UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549
FORM 10-Q
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (423) 229-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
TABLE OF CONTENTS
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS),COMPREHENSIVE INCOME (LOSS), AND RETAINED EARNINGS
The accompanying notes are an integral part of these financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Companys Consolidated Financial Statements, including related notes, and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the 2001 Annual Report and Form 10-K/A, and the unaudited interim consolidated financial statements included elsewhere in this report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
The Companys results of operations as presented beginning on page 3 of this Form 10-Q are described below.
Second quarter 2002 sales revenue of $1.4 billion was relatively flat when compared to the second quarter 2001 sales revenue. Higher sales volumes were offset by lower selling prices and an unfavorable shift in product mix. First six months 2002 sales revenue was $2.6 billion compared to the first six months 2001 sales revenue of $2.7 billion. The decline in sales revenue was mainly due to lower selling prices, which were mostly offset by higher sales volumes.
Operating earnings for the second quarter 2002 were $81 million compared to an operating loss of $200 million in the second quarter 2001. Operating earnings for the first six months 2002 were $158 million compared to an operating loss of $104 million in the first six months 2001. Operating earnings for the second quarter and first six months 2001 were negatively impacted by nonrecurring items totaling approximately $306 million, described more fully below and in Notes 6 and 7 to the consolidated financial statements. Operating results for the second quarter and first six months 2001 were also impacted by amortization of goodwill and indefinite-lived intangibles totaling approximately $5 million and $10 million, respectively.
Operating earnings excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles were $81 million for the second quarter 2002 compared to $111 million for the second quarter 2001. Compared to the second quarter 2001, selling prices for the second quarter 2002 decreased more than raw material costs, resulting in margin compression. The decline in selling prices had a negative impact on the second quarter 2002 operating earnings of approximately $144 million, approximately half of which was offset by a decrease in raw material costs. Lower unit costs resulting from increased capacity utilization had a positive impact on the second quarter 2002 operating earnings.
Operating earnings excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles were $158 million for the first six months 2002 compared to $212 million for the first six months 2001. Compared to the first six months 2001, selling prices for the first six months 2002 decreased more than raw material costs, resulting in margin compression. The decline in selling prices had a negative impact on operating earnings for the first six months 2002 of approximately $243 million, mostly offset by a decrease in raw material costs. Lower unit costs resulting from increased capacity utilization had a positive impact on the first six months 2002 operating earnings.
Net earnings for the first six months 2002 reflected a net gain due to remeasurement of foreign currency-denominated amounts, primarily attributed to the strengthening of the euro during the second quarter 2002. This net gain includes the effect of the Companys hedging program. Results for the first six months 2002 also reflected a loss due to remeasurement of foreign currency-denominated amounts, primarily related to the decrease in value of the Argentine peso-denominated, long-term tax receivables caused by the devaluation of the peso during the first six months 2002. A charge was recognized in the second quarter 2002 for the write-down to fair value of certain technology business venture investments. Net earnings for the first six months 2002 were negatively impacted by a nonrecurring charge related to the impact to the Company of the previously-announced restructuring of Genencor International, Inc. (Genencor), in which the Company owns a 42% equity interest.
Diluted earnings per share for the second quarter 2002 were $0.58 compared with a loss of $1.92 per share in the second quarter 2001. Excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles, diluted earnings per share for the second quarter 2001 were $0.61. For the first six months 2002, the Company reported earnings per share of $0.65 compared with a loss of $1.44 per share for the first six months 2001. Excluding a loss associated with a change in accounting principle and a nonrecurring charge related to the impact to the Company of
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the previously-announced restructuring of Genencor, diluted earnings per share were $0.93 in the first six months 2002. Excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles, earnings per share in the first six months 2001 were $1.15.
Second quarter 2002 sales revenue was essentially flat compared to the second quarter 2001. Increased sales volume had a positive impact on sales revenue of 11%, mostly offset by lower selling prices, which had a negative impact on sales revenue of 10%. An unfavorable shift in product mix had a negative impact on sales revenue of 2%, partially offset by the positive effect of foreign currency exchange rates.
The decline in sales revenue for the first six months 2002 compared to the first six months 2001 was primarily attributed to a decline in selling prices, which had a negative impact on sales revenue of 9%. The decline in selling prices was mainly attributable to PET polymers. Increased sales volumes, primarily attributed to the May 2001 acquisition of certain businesses from Hercules Incorporated (Hercules Businesses), had a positive impact on revenues of 8%. An unfavorable shift in product mix and foreign currency exchange rates had a negative impact on revenues of 2% and 1%, respectively.
Decreased selling prices had a negative impact on gross profit for the second quarter and first six months 2002, partially offset by a decrease in raw material costs and lower unit costs resulting from increased capacity utilization.
The increase in the second quarter 2002 selling and general administrative expenses compared to the second quarter 2001 is primarily attributable to an increase in bad debt expense related to credit exposures for one of the Companys customers in Europe. Even with the addition of selling and general administrative expenses associated with the Hercules Businesses, the first six months 2002 selling and general administrative expenses declined compared to the first six months 2001, primarily due to cost control efforts and a one-time reversal of accrued compensation expense of approximately $4 million related to the Companys decision to forego certain management bonuses in 2002.
Research and development costs for the second quarter and first six months 2002 decreased compared to the second quarter and first six months 2001 but were essentially unchanged as a percentage of sales.
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Asset impairments and restructuring charges
In the second quarter and first six months 2001, nonrecurring charges totaling $294 million related to asset impairments and restructuring costs were recognized.
In the second quarter and first six months 2001, approximately $211 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.
During 2001, the Company reported that a large customer of the Performance Chemicals and Intermediates (PCI) segment did not intend to renew its contract for a custom synthesis product beyond June 30, 2002. As a consequence, the related assets were impaired based on expected cash flows resulting from notification of termination of this contract. Nonrecurring charges related to the impacted assets were recorded during the second quarter 2001 as part of the restructuring of the fine chemicals business, as described in Note 6 to the consolidated financial statements. Subsequently, the customer initiated discussions with the Company which resulted in an agreement being reached in June 2002 to extend the custom synthesis product contract one year based on renegotiated terms. Sales revenue related to the contract extension is expected to be approximately 2% of Eastman's 2001 sales revenue.
In the second quarter and first six months 2001, nonrecurring charges of $20 million were incurred in the Coatings, Adhesives, Specialty Polymers, and Inks (CASPI) segment related to the closure of plants in Philadelphia, Pennsylvania and Portland, Oregon that were obtained in the acquisition of McWhorter Technologies, Inc.
Other nonrecurring charges
In the second quarter and first six months 2001, other nonrecurring charges totaling $12 million were recognized.
These charges consisted of an $8 million write-off of acquired in-process research and development costs, which was subsequently revised to $5 million with a $3 million credit to earnings in the third quarter 2001, related to the acquisition of the Hercules Businesses and approximately $4 million in charges associated with efforts to spin-off the specialty chemicals and plastics businesses.
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Interest expense, net
Lower interest expense for the second quarter and first six months 2002 compared to the second quarter and first six months 2001 primarily reflected a reduction in borrowings and a decrease in market interest rates, offset by a higher interest rate on the Companys recent 10-year bond issue versus the interest rate on commercial paper that was outstanding during the prior period.
Other (income) charges, net
Other income for the second quarter and first six months 2002 primarily reflected a net gain due to remeasurement of foreign currency-denominated amounts, mainly attributed to the strengthening of the euro. This net gain includes the effect of the Companys hedging program. Results for the first six months 2002 also reflected a loss due to remeasurement of foreign currency-denominated amounts, primarily related to the decrease in value of the Argentine peso-denominated, long-term tax receivables caused by the devaluation of the peso during the first six months 2002. Other income for the second quarter and first six months 2001 primarily reflected a gain on equity investments.
Other charges for the second quarter and first six months 2002 primarily reflected a write-down to fair value of certain technology business venture investments. Other charges for the first six months 2002 also included the Companys portion of a loss from operations of Genencor, in which the Company owns a 42% equity interest, which included a nonrecurring charge of $5 million related to the previously-announced restructuring of Genencor. Other charges for the second quarter and first six months 2001 primarily reflected net losses from foreign exchange transactions and fees on securitized receivables.
The effective tax rate for the second quarter and first six months 2002 reflects the elimination of non-deductible goodwill amortization resulting from the implementation of SFAS No. 142, and additionally reflects international tax structuring related to the implementation of the Companys divisional structure. This lower effective tax rate was partially offset by higher state income taxes. The effective tax rates for the second quarter and first six months 2001 include the effect of nonrecurring items. Excluding the effect of nonrecurring items, the effective tax rate for the second quarter and first six months 2001 would have been 33%.
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As required by Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, the Company completed the impairment test for intangible assets with indefinite useful lives other than goodwill in the first quarter of 2002 and the impairment test for goodwill in the second quarter of 2002. Under the provisions of this Statement, goodwill and intangible assets with indefinite useful lives are not amortized, but instead are reviewed for impairment at least annually and written down only in periods in which it is determined that the fair value is less than the recorded value. In connection with the Companys review of intangible assets with indefinite useful lives other than goodwill, it was determined that the fair value of certain trademarks related to the CASPI segment was less than the recorded value. Accordingly, the Company recognized an after-tax impairment charge of approximately $18 million in the first quarter 2002. This charge is reported in the Consolidated Statement of Earnings as the cumulative effect of a change in accounting principle. During the second quarter 2002, the Company performed the transitional impairment test on its goodwill as required upon adoption of this Statement, and determined that no impairment of goodwill exists as of January 1, 2002. The Company will begin its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter 2002, and plans to continue its annual testing in the third quarter of each year.
For additional information regarding the change in accounting principle, see Note 11 to the consolidated financial statements.
SUMMARY BY OPERATING SEGMENT
The Companys products and operations are managed and reported in five operating segments. Effective January 1, 2002, the Company implemented a divisional structure that separated the businesses into two divisions. Eastman Division consists of the CASPI segment, the PCI segment, and the Specialty Plastics (SP) segment. Voridian Division contains the Polymers segment and the Fibers segment. The divisional structure has allowed the Company to align costs more directly with the activities and businesses that generate them. The divisional and segment financial results for the first two quarters of 2002, but not for prior periods, reflect this new cost structure. This change impacts the comparisons of 2002 results to prior year results.
With the implementation of the divisional structure, goods and services are transferred between the two divisions at predetermined prices. Accordingly, the divisional structure results in the recognition of interdivisional sales revenue and operating earnings. Such interdivisional transactions are eliminated in the Eastman Chemical Company consolidated financial statements. Prior to 2002, segment sales revenue was recognized only for actual sales to third parties and the intersegment transfer of goods and services, recorded at cost, had no impact on segment earnings.
All Eastman Chemical Company assets were allocated to the divisions as of January 1, 2002. Corporate, general purpose, and other nonoperating assets were allocated to segments within each division based on process or product responsibility. Certain infrastructure assets at each site, primarily utilities that were previously allocated to all five segments, were allocated to the primary division at that site. The primary division invoices the other division for services provided by such infrastructure assets.
Effective January 1, 2002, sales and operating results for Cendian Corporation (Cendian), wholly owned by the Company and an Eastman Division initiative, are included in amounts for the CASPI, PCI and SP segments, and have been allocated to these segments on the basis of sales revenues for each of these segments. Prior to 2002, sales and operating results for Cendian were allocated to all five segments.
Effective January 1, 2002, certain compounded polyethylene products were moved from the Polymers segment to the SP segment. Accordingly, amounts for 2001 have been reclassified to reflect this change.
For additional information concerning the Companys operating segments, see Note 12 to the consolidated financial statements and Exhibits 99.01, 99.02 and 99.03 to this Form 10-Q.
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EASTMAN DIVISION
CASPI Segment
Sales revenue for both the second quarter and first six months 2002 was positively impacted by increased sales volumes, primarily due to the Hercules Businesses. Increased sales volumes and interdivisional sales had a positive impact on the second quarter 2002 sales revenue of 7% and 3%, respectively. Foreign currency exchange rates had a slightly positive impact on revenues. These increases were partially offset by lower selling prices, which had a negative impact on sales revenue of 3%.
Increased sales volumes and interdivisional sales had a positive impact on sales revenue for the first six months 2002 of 11% and 3%, respectively. These increases were partially offset by lower selling prices, which had a negative impact on sales revenue of 3%.
The decline in operating earnings for the second quarter and first six months 2002 excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles was mainly due to lower selling prices that were partially offset by lower raw material costs. Continued costs related to integration of CASPI operations also had a negative impact on operating earnings.
Operating results for 2001 were negatively impacted by nonrecurring items totaling approximately $30 million, primarily related to the restructuring of the coatings operations and the write-off of in-process research and development related to the acquisition of the Hercules Businesses.
PCI Segment
Second quarter and first six months 2002 sales revenue increased 30% and 23%, respectively, compared to the second quarter and first six months 2001, but declined 6% and 9%, respectively, excluding interdivisional sales. Lower selling prices and an unfavorable shift in product mix had a negative impact on sales revenue for the second quarter 2002 of 12% and 7%, respectively. These decreases were partially offset by increased sales volumes, which had a positive impact on sales revenue of 13%.
Lower selling prices and an unfavorable shift in product mix had a negative impact on sales revenue for the first six months 2002 of 10% and 6%, respectively. These decreases were partially offset by increased sales volumes, which had a positive impact on sales revenue of 7%.
Second quarter and first six months 2002 results were negatively impacted by lower selling prices and an unfavorable shift in product mix that were partially offset by lower raw material costs. Operating earnings excluding nonrecurring items decreased for all product lines except olefins and derivatives, which showed an improvement compared to the second quarter and first six months 2001.
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During 2001, the Company reported that a large customer of the PCI segment did not intend to renew its contract for a custom synthesis product beyond June 30, 2002. As a consequence, the related assets were impaired based on expected cash flows resulting from notification of termination of this contract. Nonrecurring charges related to the impacted assets were recorded during the second quarter 2001 as part of the restructuring of the fine chemicals business, as described in Note 6 to the consolidated financial statements. Subsequently, the customer initiated discussions with the Company which resulted in an agreement being reached in June 2002 to extend the custom synthesis product contract one year based on renegotiated terms. Sales revenue related to the contract extension is expected to be approximately the same as under the prior contract.
SP Segment
Second quarter 2002 sales revenue increased 6% compared to the second quarter 2001, but decreased 6% excluding interdivisional sales. Decreased sales volumes and selling prices, mainly for cellulosic plastics products, had a negative impact on sales revenue for the second quarter 2002 of 5% and 4%, respectively. A favorable shift in product mix and foreign currency exchange rates had a positive impact on revenues of 2% and 1%, respectively.
First six months 2002 sales revenue increased 3% compared to the first six months 2001 including interdivisional sales, but decreased 9% excluding interdivisional sales. Decreased sales volumes and selling prices, mainly for cellulosic plastics products, had a negative impact on sales revenue for the first six months 2002 of 6% and 2%, respectively. Foreign currency exchange rates had a slightly negative effect on sales revenue of 1%.
The decrease in the second quarter and first six months 2002 operating earnings compared to the second quarter and first six months 2001 was primarily due to a decline in sales volumes, mainly for cellulosic plastics products, attributed to weakened demand.
VORIDIAN DIVISION
Polymers Segment
Sales revenue for the second quarter 2002 increased compared to the second quarter 2001 mainly due to higher sales volumes, which had a positive impact on revenues of 21%, and interdivisional sales, which had a positive impact on revenues of 3%. A decline in selling prices had a negative impact on sales revenue of 21%. The increase in sales volumes and the decrease in selling prices were attributable to both PET polymers and polyethylene.
Sales revenue for the first six months 2002 decreased compared to the first six months 2001 primarily due to lower selling prices, which had a negative impact on revenues of 18%. This decrease was partially offset by increased sales volumes and interdivisional sales, which had a positive impact on sales revenue of 8% and 3%, respectively. The decrease in selling prices and the increase in sales volumes were attributable to both PET polymers and polyethylene.
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Operating earnings excluding nonrecurring items for the second quarter and first six months 2002 increased compared to the second quarter and first six months 2001. Results for 2002 were positively impacted by increased sales volumes and lower unit costs resulting from increased capacity utilization, which were partially offset by lower selling prices and operational problems in Europe.
Results for the second quarter and first six months 2001 were negatively impacted by nonrecurring items totaling approximately $211 million which resulted from the write-off of a prepaid asset related to the termination of a raw material supply agreement and the write-down of underperforming polyethylene assets.
Fibers Segment
Second quarter 2002 sales revenue increased 10% compared to the second quarter 2001 including interdivisional sales but was flat excluding interdivisional sales. Increased sales volumes, primarily for acetate flake and acetyl raw materials, had a positive impact on revenues of 8%. Decreased selling prices and an unfavorable shift in product mix had a negative impact on revenues of 5% and 3%, respectively.
The increase in sales revenue for the first six months 2002 compared to the first six months 2001 was mainly due to higher sales volumes, primarily for acetate flake and acetyl raw materials, which had a positive impact on revenues of 16%. Interdivisional sales had a positive impact on sales revenue of 12%. An unfavorable shift in product mix and lower selling prices had a negative impact on sales revenue of 11% and 2%, respectively. The shift in product mix was due to increased sales volumes of lower unit priced products, particularly acetate flake and acetyl raw materials.
Operating earnings for the second quarter 2002 declined slightly compared to the second quarter 2001 mainly due to the decline in selling prices and the negative effect of product mix. Although acetate flake and acetyl raw materials comprise a large percentage of the volume impact, their effect on operating earnings is minimal. Results for the first six months 2002 were relatively unchanged.
SUMMARY BY CUSTOMER LOCATION
Second quarter 2002 sales revenue in the United States and Canada decreased compared to the second quarter 2001 primarily due to lower selling prices, which had a negative impact on revenues of 10%. An unfavorable shift in product mix also had a negative impact on revenues of 4%. These decreases were partially offset by increased sales volumes, which had a positive impact on revenues of 6%. Both the decrease in selling prices and the increase in sales volumes were attributable to PET polymers and polyethylene. First six months 2002 sales revenue in the United States and Canada decreased compared to the first six months 2001 primarily due to lower selling prices and product mix, which had a negative impact on revenues of 9% and 4%, respectively. The decline in selling prices was primarily attributed to PET polymers and polyethylene. Increased sales volumes, mainly for Voridian Division products, had a positive impact on revenues of 5%.
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Sales revenue outside the United States and Canada for the second quarter 2002 was $601 million, up 11% from 2001 second quarter sales of $542 million, and was 43% of total sales in the second quarter of 2002 compared with 39% for the second quarter 2001. The increase in sales revenue was primarily due to higher sales volumes, which had a positive impact on sales revenue of 19%, partially offset by lower selling prices, which had a negative impact on sales revenue of 11%. Foreign currency exchange rates had a positive impact on revenues of 2%. First six months 2002 sales revenue outside the United States and Canada increased slightly due to increased sales volumes, which had a positive impact on revenues of 13%. The increase in volumes was partially offset by decreased selling prices, which had a negative impact on sales revenue for the first six months 2002 of 9%.
In Europe, Middle East and Africa, increased sales volumes and foreign currency exchange rates had a positive impact on revenues of 21% and 7%, respectively. The increase in sales volumes was primarily attributed to the Hercules Businesses and PET polymers. Decreased selling prices and an unfavorable shift in product mix had a negative impact on revenues of 11% and 2%, respectively. The decline in selling prices was primarily attributed to PET polymers. Sales revenue for the first six months 2002 was flat compared to the first six months 2001. Increased sales volumes, mainly attributable to the Hercules Businesses, had a positive impact on revenues of 9%. This increase was offset by decreased selling prices, which had a negative impact on revenues of 8%, and the negative effect of foreign currency exchange rates. The decline in selling prices was primarily for PET polymers.
In Asia Pacific, increased sales volumes, primarily for Eastman Division products, and a favorable shift in product mix had a positive impact on the second quarter 2002 sales revenue of 14% and 4%, respectively. These increases were partially offset by lower selling prices, which had a negative impact on sales revenue of 6%. For the first six months 2002, increased sales volumes and a favorable shift in product mix had a positive impact on sales revenue of 18% and 5%, respectively. The increase in sales volumes was attributed to both Eastman Division and Voridian Division products. Decreased selling prices and foreign currency exchange rates had a negative impact on revenues of 7% and 1%, respectively.
For the second quarter 2002, higher sales volumes in Latin America had a positive impact on revenues of 22%. Lower selling prices and foreign currency exchange rates had a negative impact on sales revenue of 16% and 5%, respectively. Both the increase in sales volumes and the decrease in selling prices were primarily attributable to PET polymers. Sales revenue for the first six months 2002 decreased compared to the first six months 2001 primarily due to lower selling prices, which had a negative impact on revenues of 15%, offset by increased sales volumes. Both the decrease in selling prices and the increase in sales volumes were mainly attributed to PET polymers. Foreign currency exchange rates and product mix also had a negative impact on revenues of 3% and 2%, respectively.
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
Cash provided by operating activities in the first six months 2002 increased approximately $270 million compared with the first six months 2001 primarily due to the impact of a change in working capital; a change in liabilities for employee benefits and incentive compensation; and receipt of a federal income tax refund.
Changes in working capital impacted operating cash flows approximately $160 million. Working capital remained relatively flat during the first six months of 2002 as increases in trade accounts payable largely offset the cash impact of the increase in inventories and accounts receivable. In the first six months of 2001, working capital increased approximately $160 million as cash was used to significantly reduce trade accounts payable while inventory and accounts receivable increased in line with the increase in sales.
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Changes in liabilities for employee benefits and incentive compensation impacted operating cash flows approximately $70 million. Payments required under the Eastman Performance Plan and the Unit Performance Plan during the first half of 2002 were significantly lower than similar payments in the first half of 2001 due to the performance under these plans for 2001 and 2000.
The Companys 2002 cash flow from operations included a federal income tax refund of approximately $40 million.
Cash used in investing activities reflected decreased expenditures for capital additions in the first six months 2002 compared with the first six months 2001. Cash used in investing activities also reflected the acquisition of Ariel Research Corporation in the first six months 2002 and the acquisition of the Hercules Businesses in the first six months 2001.
Cash used in financing activities in the first six months 2002 reflected a significant decrease in commercial paper and short-term borrowings attributable to the use of proceeds from long-term debt issued during the second quarter 2002 and overall improvement in generation of cash from operations. Cash provided by financing activities in the first six months 2001 reflected an increase in commercial paper and other short-term borrowings related to the acquisition of the Hercules Businesses and for general operating purposes. Cash provided by financing activities in the first six months 2001 included the effect of an increase in treasury stock resulting from a reverse/forward stock split of the Companys common stock approved by the stockholders on May 3, 2001. The payment of dividends is also reflected in both periods.
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.
LIQUIDITY
Eastman has access to a $600 million revolving credit facility (the Credit Facility) expiring in July 2005. The facility, which was previously $800 million, was reduced to $600 million in the second quarter 2002 following the issuance of $400 million in fixed rate debt described below. 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 Eastmans credit rating. The rate for such fees was 0.15% as of June 30, 2002 and December 31, 2001. The Credit Facility contains a number of covenants and events of default, including the maintenance of certain financial ratios. Eastman was in compliance with all such covenants for all periods presented.
Eastman typically utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Because the Credit Facility expires in July 2005, the commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings long term. As of June 30, 2002, the Companys Credit Facility and commercial paper borrowings were $149 million at an effective interest rate of 2.03%. At December 31, 2001, the Companys outstanding Credit Facility and commercial paper borrowings were $637 million at an effective interest rate of 3.17%.
The Company has an effective registration statement on file with the Securities and Exchange Commission to issue up to $1 billion of debt or equity securities. On April 3, 2002, Eastman issued notes in the principal amount of $400 million due 2012 and bearing interest at 7% per annum. Net proceeds from the sale of the notes were $394 million and were used to repay portions of outstanding borrowings under the Credit Facility and commercial paper borrowings.
Through interest rate swaps entered into during the first quarter of 2002, the effective interest rates of the notes due 2004 were converted to variable rates that averaged 3.96% at June 30, 2002.
As described in Note 14 to the consolidated financial statements, during the second quarter 2002, the Company renegotiated a significant operating lease of machinery and equipment, extending the terms through June 2007. The new agreement includes provisions that may require the Company to maintain $163 million in restricted cash to serve as collateral for the lease beginning in March 2003 if the lease is not refinanced. The Company believes the likelihood of the restricted cash provision becoming operative is remote.
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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 Companys 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 Eastmans products, capacity utilization and other factors described under Forward-Looking Statements beginning on page 34.
CAPITAL EXPENDITURES
Capital expenditures were $96 million and $117 million for the first six months of 2002 and 2001, respectively. For 2002, the Company expects that capital spending and other directed investments for small acquisitions and other ventures will be no more than depreciation and amortization. Long-term commitments related to planned capital expenditures are not material.
OTHER COMMITMENTS
At June 30, 2002, the Companys obligations related to long-term notes and debentures totaled $1.9 billion to be paid over a period extending 25 years. Other borrowings, related primarily to commercial paper borrowings, totaled approximately $165 million.
The Company had various purchase obligations at June 30, 2002, 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 $307 million over a period of several years. Of the total lease commitments, approximately 47% 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 18% relates to railcars. The obligations described above are summarized in the following table:
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If certain operating leases are terminated by the Company, it guarantees a portion of the residual value loss, if any, incurred by the lessors in disposing of the related assets. The Company believes, based on current facts and circumstances, that a material payment pursuant to such guarantees in excess of the payments included above is remote.
TREASURY STOCK TRANSACTIONS
The Company is currently authorized to repurchase up to $400 million of its common stock. During 2001, 77,069 shares of common stock at a total cost of approximately $4 million, or an average price of $53 per share, were repurchased. A total of 2,620,255 shares of common stock at a cost of approximately $105 million, or an average price of approximately $40 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. In the first quarter 2002, the Company issued 126,614 previously repurchased shares as the annual Company contribution to the Eastman Investment and Employee Stock Ownership Plan.
DIVIDENDS
The Company declared cash dividends of $0.44 per share in the second quarter 2002 and 2001 and $0.88 per share in the first six months 2002 and 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board (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.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement, which updates, clarifies and simplifies existing accounting pronouncements, addresses the reporting of debt extinguishments and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of this Statement are generally effective for the Companys 2003 fiscal year, or in the case of specific provisions, for transactions occurring after May 15, 2002 or for financial statements issued on or after May 15, 2002. The provisions of this Statement have not had a material impact on the Companys financial condition or results of operations.
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In July 2002 the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and concludes that an entitys commitment to an exit plan does not by itself create a present obligation that meets the definition of a liability. This Statement also establishes that fair value is the objective of initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not yet assessed the impact of this Statement on its financial statements.
OUTLOOK
For 2002, the Company:
Based upon the expectations described above, as of July 25, 2002 (the date of its second quarter 2002 sales and earnings press release) the Company anticipated that operating results excluding nonrecurring items for the Companys underlying businesses in the third quarter 2002 will be similar to the second quarter 2002.
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The Company further expects:
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; exposure to, and effects of hedging of, 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, segments, and divisions as well as for the whole of Eastman Chemical Company; cash requirements and uses of available cash; financing plans; pension expenses and funding; credit rating; cost reduction targets; integration of recently acquired businesses; development, production, commercialization, and acceptance of new products, services, and technologies; and asset and product portfolio changes.
These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions, and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, the following are some of the important factors that could cause the Companys actual results to differ materially from those in any such forward-looking statements:
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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 managements 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.
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PART II. OTHER INFORMATION
ITEM 1. 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, results of operations, or cash flows. 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 Companys 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 24 of the 26 direct and indirect purchaser class actions, although one of those settlements is currently on appeal to the Tennessee Court of Appeals. No class has been certified in either of the other cases still pending, and the Company has filed dispositive motions in both of these cases.
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. This is one of the two cases described above in which Eastman currently has a dispositive motion pending.
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 and of additional claims that could be made by other possible parties is not expected to have a material impact on the Companys financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to additional monetary damages, costs or expenses and additional charges against earnings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2002 Annual Meeting of the Stockholders of Eastman Chemical Company was held on May 2, 2002. There were 77,445,580 shares of common stock entitled to be voted, and 65,616,113 shares represented in person or by proxy, at the Annual Meeting.
Six items of business were acted upon by stockholders at the Annual Meeting:
The results of the voting for the election of directors were as follows:
Accordingly, the three nominees received a plurality of the votes cast in the election of directors at the meeting and were elected.
The results of the voting on the proposed 2002 Omnibus Long-Term Compensation Plan were as follows:
Accordingly, the number of affirmative votes cast on the proposal constituted more than a majority of the votes cast on the proposal at the meeting, and the 2002 Omnibus Long-Term Compensation Plan was approved by stockholders.
The results of the voting on the proposed 2002 Director Long-Term Compensation Plan were as follows:
Accordingly, the number of affirmative votes cast on the proposal constituted more than a majority of the votes cast on the proposal at the meeting, and the 2002 Director Long-Term Compensation Plan was approved by stockholders.
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The results of the voting on the ratification of the appointment of PricewaterhouseCoopers LLP as independent accountants were as follows:
Accordingly, the number of affirmative votes cast on the proposal constituted more than a majority of the votes cast on the proposal at the meeting, and the appointment of PricewaterhouseCoopers LLP as independent accountants was ratified.
The results of the voting on the approval of the stockholder proposal to study potential health risks from cellulose acetate fibers were as follows:
Accordingly, the number of affirmative votes cast on the proposal constituted less than a majority of the votes cast on the proposal at the meeting, and the stockholder proposal was not approved.
The results of the voting on the approval of the stockholder proposal to issue a report concerning emission of greenhouse gases and potential climate change were as follows:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EXHIBIT INDEX
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