency losses resulting from the economic crisis in
Argentina and $8 million of sorbates civil litigation settlement costs and other
professional fees.
Other nonrecurring items for 2000 totaling $10 million were recognized for costs
related to sorbates civil litigation.
Other nonrecurring items for 1999 reflected a gain of $8 million from the sale
of certain nonoperating assets.
10. ACQUISITIONS
HERCULES INCORPORATED
On May 1, 2001, the Company completed the asset acquisition of the Hercules
Businesses for approximately $252 million. The facilities acquired are located
in the United States, the Netherlands, and Mexico. Additionally, certain assets
acquired are operated under contracts with Hercules at a shared facility in the
United States.
72
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Hercules 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 of approximately $33 million, which
represents the excess of cost over the fair value of net tangible assets
acquired, were being amortized on a straight-line basis over 17 to 40 years.
Acquired in-process research and development of approximately $8 million was
written off during the second quarter 2001, and subsequently revised to $5
million with a $3 million credit to earnings in the third quarter 2001. Assuming
this transaction had been made at January 1, 2000 and 2001, the consolidated pro
forma results for 2000 and 2001 would not be materially different from reported
results.
MCWHORTER TECHNOLOGIES, INC.
In July 2000, the Company completed its acquisition of 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, were being amortized on a straight-line basis over 11 to 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 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. Efforts will continue to
accumulate additional shares as they become available from the remaining
minority shareholders.
The acquisition of Sokolov was accounted for by the purchase method of
accounting and, accordingly, the results of operations of Sokolov for the period
from February 21, 2000 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 2000 would not be materially different from
reported results.
LAWTER INTERNATIONAL, INC.
In June 1999, the Company completed its acquisition of Lawter for approximately
$370 million (net of $41 million cash acquired) and the assumption of $145
million in debt. Lawter develops, produces, and markets specialty products for
the inks and coatings market.
This transaction, which was funded through available cash and commercial paper
borrowings, was accounted for by the purchase method of accounting. Assets
acquired and liabilities assumed have been recorded at their fair values.
Goodwill and other intangible assets totaling approximately $430 million, which
represents the excess of cost over the fair value of net tangible assets
acquired, were being amortized on a straight-line basis over 5 to 40 years.
Acquired in-process research and development of approximately $25 million was
written off during 1999 after completion of purchase accounting. Assuming this
transaction had been made at January 1, 1999, the consolidated pro forma results
for 1999 would not be materially different from reported results.
73
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 2001 2000 1999
---- ---- ----
Details of acquisitions are as follows:
Fair value of assets acquired $261 $635 $662
Liabilities assumed 4 374 281
---- ---- ----
Net cash paid for acquisitions 257 261 381
Cash acquired in acquisitions -- 4 41
---- ---- ----
Cash paid for acquisitions $257 $265 $422
==== ==== ====
11. STOCK OPTION AND COMPENSATION PLANS
OMNIBUS PLANS
Eastman's 1997 Omnibus Long-Term Compensation Plan (the "1997 Omnibus Plan"),
which is substantially similar to and intended to replace the 1994 Omnibus
Long-Term Compensation Plan (the "1994 Omnibus Plan"), provides for grants to
employees of nonqualified stock options, incentive stock options, tandem and
freestanding stock appreciation rights, performance shares, and various other
stock and stock-based awards. Certain of these awards may be based on criteria
relating to Eastman performance as established by the Compensation and
Management Development Committee of the Board of Directors. No new awards have
been made under the 1994 Omnibus Plan following the effectiveness of the 1997
Omnibus Plan. Outstanding grants and awards under the 1994 Omnibus Plan are
unaffected by the replacement of the 1994 Omnibus Plan with the 1997 Omnibus
Plan. The 1997 Omnibus Plan provides that options can be granted through April
30, 2002, for the purchase of Eastman common stock at an option price not less
than 50% of the per share fair market value on the date of the stock option's
grant. Substantially all grants awarded under the 1994 Omnibus Plan and under
the 1997 Omnibus Plan have been at option prices equal to the fair market value
on the date of grant. Options typically become exercisable 50% one year after
grant and 100% after two years and expire 10 years after grant. There is a
maximum of 7 million shares of common stock available for option grants and
other awards during the term of the 1997 Omnibus Plan. The maximum number of
shares of common stock with respect to one or more options and/or SARs that may
be granted during any one calendar year under the 1997 Omnibus Plan to the Chief
Executive Officer or to any of the next four most highly compensated executive
officers (each a "Covered Employee") is 200,000. The maximum fair market value
of any awards (other than options and SARs) that may be received by a Covered
Employee during any one calendar year under the 1997 Omnibus Plan is $5,000,000.
The Board of Directors adopted Eastman's 2002 Omnibus Long-Term Compensation
Plan on March 7, 2002, subject to approval by stockholders at the 2002 Annual
Meeting. If approved by the stockholders, the 2002 Omnibus Long-Term
Compensation Plan (the "2002 Omnibus Plan") will be effective as of the date of
the Annual Meeting. The 2002 Omnibus Plan is substantially similar to, and is
intended to replace, the 1997 Omnibus Plan. If the 2002 Omnibus Plan becomes
effective, no new awards will be made under the 1997 Omnibus Plan.
DIRECTOR LONG-TERM COMPENSATION PLAN
Eastman's 1999 Director Long-Term Compensation Plan (the "Director Plan"), which
is substantially similar to and intended to replace the 1994 Director Long-Term
Compensation Plan, provides for grants of nonqualified stock options and
restricted shares to nonemployee members of the Board of Directors. No new
awards have been made under the 1994 Director Long-Term Compensation Plan,
following the effectiveness of the 1999 Director Plan. Outstanding grants and
awards under the 1994 Director Long-Term Compensation Plan are unaffected by the
replacement of the 1994 Director Plan with the 1999 Director Plan. Shares of
restricted stock are granted upon the first day of the directors' initial term
of service and nonqualified stock options and shares of restricted stock are
granted each year following the annual meeting of stockholders. The Director
Plan provides that options can be granted through the later of May 1, 2003, or
the date of the annual meeting of stockholders in 2003 for the purchase of
Eastman common stock at an option price not less than the stock's fair market
value on the date of the grant. The options vest in 50% increments on the first
two anniversaries of the grant date. The maximum number of shares of common
stock that shall be available for grant of awards under the Director Plan during
its term is 60,000.
74
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 7, 2002, the Board of Directors adopted, subject to stockholder
approval at the 2002 Annual Meeting, the 2002 Director Long-Term Compensation
Plan. If approved by the stockholders, the 2002 Director Long-Term Compensation
Plan will be effective as of the date of the Annual Meeting. The 2002 Director
Long-Term Compensation Plan is substantially similar to, and intended to
replace, the 1999 Director Long-Term Compensation Plan. If the 2002 Director
Long-Term Compensation Plan becomes effective, no new awards will be made under
the 1999 Director Long-Term Compensation Plan.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
Eastman's 1996 Nonemployee Director Stock Option Plan provides for grants of
nonqualified stock options to nonemployee members of the Board of Directors in
lieu of all or a portion of each member's annual retainer. The Nonemployee
Director Stock Option Plan provides that options may be granted for the purchase
of Eastman common stock at an option price not less than the stock's fair market
value on the date of grant. The options become exercisable six months after the
grant date. The maximum number of shares of Eastman common stock available for
grant under the Plan is 150,000.
STOCK OPTION BALANCES AND ACTIVITY
The Company applies intrinsic value accounting for its stock option plans. If
the Company had elected to recognize compensation expense based upon the fair
value at the grant dates for awards under these plans, the Company's net
earnings (loss) and earnings (loss) per share would be reduced to the unaudited
pro forma amounts following:
(Dollars in millions, except per share amounts) 2001 2000 1999
------ ----- -----
Net earnings (loss) As reported $ (179) $ 303 $ 48
Pro forma (187) 294 45
Basic earnings (loss) per share As reported (2.33) 3.95 0.61
Pro forma (2.43) 3.83 0.58
Diluted earnings (loss) per share As reported (2.33) 3.94 0.61
Pro forma (2.43) 3.82 0.57
The fair value of each option is estimated on the grant date using the
Black-Scholes option-pricing model, which requires input of highly subjective
assumptions. Some of these assumptions used for grants in 2001, 2000, and 1999,
respectively, include: average expected volatility of 27.07%, 26.98%, and
25.48%; average expected dividend yield of 3.67%, 3.84%, and 4.05%; and average
risk-free interest rates of 4.72%, 6.19%, and 5.74%. An expected option term of
six years for all periods was developed based on historical experience
information. The expected term for reloads was considered as part of this
calculation and is equivalent to the remaining term of the original grant at the
time of reload.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
75
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans is presented below:
2001 2000 1999
------------------------- ------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- ---------
Outstanding at beginning of year 5,801,348 $ 50 4,784,957 $ 50 3,865,101 $ 51
Granted 1,608,793 48 1,263,051 45 1,019,977 47
Exercised 330,989 42 202,691 35 81,504 39
Forfeited or canceled 72,742 52 43,969 60 18,617 57
--------- ------ --------- ------ --------- -----
Outstanding at end of year 7,006,410 $ 50 5,801,348 $ 50 4,784,957 $ 50
========= ========= =========
Options exercisable at year-end 4,773,210 3,967,571 3,400,079
========= ========= =========
Weighted-average fair value of
options granted during the year $10.95 $11.06 $9.82
Available for grant at end of year 1,911,557 3,011,978 4,407,371
========= ========= =========
The following table summarizes information about stock options outstanding at
December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/01 LIFE PRICE AT 12/31/01 PRICE
-------- ----------- ----------- -------- ----------- --------
$33-$42 315,690 7.9 Years $ 37 193,790 $ 38
$43-$44 1,278,267 2.1 43 1,277,217 43
$45-$47 1,795,460 7.9 46 1,132,110 46
$48-$63 3,077,297 6.5 53 1,590,397 56
$64-$74 539,696 3.6 65 539,696 65
---------- ---------
7,006,410 5.9 $ 50 4,733,210 $ 50
========== =========
EASTMAN INVESTMENT AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a defined contribution employee stock ownership plan (the
"ESOP"), a qualified plan under Section 401(a) of the Internal Revenue Code,
which is a component of the Eastman Investment and Employee Stock Ownership Plan
("EIP/ESOP"). Eastman anticipates that it will make annual contributions for
substantially all U.S. employees equal to 5% of eligible compensation to the
ESOP, or for employees who have five or more prior ESOP contributions, to either
the Eastman Stock Fund or other investment funds within the Eastman Investment
Plan. Through early 2001, the Company sponsored, for its international
employees, an employee stock ownership plan which was substantially similar to
the ESOP. In March 2001, shares in the international employee stock ownership
plan were distributed to participants in the plan. Allocated shares in the ESOP
totaled 2,840,860, 3,075,739, and 3,249,519 as of December 31, 2001, 2000, and
1999, respectively. Dividends on shares held by the EIP/ESOP are charged to
retained earnings. All shares held by the EIP/ESOP are treated as outstanding in
computing earnings per share.
Charges for contributions to the EIP/ESOP were $38 million, $34 million, and $37
million for 2001, 2000, and 1999, respectively.
76
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EASTMAN PERFORMANCE PLAN
The Eastman Performance Plan (the "EPP") places a portion of each employee's
annual compensation at risk and provides a lump-sum payment to plan participants
based on the Company's financial performance. There were no charges under the
EPP in 2001. Amounts paid under the EPP were $55 million and $3 million for 2000
and 1999, respectively.
ANNUAL PERFORMANCE PLAN
Through 2000, Eastman's managers and executive officers participated in an
Annual Performance Plan (the "APP"), which placed a portion of annual cash
compensation at risk based upon Company performance as measured by specified
annual goals. Amounts paid under the APP for 2000 and 1999 were $3 million and
$13 million, respectively.
UNIT PERFORMANCE PLAN
Beginning in 2000, Eastman managers and executive officers began participating
in a new variable compensation plan, the Unit Performance Plan (the "UPP"),
under which a portion of annual cash compensation is made variable based upon
organizational unit performance and the attainment of individual objectives and
expectations. No amounts were paid under the UPP for 2001. The amount paid under
the UPP for 2000 was $7 million.
Beginning in 2001, the portion of each participant's total pay that was formerly
made variable under the APP is now variable under the UPP.
12. INCOME TAXES
Components of earnings (loss) before income taxes and the provision (benefit)
for U.S. and other income taxes follow:
(Dollars in millions) 2001 2000 1999
----- ---- -----
Earnings (loss) before income taxes
United States $(299) $413 $ 185
Outside the United States 2 39 (113)
----- ---- -----
Total $(297) $452 $ 72
===== ==== =====
Provision (benefit) for income taxes
United States
Current $ (46) $ 69 $ 31
Deferred (68) 60 (14)
Non-United States
Current 9 9 10
Deferred (3) 1 (3)
State and other
Current (3) 4 1
Deferred (7) 6 (1)
----- ---- -----
Total $(118) $149 $ 24
===== ==== =====
77
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Differences between the provision (benefit) for income taxes and income taxes
computed using the U.S. federal statutory income tax rate follow:
2001 2000 1999
------- ------ -----
(Dollars in millions)
Amount computed using the statutory rate $ (104) $ 158 $ 25
State income taxes (6) 6 --
Foreign rate variance (6) 1 7
Foreign sales corporation benefit (4) (11) (7)
ESOP dividend payout (1) (2) (1)
Other 3 (3) --
------- ------ -----
Provision (benefit) for income taxes $ (118) $ 149 $ 24
======= ====== =====
The significant components of deferred tax assets and liabilities follow:
DECEMBER 31,
(Dollars in millions) 2001 2000
------ ------
Deferred tax assets
Postemployment obligations $ 375 $ 299
Payroll and related items 53 47
Deferred revenue 6 13
Miscellaneous reserves 31 31
Preproduction and start-up costs 7 8
Other 48 45
------ ------
Total $ 520 $ 443
====== ======
Deferred tax liabilities
Depreciation $ 752 $ 824
Inventories 13 6
Purchase accounting adjustments 97 103
Other 62 62
------ ------
Total $ 924 $ 995
====== ======
Unremitted earnings of subsidiaries outside the United States, considered to be
reinvested indefinitely, total $335 million at December 31, 2001. It is not
practicable to determine the deferred tax liability for temporary differences
related to those unremitted earnings.
Current income taxes payable totaling $34 million and $67 million are included
in current liabilities at December 31, 2001 and 2000, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
DECEMBER 31, 2001 DECEMBER 31, 2000
RECORDED FAIR RECORDED FAIR
(Dollars is millions) AMOUNT VALUE AMOUNT VALUE
-------- ------- ------- -------
Long-term borrowings $ 2,143 $ 2,168 $ 1,914 $ 1,816
The fair value for fixed-rate borrowings is based on current interest rates for
comparable securities. The Company's floating-rate borrowings approximate fair
value.
78
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
Effective January 1, 2001, the Company adopted 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 stockholders' equity, and an after-tax gain of $4 million included in net
earnings as of January 1, 2001.
At December 31, 2001, the mark-to-market losses from hedging activities included
in other comprehensive income totaled approximately $2 million. This balance is
expected to be reclassified into earnings during 2002. 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 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 material 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. At December 31, 2001, the Company did not
utilize fair value hedges and did not hold or 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 expected within no more than two years and denominated in foreign
currencies (principally the British pound, Canadian dollar, euro, and the
Japanese yen). These contracts are designated as cash flow hedges. The
mark-to-market gains or losses on qualifying hedges are included in other
comprehensive income (loss) 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 gains or
losses on qualifying hedges are included in other comprehensive income (loss) 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 on 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.
79
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS
PURCHASE OBLIGATIONS AND LEASE COMMITMENTS
At December 31, 2001, the Company had various purchase obligations totaling
approximately $1.9 billion over a period of approximately 15 years for
materials, supplies, and energy incident to the ordinary conduct of business.
Approximately $230 million of these obligations will be paid in 2002.
The Company also had various lease commitments for property and equipment under
cancelable, noncancelable, and month-to-month operating leases totaling $239
million over a period of several years. Of the total lease commitments,
approximately 40% relates to machinery and equipment, including computer and
communications equipment and production equipment; approximately 35% relates to
real property, including office space, storage facilities, and land; and
approximately 25% relates to railcars. Future lease payments, reduced by
sublease income, follow:
(Dollars in millions)
Year ending December 31,
2002 $ 55
2003 33
2004 25
2005 19
2006 18
2007 and beyond 89
-------
Total minimum payments required $ 239
=======
If certain operating leases are terminated by the Company, it guarantees a
portion of the residual value loss, if any, incurred by the lessors in disposing
of the related assets. The Company believes, based on current facts and
circumstances, that a material payment pursuant to such guarantees is remote.
Rental expense, net of sublease income, was approximately $83 million in 2001,
2000 and 1999.
OTHER COMMITMENTS
The Company maintains defined benefit plans that provide eligible employees with
retirement benefits. Benefits are paid to employees from trust funds. The
Company contributes to the plans as permitted by laws and regulations. No
contribution to the plans was required in 2001 and the Company anticipates that
none will be required for 2002.
Eastman has long-term commitments relating to a joint venture as described in
Note 4 to the consolidated financial statements. The Company guarantees up to
$125 million of the principal amount of the joint venture's third-party
borrowings, but believes, based on current facts and circumstances and the
structure of the venture, that the likelihood of a payment pursuant to such
guarantee is remote.
In 1999, the Company entered into an agreement that allows the Company to sell
certain domestic accounts receivable under a planned continuous sale program to
a third party. The agreement permits the sale of undivided interests in domestic
trade accounts receivable. Receivables sold to the third party totaled $200
million at December 31, 2001 and 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 certain variable market rate indices and totaled approximately $9 million and
$12 million in 2001 and 2000, respectively. Average monthly proceeds from
collections reinvested in the continuous sale program were approximately $239
million and $235 million in 2001 and 2000, respectively. The portion that
continues to be recognized in the Statements of Financial Position is domestic
trade receivables of $124 million and $85 million at December 31, 2001 and 2000,
respectively.
80
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RETIREMENT PLANS
Eastman maintains defined benefit plans that provide eligible employees with
retirement benefits. Prior to 2000, benefits were calculated using a traditional
defined benefit formula based on age, years of service, and the employees' final
average compensation as defined in the plans. Effective January 1, 2000, the
defined benefit pension plan, the Eastman Retirement Assistance Plan, was
amended. Employees' accrued pension benefits earned prior to January 1, 2000 are
calculated based on previous plan provisions using the employee's age, years of
service, and final average compensation as defined in the plans. The amended
defined benefit pension plan uses a pension equity formula based on age, years
of service, and final average compensation to calculate an employee's retirement
benefit from January 1, 2000 forward. Benefits payable will be the combined
pre-2000 and post-1999 benefits.
Benefits are paid to employees from trust funds. Contributions to the plan are
made as permitted by laws and regulations.
Pension coverage for employees of Eastman's international operations is
provided, to the extent deemed appropriate, through separate plans. The Company
systematically provides for obligations under such plans by depositing funds
with trustees, under insurance policies, or by book reserves.
A summary balance sheet of the change in plan assets during 2001 and 2000, the
funded status of the plans, amount recognized in the Statements of Financial
Position, and the assumptions used to develop the projected benefit obligation
for the Company's U.S. defined pension plans are provided in the following
tables:
SUMMARY BALANCE SHEET
(Dollars in millions) 2001 2000
-------- -------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 920 $ 877
Service cost 32 29
Interest cost 72 68
Actuarial loss 142 47
Curtailments/settlements (12) --
Benefits paid (92) (101)
-------- -------
Benefit obligation, end of year $ 1,062 $ 920
======== =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 869 $ 911
Actual return (loss) on plan assets (83) 47
Acquisitions/divestitures/other receipts -- 5
Benefits paid (89) (94)
-------- -------
Fair value of plan assets, end of year $ 697 $ 869
======== =======
Benefit obligation in excess of plan assets $ 365 $ 51
Unrecognized actuarial gain (329) (43)
Unrecognized prior service cost 116 128
Unrecognized net transition asset 4 8
-------- -------
Net amount recognized, end of year $ 156 $ 144
======== =======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ 156 $ 144
Additional minimum liability 187 16
Accumulated other comprehensive loss (187) (16)
-------- -------
Net amount recognized, end of year $ 156 $ 144
======== =======
81
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eastman's worldwide net pension cost was $27 million, $32 million, and $58
million in 2001, 2000, and 1999, respectively.
A summary of the components of net periodic benefit cost recognized for
Eastman's U.S. defined benefit pension plans follows:
SUMMARY OF BENEFIT COSTS
(Dollars in millions) 2001 2000 1999
------ ------ ------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 32 $ 29 $ 42
Interest cost 72 68 86
Expected return on assets (72) (64) (78)
Amortization of:
Transition asset (4) (4) (6)
Prior service cost (12) (12) (5)
Actuarial loss 4 7 14
------ ------ ------
Net periodic benefit cost $ 20 $ 24 $ 53
====== ====== ======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 7.25% 7.75% 8.15%
Expected return on assets 9.50% 9.50% 9.50%
Rate of compensation increase 4.00% 4.25% 4.50%
As a result of the partial settlement of pension liabilities, the Company
recorded a charge of $7 million and a gain of $12 million in 2001 and 1999,
respectively.
POSTRETIREMENT WELFARE PLANS
Eastman provides life insurance and health care benefits for eligible retirees,
and health care benefits for retirees' eligible survivors. In general, Eastman
provides those benefits to retirees eligible under the Company's U.S. pension
plans.
A few of the Company's non-U.S. operations have supplemental health benefit
plans for certain retirees, the cost of which is not significant to the Company.
82
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the status of the Company's U.S. plans at
December 31, 2001 and 2000:
SUMMARY BALANCE SHEET
(Dollars in millions) 2001 2000
------- ------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 645 $ 587
Service cost 6 5
Interest cost 52 48
Actuarial loss 118 38
Benefits paid (42) (33)
------- ------
Benefit obligation, end of year $ 779 $ 645
======= ======
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 37 $ 41
Actual return on plan assets 3 2
Company contributions 37 26
Benefits paid (42) (32)
------- ------
Fair value of plan assets, end of year $ 35 $ 37
======= ======
Benefit obligation in excess of plan assets $ 744 $ 608
Unrecognized actuarial gain (195) (84)
Unrecognized prior service cost 33 36
------- ------
Net amount recognized, end of year $ 582 $ 560
======= ======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ 582 $ 560
------- ------
Net amount recognized, end of year $ 582 $ 560
======= ======
A 1% increase in health care cost trend would increase the 2001 service and
interest costs by $2 million, and the 2001 benefit obligation by $37 million. A
1% decrease in health care cost trend would decrease the 2001 service and
interest costs by $2 million, and the 2001 benefit obligation by $32 million.
The net periodic postretirement benefit cost follows:
SUMMARY OF BENEFIT COSTS
2001 2000 1999
----- ----- -----
(Dollars in millions)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 6 $ 5 $ 7
Interest cost 52 48 42
Expected return on assets (2) (3) (2)
Amortization of:
Prior service cost (3) (3) (3)
Actuarial loss 5 1 2
----- ----- -----
Net periodic benefit cost $ 58 $ 48 $ 46
===== ===== =====
83
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000 1999
----- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 7.25% 7.75% 8.15%
Expected return on plan assets 9.50% 9.50% 9.00%
Rate of compensation increase 4.00% 4.25% 4.50%
Health care cost trend
Initial 10.00% 7.00% 7.00%
Decreasing to ultimate trend of 5.00% 5.00% 5.25%
in year 2006 2006 2005
16. 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. Approximately 800
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 $7 million, $58
million, and $6 million were paid in 2001, 2000, and 1999, respectively.
17. HOLSTON DEFENSE CORPORATION
Holston, a wholly owned subsidiary of the Company, managed the government-owned
Holston Army Ammunition Plant in Kingsport, Tennessee (the "Facility") under
contract with the Department of Army ("DOA") from 1949 until expiration of the
contract (the "Contract") on December 31, 1998. The DOA awarded a contract to
manage the Facility to a third party effective January 1, 1999.
The Contract provided for reimbursement of allowable costs incurred by Holston.
During the fourth quarter 1999, the DOA reimbursed approximately $20 million of
previously expensed pension costs. This reimbursement was credited to earnings
in the fourth quarter 1999. The Company is continuing to pursue additional
reimbursement from the DOA related to previously expensed employee benefit
costs. If the Company is unable to collect such amount from the DOA, it may be
required to fund these obligations in the future. However, there will be no
material impact to Eastman's results of operations.
18. SEGMENT INFORMATION
The Company's products and operations are managed and reported in five operating
segments. The Chemicals Group includes the CASPI segment; the PCI segment; and
the SP segment. The Polymers Group includes the Polymers segment and the Fibers
segment. During the first quarter 2002, Eastman began managing the Chemicals
Group as Eastman Division and the Polymers Group as Voridian Division
("Voridian").
The CASPI segment manufactures raw materials, additives and specialty polymers
primarily for the paints and coatings, inks and graphic arts and adhesives
markets. The CASPI segment's products consist of binders and resins, liquid
vehicles, pigment concentrates and additives, unsaturated polyester resins and
polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester
resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as
a key component and in paints and inks to form a protective coating or film and
bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol
solvents, maintain the binders in liquid form for ease of application. Pigment
concentrates and additives, such as cellulosic polymers, Texanol(R) coalescing
aid and chlorinated polyolefins, provide different properties or performance
enhancements to the end product. Unsaturated polyester resins are used primarily
in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions
are traditionally used to protect fibers during processing in textile
manufacturing, and the technology is being extended for use in water-based
paints, coatings and inks.
84
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The PCI segment manufactures diversified products that are used in a variety of
environments, including chemicals for agricultural products, fibers, food and
beverage ingredients, photographic chemicals, pharmaceutical intermediates,
polymer compounding and custom synthesis and chemical manufacturing
intermediates. Custom synthesis and photographic chemicals were historically
managed as part of Eastman's fine chemicals product line. The Company believes
it has one of the industry's broadest product offerings, offering custom
manufacturing and high volume manufacturing of complex organic molecules for
customers.
The SP segment produces highly specialized copolyesters and cellulosic plastics
that possess unique performance properties for value-added end uses such as
consumer products, medical devices, electrical connectors, medical packaging,
heavy gauge sheeting for signs and displays, specialty packaging films and tape.
The Polymers segment manufactures a broad line of PET polymers and polyethylene
products for the beverage bottle and consumer and industrial products markets.
PET polymers serve as source products for containers for, among other things,
carbonated soft drinks, water, beer and personal care items, and food containers
that are suitable for both conventional and microwave oven use. The Polymers
segment also manufactures low density polyethylene and linear low density
polyethylene, which are used primarily for packaging and film applications and
in extrusion coated containers such as milk and juice cartons.
The Fibers segment manufactures acetate tow and Estrobond(R) triacetin
plasticizers for the cigarette filter market, acetate yarn for textile markets,
and acetate flake and acetyl raw materials for acetate fibers and plastics uses.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Corporate and certain other costs
are allocated to operating segments using systematic allocation methods
consistently applied. Senior management believes presenting the operating
segments' performance with these costs allocated is appropriate in the
circumstances. Non-operating income and expense, including interest cost, are
not allocated to operating segments.
Sales revenue presented below represents sales to third parties. Intersegment
transfers, recorded at cost, have been eliminated and have no impact on
earnings.
(Dollars in millions) 2001 2000 1999
-------- -------- --------
SALES
Chemicals Group Segments:
Coatings, Adhesives, Specialty Polymers, and Inks $ 1,508 $ 1,176 $ 836
Performance Chemicals and Intermediates 1,132 1,297 1,245
Specialty Plastics 505 550 531
-------- -------- --------
Total 3,145 3,023 2,612
-------- -------- --------
Polymers Group Segments:
Polymers 1,611 1,636 1,344
Fibers 628 633 634
-------- -------- --------
Total 2,239 2,269 1,978
-------- -------- --------
Total Eastman Chemical Company $ 5,384 $ 5,292 $ 4,590
======== ======== ========
85
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 2001 2000 1999
-------- -------- --------
OPERATING EARNINGS (LOSS) (1)
Chemicals Group Segments:
Coatings, Adhesives, Specialty Polymers, and Inks $ (35) $ 123 $ 121
Performance Chemicals and Intermediates (76) 87 (2)
Specialty Plastics 40 103 80
-------- -------- --------
Total (71) 313 199
-------- -------- --------
Polymers Group Segments:
Polymers (201) 99 (104)
Fibers 146 150 107
-------- -------- --------
Total (55) 249 3
-------- -------- --------
Total Eastman Chemical Company $ (126) $ 562 $ 202
======== ======== ========
ASSETS
Chemicals Group Segments:
Coatings, Adhesives, Specialty Polymers, and Inks $ 1,922 $ 1,856 $ 1,390
Performance Chemicals and Intermediates 1,256 1,443 1,497
Specialty Plastics 912 989 1,098
-------- -------- --------
Total 4,090 4,288 3,985
-------- -------- --------
Polymers Group Segments:
Polymers 1,398 1,604 1,634
Fibers 598 658 684
-------- -------- --------
Total 1,996 2,262 2,318
-------- -------- --------
Total Eastman Chemical Company $ 6,086 $ 6,550 $ 6,303
======== ======== ========
DEPRECIATION EXPENSE
Chemicals Group Segments:
Coatings, Adhesives, Specialty Polymers, and Inks $ 102 $ 86 $ 66
Performance Chemicals and Intermediates 80 80 80
Specialty Plastics 64 63 64
-------- -------- --------
Total 246 229 210
-------- -------- --------
Polymers Group Segments:
Polymers 94 104 107
Fibers 45 49 51
-------- -------- --------
Total 139 153 158
-------- -------- --------
Total Eastman Chemical Company $ 385 $ 382 $ 368
======== ======== ========
CAPITAL EXPENDITURES
Chemicals Group Segments:
Coatings, Adhesives, Specialty Polymers, and Inks $ 36 $ 55 $ 34
Performance Chemicals and Intermediates 55 46 92
Specialty Plastics 44 30 35
-------- -------- --------
Total 135 131 161
-------- -------- --------
Polymers Group Segments:
Polymers 67 71 95
Fibers 32 24 36
-------- -------- --------
Total 99 95 131
-------- -------- --------
Total Eastman Chemical Company $ 234 $ 226 $ 292
======== ======== ========
(1) Operating earnings (loss) includes the impact of nonrecurring items
described in Notes 8 and 9 to the consolidated financial statements.
86
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GEOGRAPHIC INFORMATION
(Dollars in millions) 2001 2000 1999
-------- -------- --------
REVENUES
United States $ 2,984 $ 3,016 $ 2,662
All foreign countries 2,400 2,276 1,928
-------- -------- --------
Total $ 5,384 $ 5,292 $ 4,590
======== ======== ========
LONG-LIVED ASSETS, NET
United States $ 2,760 $ 3,009 $ 3,036
All foreign countries 867 916 914
-------- -------- --------
Total $ 3,627 $ 3,925 $ 3,950
======== ======== ========
Revenues are attributed to countries based on customer location. No individual
foreign country is material with respect to revenues or long-lived assets.
19. SUPPLEMENTAL CASH FLOW INFORMATION
(Dollars in millions) 2001 2000 1999
------ ------ ------
Cash paid for interest and income taxes is as follows:
Interest (net of amounts capitalized) $ 152 $ 142 $ 117
Income taxes (7) 90 (4)
Cash flows from operating activities include gains from equity investments of $6
million, $15 million, and $10 million for 2001, 2000, and 1999, respectively.
Derivative financial instruments and related gains and losses are included in
cash flows from operating activities. The effect on cash of foreign currency
transactions and exchange rate changes for all years presented was
insignificant.
20. ENVIRONMENTAL MATTERS
Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes,
of which the treatment, storage, transportation, and disposal are regulated by
various governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP"), by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be required to
incur costs for environmental remediation and closure/postclosure under the
federal Resource Conservation and Recovery Act. Adequate reserves for
environmental contingencies have been established in accordance with Eastman's
policies described in Note 1. Because of expected sharing of costs, the
availability of legal defenses, and the Company's preliminary assessment of
actions that may be required, it does not believe its liability for these
environmental matters, individually or in the aggregate, will be material to the
Company's consolidated financial position, results of operations, or competitive
position.
87
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. LEGAL MATTERS
GENERAL
The Company and its operations from time to time 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 its overall financial
condition or results of operations. However, adverse developments could
negatively impact earnings in a particular future period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, the Company entered into a
voluntary plea agreement with the U.S. Department of Justice and agreed to pay
an $11 million fine to resolve a charge brought against the Company for
violation of Section One of the Sherman Act. Under the agreement, the Company
entered a plea of guilty to one count of price-fixing for sorbates, a class of
food preservatives, from January 1995 through June 1997. The plea agreement was
approved by the United States District Court for the Northern District of
California on October 21, 1998. The Company recognized the entire fine in the
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 26 antitrust lawsuits, in various federal and state courts, brought
subsequent to the Company's plea agreements as putative class actions on behalf
of certain direct and indirect 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. 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 has reached final or preliminary settlements in 20
of the 26 direct and indirect purchaser class actions. The six remaining class
actions are in the preliminary discovery stage, with no litigation class having
been certified to date.
Of the 26 antitrust lawsuits, the Company was included as one of several
defendants in two separate lawsuits concerning sorbates 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.
All of these plaintiffs were direct purchasers of sorbates from one or more of
the defendants and had elected to opt out of the direct purchaser class action
settlement and pursue their claims on their own. The Company has reached
settlements in these two actions as well. In addition, several indirect
purchasers of products containing sorbates have recently opted out of the
indirect purchaser class action settlement, finally approved in Kansas and have
filed a separate action against the Company and other sorbates producers in
Kansas state court.
The Company recognized charges to earnings in each of the last four years for
estimated costs, including legal fees, related to the sorbates litigation
described above. While the Company intends to continue vigorously to defend the
remaining sorbates actions unless they can be settled on terms acceptable to the
parties, the ultimate outcome of the matters still pending is not expected to
have a material impact on the Company's financial condition or results of
operations although these matters could result in the Company being subject to
additional monetary damages, costs or expenses and additional charges against
earnings.
88
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
FIRST SECOND THIRD FOURTH
(Dollars in millions, except per share amounts) QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
2001(1)
Sales $ 1,344 $ 1,402 $ 1,367 $ 1,271
Gross profit 232 253 233 169
Operating earnings (loss) 96 (200) 64 (86)
Earnings (loss) before income taxes 55 (243) 33 (142)
Provision (benefit) for income taxes 18 (96) 10 (50)
Net earnings (loss) 37 (147) 23 (92)
Basic earnings (loss) per share (3) 0.48 (1.92) 0.31 (1.20)
Diluted earnings (loss) per share (3) 0.48 (1.92) 0.31 (1.20)
2000(2)
Sales $ 1,217 $ 1,316 $ 1,387 $ 1,372
Gross profit 250 298 295 235
Operating earnings 132 173 154 103
Earnings before income taxes 102 128 145 77
Provision for income taxes 34 42 48 25
Net earnings 68 86 97 52
Basic earnings per share (3) 0.88 1.12 1.27 0.68
Diluted earnings per share (3) 0.88 1.12 1.27 0.68
(1) Results for the second quarter 2001 include charges totaling $294
million related to restructuring and asset impairments; $8 million for
the write-off of in-process research and development related to the
acquired Hercules Businesses; and $4 million related to efforts to
spin-off the specialty chemicals and plastics businesses.
Results for the third quarter 2001 include charges totaling $27 million
related to restructuring and asset impairments; $5 million related to
efforts to spin-off the specialty chemicals and plastics businesses; $2
million related to other professional services; offset by a $3 million
adjustment to the write-off of in-process research and development
related to the acquired Hercules Businesses.
Results for the fourth quarter 2001 include charges totaling $75
million related to restructuring and asset impairments; $30 million
related to currency losses and the write-down of accounts receivable
for credit risks resulting from the economic crisis in Argentina; $11
million related to efforts to spin-off the specialty chemicals and
plastics businesses; $7 million related to pension settlement; and $6
million related to sorbates civil litigation.
For additional information on 2001 nonrecurring items, see Notes 8 and
9 to the consolidated financial statements.
(2) Results for the second quarter 2000 include restructuring charges
totaling $9 million; a charge of $10 million related to sorbates civil
litigation; and a $1 million gain on the sale of certain assets.
Results for the third quarter 2000 include restructuring charges of $4
million; a charge of $9 million for the write-off of in-process
research and development related to the McWhorter acquisition; and a
gain of $38 million related to the initial public offering of Genencor.
For additional information on 2000 nonrecurring items, see Notes 8 and
9 to the consolidated financial statements.
(3) Each quarter is calculated as a discrete period; the sum of the four
quarters may not equal the calculated full-year amount.
89
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. SUBSEQUENT EVENTS
ACQUISITION OF ARIEL RESEARCH CORPORATION
In January 2002, Eastman acquired Ariel Research Corporation ("Ariel"), a world
leader in chemical regulatory compliance products and services, for
approximately $8 million. Headquartered in Bethesda, Maryland, Ariel is a
leading provider of worldwide regulatory information and software products that
enable corporations to manage product safety and stewardship functions,
including requirements for workplace, environmental and dangerous goods
compliance. Its customers include major global corporations for chemical,
pharmaceutical, consumer products, aerospace, electronics and telecommunications
markets.
DEVALUATION OF ARGENTINA PESO
As a result of the continuing economic crisis in Argentina, the peso has
continued to devalue during the early part of 2002 and is currently at an
approximate exchange rate of 2 to 1 with the U.S. dollar. This continued
devaluation of the peso will result in an additional charge against earnings in
the first quarter 2002 of approximately $6 million to $9 million.
90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
91
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the heading "Proposals to be Voted Upon at the Annual
Meeting--Item 1--Election of Directors," (except for the material under the
subheading "Board Committees--Audit Committee--Audit Committee Report", which is
not incorporated by reference herein) and in Note (12) to the Summary
Compensation Table under the heading "Executive Compensation--Compensation
Tables", in the to be filed definitive 2002 Proxy Statement is incorporated by
reference herein in response to this Item. Certain information concerning
executive officers of the Company is set forth under the heading "Executive
Officers of the Company" in Part I of this Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
The material under the headings "Proposals to be Voted Upon at the Annual
Meeting--Item 1--"Election of Directors--Director Compensation" in the to be
filed definitive 2002 Proxy Statement is incorporated by reference herein in
response to this Item. In addition, the material under the heading "Executive
Compensation" in the to be filed definitive 2002 Proxy Statement is incorporated
by reference herein in response to this Item, except for the material under the
subheadings "--Compensation and Management Development Committee Report on
Executive Compensation" and "--Performance Graph," which are not incorporated by
reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The material under the headings "Stock Ownership of Directors and Executive
Officers--Common Stock" and "Stock Ownership of Certain Beneficial Owners" in
the to be filed definitive 2002 Proxy Statement is incorporated by reference
herein in response to this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no transactions or relationships since the beginning of the last
completed fiscal year required to be reported in response to this Item.
92
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
PAGE
(a) 1. Consolidated financial statements:
Management's responsibility for financial statements 55
Report of independent accountants 56
Consolidated statements of earnings (loss), comprehensive income
(loss), and retained earnings 57
Consolidated statements of financial position 58
Consolidated statements of cash flows 59
Notes to consolidated financial statements 60-90
2. Financial statement schedules
II - Valuation and Qualifying Accounts 151
3. Exhibits filed as part of this report are listed in the Exhibit
Index beginning at page 96.
(b) Report on Form 8-K
On November 26, 2001, Eastman filed a report on Form 8-K
announcing that the Company was delaying the previously announced
spin-off of its specialty chemicals and plastics businesses.
(c) The Exhibit Index and required Exhibits to this report are included
beginning at page 96.
(d) II -- Valuation and Qualifying Accounts 151
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Eastman Chemical Company
By: /s/ J. Brian Ferguson
----------------------------------------
J. Brian Ferguson
Chairman of the Board and Chief
Executive Officer
Date: March 7, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
------------------------------------------------- ---------------------------------- -------------------
PRINCIPAL EXECUTIVE OFFICER:
/s/ J. Brian Ferguson Chairman of the Board and March 7, 2002
------------------------------------------------- Chief Executive Officer
J. Brian Ferguson
PRINCIPAL FINANCIAL OFFICER:
/s/ James P. Rogers Senior Vice President and March 7, 2002
------------------------------------------------- Chief Financial Officer
James P. Rogers
PRINCIPAL ACCOUNTING OFFICER:
/s/ Mark W. Joslin Vice President and Controller March 7, 2002
-------------------------------------------------
Mark W. Joslin
94
DIRECTORS:
SIGNATURE TITLE DATE
------------------------------------------------- ---------------------------------- -------------------
/s/ H. Jesse Arnelle Director March 7, 2002
-------------------------------------------------
H. Jesse Arnelle
/s/ Calvin A. Campbell, Jr. Director March 7, 2002
-------------------------------------------------
Calvin A. Campbell, Jr.
/s/ Jerry E. Dempsey Director March 7, 2002
-------------------------------------------------
Jerry E. Dempsey
/s/ John W. Donehower Director March 7, 2002
-------------------------------------------------
John W. Donehower
/s/ Donald W. Griffin Director March 7, 2002
-------------------------------------------------
Donald W. Griffin
/s/ Marilyn R. Marks Director March 7, 2002
-------------------------------------------------
Marilyn R. Marks
/s/ David W. Raisbeck Director March 7, 2002
-------------------------------------------------
David W. Raisbeck
/s/ John A. White Director March 7, 2002
-------------------------------------------------
John A. White
/s/ Peter M. Wood Director March 7, 2002
-------------------------------------------------
Peter M. Wood
95
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
---------------- --------------------------------------------------------------------------- -----------------
3.01 Amended and Restated Certificate of Incorporation of Eastman Chemical
Company, as amended (incorporated herein by reference to Exhibit 3.01
to Eastman Chemical Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001)
3.02 Amended and Restated Bylaws of Eastman Chemical Company, as
amended (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 (incorporated
herein by reference to Exhibit 4.01 to Eastman Chemical Company's Quarterly
Report on Form 10-K 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 American Stock Transfer & Trust Company,
as Rights Agent (incorporated herein by reference to Exhibit 4.4 to
Eastman Chemical Company's Registration Statement on Form S-8 relating to
the Eastman Investment Plan, File No. 33-73810)
4.03 Indenture, dated as of January 10, 1994, between Eastman Chemical Company
and The Bank of New York, as Trustee (the "Indenture") (incorporated
herein by reference to Exhibit 4(a) to Eastman Chemical Company's current
report on Form 8-K dated January 10, 1994 (the "8-K"))
4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by
reference to Exhibit 4(c) to the 8-K)
4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K)
4.06 Officers' Certificate pursuant to Sections 201 and 301 of the Indenture
(incorporated herein by reference to Exhibit 4(a) to Eastman Chemical
Company's Current Report on Form 8-K dated June 8, 1994 (the "June 8-K"))
4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by
reference to Exhibit 4(b) to the June 8-K)
4.08 Form of 7.60% Debentures due February 1, 2027 (incorporated herein by
reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 10-K"))
4.09 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)
96
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
---------------- --------------------------------------------------------------------------- -----------------
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 (the "June 30, 2000 10-Q"))
10.01* Eastman Chemical Company Benefit Security Trust dated December 24, 1997, as
amended February 1, 2001 (incorporated herein by reference to Exhibit 10.01 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001)
10.02* 1999 Director Long-Term Compensation Plan, as amended (incorporated herein by
reference to Exhibit 10.02 to Eastman Chemical Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001 (the "June 30, 2001 10-Q")
10.03* Eastman 2001-2003 Long-Term Performance Subplan of 1997 Omnibus Long-Term
Compensation Plan (incorporated herein by reference to Exhibit 10.03 to the
June 30, 2001 10-Q)
10.04* James L. Chitwood Severance Agreement (incorporated herein by reference to
Exhibit 10.04 to the June 30, 2001 10-Q)
10.05* Garland Williamson Severance Agreement (incorporated herein by reference to
Exhibit 10.05 to the June 30, 2001 10-Q)
10.06* Eastman Executive Deferred Compensation Plan, as amended October 1, 2001 100-113
10.07* Agreement with Earnest W. Deavenport, Jr. dated December 7, 2001 114-117
10.08* Notice of Nonqualified Stock Option Granted to Earnest W. Deavenport, Jr.
Pursuant to the Eastman Chemical Company 1997 Omnibus Long-Term Compensation
Plan dated December 7, 2001 118-119
10.09* Notice Of Restricted Stock Granted to Earnest W. Deavenport, Jr. Pursuant to
the Eastman Chemical Company 1997 Omnibus Long-Term Compensation Plan dated
December 7, 2001 120-122
10.10* Eastman Excess Retirement Income Plan, amended and restated effective
January 1, 2002 123-128
10.11* Eastman Unfunded Retirement Income Plan, amended and restated effective
January 1, 2002 129-134
10.12* Form of Executive Severance Agreements as amended and restated 135-143
97