EASTMAN CHEMICAL CO
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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(Mark
One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2010
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OR
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______________ to ______________
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Commission file number 1-12626
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EASTMAN CHEMICAL COMPANY
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(Exact name of registrant as specified in its charter)
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Delaware
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62-1539359
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(State or other jurisdiction of
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(I.R.S. employer
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incorporation or organization)
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identification no.)
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200 South Wilcox Drive
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Kingsport, Tennessee
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37662
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area code: (423) 229-2000
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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 [ ]
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [ ] NO [ ]
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class
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Number of Shares Outstanding at June 30, 2010
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Common Stock, par value $0.01 per share
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72,242,224
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PAGE 1 OF 45 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 44
TABLE OF CONTENTS
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ITEM
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PAGE
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PART I. FINANCIAL INFORMATION
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1.
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Financial Statements
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3
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4
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5
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6
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2.
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20
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3.
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40
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4.
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40
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PART II. OTHER INFORMATION
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1.
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41
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1A.
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42
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2.
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42
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6.
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42
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SIGNATURES
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43
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EXHIBIT INDEX
2
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Second Quarter
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First Six Months
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(Dollars in millions, except per share amounts)
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2010
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2009
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2010
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2009
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Sales
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$ | 1,724 | $ | 1,253 | $ | 3,288 | $ | 2,382 | ||||||||
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Cost of sales
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1,320 | 993 | 2,563 | 1,943 | ||||||||||||
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Gross profit
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404 | 260 | 725 | 439 | ||||||||||||
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Selling, general and administrative expenses
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108 | 98 | 211 | 192 | ||||||||||||
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Research and development expenses
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36 | 34 | 72 | 68 | ||||||||||||
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Asset impairments and restructuring charges, net
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3 | (3 | ) | 3 | 23 | |||||||||||
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Operating earnings
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257 | 131 | 439 | 156 | ||||||||||||
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Net interest expense
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25 | 20 | 50 | 39 | ||||||||||||
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Other charges (income), net
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8 | 5 | 14 | 9 | ||||||||||||
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Earnings before income taxes
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224 | 106 | 375 | 108 | ||||||||||||
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Provision for income taxes
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76 | 41 | 126 | 41 | ||||||||||||
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Net earnings
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$ | 148 | $ | 65 | $ | 249 | $ | 67 | ||||||||
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Earnings per share
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Basic
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$ | 2.05 | $ | 0.89 | $ | 3.44 | $ | 0.92 | ||||||||
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Diluted
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$ | 2.02 | $ | 0.89 | $ | 3.38 | $ | 0.91 | ||||||||
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Comprehensive Income
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Net earnings
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$ | 148 | $ | 65 | $ | 249 | $ | 67 | ||||||||
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Other comprehensive income (loss), net of tax
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Change in cumulative translation adjustment
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(9 | ) | 25 | (21 | ) | 15 | ||||||||||
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Change in unrecognized losses and prior service credits for benefit plans
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6 | (2 | ) | 9 | (2 | ) | ||||||||||
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Change in unrealized gains on derivative instruments
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2 | (8 | ) | 8 | 1 | |||||||||||
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Total other comprehensive income (loss), net of tax
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(1 | ) | 15 | (4 | ) | 14 | ||||||||||
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Comprehensive income
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$ | 147 | $ | 80 | $ | 245 | $ | 81 | ||||||||
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Retained Earnings
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Retained earnings at beginning of period
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$ | 2,640 | $ | 2,533 | $ | 2,571 | $ | 2,563 | ||||||||
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Net earnings
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148 | 65 | 249 | 67 | ||||||||||||
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Cash dividends declared
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(32 | ) | (32 | ) | (64 | ) | (64 | ) | ||||||||
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Retained earnings at end of period
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$ | 2,756 | $ | 2,566 | $ | 2,756 | $ | 2,566 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
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June 30,
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December 31,
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(Dollars in millions, except per share amounts)
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2010
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2009
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(Unaudited)
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Assets
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Current assets
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Cash and cash equivalents
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$ | 435 | $ | 793 | ||||
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Trade receivables, net
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721 | 277 | ||||||
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Miscellaneous receivables
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88 | 102 | ||||||
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Inventories
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635 | 531 | ||||||
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Other current assets
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30 | 32 | ||||||
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Total current assets
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1,909 | 1,735 | ||||||
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Properties
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Properties and equipment at cost
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8,631 | 8,525 | ||||||
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Less: Accumulated depreciation
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5,476 | 5,415 | ||||||
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Net properties
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3,155 | 3,110 | ||||||
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Goodwill
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376 | 315 | ||||||
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Other noncurrent assets
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359 | 355 | ||||||
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Total assets
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$ | 5,799 | $ | 5,515 | ||||
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Liabilities and Stockholders' Equity
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Current liabilities
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Payables and other current liabilities
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$ | 880 | $ | 800 | ||||
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Borrowings due within one year
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6 | -- | ||||||
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Total current liabilities
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886 | 800 | ||||||
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Long-term borrowings
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1,605 | 1,604 | ||||||
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Deferred income tax liabilities
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285 | 258 | ||||||
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Post-employment obligations
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1,216 | 1,221 | ||||||
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Other long-term liabilities
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130 | 119 | ||||||
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Total liabilities
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4,122 | 4,002 | ||||||
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Stockholders' equity
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Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 95,417,504 and 94,775,064 for 2010 and 2009, respectively)
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1 | 1 | ||||||
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Additional paid-in capital
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697 | 661 | ||||||
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Retained earnings
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2,756 | 2,571 | ||||||
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Accumulated other comprehensive loss
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(389 | ) | (385 | ) | ||||
| 3,065 | 2,848 | |||||||
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Less: Treasury stock at cost (23,257,954 shares for 2010 and 22,389,696 shares for 2009 )
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1,388 | 1,335 | ||||||
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Total stockholders' equity
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1,677 | 1,513 | ||||||
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Total liabilities and stockholders' equity
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$ | 5,799 | $ | 5,515 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
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First Six Months
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(Dollars in millions)
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2010
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2009
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Cash flows from operating activities
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Net earnings
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$ | 249 | $ | 67 | ||||
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Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
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Depreciation and amortization
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139 | 134 | ||||||
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Provision for deferred income taxes
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12 | 140 | ||||||
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Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
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(Increase) decrease in trade receivables
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(433 | ) | (52 | ) | ||||
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(Increase) decrease in inventories
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(90 | ) | 191 | |||||
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Increase (decrease) in trade payables
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90 | (55 | ) | |||||
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Increase (decrease) in liabilities for employee benefits and incentive pay
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(10 | ) | (22 | ) | ||||
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Other items, net
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24 | (66 | ) | |||||
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Net cash provided by (used in) operating activities
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(19 | ) | 337 | |||||
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Cash flows from investing activities
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Additions to properties and equipment
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(76 | ) | (204 | ) | ||||
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Proceeds from sale of assets and investments
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11 | 25 | ||||||
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Acquisitions and investments in joint ventures
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(189 | ) | (36 | ) | ||||
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Additions to capitalized software
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(3 | ) | (4 | ) | ||||
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Other items, net
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-- | (7 | ) | |||||
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Net cash used in investing activities
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(257 | ) | (226 | ) | ||||
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Cash flows from financing activities
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Net increase in commercial paper, credit facility, and other borrowings
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1 | 9 | ||||||
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Repayment of borrowings
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-- | (2 | ) | |||||
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Dividends paid to stockholders
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(64 | ) | (64 | ) | ||||
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Treasury stock purchases
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(53 | ) | -- | |||||
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Proceeds from stock option exercises and other items
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33 | 9 | ||||||
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Net cash used in financing activities
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(83 | ) | (48 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents
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1 | -- | ||||||
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Net change in cash and cash equivalents
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(358 | ) | 63 | |||||
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Cash and cash equivalents at beginning of period
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793 | 387 | ||||||
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Cash and cash equivalents at end of period
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$ | 435 | $ | 450 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
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Page
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Note 1.
Basis of Presentation
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7
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Note 2.
Acquisitions
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7
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Note 3.
Asset Impairments and Restructuring Charges, Net
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8
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Note 4.
Inventories
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9
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Note 5.
Goodwill and Intangible Assets
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9
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Note 6.
Payables and Other Current Liabilities
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9
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Note 7.
Provision for Income Taxes
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10
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Note 8.
Borrowings
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10
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Note 9.
Retirement Plans
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11
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Note 10.
Environmental Matters
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12
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Note 11.
Commitments
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12
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Note 12.
Fair Value of Financial Instruments
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13
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Note 13.
Stockholders' Equity
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16
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Note 14.
Earnings and Dividends per Share
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16
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Note 15.
Share-Based Compensation Awards
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17
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Note 16.
Supplemental Cash Flow Information
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17
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Note 17.
Segment Information
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17
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Note 18.
Legal Matters
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19
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6
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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BASIS OF PRESENTATION
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The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company (the "Company" or "Eastman") in accordance and consistent with the accounting policies stated in the Company's 2009 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K. The unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States ("GAAP") and, of necessity, include some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of all majority-owned subsidiaries and joint ventures. Eastman accounts for other joint ventures and investments where it exercises significant influence, but does not have control, on the equity basis. Intercompany transactions and balances are eliminated in consolidation. Certain prior period data has been reclassified in the Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.
Effective January 1, 2010, the Company adopted amended accounting guidance on transfers of financial assets. The impact of this guidance is prospective with changes in first six months Statements of Consolidated Financial Position and the Statements of Cash Flows. For additional information, refer to Notes 8, "Borrowings," and 11, "Commitments."
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ACQUISITIONS
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Genovique Specialties Corporation
On April 30, 2010, Eastman completed the stock purchase of Genovique Specialties Corporation ("Genovique"), which has been accounted for as a business combination. Genovique is a global producer of specialty plasticizers, benzoic acid, and sodium benzoate. This acquisition includes Genovique's manufacturing operations in Kohtla-Järve, Estonia, Chestertown, Maryland, and a joint venture in Wuhan, China. Genovique's benzoate ester plasticizers are a strategic addition to Eastman's existing general-purpose and specialty non-phthalate plasticizers. The acquisition adds differentiated, sustainably-advantaged products to Eastman's Performance Chemicals and Intermediates ("PCI") segment and enhances the Company's diversification into emerging geographic regions.
The total purchase price was approximately $160 million, including assumed debt of $5 million. Transaction costs associated with the acquisition were expensed as incurred. The table below shows the preliminary fair value purchase price allocation for the Genovique acquisition:
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Dollars in millions
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Current assets
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$ | 48 | ||
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Properties and equipment
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33 | |||
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Intangible assets
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59 | |||
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Other noncurrent assets
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2 | |||
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Goodwill
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64 | |||
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Current liabilities
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(17 | ) | ||
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Long-term liabilities
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(29 | ) | ||
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Total purchase price
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$ | 160 | ||
Acquired intangible assets consist of $44 million in established customer relationships, $14 million in trade names, and $1 million in developed technology. The customer relationships and developed technology intangible assets have remaining useful lives of 16 and 7 years, respectively. Trade names have been determined to have an indefinite life. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired and liabilities assumed, is attributed to the synergies between the acquired company and Eastman.
7
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Korean Acetate Tow Facility
On March 22, 2010, Eastman Fibers Korea Limited ("EFKL") completed the purchase of the acetate tow facility in Ulsan, Korea from SK Chemicals Co., Ltd. ("SK"), which has been accounted for as a business combination. EFKL is a venture between the Company and SK, in which the Company has controlling ownership and operates the facility. This acquisition established acetate tow manufacturing capacity for the Company in Asia and supports projected long term sales growth for acetate tow in the region.
The fair value of total consideration was $111 million, which was paid in installments beginning first quarter 2009 and completed second quarter 2010. The Company has determined the preliminary fair value of the acquired assets to be as follows: property, plant, and equipment of $101 million, inventory of $5 million, and technology of $5 million.
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ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET
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In second quarter 2010, there were $3 million in restructuring charges primarily for severance associated with the acquisition and integration of Genovique.
In second quarter 2009, there was a $3 million reduction of the first quarter 2009 restructuring charge resulting in a net $23 million charge in first six months 2009. The charges, primarily for severance, resulted from a reduction in force.
Changes in Reserves for Asset Impairments, Restructuring Charges, and Severance Charges
The following table summarizes the beginning reserves, charges to and changes in estimates to the reserves as described above, and the cash and non-cash reductions to the reserves attributable to asset impairments and the cash payments for severance and site closure costs for full year 2009 and first six months 2010:
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(Dollars in millions)
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Balance at January 1, 2009
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Provision/ Adjustments
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Non-cash Reductions
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Cash Reductions
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Balance at December 31, 2009
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Non-cash charges
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$ | -- | $ | 179 | $ | (179 | ) | $ | -- | $ | -- | |||||||||
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Severance costs
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5 | 23 | -- | (23 | ) | 5 | ||||||||||||||
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Site closure and other restructuring costs
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25 | (2 | ) | -- | (18 | ) | 5 | |||||||||||||
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Total
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$ | 30 | $ | 200 | $ | (179 | ) | $ | (41 | ) | $ | 10 | ||||||||
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Balance at January 1, 2010
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Provision/ Adjustments
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Non-cash Reductions
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Cash Reductions
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Balance at June 30, 2010
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Non-cash charges
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$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
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Severance costs
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5 | 3 | -- | (6 | ) | 2 | ||||||||||||||
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Site closure and other restructuring costs
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5 | -- | -- | -- | 5 | |||||||||||||||
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Total
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$ | 10 | $ | 3 | $ | -- | $ | (6 | ) | $ | 7 | |||||||||
8
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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INVENTORIES
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June 30,
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December 31,
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(Dollars in millions)
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2010
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2009
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At FIFO or average cost (approximates current cost)
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Finished goods
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$ | 612 | $ | 547 | ||||
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Work in process
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189 | 168 | ||||||
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Raw materials and supplies
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297 | 262 | ||||||
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Total inventories
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1,098 | 977 | ||||||
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LIFO Reserve
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(463 | ) | (446 | ) | ||||
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Total inventories
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$ | 635 | $ | 531 | ||||
Inventories valued on the LIFO method were approximately 70 percent and 75 percent of total inventories as of June 30, 2010 and December 31, 2009, respectively.
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GOODWILL AND INTANGIBLE ASSETS
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Changes in the carrying amount of goodwill are as follows:
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(Dollars in millions)
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CASPI Segment
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PCI Segment
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Other Segments
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Total
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Reported balance at December 31, 2009
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$ | 309 | $ | 1 | $ | 5 | $ | 315 | ||||||||
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Additions
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-- | 64 | -- | 64 | ||||||||||||
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Currency translation adjustments
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(3 | ) | -- | -- | (3 | ) | ||||||||||
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Reported balance at June 30, 2010
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$ | 306 | $ | 65 | $ | 5 | $ | 376 | ||||||||
As a result of the purchase of Genovique during second quarter 2010, the Company recorded goodwill of $64 million. The remaining goodwill and indefinite-lived intangibles primarily consist of goodwill in the Coatings, Adhesives, Specialty Polymers and Inks ("CASPI") and PCI segments. Included in the reported balance for goodwill are accumulated impairment losses of $44 million at December 31, 2009 and June 30, 2010.
Intangible assets include developed technology, customer lists, patents and patent licenses, and trademarks with a net book value of $102 million as of June 30, 2010 and $43 million as of December 31, 2009. As a result of the Genovique acquisition, the Company recorded $59 million in customer relationships, technology, and other intangible assets. Intangible assets are included in other noncurrent assets on the balance sheet.
Refer to Note 2, "Acquisitions" for further details regarding the acquisition of Genovique.
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PAYABLES AND OTHER CURRENT LIABILITIES
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June 30,
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December 31,
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(Dollars in millions)
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2010
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2009
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Trade creditors
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$ | 540 | $ | 433 | ||||
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Accrued payrolls, vacation, and variable-incentive compensation
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104 | 125 | ||||||
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Accrued taxes
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30 | 33 | ||||||
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Post-employment obligations
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63 | 61 | ||||||
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Interest payable
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31 | 32 | ||||||
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Other
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112 | 116 | ||||||
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Total payables and other current liabilities
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$ | 880 | $ | 800 | ||||
The current portion of post-employment obligations is an estimate of current year payments.
9
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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PROVISION FOR INCOME TAXES
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Second Quarter
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First Six Months
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(Dollars in millions)
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2010
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2009
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2010
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2009
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Provision for income taxes
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$ | 76 | $ | 41 | $ | 126 | $ | 41 | ||||||||
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Effective tax rate
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34 | % | 39 | % | 33 | % | 38 | % | ||||||||
Excluding discrete items, second quarter and first six months 2010 effective tax rates reflect the Company's expected full year tax rate on reported earnings before income taxes of approximately 33 percent. Second quarter and first six months 2009 effective tax rates reflect a $7 million tax charge associated with a change in accounting method for tax purposes to accelerate timing of deductions for manufacturing repairs expense.
The Company or one of its subsidiaries files tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005. It is reasonably possible that within the next 12 months the Company will recognize approximately $2 million of unrecognized tax benefits as a result of the expiration of relevant statutes of limitations.
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BORROWINGS
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June 30,
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December 31,
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(Dollars in millions)
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2010
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2009
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||||||
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Borrowings consisted of:
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7% notes due 2012
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$ | 151 | $ | 152 | ||||
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6.30% notes due 2018
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204 | 205 | ||||||
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5.5% notes due 2019
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250 | 250 | ||||||
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7 1/4% debentures due 2024
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498 | 497 | ||||||
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7 5/8% debentures due 2024
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200 | 200 | ||||||
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7.60% debentures due 2027
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298 | 298 | ||||||
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Other
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10 | 2 | ||||||
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Total borrowings
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1,611 | 1,604 | ||||||
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Borrowings due within one year
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(6 | ) | -- | |||||
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Long-term borrowings
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$ | 1,605 | $ | 1,604 | ||||
At June 30, 2010, the Company had a $700 million revolving credit facility ("Credit Facility") in two tranches, with $125 million expiring in 2012 and $575 million expiring in 2013. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a facility fee is paid on the total commitment. In addition, the Credit Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. At June 30, 2010 and December 31, 2009, the Company had no outstanding borrowings under the Credit Facility.
The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Given the expiration dates of the Credit Facility, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability and intent to refinance such borrowings on a long-term basis.
10
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2010, the Company also had a $200 million line of credit under its annually renewable accounts receivable securitization agreement ("A/R Facility"). The A/R Facility was renewed in July 2010. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and the Company pays a fee to maintain availability of the A/R Facility. In addition, the A/R Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. At June 30, 2010, the Company had no outstanding borrowings under the A/R Facility. Refer to Note 11, "Commitments" for further details regarding the A/R Facility.
|
RETIREMENT PLANS
|
DEFINED BENFIT PENSION PLANS
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined.
Below is a summary of the components of net periodic benefit cost recognized for Eastman's significant defined benefit pension plans:
|
Summary of Components of Net Periodic Benefit Costs
|
||||||||||||||||
|
Second Quarter
|
First Six Months
|
|||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Service cost
|
$ | 11 | $ | 10 | $ | 22 | $ | 21 | ||||||||
|
Interest cost
|
21 | 22 | 42 | 43 | ||||||||||||
|
Expected return on assets
|
(26 | ) | (25 | ) | (53 | ) | (49 | ) | ||||||||
|
Amortization of:
|
||||||||||||||||
|
Prior service credit
|
(4 | ) | (4 | ) | (8 | ) | (8 | ) | ||||||||
|
Actuarial loss
|
11 | 10 | 22 | 17 | ||||||||||||
|
Net periodic benefit cost
|
$ | 13 | $ | 13 | $ | 25 | $ | 24 | ||||||||
POSTRETIREMENT WELFARE PLANS
Eastman provides a subsidy toward life insurance and health care and dental benefits for eligible retirees hired prior to January 1, 2007, and a subsidy toward health care benefits for retirees' eligible survivors. In general, Eastman provides those benefits to retirees eligible under the Company's U.S. plans. Similar benefits are also made available to retirees of Holston Defense Corporation, a wholly-owned subsidiary of the Company that, prior to January 1, 1999, operated a government-owned ammunitions plant.
Eligible employees hired on or after January 1, 2007 have access to postretirement health care benefits, but Eastman does not provide a subsidy toward the premium cost of postretirement benefits for those employees.
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.
11
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Costs recognized for benefits for eligible retirees hired prior to January 1, 2007 are recorded using estimated amounts, which may change as actual costs derived for the year are determined. Below is a summary of the components of net periodic benefit cost recognized for the Company's U.S. other post-employment plans:
|
Summary of Components of Net Periodic Benefit Costs
|
||||||||||||||||
|
Second Quarter
|
First Six Months
|
|||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Service cost
|
$ | 2 | $ | 2 | $ | 5 | $ | 4 | ||||||||
|
Interest cost
|
11 | 11 | 22 | 22 | ||||||||||||
|
Expected return on assets
|
-- | -- | (1 | ) | (1 | ) | ||||||||||
|
Amortization of:
|
||||||||||||||||
|
Prior service credit
|
(6 | ) | (6 | ) | (12 | ) | (12 | ) | ||||||||
|
Actuarial loss
|
3 | 3 | 6 | 6 | ||||||||||||
|
Net periodic benefit cost
|
$ | 10 | $ | 10 | $ | 20 | $ | 19 | ||||||||
|
ENVIRONMENTAL MATTERS
|
Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP"), by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure and postclosure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K. Because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations or cash flows. The Company's total reserve for environmental contingencies was $40 million and $42 million at June 30, 2010 and December 31, 2009, respectively. Estimated future environmental expenditures for remediation costs range from the minimum or best estimate of $10 million to the maximum of $21 million at June 30, 2010, and $10 million to the maximum of $20 million at December 31, 2009. The best estimate accrued to date over the facilities' estimated useful lives for asset retirement obligation costs is $30 million and $32 million at June 30, 2010 and December 31, 2009, respectively.
|
COMMITMENTS
|
Purchasing Obligations and Lease Commitments
At June 30, 2010, the Company had various purchase obligations totaling approximately $1 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 $85 million over a period of several years. Of the total lease commitments, approximately 15 percent relates to machinery and equipment, including computer and communications equipment and production equipment; approximately 50 percent relates to real property, including office space, storage facilities and land; and approximately 35 percent relates to railcars.
12
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable Securitization Program
Effective January 1, 2010, the Company adopted amended accounting guidance for transfers of financial assets which impacts the financial statement presentation for activity under the Company's $200 million accounts receivable securitization program. Beginning for periods after December 31, 2009, transfers of receivables interests that were previously treated as sold and removed from the balance sheet will be included in trade receivables, net and reflected as secured borrowings on the balance sheet. The Company's Statement of Financial Position at June 30, 2010 reflects an increase in trade receivables, $200 million of which was transferred at December 31, 2009 under the securitization program and reduced cash flows from operating activities by that amount for first six months 2010. As a result of the adoption of this accounting guidance, any amounts drawn on this accounts receivable securitization program would now be reflected as secured borrowings and disclosed in Note 8, "Borrowings." At December 31, 2009 and June 30, 2009 the accounts receivable securitization program was fully drawn.
Guarantees
The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease. These residual value guarantees at June 30, 2010
totaled $160 million and consisted primarily of leases for railcars and company aircraft. Leases with guarantee amounts totaling $11 million, $139 million, and $10 million will expire in 2011, 2012, and 2014 and beyond, respectively. The Company believes, based on current facts and circumstances, that the likelihood of a material payment pursuant to such guarantees is remote.
Variable Interest Entities
In June 2009, new accounting guidance on the consolidation of Variable Interest Entities ("VIEs") was issued. This guidance is effective for all VIEs or potential VIEs the Company is involved with on or after January 1, 2010. This guidance amends the evaluation criteria to identify which entity has a controlling financial interest of a variable interest entity and requires ongoing reassessments. The Company has evaluated its material contractual relationships under the new guidance and concluded that the entities involved in these relationships are not VIEs or, in the case of Primester, a joint venture that manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the Company has shared control of the VIE. As such, the Company is not required to consolidate these entities.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Fair Value of Borrowings
The fair value for fixed-rate borrowings is based on current interest rates for comparable securities.
|
June 30, 2010
|
December 31, 2009
|
|||||||||||||||
|
(Dollars in millions)
|
Recorded Amount
|
Fair Value
|
Recorded Amount
|
Fair Value
|
||||||||||||
|
Long-term borrowings
|
$ | 1,605 | $ | 1,800 | $ | 1,604 | $ | 1,656 | ||||||||
The Company's floating-rate borrowings approximate fair value.
13
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
The following chart shows the financial assets and liabilities measured at fair value on a recurring basis.
|
(Dollars in millions)
|
Fair Value Measurements at June 30, 2010
|
|||||||||||||||
|
Description
|
June 30, 2010
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
||||||||||||
|
Derivative Assets
|
$ | 139 | $ | 2 | $ | 137 | $ | -- | ||||||||
|
Derivative Liabilities
|
(93 | ) | (4 | ) | (89 | ) | -- | |||||||||
| $ | 46 | $ | (2 | ) | $ | 48 | $ | -- | ||||||||
|
(Dollars in millions)
|
Fair Value Measurements at December 31, 2009
|
|||||||||||||||
|
Description
|
December 31, 2009
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
||||||||||||
|
Derivative Assets
|
$ | 52 | $ | -- | $ | 52 | $ | -- | ||||||||
|
Derivative Liabilities
|
(21 | ) | -- | (21 | ) | -- | ||||||||||
| $ | 31 | $ | -- | $ | 31 | $ | -- | |||||||||
Hedging Programs
The Company is exposed to market risk, such as changes in currency exchange rates, raw material and energy costs and interest rates. The Company uses various derivative financial instruments pursuant to the Company's hedging policies to mitigate these market risk factors and their effect on the cash flows of the underlying transactions. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. For further information, see Note 9, "Fair Value of Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.
Fair Value Hedges
Fair value hedges are derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.
As of June 30, 2010, the total notional amount of the Company's interest rate swaps was $146 million. The fair value of the derivative of $2 million was recorded in other noncurrent assets.
Cash Flow Hedges
Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income, net of income taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
During the second quarter 2010, the Company entered into forward starting interest rate swaps designated as cash flow hedges to manage interest rate exposure related to the probable future issuance of fixed-rate debt. These forward starting interest rate swaps are based on a total notional amount of $300 million.
As of June 30, 2010, the total amount of the Company's foreign exchange forward and option contracts was a $62 million asset. As of June 30, 2010, the total amount of the Company's feedstock/energy forward and option contracts was a $14 million liability. As of June 30, 2010, the total amount of the Company's forward starting interest rate swaps contracts was a $4 million liability.
14
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Derivatives Designated as Cash Flow Hedging Instruments
|
(Dollars in millions)
|
Fair Value
|
|||||||||
|
Derivative Assets
|
Balance Sheet Location
|
June 30, 2010
|
December 31, 2009
|
|||||||
|
Commodity contracts
|
Other current assets
|
$ | -- | $ | 7 | |||||
|
Foreign exchange contracts
|
Other current assets
|
33 | 14 | |||||||
|
Foreign exchange contracts
|
Other noncurrent assets
|
30 | 11 | |||||||
| $ | 63 | $ | 32 | |||||||
|
(Dollars in millions)
|
Fair Value
|
|||||||||
|
Derivative Liabilities
|
Balance Sheet Location
|
June 30, 2010
|
December 31, 2009
|
|||||||
|
Commodity contracts
|
Payables and other current liabilities
|
$ | 14 | $ | 1 | |||||
|
Foreign exchange contracts
|
Other noncurrent liabilities
|
1 | -- | |||||||
|
Forward starting interest rate swap contracts
|
Other noncurrent liabilities
|
4 | -- | |||||||
| $ | 19 | $ | 1 | |||||||
Derivatives' Cash Flow Hedging Relationships
|
Second Quarter
|
|||||||||||||||||
|
(Dollars in millions)
|
|||||||||||||||||
|
Derivatives' Cash Flow Hedging Relationships
|
Amount after tax of gain/ (loss) recognized in Other Comprehensive Income on derivatives (effective portion)
|
Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
|
Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
|
||||||||||||||
|
June 30, 2010
|
June 30, 2009
|
June 30, 2010
|
June 30, 2009
|
||||||||||||||
|
Commodity contract
|
$ | (8 | ) | $ | 1 |
Cost of sales
|
$ | (1 | ) | $ | (3 | ) | |||||
|
Foreign exchange contracts
|
13 | (9 | ) |
Sales
|
14 | 6 | |||||||||||
|
Forward starting interest rate swap contracts
|
(3 | ) | -- | ||||||||||||||
| $ | 2 | $ | (8 | ) | $ | 13 | $ | 3 | |||||||||
|
First Six Months
|
|||||||||||||||||
|
(Dollars in millions)
|
|||||||||||||||||
|
Derivatives' Cash Flow Hedging Relationships
|
Amount after tax of gain/ (loss) recognized in Other Comprehensive Income on derivatives (effective portion)
|
Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
|
Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
|
||||||||||||||
|
June 30, 2010
|
June 30, 2009
|
June 30, 2010
|
June 30, 2009
|
||||||||||||||
|
Commodity contract
|
$ | (12 | ) | $ | 5 |
Cost of sales
|
$ | 4 | $ | (9 | ) | ||||||
|
Foreign exchange contracts
|
23 | (4 | ) |
Sales
|
23 | 14 | |||||||||||
|
Forward starting interest rate swap contracts
|
(3 | ) | -- | ||||||||||||||
| $ | 8 | $ | 1 | $ | 27 | $ | 5 | ||||||||||
For all periods presented, there were no material ineffectiveness with regard to the Company's cash flow hedges.
Nondesignated / Nonqualifying Derivative Instruments
The Company mitigates foreign currency transaction exposure within a quarter from point of recording a sale or purchase transaction to the point of receipt of the currency related to that transaction through its foreign exchange tactical hedging program. The gains or losses on these nonqualifying derivatives or derivatives that are not designated as hedges are marked to market in the line item "Other charges (income), net" of the Statements of Earnings. The Company recognized approximately $12 million net gain on nonqualifying derivatives during the quarter ended June 30, 2010. The Company recognized approximately $15 million net gain on nonqualifying derivatives during the six months ended June 30, 2010.
15
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
STOCKHOLDERS' EQUITY
|
A reconciliation of the changes in stockholders' equity for first six months 2010 is provided below:
|
(Dollars in millions)
|
Common Stock at Par Value
$
|
Paid-in Capital
$
|
Retained Earnings
$
|
Accumulated Other Comprehensive Income (Loss)
$
|
Treasury Stock at Cost
$
|
Total Stockholders' Equity
$
|
||||||||||||||||||
|
Balance at December 31, 2009
|
1 | 661 | 2,571 | (385 | ) | (1,335 | ) | 1,513 | ||||||||||||||||
|
Net Earnings
|
-- | -- | 249 | -- | -- | 249 | ||||||||||||||||||
|
Cash Dividends Declared
(1)
|
-- | -- | (64 | ) | -- | -- | (64 | ) | ||||||||||||||||
|
Other Comprehensive Income (Loss)
|
-- | -- | -- | (4 | ) | -- | (4 | ) | ||||||||||||||||
|
Share-Based Compensation Expense
(2)
|
-- | 10 | -- | -- | -- | 10 | ||||||||||||||||||
|
Stock Option Exercises
|
-- | 26 | -- | -- | -- | 26 | ||||||||||||||||||
|
Stock Repurchases
|
-- | -- | -- | -- | (53 | ) | (53 | ) | ||||||||||||||||
|
Balance at June 30, 2010
|
1 | 697 | 2,756 | (389 | ) | (1,388 | ) | 1,677 | ||||||||||||||||
|
(1)
|
Includes cash dividends declared, but unpaid.
|
|
(2)
|
Includes the fair value of equity share-based awards recognized for share-based compensation.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
|
(Dollars in millions)
|
Cumulative Translation Adjustment
$
|
Unrecognized Losses and Prior Service Credits for Benefit Plans
$
|
Unrealized Gains on Derivative Instruments
$
|
Unrealized Losses on Investments
$
|
Accumulated Other Comprehensive Income (Loss)
$
|
|||||||||||||||
|
Balance at December 31, 2008
|
60 | (414 | ) | 20 | (1 | ) | (335 | ) | ||||||||||||
|
Period change
|
17 | (74 | ) | 7 | -- | (50 | ) | |||||||||||||
|
Balance at December 31, 2009
|
77 | (488 | ) | 27 | (1 | ) | (385 | ) | ||||||||||||
|
Period change
|
(21 | ) | 9 | 8 | -- | (4 | ) | |||||||||||||
|
Balance at June 30, 2010
|
56 | (479 | ) | 35 | (1 | ) | (389 | ) | ||||||||||||
Amounts of other comprehensive income (loss) are presented net of applicable taxes. The Company records deferred income taxes on the cumulative translation adjustment related to branch operations and other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are provided on the cumulative translation adjustment of subsidiaries outside the United States, as such cumulative translation adjustment is considered to be a component of permanently invested, unremitted earnings of these foreign subsidiaries.
|
EARNINGS AND DIVIDENDS PER SHARE
|
|
Second Quarter
|
First Six Months
|
||||||
|
2010
|
2009
|
2010
|
2009
|
||||
|
Shares used for earnings per share calculation (in millions):
|
|||||||
|
Basic
|
72.3
|
72.5
|
72.3
|
72.5
|
|||
|
Diluted
|
73.5
|
73.1
|
73.5
|
73.0
|
|||
In second quarter and first six months 2010, common shares underlying options to purchase 594,551 shares of common stock and 709,801 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total proceeds that would be received for these awards. Second quarter and first six months 2010 reflect the impact of share repurchases of 0.9 million shares.
In second quarter and first six months 2009, common shares underlying options to purchase 3,745,729 shares of common stock and 4,031,829 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total proceeds that would be received for these awards. There were no repurchases in first six months 2009.
16
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company declared cash dividends of $0.44 per share in second quarter 2010 and 2009 and $0.88 per share in first six months 2010 and 2009.
The Company utilizes share-based awards under employee and non-employee director compensation programs. These share-based awards may include restricted and unrestricted stock, restricted stock units, stock options, and performance shares. In both second quarter 2010 and 2009, approximately $5 million of compensation expense before tax were recognized in selling, general and administrative expense in the earnings statement for all share-based awards. The impact on second quarter 2010 and 2009 net earnings of approximately $3 million and $2 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.
In first six months 2010 and 2009, $10 million and $9 million, respectively, of compensation expense before tax were recognized in selling, general and administrative expense in the earnings statement for all share-based awards. The impact on first six months 2010 and 2009 net earnings of $6 million and $5 million, respectively, is net of deferred tax expense related to share-based award compensation.
Additional information regarding share-based compensation plans and awards may be found in Note 15, "Share-Based Compensation Plans and Awards", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
Included in the line item "Other items, net" of the "Cash flows from operating activities" section of the Consolidated Statements of Cash Flows are specific changes to certain balance sheet accounts as follows:
|
(Dollars in millions)
|
First Six Months
|
|||||||
|
2010
|
2009
|
|||||||
|
Current assets
|
$ | 7 | $ | (72 | ) | |||
|
Other assets
|
(8 | ) | 37 | |||||
|
Current liabilities
|
11 | (34 | ) | |||||
|
Long-term liabilities and equity
|
14 | 3 | ||||||
|
Total
|
$ | 24 | $ | (66 | ) | |||
The above changes included transactions such as monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, accrued taxes, value-added taxes, and other miscellaneous accruals.
|
SEGMENT INFORMATION
|
The Company's products and operations are managed and reported in five reportable operating segments, consisting of the CASPI segment, the Fibers segment, the PCI segment, the Performance Polymers segment, and the Specialty Plastics segment. For additional information concerning the Company's segments' businesses and products, see Note 22, "Segment Information", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.
Research and development and other expenses not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown in the tables below as "other" operating losses.
17
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In first quarter 2010, the Company transferred certain intermediates product lines from the Performance Polymers segment to the PCI segment to improve optimization of manufacturing assets supporting the three raw material streams that supply the Company's downstream businesses. The revised segment composition reflects how management views and evaluates operations. Accordingly, the amounts for sales, operating earnings, and assets have been adjusted to retrospectively apply these changes to all periods presented.
|
Second Quarter
|
||||||||
|
(Dollars in millions)
|
2010
|
2009
|
||||||
|
Sales
|
||||||||
|
CASPI
|
$ | 416 | $ | 302 | ||||
|
Fibers
|
274 | 263 | ||||||
|
PCI
|
541 | 316 | ||||||
|
Performance Polymers
|
222 | 185 | ||||||
|
Specialty Plastics
|
271 | 187 | ||||||
|
Total Sales
|
$ | 1,724 | $ | 1,253 | ||||
|
First Six Months
|
||||||||
|
(Dollars in millions)
|
2010
|
2009
|
||||||
|
Sales
|
||||||||
|
CASPI
|
$ | 789 | $ | 552 | ||||
|
Fibers
|
541 | 522 | ||||||
|
PCI
|
1,023 | 620 | ||||||
|
Performance Polymers
|
416 | 344 | ||||||
|
Specialty Plastics
|
519 | 344 | ||||||
|
Total Sales
|
$ | 3,288 | 2,382 | |||||
|
Second Quarter
|
||||||||
|
(Dollars in millions)
|
2010
|
2009
|
||||||
|
Operating Earnings (Loss)
|
||||||||
|
CASPI
(1)
|
$ | 94 | $ | 50 | ||||
|
Fibers
|
83 | 74 | ||||||
|
PCI
(2)
|
69 | 1 | ||||||
|
Performance Polymers
|
6 | 7 | ||||||
|
Specialty Plastics
(1)
|
21 | 8 | ||||||
|
Total Operating Earnings by Segment
|
273 | 140 | ||||||
|
Other
|
(16 | ) | (9 | ) | ||||
|
Total Operating Earnings
|
$ | 257 | $ | 131 | ||||
|
(1)
|
Second quarter 2009 includes a positive adjustment to first quarter 2009 restructuring charge of ($2) million and ($1) million in the CASPI and Specialty Plastics segments, respectively.
|
|
(2)
|
Second quarter 2010 includes restructuring charges of $3 million, primarily for severance in the PCI segment. See Note 3, "Asset Impairments and Restructuring Charges, Net" for additional information.
|
18
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
First Six Months
|
||||||||
|
(Dollars in millions)
|
2010
|
2009
|
||||||
|
Operating Earnings (Loss)
|
||||||||
|
CASPI
(1)
|
$ | 160 | $ | 64 | ||||
|
Fibers
(1)
|
162 | 143 | ||||||
|
PCI
(1) (2)
|
106 | (9 | ) | |||||
|
Performance Polymers
(1)
|
(7 | ) | (11 | ) | ||||
|
Specialty Plastics
(1)
|
42 | (10 | ) | |||||
|
Total Operating Earnings by Segment
|
463 | 177 | ||||||
|
Other
|
(24 | ) | (21 | ) | ||||
|
Total Operating Earnings
|
$ | 439 | $ | 156 | ||||
|
(1)
|
First six months 2009 includes a restructuring charge primarily for a severance program of $5 million, $4 million, $6 million, $4 million, and $4 million in the CASPI, Fibers, PCI, Performance Polymers, and Specialty Plastics segments, respectively.
|
|
(2)
|
First six months 2010 includes restructuring charges of $3 million, primarily for severance in the PCI segment. See Note 3, "Asset Impairments and Restructuring Charges, Net" for additional information.
|
|
June 30,
|
December 31,
|
|||||||
|
(Dollars in millions)
|
2010
|
2009
|
||||||
|
Assets by Segment
(1)
|
||||||||
|
CASPI
|
$ | 1,270 | $ | 1,128 | ||||
|
Fibers
|
845 | 726 | ||||||
|
PCI
|
1,177 | 845 | ||||||
|
Performance Polymers
|
614 | 575 | ||||||
|
Specialty Plastics
|
1,001 | 910 | ||||||
|
Total Assets by Segment
|
4,907 | 4,184 | ||||||
|
Corporate Assets
|
892 | 1,331 | ||||||
|
Total Assets
|
$ | 5,799 | $ | 5,515 | ||||
|
(1)
|
The chief operating decision maker holds segment management accountable for accounts receivable, inventory, fixed assets, goodwill, and intangibles.
|
|
LEGAL MATTERS
|
From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could negatively impact earnings or cash flows in a particular future period.
19
|
ITEM
|
Page
|
|
21
|
|
|
21
|
|
|
22
|
|
|
23
|
|
|
26
|
|
|
31
|
|
|
32
|
|
|
35
|
|
|
37
|
|
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Eastman Chemical Company's (the "Company" or "Eastman") audited consolidated financial statements, including related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2009 Annual Report on Form 10-K, and the Company's unaudited consolidated financial statements, including related notes, included elsewhere in this report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"), the Company's management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, sales revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, impairment of long-lived assets, environmental costs, U.S. pension and other post-employment benefits, litigation and contingent liabilities, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's management believes the critical accounting estimates described in Part II, Item 7 of the Company's 2009 Annual Report on Form 10-K are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.
This Management's Discussion and Analysis includes the following non-GAAP financial measures and accompanying reconciliations to the most directly comparable GAAP financial measures. The non-GAAP financial measures used by the Company may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance or liquidity prepared in accordance with GAAP.
|
·
|
Company and segment operating earnings, net earnings, and diluted earnings per share excluding asset impairments and restructuring charges, net; and
|
|
·
|
Cash flows from operating activities excluding the impact of adoption of amended accounting guidance for transfers of financial assets.
|
In second quarter 2010, there were $3 million in restructuring charges, primarily for severance associated with the acquisition and integration of Genovique Specialties Corporation ("Genovique").
In second quarter 2009, the Company recognized a $3 million reduction of the first quarter 2009 restructuring charge resulting in a net $23 million charge in first six months 2009. The charges, primarily for severance, resulted from a reduction in force.
In first quarter 2010, the Company adopted amended accounting guidance for transfers of financial assets which impacts the financial statement presentation for activity under the Company's $200 million accounts receivable securitization program. For periods beginning after December 31, 2009, transfers of receivables interests that were previously treated as sold and removed from the balance sheet will be included in trade receivables, net and reflected as secured borrowings on the balance sheet. The Company's Statement of Financial Position at June 30, 2010 reflects an increase in trade receivables, $200 million of which was transferred at December 31, 2009 under the securitization program and reduced cash flows from operating activities by that amount for first quarter 2010. At June 30, 2010, there were no transfers of receivables interests under the accounts receivable securitization program.
For evaluation and analysis of ongoing business results and of the impact on the Company and segments of strategic decisions and actions to reduce costs and to improve the profitability of the Company, Eastman's management believes that Company and segment earnings should be considered both with and without asset impairments and restructuring charges. Management believes that investors can better evaluate and analyze historical and future business trends if they also consider the reported Company and segment results, respectively, without the asset impairments and restructuring charges, net. In addition, management believes that cash provided by (used in) operating earnings should be considered both with and without the impact of adoption of amended accounting guidance for transfers of financial assets. Management utilizes these measures to evaluate business performance and its cash position and in determining certain performance-based compensation. These measures, excluding the identified items, are not recognized in accordance with GAAP and should not be viewed as alternatives to the GAAP measures of performance.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company generated sales revenue of $1.7 billion and $1.3 billion in second quarter 2010 and 2009, respectively and $3.3 billion and $2.4 billion in first six months 2010 and 2009, respectively. Sales revenue increases for both second quarter and first six months 2010 compared to comparable 2009 periods were due to higher sales volume primarily attributed to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives, and increased selling prices in response to higher raw material and energy costs.
Operating earnings were $257 million in second quarter 2010 compared with $131 million in second quarter 2009 and $439 million in first six months 2010 compared with $156 million in first six months 2009. Operating earnings were negatively impacted by restructuring charges of $3 million in both second quarter and first six months 2010 and $23 million in first six months 2009. Operating earnings in second quarter 2009 were positively impacted by a $3 million reduction of a first quarter 2009 restructuring charge. The increase in both comparable periods was due to higher sales volume and higher capacity utilization which led to lower unit costs. In addition, higher selling prices more than offset higher raw material and energy costs. Operating earnings in second quarter 2010 were negatively impacted by costs recognized during the quarter related to the previously announced power outage at the Company's Longview, Texas manufacturing facility, which were mostly offset by a partial settlement of a related insurance claim and were primarily reflected in the Performance Chemicals and Intermediates ("PCI") and Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segments. In first six months 2010, operating earnings included the cumulative negative impact of approximately $25 million related to the outage, net of these insurance proceeds from partial settlement. The Company expects additional insurance proceeds in the second half of the year. First six months 2010 operating earnings also included $12 million from acetyl license revenue. Second quarter and first six months 2009 operating earnings included approximately $20 million in costs related to the reconfiguration of the Longview, Texas facility.
The Company used $19 million in cash from operating activities during first six months 2010 compared to $337 million provided by operating activities in first six months 2009. Excluding the $200 million impact of the adoption of amended accounting guidance discussed above in "Presentation of Non-GAAP Financial Measures", Eastman generated $181 million in cash from operating activities primarily due to higher net earnings partially offset by an increase in working capital. Excluding the impact of the adoption of this amended accounting guidance, the Company expects to generate free cash flow of approximately $300 million for full year 2010, assuming capital expenditures of approximately $250 million and U.S. defined benefit pension plan funding in an amount of approximately $25 million. Free cash flow is defined as cash from operating activities less capital expenditures and dividends.
The Company is progressing on its growth initiatives in 2010.
|
·
|
In the Fibers segment, the Korean acetate tow facility was acquired and commenced production in first quarter, and began customer qualifications during second quarter.
|
|
·
|
In the Specialty Plastics segment, the monomer manufacturing facility and the first Eastman Tritan
TM
copolyester polymer manufacturing facility in Kingsport, Tennessee commenced production in first quarter.
|
|
·
|
In the PCI segment, Genovique, a global producer of specialty non-phthalate plasticizers for water-based adhesives and other applications, was acquired in second quarter.
|
|
·
|
In the Specialty Plastics segment, the expansion of capacity by approximately 25 percent for cyclohexane dimethanol ("CHDM") modified polymers, a monomer used in the manufacture of copolyester, has commenced and is expected to be online in two phases in late 2011 and in 2012.
|
|
·
|
In the Specialty Plastics segment, the second thirty thousand metric ton expansion of the resin capacity for Tritan
TM
copolyesters has commenced and is expected to be online by the end of 2011.
|
|
·
|
In the CASPI segment, the third expansion of the Company’s hydrogenated hydrocarbon resins capacity in Middelburg, the Netherlands will increase this capacity by an additional 20 percent and is expected to be online in early 2011. A Longview, Texas hydrogenated hydrocarbon resins expansion will commence in the second half of the year and will also be online in early 2011.
|
In addition, the Company announced on April 23, 2010 that it will review strategic options, including a possible divestiture, for its polyethylene terephthalate ("PET") business in the Performance Polymers segment and anticipates completing this effort by year end.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
Second Quarter
|
||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
Change
|
Volume Effect
|
Price Effect
|
Product
Mix Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
Sales
|
$ | 1,724 | $ | 1,253 | 38 | % | 21 | % | 13 | % | 4 | % | -- | % | ||||||||||||||
|
First Six Months
|
||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
Change
|
Volume Effect
|
Price Effect
|
Product
Mix Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
Sales
|
$ | 3,288 | $ | 2,382 | 38 | % | 21 | % | 11 | % | 5 | % | 1 | % | ||||||||||||||
Sales revenue in second quarter 2010 compared to second quarter 2009 increased $471 million primarily due to higher sales volume in all segments and increased selling prices primarily in the PCI, CASPI, and Performance Polymers segments. The higher sales volume was attributed primarily to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives. The increased selling prices were in response to higher raw material and energy costs.
Sales revenue in first six months 2010 compared to first six months 2009 increased $906 million primarily due to higher sales volume in all segments and increased selling prices primarily in the PCI, Performance Polymers, and CASPI segments. The higher sales volume was attributed primarily to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives. The increased selling prices were in response to higher raw material and energy costs.
|
Second Quarter
|
First Six Months
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
||||||||||||||||||
|
Gross Profit
|
$ | 404 | $ | 260 | 55 | % | $ | 725 | $ | 439 | 65 | % | ||||||||||||
|
As a percentage of sales
|
23 | % | 21 | % | 22 | % | 18 | % | ||||||||||||||||
Gross profit and gross profit as a percentage of sales in second quarter and first six months 2010 increased compared to second quarter and first six months 2009 in all segments except Performance Polymers. The increase in both comparable periods was due to higher sales volume and higher capacity utilization which led to lower unit costs. In addition, higher selling prices more than offset higher raw material and energy costs. Gross profit in second quarter 2010 included costs recognized during the quarter related to the previously announced power outage, which were mostly offset by a partial settlement of a related insurance claim and were primarily reflected in the PCI and CASPI segments. In first six months 2010, gross profit included the cumulative negative impact of approximately $25 million related to the outage, net of these insurance proceeds from partial settlement. First six months 2010 gross profit also included $12 million from acetyl license revenue. Second quarter and first six months 2009 included approximately $20 million in costs related to the reconfiguration of the Longview, Texas facility. The reconfiguration costs impacted the PCI and CASPI segments.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
Second Quarter
|
First Six Months
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
||||||||||||||||||
|
Selling, General and Administrative Expenses
|
$ | 108 | $ | 98 | 10 | % | $ | 211 | $ | 192 | 10 | % | ||||||||||||
|
Research and Development Expenses
|
36 | 34 | 6 | % | 72 | 68 | 6 | % | ||||||||||||||||
| $ | 144 | $ | 132 | 9 | % | $ | 283 | $ | 260 | 9 | % | |||||||||||||
|
As a percentage of sales
|
8 | % | 11 | % | 9 | % | 11 | % | ||||||||||||||||
Selling, general and administrative ("SG&A") expenses in second quarter 2010 were higher compared to second quarter 2009 primarily due to higher expenses for growth initiatives. SG&A expenses in first six months 2010 were higher compared to first six months 2009 primarily due to increased performance-based compensation expense and higher expenses for growth initiatives.
Research and development ("R&D") expenses were higher in second quarter and first six months 2010 compared to second quarter and first six months 2009 primarily due to higher R&D expenses for growth initiatives.
Asset Impairments and Restructuring Charges, Net
In second quarter 2010, there were $3 million in restructuring charges primarily for severance associated with the acquisition and integration of Genovique.
In second quarter 2009, there was a $3 million reduction of the first quarter 2009 restructuring charge resulting in a net $23 million charge in first six months 2009. The charges, primarily for severance, resulted from a reduction in force.
For more information regarding asset impairments and restructuring charges, net see the segment discussions and Note 3, "Asset Impairments and Restructuring Charges, Net", to the Company's unaudited consolidated financial statements
in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Operating Earnings
|
Second Quarter
|
First Six Months
|
||||||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||
|
Operating earnings
|
$ | 257 | $ | 131 | 96 | % | $ | 439 | $ | 156 |
>100 %
|
||||||||||
|
Asset impairments and restructuring charges, net
|
3 | (3 | ) | 3 | 23 | ||||||||||||||||
|
Operating earnings excluding asset impairments and restructuring charges, net
|
$ | 260 | $ | 128 |
>100
|
% | $ | 442 | $ | 179 |
>100 %
|
||||||||||
Net Interest Expense
|
Second Quarter
|
First Six Months
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
||||||||||||||||||
|
Gross interest costs
|
$ | 27 | $ | 26 | $ | 54 | $ | 50 | ||||||||||||||||
|
Less: Capitalized interest
|
-- | 4 | 1 | 7 | ||||||||||||||||||||
|
Interest expense
|
27 | 22 | 23 | % | 53 | 43 | 23 | % | ||||||||||||||||
|
Interest income
|
2 | 2 | 3 | 4 | ||||||||||||||||||||
|
Net interest expense
|
$ | 25 | $ | 20 | 25 | % | $ | 50 | $ | 39 | 28 | % | ||||||||||||
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net interest expense increased $5 million and $11 million in second quarter and first six months 2010, respectively, compared to comparable 2009 periods primarily due to lower capitalized interest resulting from lower capital spending and higher average borrowings.
For 2010, the Company expects net interest expense to increase compared with 2009 primarily due to lower capitalized interest and higher average borrowings.
Other Charges (Income), Net
|
Second Quarter
|
First Six Months
|
|||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Foreign exchange transaction losses
|
$ | 6 | $ | 2 | $ | 9 | $ | 2 | ||||||||
|
Investment losses, net
|
-- | 2 | 1 | 5 | ||||||||||||
|
Other, net
|
2 | 1 | 4 | 2 | ||||||||||||
|
Other charges (income), net
|
$ | 8 | $ | 5 | $ | 14 | $ | 9 | ||||||||
Provision for Income Taxes
|
Second Quarter
|
First Six Months
|
|||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Provision for income taxes
|
$ | 76 | $ | 41 | $ | 126 | $ | 41 | ||||||||
|
Effective tax rate
|
34 | % | 39 | % | 33 | % | 38 | % | ||||||||
Excluding discrete items, second quarter and first six months 2010 effective tax rates reflect the Company's expected full year tax rate on reported earnings before income taxes of approximately 33 percent. Second quarter and first six months 2009 effective tax rates reflect a $7 million tax charge associated with a change in accounting method for tax purposes to accelerate timing of deductions for manufacturing repairs expense.
|
Net Earnings and Diluted Earnings per Share
|
||||||||||||||||
|
Second Quarter
|
||||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
(Dollars in millions, except diluted EPS)
|
$ | EPS | $ | EPS | ||||||||||||
|
Net earnings
|
$ | 148 | $ | 2.02 | $ | 65 | $ | 0.89 | ||||||||
|
Asset impairments and restructuring charges, net of tax
|
2 | 0.03 | (2 | ) | (0.03 | ) | ||||||||||
|
Net earnings excluding asset impairments and restructuring charges, net of tax
|
$ | 150 | $ | 2.05 | $ | 63 | $ | 0.86 | ||||||||
|
First Six Months
|
||||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
(Dollars in millions, except diluted EPS)
|
$ | EPS | $ | EPS | ||||||||||||
|
Net earnings
|
$ | 249 | $ | 3.38 | $ | 67 | $ | 0.91 | ||||||||
|
Asset impairments and restructuring charges, net of tax
|
2 | 0.03 | 14 | 0.20 | ||||||||||||
|
Net earnings excluding asset impairments and restructuring charges, net of tax
|
$ | 251 | $ | 3.41 | $ | 81 | $ | 1.11 | ||||||||
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's products and operations are managed and reported in five reportable operating segments, consisting of the CASPI segment, the Fibers segment, the PCI segment, the Performance Polymers segment, and the Specialty Plastics segment. For additional information concerning the Company's operating businesses and products,
see Note 22, "Segment Information", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.
Sales revenue and expenses not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown in Note 17, "Segment Information", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, as "other" sales revenue and operating losses.
In first quarter 2010, the Company transferred certain intermediates product lines from the Performance Polymers segment to the PCI segment to improve optimization of manufacturing assets supporting the three raw material streams that supply the Company's downstream businesses. The revised segment composition reflects how management views and evaluates operations. Accordingly, the amounts for sales and operating earnings have been adjusted to retrospectively apply these changes to all periods presented.
|
CASPI Segment
|
|||||||||||||||||
|
Second Quarter
|
First Six Months
|
||||||||||||||||
|
Change
|
Change
|
||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
$
|
%
|
2010
|
2009
|
$
|
%
|
|||||||||
|
Sales
|
$
|
416
|
$
|
302
|
$
|
114
|
37 %
|
$
|
789
|
$
|
552
|
$
|
237
|
43 %
|
|||
|
Volume effect
|
48
|
16 %
|
133
|
24 %
|
|||||||||||||
|
Price effect
|
42
|
14 %
|
49
|
9 %
|
|||||||||||||
|
Product mix effect
|
26
|
8 %
|
50
|
9 %
|
|||||||||||||
|
Exchange rate effect
|
(2)
|
(1) %
|
5
|
1 %
|
|||||||||||||
|
Operating earnings
|
94
|
50
|
44
|
88 %
|
160
|
64
|
96
|
>100 %
|
|||||||||
|
Asset impairments and restructuring charges, net
|
--
|
(2)
|
2
|
--
|
5
|
(5)
|
|||||||||||
|
Operating earnings excluding asset impairments and restructuring charges, net
|
94
|
48
|
46
|
96 %
|
160
|
69
|
91
|
>100 %
|
|||||||||
Sales revenue increased second quarter and first six months 2010 compared to second quarter and first six months 2009 in all product lines due to higher sales volume, higher selling prices, and a favorable shift in product mix. The higher sales volume was attributed to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives, including the hydrogenated hydrocarbon resins manufacturing capacity expansion in Middelburg, the Netherlands which was completed in fourth quarter 2009. The higher selling prices were in response to higher raw material costs, particularly for commodity solvents product lines. The favorable shift in product mix was due to higher sales volume for specialty polymers and specialty coalescents product lines attributed to the demand recovery in coatings markets, particularly in the Asia Pacific and Europe, Middle East, and Africa regions.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Excluding the segment's portion of an adjustment to the severance charge for a reduction in force in first quarter 2009, operating earnings increased $46 million in second quarter 2010 compared to second quarter 2009 due primarily to higher sales volume and higher capacity utilization which led to lower unit costs and the favorable shift in product mix. Operating earnings in second quarter 2010 were negatively impacted by costs recognized during the quarter related to the previously announced power outage, which were mostly offset by a partial settlement of a related insurance claim. Second quarter 2009 operating earnings included approximately $5 million in costs related to the reconfiguration of the Longview, Texas facility.
Excluding the segment's portion of the severance charge for a reduction in force in first six months 2009, operating earnings increased $91 million in first six months 2010 compared to first six months 2009 due primarily to higher sales volume and higher capacity utilization which led to lower unit costs and the favorable shift in product mix. Operating earnings in first six months 2010 were negatively impacted by higher raw material and energy costs. Operating earnings also included the cumulative negative impact of approximately $10 million related to the previously announced power outage, net of a partial settlement of a related insurance claim. The Company expects additional insurance proceeds in the second half of the year. First six months 2009 operating earnings included approximately $5 million in costs related to the reconfiguration of the Longview, Texas facility. The asset impairments and restructuring charges, net for 2009 reflect the segment's portion of the severance charge for a reduction in force in first quarter 2009.
|
Fibers Segment
|
|||||||||||||||||
|
Second Quarter
|
First Six Months
|
||||||||||||||||
|
Change
|
Change
|
||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
$
|
%
|
2010
|
2009
|
$
|
%
|
|||||||||
|
Sales
|
$
|
274
|
$
|
263
|
$
|
11
|
4 %
|
$
|
541
|
$
|
522
|
$
|
19
|
4 %
|
|||
|
Volume effect
|
14
|
5 %
|
13
|
2 %
|
|||||||||||||
|
Price effect
|
(3)
|
(1) %
|
2
|
1 %
|
|||||||||||||
|
Product mix effect
|
--
|
-- %
|
4
|
1 %
|
|||||||||||||
|
Exchange rate effect
|
--
|
-- %
|
--
|
-- %
|
|||||||||||||
|
Operating earnings
|
83
|
74
|
9
|
12 %
|
162
|
143
|
19
|
13 %
|
|||||||||
|
Asset impairments and restructuring charges, net
|
--
|
--
|
--
|
--
|
4
|
(4)
|
|||||||||||
|
Operating earnings excluding asset impairments and restructuring charges, net
|
83
|
74
|
9
|
12 %
|
162
|
147
|
15
|
10 %
|
|||||||||
Sales revenue increased in second quarter and first six months 2010 compared to second quarter and first six months 2009 due to higher sales volume primarily for acetate yarn product lines in the Asia Pacific region.
Operating earnings increased $9 million in second quarter 2010 compared to second quarter 2009 primarily due to higher sales volume and higher capacity utilization for acetate yarn product lines.
Excluding the segment's portion of the severance charge for a reduction in force in first six months 2009, operating earnings increased $15 million in first six months 2010 primarily due to higher selling prices and higher capacity utilization for acetate yarn product lines.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
During first quarter 2010, the Company completed the acquisition of and commenced production at the Korean acetate tow manufacturing facility. The Company commenced customer qualifications during second quarter 2010.
The acquisition is expected to be fully integrated into the segment's production and sales processes in 2011.
|
PCI Segment
|
||||||||||||||||
|
Second Quarter
|
First Six Months
|
|||||||||||||||
|
Change
|
Change
|
|||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
$
|
%
|
2010
|
2009
|
$
|
%
|
||||||||
|
Sales
|
$
|
541
|
$
|
316
|
$
|
225
|
72 %
|
$
|
1,023
|
$
|
620
|
$
|
403
|
65 %
|
||
|
Volume effect
|
122
|
39 %
|
189
|
31 %
|
||||||||||||
|
Price effect
|
90
|
28 %
|
163
|
26 %
|
||||||||||||
|
Product mix effect
|
14
|
5 %
|
48
|
8 %
|
||||||||||||
|
Exchange rate effect
|
(1)
|
-- %
|
3
|
-- %
|
||||||||||||
|
Operating earnings (loss)
|
69
|
1
|
68
|
>100 %
|
106
|
(9)
|
115
|
>100 %
|
||||||||
|
Asset impairments and restructuring charges, net
|
3
|
--
|
3
|
3
|
6
|
(3)
|
||||||||||
|
Operating earnings (loss) excluding asset impairments and restructuring charges, net
|
72
|
1
|
71
|
>100 %
|
109
|
(3)
|
112
|
>100 %
|
||||||||
Sales revenue increased in second quarter and first six months 2010 compared to second quarter and first six months 2009 due to higher sales volume and higher selling prices. The higher sales volume, particularly for olefin derivative product lines, was attributed to improved customer demand due to the upturn in the global economy and the impact of competitor outages in the quarter, as well as the addition of new plasticizer product lines from the acquisition of Genovique. The higher selling prices were primarily in the olefin-based product lines in response to higher raw material and energy costs. Sales revenue also included $12 million from an acetyl technology licensing agreement in first six months 2010.
Excluding asset impairments and restructuring charges, net, operating earnings increased $71 million in second quarter 2010 compared to second quarter 2009 due to higher selling prices more than offsetting higher raw material and energy costs and higher sales volume and higher capacity utilization which led to lower unit costs. Operating earnings in second quarter 2010 included $3 million in restructuring charges, primarily for severance associated with the acquisition and integration of Genovique. Operating earnings in second quarter 2010 were negatively impacted by costs recognized during the quarter related to the previously announced power outage, which were mostly offset by a partial settlement of a related insurance claim. Operating earnings in second quarter 2009 included approximately $15 million of costs related to the reconfiguration of the Longview, Texas facility.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Excluding asset impairments and restructuring charges, net, operating earnings increased $112 million in first six months 2010 compared to first six months 2009 primarily due to higher selling prices and higher sales volume and higher capacity utilization which led to lower unit costs. Operating earnings in first six months 2010 were negatively impacted by higher raw material and energy costs. Operating earnings also included the cumulative negative impact of approximately $12 million related to the previously announced power outage, net of a partial settlement of a related insurance claim. The Company expects additional insurance proceeds in the second half of the year. First six months 2010 operating earnings also included $12 million from acetyl license revenue and $3 million in restructuring charges, primarily for severance associated with the acquisition and integration of Genovique. Operating earnings in first six months 2009 included approximately $15 million of costs related to the reconfiguration of the Longview, Texas facility. A restructuring charge in first six months 2009 consisted of the segment's portion of the severance charge for a reduction in force.
In second quarter 2010, the Company acquired Genovique, a global producer of specialty non-phthalate plasticizers for water-based adhesives and other applications. The transaction is expected to be accretive to the Company's full-year 2010 earnings per share.
|
Performance Polymers Segment
|
||||||||||||||||
|
Second Quarter
|
First Six Months
|
|||||||||||||||
|
Change
|
Change
|
|||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
$
|
%
|
2010
|
2009
|
$
|
%
|
||||||||
|
Sales
|
$
|
222
|
$
|
185
|
$
|
37
|
20 %
|
$
|
416
|
$
|
344
|
$
|
72
|
21 %
|
||
|
Volume effect
|
13
|
7 %
|
23
|
7 %
|
||||||||||||
|
Price effect
|
26
|
14 %
|
54
|
16 %
|
||||||||||||
|
Product mix effect
|
(2)
|
(1) %
|
(5)
|
(2) %
|
||||||||||||
|
Exchange rate effect
|
--
|
-- %
|
--
|
-- %
|
||||||||||||
|
Operating earnings (loss)
|
6
|
7
|
(1)
|
(14) %
|
(7)
|
(11)
|
4
|
36 %
|
||||||||
|
Asset impairments and restructuring charges, net
|
--
|
--
|
--
|
--
|
4
|
(4)
|
||||||||||
|
Operating earnings (loss) excluding asset impairments and restructuring charges, net
|
6
|
7
|
(1)
|
(14) %
|
(7)
|
(7)
|
--
|
-- %
|
||||||||
Sales revenue increased in second quarter and first six months 2010 compared to second quarter and first six months 2009 primarily due to higher selling prices and higher sales volume. Higher selling prices were primarily in response to higher raw material and energy costs. Sales volume increased due to improved operations of the Eastman IntegRex
TM
-based PET manufacturing facility.
Operating earnings in second quarter 2010 decreased $1 million compared to second quarter 2009 as the favorable impact of improved IntegRex™ operations was offset by continued difficult market conditions for PET in North America which limited the ability to offset higher raw material and energy costs with higher selling prices.
Excluding the segment's portion of the severance charge for a reduction in force in first quarter 2009, operating results in first six months 2010 were similar to first six months 2009 as the favorable impact of higher selling prices and improved IntegRex™ operations were offset by higher raw material and energy costs.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company announced in second quarter 2010 that it will review strategic options, including a possible divestiture, for the PET business and anticipates completing this effort by year end.
|
Specialty Plastics Segment
|
|||||||||||||||||
|
Second Quarter
|
First Six Months
|
||||||||||||||||
|
Change
|
Change
|
||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
$
|
%
|
2010
|
2009
|
$
|
%
|
|||||||||
|
Sales
|
$
|
271
|
$
|
187
|
$
|
84
|
44 %
|
$
|
519
|
$
|
344
|
$
|
175
|
51 %
|
|||
|
Volume effect
|
67
|
36 %
|
146
|
42 %
|
|||||||||||||
|
Price effect
|
4
|
2 %
|
(1)
|
-- %
|
|||||||||||||
|
Product mix effect
|
12
|
6 %
|
26
|
8 %
|
|||||||||||||
|
Exchange rate effect
|
1
|
-- %
|
4
|
1 %
|
|||||||||||||
|
Operating earnings (loss)
|
21
|
8
|
13
|
>100 %
|
42
|
(10)
|
52
|
>100 %
|
|||||||||
|
Asset impairments and restructuring charges, net
|
--
|
(1)
|
1
|
--
|
4
|
(4)
|
|||||||||||
|
Operating earnings (loss) excluding asset impairments and restructuring charges, net
|
21
|
7
|
14
|
>100 %
|
42
|
(6)
|
48
|
>100 %
|
|||||||||
Sales revenue increased in second quarter and first six months 2010 compared to second quarter and first six months 2009 primarily due to higher sales volume and a favorable shift in product mix. The higher sales volume was attributed to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives for core copolyesters and the Tritan
TM
copolyester product lines. The favorable shift in product mix was due to higher sales volume for cellulosic plastics sold into the liquid crystal display market.
Excluding the segment's portion of an adjustment to first quarter 2009 severance charge in second quarter 2009, operating earnings increased $14 million in second quarter 2010 compared to second quarter 2009 primarily due to higher sales volume and higher capacity utilization which led to lower unit costs.
Excluding the segment's portion of the severance charge for a reduction in force in first quarter 2009, operating results increased $48 million in first six months 2010 compared to first six months 2009 primarily due to higher sales volume and higher capacity utilization which led to lower unit costs.
The Specialty Plastics segment is progressing with the market introduction of its new Tritan
TM
copolyester, which it will supply from the monomer manufacturing facility and its first Tritan
TM
copolyester polymer manufacturing facility in Kingsport, Tennessee which were both completed in 2009 and became operational in first quarter 2010.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales Revenue
|
Second Quarter
|
||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
Change
|
Volume Effect
|
Price Effect
|
Product
Mix Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
United States and Canada
|
$ | 963 | $ | 688 | 40 | % | 24 | % | 16 | % | -- | % | -- | % | ||||||||||||||
|
Asia Pacific
|
355 | 277 | 28 | % | 9 | % | 9 | % | 9 | % | 1 | % | ||||||||||||||||
|
Europe, Middle East, and Africa
|
285 | 207 | 38 | % | 23 | % | 4 | % | 13 | % | (2 | )% | ||||||||||||||||
|
Latin America
|
121 | 81 | 50 | % | 32 | % | 17 | % | 1 | % | -- | % | ||||||||||||||||
| $ | 1,724 | $ | 1,253 | 38 | % | 21 | % | 13 | % | 4 | % | -- | % | |||||||||||||||
Sales revenue in the United States and Canada increased in second quarter 2010 compared to second quarter 2009 primarily due to higher sales volume and higher selling prices in all segments except the Fibers segment.
Sales revenue in Asia Pacific increased in second quarter 2010 compared to second quarter 2009 primarily due to higher selling prices particularly in the PCI segment, higher sales volume particularly in the Specialty Plastics segment, and a favorable shift in product mix in all segments. The sales volume increase was less for the region than in other regions as Asia Pacific was less affected by the global recession and recovered earlier than the other regions.
Sales revenue in Europe, Middle East, and Africa increased in second quarter 2010 compared to second quarter 2009 primarily due to higher sales volume and a favorable shift in product mix in all segments. Sales volume was impacted by growth initiatives including the hydrogenated hydrocarbon resins manufacturing capacity expansion in Middelburg, the Netherlands in the CASPI segment which was completed in fourth quarter 2009. The region had less significant price effect change compared to other regions due to fewer sales from commodity product lines.
Sales revenue in Latin America increased in second quarter 2010 compared to second quarter 2009 primarily due to higher sales volume particularly in the Performance Polymers segment and higher selling prices in the Performance Polymers segment.
|
First Six Months
|
||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2010
|
2009
|
Change
|
Volume Effect
|
Price Effect
|
Product
Mix Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
United States and Canada
|
$ | 1,800 | $ | 1,359 | 33 | % | 19 | % | 13 | % | 1 | % | -- | % | ||||||||||||||
|
Asia Pacific
|
689 | 487 | 42 | % | 20 | % | 11 | % | 10 | % | 1 | % | ||||||||||||||||
|
Europe, Middle East, and Africa
|
561 | 385 | 46 | % | 25 | % | 2 | % | 17 | % | 2 | % | ||||||||||||||||
|
Latin America
|
238 | 151 | 57 | % | 38 | % | 19 | % | -- | % | -- | % | ||||||||||||||||
| $ | 3,288 | $ | 2,382 | 38 | % | 21 | % | 11 | % | 5 | % | 1 | % | |||||||||||||||
Sales revenue in the United States and Canada increased in first six months 2010 compared to first six months 2009 primarily due to higher sales volume and higher selling prices particularly in the PCI segment.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales revenue in Asia Pacific increased in first six months 2010 compared to first six months 2009 primarily due to higher sales volume and a favorable shift in product mix in all segments except the Fibers segment, and higher selling prices in all segments except the Specialty Plastics segment.
Sales revenue in Europe, Middle East, and Africa increased in first six months 2010 compared to first six months 2009 primarily due to higher sales volume in all segments and a favorable shift in product mix in all segments. Sales volume wasimpacted by growth initiatives including the hydrogenated hydrocarbon resins manufacturing capacity expansion in Middelburg, the Netherlands in the CASPI segment which was completed in fourth quarter 2009. Product mix included sales revenue from the acetyl license in the PCI segment.
The region had minimal price effect change compared to other regions due to fewer sales from commodity product lines.
Sales revenue in Latin America increased in first six months 2010 compared to first six months 2009 primarily due to higher sales volume particularly in the Performance Polymers segment and higher selling prices in the Performance Polymers segments.
With a substantial portion of 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 or euros. In addition, where it deems such actions advisable, the Company engages in foreign currency hedging transactions and requires letters of credit and prepayment for shipments where its assessment of individual customer and country risks indicates their use is appropriate. For additional information on these practices, see Note 9, "Fair Value of Financial Instruments", to the consolidated financial statements in Part II, Item 8 and Part II, Item 7A of the Company's 2009 Annual Report on Form 10-K and Forward-Looking Statements and Risk Factors of this Quarterly Report on Form 10-Q.
Cash Flows
|
First Six Months
|
||||||||
|
(Dollars in millions)
|
2010
|
2009
|
||||||
|
Net cash provided by (used in)
|
||||||||
|
Operating activities
|
$ | (19 | ) | $ | 337 | |||
|
Investing activities
|
(257 | ) | (226 | ) | ||||
|
Financing activities
|
(83 | ) | (48 | ) | ||||
|
Effect of exchange rate changes on cash and cash equivalents
|
1 | -- | ||||||
|
Net change in cash and cash equivalents
|
(358 | ) | 63 | |||||
|
|
||||||||
|
Cash and cash equivalents at beginning of period
|
793 | 387 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 435 | $ | 450 | ||||
|
First Six Months
|
||||||||
|
(Dollars in millions)
|
2010
|
2009
|
||||||
|
Net cash provided by (used in) operating activities
|
$ | (19 | ) | $ | 337 | |||
|
Impact of adoption of amended accounting guidance
(1)
|
200 | -- | ||||||
|
Net cash provided by operating activities excluding item
|
181 | 337 | ||||||
|
Additions to properties and equipment
|
(76 | ) | (204 | ) | ||||
|
Dividends paid to stockholders
|
(64 | ) | (64 | ) | ||||
|
Free Cash Flow
|
$ | 41 | $ | 69 | ||||
|
(1)
|
First six months 2010 cash from operating activities reflected the adoption of amended accounting guidance for transfers of financial assets which resulted in $200 million of receivables, which were previously accounted for as sold and removed from the balance sheet when transferred under the accounts receivable securitization program, being included on the first quarter balance sheet as trade receivables, net. This increase in receivables reduced cash from operations by $200 million in first quarter 2010.
|
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cash used in operating activities was $19 million during first six months 2010 compared to $337 million provided by operating activities in first six months 2009. The use of cash was primarily due to an increase in working capital, particularly trade receivables, net, more than offsetting higher net earnings. End of first six months 2010 receivables were higher primarily due to increased sales and the impact of the adoption of amended accounting guidance for transfers of financial assets which impacts the financial statement presentation for activity under the Company's accounts receivable securitization program. Inventories increased in response to higher quantities and prices attributed to improved demand for the Company's products. Both the increase in receivables and inventory were partially offset by an increase in accounts payable driven by a higher level of purchasing activity.
Cash used in investing activities was $257 million in first six months 2010 compared to $226 million used in investing activities in first six months 2009. First six months 2010 includes the acquisition of Genovique and payments for the acquisition of the Korean acetate tow facility. Capital spending of $76 million in first six months 2010 was lower primarily due to the deferral of discretionary spending in response to the global recession compared to first six months 2009 which included the completion of large growth initiatives.
Cash used in financing activities totaled $83 million in first six months 2010 compared to $48 million used in financing activities in first six months 2009. Share repurchases in first six months 2010 were $53 million.
The payment of dividends is also reflected in financing activities in all periods.
The Company expects to generate positive free cash flow (operating cash flow excluding the $200 million impact of adoption of amended accounting guidance, less capital expenditures and dividends) in 2010 of approximately $300 million, assuming capital expenditures of approximately $250 million and U.S. defined benefit pension plan funding in an amount of approximately $25 million. The priorities for uses of available cash in 2010 are payment of the quarterly cash dividend, funding targeted growth initiatives (including organic initiatives, joint ventures and acquisitions), and repurchasing shares.
Liquidity
At June 30, 2010, the Company had a $700 million revolving credit facility ("Credit Facility") in two tranches, with $125 million expiring in 2012 and $575 million expiring in 2013. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a facility fee is paid on the total commitment. In addition, the Credit Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. At June 30, 2010 and December 31, 2009, the Company had no outstanding borrowings under the Credit Facility.
The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Given the expiration dates of the Credit Facility, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings on a long-term basis.
Additionally, at June 30, 2010, the Company also had a $200 million line of credit under its annually renewable accounts receivable securitization agreement ("A/R Facility"). The A/R Facility was renewed in July 2010. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and the Company pays a fee to maintain availability of the A/R Facility. In addition, the A/R Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. At June 30, 2010, the Company had no outstanding borrowings under the A/R Facility.
For more information regarding interest rates, refer to Note 8, "Borrowings", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In 2009, the Company made $181 million in contributions to its U.S. defined benefit pension plan. The Company expects to make contributions to its defined benefit pension plans in 2010 in an amount of approximately $25 million.
Cash flows from operations and the other sources of liquidity described above are expected to be available and sufficient to meet foreseeable cash flow requirements. However, the Company's cash flows from operations can be affected by numerous factors including risks associated with global operations, raw material availability and cost, demand for and pricing of Eastman's products, capacity utilization, and other factors described under "Forward-Looking Statements and Risk Factors" below. The Company believes maintaining a financial profile consistent with an investment grade company is important to its long term strategic and financial flexibility.
Capital Expenditures
Capital expenditures were $76 million and $204 million in first six months 2010 and 2009, respectively. The lower expenditures in first six months 2010 were primarily due to the deferral of discretionary spending in response to the global recession compared to first six months 2009 which included the completion of large growth initiatives. The Company expects that 2010 capital spending will be approximately $250 million as the Company increases spending on discretionary infrastructure projects and certain strategic growth initiatives.
Other Commitments
At June 30, 2010, the Company's obligations related to notes and debentures totaled approximately $1.6 billion to be paid over a period of approximately 20 years. Other borrowings, related primarily to credit facility borrowings, totaled $8 million.
The Company had various purchase obligations at June 30, 2010 totaling approximately $1 billion over a period of approximately 15 years for materials, supplies and energy incident to the ordinary conduct of business. For information regarding the Company's lease commitments, refer to Note 11, "Commitments", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
In addition, the Company had other liabilities at June 30, 2010 totaling approximately $1.4 billion primarily related to pension, retiree medical, and other post-employment obligations.
The items described above are summarized in the following table:
|
(Dollars in millions)
|
Payments Due for
|
|||||||||||||||||||||||||||
|
Period
|
Notes and Debentures
|
Credit Facility Borrowings and Other
|
Interest Payable
|
Purchase Obligations
|
Operating Leases
|
Other Liabilities (a)
|
Total
|
|||||||||||||||||||||
|
2010
|
$ | -- | $ | 6 | $ | 55 | $ | 130 | $ | 12 | $ | 159 | $ | 362 | ||||||||||||||
|
2011
|
2 | 2 | 110 | 252 | 23 | 64 | 453 | |||||||||||||||||||||
|
2012
|
151 | -- | 105 | 245 | 16 | 56 | 573 | |||||||||||||||||||||
|
2013
|
-- | -- | 99 | 231 | 10 | 58 | 398 | |||||||||||||||||||||
|
2014
|
-- | -- | 99 | 36 | 7 | 59 | 201 | |||||||||||||||||||||
|
2015 and beyond
|
1,450 | -- | 889 | 152 | 17 | 957 | 3,465 | |||||||||||||||||||||
|
Total
|
$ | 1,603 | $ | 8 | $ | 1,357 | $ | 1,046 | $ | 85 | $ | 1,353 | $ | 5,452 | ||||||||||||||
(a) Amounts represent the current estimated cash payments to be made by the Company primarily for pension and other post-employment benefits and taxes payable in the periods indicated. The amount and timing of such payments is dependent upon interest rates, health care cost trends, actual returns on plan assets, retirement and attrition rates of employees, continuation or modification of the benefit plans, and other factors. Such factors can significantly impact the amount and timing of any future contributions by the Company.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Off Balance Sheet and Other Financing Arrangements
If certain operating leases are terminated by the Company, it has guaranteed a portion of the residual value loss, if any, incurred by the lessors in disposing of the related assets. For information on the Company's residual value guarantees, refer to Note 11, "Commitments", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
At June 30, 2010, the Company did not have any other material relationships with unconsolidated entities or financial partnerships, including special purpose entities, for the purpose of facilitating off-balance sheet arrangements with contractually 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.
In June 2009, new accounting guidance on the consolidation of Variable Interest Entities ("VIEs") was issued. This guidance is effective for all VIEs or potential VIEs the Company is involved with on or after January 1, 2010. This guidance amends the evaluation criteria to identify which entity has a controlling financial interest of a variable interest entity and requires ongoing reassessments. The Company has evaluated its material contractual relationships under this new guidance and has concluded that the entities involved in these relationships are not VIEs or, in the case of Primester, a joint venture that manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the Company has shared control of the VIE. As such, the Company is not required to consolidate these entities.
Guarantees and claims also arise during the ordinary course of business from relationships with suppliers, customers, and other parties when the Company undertakes an obligation to guarantee the performance of others, if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, intellectual property and environmental matters, and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's consolidated financial position or liquidity.
Treasury Stock
In October 2007, the Company's Board of Directors authorized the repurchase of up to $700 million of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined to be in the best interests of the Company. As of June 30, 2010, a total of 10.6 million shares have been repurchased under this authorization for a total amount of approximately $658 million. During first six months 2010, the Company repurchased 859,900 shares of common stock for a cost of approximately $53 million.
Dividends
The Company declared cash dividends of $0.44 per share in second quarter 2010 and 2009 and $0.88 per share in first six months 2010 and 2009.
For 2010, the Company expects:
|
·
|
increases in volume due to the recovery from the global recession and continued substitution of Eastman products for other materials and new applications for existing products;
|
|
·
|
the volatility of market prices for raw materials and energy to continue and that the Company will continue to use pricing and hedging strategies to offset this volatility and for raw material and energy costs to be higher than 2009;
|
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
·
|
to acquire and operate a cellulose acetate tow manufacturing facility and related business in Korea, with the facility to be operational in first quarter 2010 (acquired and operational in first quarter 2010) and fully integrated into the Fibers segment's production and sales processes in 2011;
|
|
·
|
to continue to progress with the introduction of its new Eastman Tritan
TM
copolyester, which it will supply from the monomer manufacturing facility and its first Tritan
TM
copolyester polymer manufacturing facility in Kingsport, Tennessee which were both completed in 2009 and are expected to be operational in early 2010 (operational in first quarter 2010);
|
|
·
|
to improve the profitability of its PET product lines in the Performance Polymers segment as a result of improved operational performance of the South Carolina facility and more profitable mix of PET product sales, and to continue to pursue licensing opportunities;
|
|
·
|
to review strategic options, including a possible divestiture, for the PET business and anticipates completing this effort by year end;
|
|
·
|
the acquisition of Genovique Specialties Corporation, a global producer of specialty non-phthalate plasticizers for water-based adhesives and other applications, completed in the second quarter, to be accretive to the Company's full-year earnings per share;
|
|
·
|
depreciation and amortization to be slightly higher than 2009 primarily due to expected completion of manufacturing facilities in 2010;
|
|
·
|
pension expense to be slightly higher than 2009, and to fund the U.S. defined benefit pension plan in an amount of approximately $25 million;
|
|
·
|
net interest expense to increase compared with 2009 primarily due to lower capitalized interest and higher average borrowings;
|
|
·
|
the effective tax rate to be approximately 33 percent;
|
|
·
|
capital spending to be approximately $250 million for required maintenance, discretionary infrastructure projects, and certain strategic growth initiatives;
|
|
·
|
to generate approximately $300 million of positive free cash flow (operating cash flow excluding the $200 million impact of adoption of amended accounting guidance, less capital expenditures and dividends);
|
|
·
|
priorities
for uses of available cash to be payment of the quarterly cash dividend, funding targeted growth initiatives (including organic initiatives, joint ventures and acquisitions), and repurchasing shares; and
|
|
·
|
full year earnings per share to be between $6.20 and $6.40 excluding any charges related to restructuring actions
.
|
See "Forward-Looking Statements and Risk Factors" below.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The expectations under "Outlook" and certain other statements in this Quarterly Report on Form 10-Q which are not statements of historical fact may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These statements, and other written and oral forward-looking statements made by the Company from time to time may relate to, among other things, such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters; legal proceedings; exposure to, and effects of hedging of, raw material and energy costs, foreign currencies and interest rates; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin, and sales; earnings, cash flow, dividends and other expected financial results and conditions; expectations, strategies, and plans for individual assets and products, businesses and segments as well as for the whole of Eastman; cash requirements and uses of available cash; financing plans; pension expenses and funding; credit ratings; anticipated restructuring, divestiture, and consolidation activities; cost reduction and control efforts and targets; integration of any acquired businesses; strategic initiatives and development, production, commercialization, and acceptance of new products, services and technologies and related costs; asset, business and product portfolio changes; and expected tax rates and net interest costs.
These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are 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 underlying assumptions are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in any forward-looking statement if one or more of the underlying assumptions or expectations proves to be inaccurate or is unrealized. In addition to the factors described elsewhere in this report, the following are the most significant known factors that could cause the Company's actual results to differ materially from those in any such forward-looking statement. Additional factors not presently known to the Company, or that the Company does not currently believe to be material, may also cause actual results to differ materially from expectations:
Adverse and uncertain conditions in the global economy and the financial markets could negatively impact the Company.
Conditions in the global economy and global capital markets may adversely affect the Company's results of operations, financial condition, and cash flows. The Company's business and operating results have been affected by the impact of the recent
global recession, including the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges currently affecting the global economy. The Company's customers may experience deterioration of their businesses, cash flow shortages, and difficulty obtaining financing. As a result, existing or potential customers may still delay or cancel plans to purchase products and may not be able to
,
or may be unwilling to
,
fulfill their obligations in a timely fashion. Further, suppliers may experience similar conditions, which could impact their ability to fulfill their obligations to the Company. If weakness in the global economy continues for significant future periods or if the global economy or financial markets experience significant new disruptions or deteriorations, the Company's results of operations, financial condition and cash flows could be materially adversely affected and the Company's ability to access the credit and capital markets under attractive rates and terms could be constrained, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Volatility in costs for strategic raw material and energy commodities or disruption in the supply of these commodities could adversely affect our financial results.
The Company is reliant on certain strategic raw material and energy commodities for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate short-term market fluctuations in raw material and energy costs. It is unlikely, however, that these risk mitigation measures will eliminate all exposure to market fluctuations. In addition, natural disasters, plant interruptions, changes in laws or regulations, war or other outbreak of hostilities or terrorism, and breakdown or degradation of transportation infrastructure used for delivery of strategic raw material and energy commodities, could adversely impact both the cost and availability of these commodities.
The Company could be materially adversely affected by disruptions to manufacturing operations or related infrastructure.
Significant limitation of the Company's ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse affect on sales revenue, costs, results of operations, and financial condition. Disruptions could occur due to internal factors such as computer or equipment malfunction, operator error, or process failures; or external factors such as natural disasters, pandemic illness, changes in laws or regulations, war or other outbreak of hostilities or terrorism, or breakdown or degradation of transportation infrastructure used for delivery of supplies to the Company or for delivery of products to customers.
Loss or financial weakness of the Company's largest customers could adversely affect our financial results.
The Company has an extensive customer base; however, loss of, or material financial weakness of, certain of the largest customers could adversely affect the Company's financial condition and results of operations until such business is replaced and no assurances can be made that the Company would be able to regain or replace any lost customers.
Growth initiatives may not achieve desired business or financial objectives and may require a significant use of resources.
The Company continues to identify and pursue growth opportunities through both internal development and acquisitions and joint ventures to diversify and extend the portfolio of our businesses. These growth opportunities include development and commercialization of new products and technologies, expansion into new markets and geographic regions, and alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses and capabilities. There can be no assurance that such efforts, investments, or acquisitions and alliances will result in financially successful commercialization of products or acceptance by existing or new customers or new markets or achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations. There also can be no assurance that capital projects for such growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers. Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively affect the returns from any proposed investments and projects.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Legislative and regulatory actions could increase the Company's future compliance costs.
The Company's facilities and businesses are subject to complex health, safety and environmental laws and regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. The amount accrued reflects the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations, and testing requirements could result in higher costs. Pending and proposed U.S. Federal legislation and regulation increase the likelihood that the Company's manufacturing sites will in the future be impacted by regulation or taxation of greenhouse gas emissions, which legislation and regulation, if enacted, may result in capital expenditures, increases in costs for raw materials and energy, limitations on raw material and energy source and supply choices, and other direct compliance costs.
In addition to the foregoing most significant known risk factors to the Company, there may be other factors, not currently known to the Company, which could, in the future, materially adversely affect the Company, its business, financial condition, or results of operations. The foregoing discussion of the most significant risk factors to the Company does not necessarily present them in order of importance. This disclosure, including that under "Outlook" and "Forward-Looking Statements and Risk Factors," and other forward-looking statements and related disclosures made by the Company in this Quarterly Report on Form 10-Q and elsewhere from time to time, represents management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public Company disclosures (such as in filings with the Securities and Exchange Commission or in Company press releases) on related subjects.
39
There are no material changes to the Company's market risks from those disclosed in Part II, Item 7A of the Company's 2009 Annual Report on Form 10-K.
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that as of June 30, 2010, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed was accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial reporting that occurred during the first six months of 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
40
General
From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows. However, adverse developments could negatively impact earnings or cash flows in a particular future period.
Jefferson (Pennsylvania) Environmental Proceeding
In December 2005, Eastman Chemical Resins, Inc., a wholly-owned subsidiary of the Company (the "ECR Subsidiary"), received a Notice of Violation ("NOV") from the United States Environmental Protection Agency's Region III Office ("EPA") alleging that the ECR Subsidiary's West Elizabeth, Jefferson Borough, Allegheny County, Pennsylvania manufacturing operation violated certain federally enforceable local air quality regulations and certain provisions in a number of air quality-related permits. In October 2006, the EPA referred the matter to the United States Department of Justice's Environmental Enforcement Section ("DOJ"). Company representatives have met with the EPA and DOJ on a number of occasions since the NOV's issuance and have determined that it is not reasonably likely that any civil penalty assessed by the EPA and DOJ will be less than $100,000. While the Company intends to vigorously defend against these allegations, this disclosure is made pursuant to Securities and Exchange Commission Regulation S-K, Item 103, Instruction 5.C., which requires disclosure of administrative proceedings commenced under environmental laws that involve governmental authorities as parties and potential monetary sanctions of at least $100,000. The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company's financial condition, results of operations, or cash flows.
Kingsport (Tennessee) Environmental Proceeding
In March 2010, representatives of the Company met with the Tennessee Department of Environment and Conservation ("TDEC") regarding alleged violations of state water quality control statutory provisions and regulations by the Company's manufacturing operations in Kingsport, Tennessee. At this meeting, TDEC provided the Company a draft enforcement order addressing these alleged violations. Based on the Company's meeting with TDEC and review of the draft enforcement order, the Company has determined that it is not reasonably likely that any civil penalty assessed by TDEC will be less than $100,000. While the Company intends to vigorously defend against these allegations, this disclosure is made pursuant to Securities and Exchange Commission Regulation S-K, Item 103, Instruction 5.C., which requires disclosure of administrative proceedings commenced under environmental laws that involve governmental authorities as parties and potential monetary sanctions of at least $100,000. The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company's financial condition, results of operation, or cash flows.
Franklin (Virginia) Environmental Proceeding
In 2005, the EPA’s National Enforcement Investigations Center ("NEIC") conducted a multimedia inspection of the ECR Subsidiary’s Franklin manufacturing operation located in Courtland, Virginia. The NEIC’s report resulting from that inspection alleges that the Franklin operations violated certain federally enforceable environmental laws and regulations. Based on recent communication with EPA Region III and the DOJ, the Company has determined that it is not reasonably likely that any civil penalty assessed by the EPA and DOJ will be less than $100,000. While the Company intends to vigorously defend against these allegations, this disclosure is made pursuant to Securities and Exchange Commission Regulation S-K, Item 103, Instruction 5.C., which requires disclosure of administrative proceedings commenced under environmental laws that involve governmental authorities as parties and potential monetary sanctions of at least $100,000. The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company's financial condition, results of operations, or cash flows.
41
For identification and discussion of the most significant risks applicable to the Company and its business, see "Part I – Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements and Risk Factors" of this Quarterly Report on Form 10-Q.
(c) Purchases of Equity Securities by the Issuer
|
Period
|
Total Number
of Shares
Purchased
(1)
|
Average Price Paid Per Share
(2)
|
Total Number of Shares Purchased as Part of Publicly Announced Plans
or Programs
(3)
|
Approximate Dollar
Value (in millions) that May Yet Be Purchased Under the Plans or Programs
(3)
|
|||
|
April 1- 30, 2010
|
0
|
$
|
--
|
0
|
$
|
75
|
|
|
May 1 - 31, 2010
|
519,900
|
$
|
63.59
|
519,900
|
$
|
42
|
|
|
June 1 - 30, 2010
|
0
|
$
|
--
|
0
|
$
|
42
|
|
|
Total
|
519,900
|
$
|
63.59
|
519,900
|
|
(1)
|
Shares repurchased under a Company announced repurchase plan.
|
|
(2)
|
Average price paid per share reflects the weighted average purchase price paid for share.
|
|
(3)
|
In October 2007, the Board of Directors authorized $700 million for repurchase of the Company's outstanding common shares at such times, in such amounts, and on such terms, as determined to be in the best interests of the Company. As of June 30, 2010, a total of 10.6 million shares have been repurchased under this authorization for a total amount of $658 million.
For additional information, see Note 13, "Stockholders' Equity", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
|
Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 44.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Eastman Chemical Company
|
|||
|
Date: August 03, 2010
|
By:
|
/s/ Curtis E. Espeland | |
|
Curtis E. Espeland
|
|||
|
Senior Vice President and Chief Financial Officer
|
43
| Exhibit |
Sequential
|
|||
|
Eh
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
3.01
|
46
|
|||
|
3.02
|
53
|
|||
|
4.01
|
Form of Eastman Chemical Company common stock certificate as amended February 1, 2001 (incorporated herein by reference to Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)
|
|||
|
4.02
|
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 the Company's Current Report on Form 8-K dated January 10, 1994)
|
|||
|
4.03
|
Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the Company's Current Report on Form 8-K dated January 10, 1994)
|
|||
|
4.04
|
Officers' Certificate pursuant to Sections 201 and 301 of the Indenture (incorporated herein by reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated June 8, 1994)
|
|||
|
4.05
|
Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the Company's Current Report on Form 8-K dated June 8, 1994)
|
|||
|
4.06
|
Form of 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.08 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
|
|||
|
4.07
|
Form of 7% Notes due April 15, 2012 (incorporated herein by reference to Exhibit 4.09 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002)
|
|||
|
4.08
|
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 Company's Annual Report on Form 10-K for the year ended December 31, 2006)
|
|||
|
4.09
|
Form of 5.500% Notes due 2019 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated November 2, 2009)
|
|||
|
4.10
|
July 7, 2010 Letter Amendment to $200,000,000 Accounts Receivable Securitization agreement dated July 9, 2008
(amended February 18, 2009, and July 8, 2009), between the Company and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as agent. (incorporated herein by reference to Exhibit 4.09 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009)
|
64
|
||
|
4.11
|
Amended and Restated Credit Agreement, dated as of April 3, 2006 (the "Credit Agreement") among Eastman Chemical Company, the Lenders named therein, and Citigroup Global Markets , Inc. and J. P. Morgan Securities Inc., as joint lead arrangers, as amended on November 16, 2007 and March 10, 2008 (incorporated herein by reference to Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)
|
44
| Exhibit |
EXHIBIT INDEX
|
Sequential
|
||
|
Exhibit
|
Page
|
|||
|
Number
|
Description
|
Number
|
||
|
4.12
|
Form of 6.30% Notes due 2018 (incorporated herein by reference to Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003)
|
|||
|
12.01
|
71
|
|||
|
31.01
|
72
|
|||
|
31.02
|
73
|
|||
|
32.01
|
74
|
|||
|
32.02
|
75
|
|||
|
101.INS
|
XBRL Instance Document (furnished, not filed)
|
|||
|
101.SCH
|
XBRL Taxonomy Extension Schema (furnished, not filed)
|
|||
|
101.CAL
|
XBRL Taxonomy Calculation Linkbase (furnished, not filed)
|
|||
|
101.LAB
|
XBRL Taxonomy Label Linkbase (furnished, not filed)
|
|||
|
101.PRE
|
XBRL Presentation Linkbase Document (furnished, not filed)
|
|||
| 101.DEF |
XBRL Definition Linkbase Document (furnished, not filed)
|
45
TABLE OF CONTENTS
Part I. Financial InformationprintPart II. Other InformationprintItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint