UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2009
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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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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $0.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
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____________________________________________________________________________________________
PAGE 1 OF
132 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 128
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Yes
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No
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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[X]
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Yes
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No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act.
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[X]
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Yes
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No
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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.
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[X]
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Yes
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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).
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[X]
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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[X]
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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 definition 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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Yes
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No
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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[X]
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The
aggregate market value (based upon the $37.90 closing price on the New York
Stock Exchange on June 30, 2009) of the 71,980,441 shares of common equity held
by non-affiliates as of December 31, 2009 was approximately $2,728,058,714,
using beneficial ownership rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended, to exclude common stock that may be
deemed beneficially owned as of December 31, 2009 by Eastman Chemical Company's
("Eastman" or the "Company") directors and executive officers and charitable
foundation, some of whom might not be held to be affiliates upon judicial
determination. A total of 72,468,042 shares of common stock of the
registrant were outstanding at December 31, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement relating to the 2010 Annual
Meeting of Stockholders (the "2010 Proxy Statement"), to be filed with the
Securities and Exchange Commission, are incorporated by reference in Part III,
Items 10 to 14 of this Annual Report on Form 10-K (the "Annual Report") as
indicated herein.
FORWARD-LOOKING
STATEMENTS
Certain
statements in this Annual Report 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 and activities; 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 other 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 statements if one or more of the
underlying assumptions or expectations proves to be inaccurate or is
unrealized. The most significant known factors that could cause
actual results to differ materially from those in the forward-looking statements
are identified and discussed in Part II—Item 7—"Management's Discussion and
Analysis of Financial Condition and Results of Operations—Forward-Looking
Statements and Risk Factors" of this Annual Report.
TABLE OF
CONTENTS
PART
I
1.
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5
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1A.
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23
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1B.
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Unresolved
Staff Comments
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23
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24
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2.
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26
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3.
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27
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4.
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27
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PART II
5.
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28
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6.
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30
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7.
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32
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7A.
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70
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8.
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71
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9.
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121
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9A.
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121
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9B.
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122
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PART
III
10.
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123
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11.
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123
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12.
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123
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13.
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124
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14.
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124
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PART
IV
SIGNATURES
PART
I
CORPORATE
OVERVIEW
Eastman
Chemical Company ("Eastman" or the "Company") is a global chemical company which
manufactures and sells a broad portfolio of chemicals, plastics, and
fibers. Eastman began business in 1920 for the purpose of producing
chemicals for Eastman Kodak Company's photographic business and became a public
company, incorporated in Delaware, as of December 31, 1993. Eastman
has eleven manufacturing sites in seven countries that supply chemicals,
plastics, and fibers products to customers throughout the world. The
Company's headquarters and largest manufacturing site are located in Kingsport,
Tennessee.
In 2009,
the Company had sales revenue of $5.0 billion and operating earnings of $317
million. Earnings per diluted share were $1.85 in
2009. Included in 2009 operating earnings were asset impairments and
restructuring charges of $200 million.
The
Company's products and operations are managed and reported in five operating
segments: the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI")
segment, the Fibers segment, the Performance Chemicals and Intermediates ("PCI")
segment, the Performance Polymers segment and the Specialty Plastics
segment. The Company manages certain costs and initiatives at the
corporate level, including certain research and development costs not allocated
to the operating segments. For additional information concerning the
Company's operating segments, see Note 22 "Segment Information" to the Company's
consolidated financial statements in Part II, Item 8 of this 2009 Annual Report
on Form 10-K (this "Annual Report").
Corporate
Strategy
Eastman's
objective is to be an outperforming chemical company by delivering solid
financial results from its core businesses and its plans for profitable
growth. The Company's core businesses currently sell differentiated
products into diverse markets and geographic regions. Management
believes that the Company can increase the revenues from its core businesses
with increasing profitability through a balance of new applications for existing
products, development of new products, and sales growth in adjacent markets and
emerging geographic regions. These revenue and earnings increases are
expected to result from organic initiatives and through acquisitions and joint
ventures. Current Company growth initiatives include:
·
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In
the Fibers segment, construction of the Korean cellulose acetate tow
manufacturing facility began in first quarter 2009 and the facility is
expected to be operational in first quarter 2010. The facility
and related business will be owned by a company formed through an alliance
with SK Chemicals Company Ltd.
("SK").
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·
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In
the Specialty Plastics segment, continued introduction of new
high-temperature copolyester products based on Eastman TritanTM
copolyester and production in early 2010 from the monomer manufacturing
facility and its first TritanTM
copolyester polymer manufacturing facility in Kingsport, Tennessee which
were both completed in 2009.
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·
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In
the CASPI segment, increased production in 2010 as a result of the 30
percent expansion of the Company's hydrogenated hydrocarbon resins
manufacturing capacity in Middelburg, the Netherlands which was completed
in 2009 to meet growing demand for specialty hydrocarbon
resins.
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·
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In
the PCI segment, increased revenue from acetyl licenses and growth in
plasticizers, including Eastman 168TM
plasticizer, in 2010.
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The
Company benefits from advantaged feedstocks and proprietary technologies, and is
focusing on sustainability as a competitive strength for
growth. Eastman has developed new products and technologies that
enable customers' development and sales of sustainable products, and has reduced
its greenhouse gas emissions and energy consumption.
The
combination of sustainable profits from the solid core businesses and profitable
revenue growth is expected to result in continued solid financial
results.
Manufacturing
Streams
Integral
to Eastman's corporate strategy for growth is leveraging its heritage of
expertise and innovation in acetyl, polyester, and olefins chemistries in key
markets, including packaging, tobacco, building and construction, and
consumables. For each of these chemistries, Eastman has developed a
combination of assets and technologies that are operated within three
manufacturing "streams".
·
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In
the acetyl stream, the Company begins with high sulfur coal which is then
gasified in its coal gasification facility. The resulting
synthesis gas is converted into a number of chemicals including methanol,
methyl acetate, acetic acid, and acetic anhydride. These
chemicals are used in products throughout the Company including acetate
tow, acetate yarn, and cellulose esters. The Company's ability
to use coal is a competitive advantage in both raw materials and
energy. The Company continues to evaluate opportunities to
further leverage its gasification expertise to produce additional cost
advantaged chemicals from petroleum coke or coal instead of natural gas or
petroleum.
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·
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In
the polyester stream, the Company begins with purchased paraxylene and
produces purified terephthalic acid ("PTA") for polyethylene terephthalate
("PET") and copolyesters and dimethyl terephthalate ("DMT") for
copolyesters. PTA or DMT is then reacted with ethylene glycol,
which the Company both makes and purchases, along with other raw materials
(some of which the Company makes and are proprietary) to produce PET and
copolyesters. The Company believes that this backward
integration of polyester manufacturing is a competitive advantage, giving
Eastman a low cost position, as well as surety of intermediate
supply. In addition, Eastman can add specialty monomers to
copolyesters to provide clear, tough, chemically resistant product
characteristics. As a result, the Company's copolyesters can
effectively compete with materials such as polycarbonate and
acrylic.
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·
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In
the olefins stream, the Company begins primarily with propane and ethane,
which are then cracked at its facility in Longview, Texas into propylene,
as well as ethylene. "Cracking" is a chemical process in which
gases are broken down into smaller, lighter molecules for use in the
manufacturing process. The Company also purchases propylene for
use at its Longview facility and its facilities outside the
U.S. The propylene is used in oxo derivative
products. The ethylene is used in oxo derivative products,
acetaldehyde and ethylene glycol production and is also sold
commercially. Petrochemical business cycles are influenced by
periods of over- and under-capacity. Capacity additions to
steam cracker units around the world, combined with demand for light
olefins, determine the operating rate and thus profitability of producing
olefins. Historically, periodic additions of large blocks of
capacity have caused profit margins of light olefins to be very volatile,
resulting in "ethylene" or "olefins"
cycles.
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The
following chart shows the Company's sites at which its manufacturing streams are
primarily employed.
SITE
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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Kingsport,
Tennessee
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X
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X
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X
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Longview,
Texas
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X
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X
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Columbia,
South Carolina
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X
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Kuantan,
Malaysia
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X
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Singapore
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X
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Workington,
United Kingdom
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X
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The
following chart shows significant Eastman products, markets, and end uses by
segment and manufacturing stream.
SEGMENT
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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KEY
PRODUCTS, MARKETS, AND
END
USES
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CASPI
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X
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X
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Adhesives
ingredients (tape, labels, and nonwovens) and paints and coatings
(architectural, transportation, industrial, and original equipment
manufacturing ("OEM"))
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Fibers
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X
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Acetate
fibers for filter products and textiles
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PCI
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X
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X
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X
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Intermediate
chemicals for agrochemicals, transportation, beverages, nutrition,
pharmaceuticals, coatings, medical devices, toys, photographic and
imaging, household products, polymers, textiles, and consumer and
industrial products and uses
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Performance
Polymers
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X
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X
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PET
for beverage and food packaging, custom-care and cosmetic packaging,
health care and pharmaceutical uses, household products, and industrial
packaging applications
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Specialty
Plastics
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X
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X
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X
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Copolyesters
and cellulosics for appliances, store fixtures and displays, building and
construction, electronic packaging, medical devices and packaging, graphic
arts, general purpose packaging, personal care and cosmetics, food and
beverage packaging, performance films, tape and labels, fibers/nonwovens,
photographic and optical films, and liquid crystal displays
|
In
addition to stream integration, the Company also derives value from Eastman
cellulosics. These are natural polymers, sourced from managed
forests, which when combined with the acetyl and olefin streams, provide an
advantaged raw material position for Eastman.
The
Company continues to leverage its heritage of expertise and innovation in
acetyl, polyester, and olefins chemistries and technologies, as well as its use
of cellulosics, to meet demand and create new uses and opportunities for the
Company's products in key markets. By choosing to
combine certain streams, the Company is able to create unique and
differentiated products that have a performance advantage over competitive
materials.
Cyclicality
and Seasonality
The PCI
and Performance Polymers segments are impacted by the cyclicality of key
products and markets, while the other segments are more sensitive to global
economic conditions. Supply and demand dynamics determine profitability at
different stages of cycles and global economic conditions affect the length of
each cycle. Despite sensitivity to global economic conditions, many of the
products in the Fibers and CASPI segments provide a stable foundation of
earnings.
The
Company's earnings are typically greater in the second and third quarters and
cash flows from operations are greatest in fourth quarter due to
seasonality. Demand for CASPI segment products is typically stronger
in the second and third quarters due to the increased use of coatings products
in the building and construction industries, while demand is typically weaker
during the winter months because of seasonal construction
downturns. The PCI segment typically has weaker fourth quarter
financial results, due in part to a seasonal downturn in demand for products
used in certain building and construction and agricultural
markets. The Performance Polymers segment typically has stronger
demand for its PET polymers for beverage container plastics during the second
and early third quarters due to higher consumption of beverages in the U.S. and
Canada, while demand typically weakens during the late third and fourth
quarters.
In 2009,
the impact of the global recession on demand for the Company's products affected
the typical yearly trend, resulting in lower earnings in first and second
quarters, with increased earnings in the second half of the year. Due
to strategic cash management during the first half of the year to counter the
effects of the recession and a pension contribution in fourth quarter, cash
flows from operations were greatest in third quarter.
CASPI
SEGMENT
In the
CASPI segment, the Company manufactures resins, specialty polymers, and solvents
which are integral to the production of paints and coatings, inks, adhesives,
and other formulated products. Growth in these markets in the U.S.,
Canada, and Europe typically approximates general economic growth due to the
wide variety of end uses for these applications. Typically, growth in
Asia, Eastern Europe, and Latin America continues to be higher than general
economic growth, driven by regional growth in these emerging
economies. In 2009, the impact of the global recession on demand for
the Company's products affected the typical yearly trend. The CASPI
segment focuses on producing raw materials rather than finished products and
developing long-term, strategic relationships to achieve preferred supplier
status with its customers. In 2009, the CASPI segment had sales
revenue of $1.2 billion, representing 24 percent of Eastman's total
sales.
The
profitability of the CASPI segment is sensitive to the global economy, market
trends, broader chemical cycles, particularly the olefins cycle, and foreign
currency exchange rates. The CASPI segment's specialty products,
which include cellulose-based specialty polymers, coalescents, and selected
hydrocarbon resins, are less sensitive to the olefins cycle due to their
functional performance attributes. The commodity products, which
include commodity solvents and base resins, are more impacted by the olefins
cycle as discussed under "Manufacturing Streams". The Company seeks
to leverage its proprietary technologies, competitive cost structure, and
integrated manufacturing facilities to maintain a strong competitive position
throughout such cycles.
The
polymers product line consists of cellulose-based specialty polymers and
olefin-based performance products. Eastman's cellulose-based
specialty polymers enhance the aesthetic appeal and improve the performance of
industrial and transportation coatings and inks. Olefin-based
products are used as base polymers in hot-melt adhesives, paper laminating,
sealants and pressure sensitive adhesives. They are also used as
elastomer extenders in sealants and waterproofing compounds for wire and cable
flooding applications. The polymers product line also includes
chlorinated polyolefins which promote the adherence of paints and coatings to
plastic substrates. Polymers accounted for approximately 15 percent
of the CASPI segment's total sales for 2009.
The
resins product line consists of hydrocarbon resins, rosin resins, and resin
dispersions. These products are sold primarily to adhesive
formulators and consumer product companies for use as raw materials essential in
hot-melt and pressure sensitive adhesives and as binders in nonwoven products
such as disposable diapers, feminine products, and pre-saturated
wipes. Eastman offers a broad product portfolio of essential
ingredients for the adhesives industry, and ranks as the second largest global
tackifier supplier. In addition, Eastman is one of the largest
manufacturers of hydrogenated gum rosins used in chewing gum
applications. Eastman resins are also used in a wide range of
applications including plastics and rubber modification and
inks. Resins accounted for approximately 35 percent of the CASPI
segment's total sales for 2009.
The
solvents product line includes both specialty coalescents and ketones and
commodity esters, glycol ethers and alcohol solvents. Coalescents
include products such as TexanolTM
ester alcohol which improves film formation and durability in architectural
latex paints. Ketones consist of low volatile organic compound
("VOC") solvents used in high solids coatings applications. Commodity
solvents, which consist of esters, glycol ether, and alcohol solvents, are used
in both paints and inks to maintain the formulation in liquid form for ease of
application. Solvents accounted for approximately 50 percent of the
CASPI segment's total sales for 2009.
·
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Strategy
and Innovation
|
A key
element of the CASPI segment's growth strategy is the continued development of
innovative product offerings, building on proprietary technologies in
high-growth markets and regions to meet customers' evolving needs and improve
the quality and performance of customers' end products. Management
believes that its ability to leverage the CASPI segment's broad product line and
Eastman's research and development capabilities make the segment uniquely
capable of offering a broad array of solutions for new and emerging
markets. For example, in 2009 Eastman received the Environmental
Protection Agency's ("EPA") 2009 Presidential Green Chemistry Challenge Award
for its green biocatalytic process. This process is utilized in the
CASPI segment products sold in higher-growth markets such as personal and
household care.
The
Company intends to continue to leverage its resources to strengthen the CASPI
segment's product innovation and product enhancement pipeline by meeting market
needs and the expanded use of proprietary products and
technologies. Although the CASPI segment sales and application
development are often specialized by end-use markets, developments in technology
can often be successfully shared across multiple end-uses and
markets.
The
Company's global manufacturing presence is a key element of the CASPI segment's
growth strategy. For example, the segment is well positioned to
capitalize on expected high industrial growth in China and other parts of Asia
from its facility in Singapore and joint venture operations in
China. This regional position will be further strengthened by the
purchase of a small polymer producer in China which was completed in first
quarter 2010. The Company is committed to maintaining reliability of
supply of the CASPI segment products to our strategic customers to ensure that
Eastman is the supplier of choice. The segment is meeting growing
demand for specialty hydrocarbon resins through the 30 percent expansion of the
Company's hydrogenated hydrocarbon resins manufacturing capacity in Middelburg,
the Netherlands which was completed in 2009.
As a
result of the variety of end uses for its products, the customer base for the
CASPI segment is broad and diverse. This segment has approximately 825 customers
around the world, while 80 percent of its sales revenue in 2009 was attributable
to approximately 80 customers. The CASPI segment focuses on
establishing long-term, customer service-oriented relationships with its
strategic customers in order to become their preferred supplier and to leverage
these relationships to pursue sales opportunities in previously underserved
markets and to expand the scope of its value-added services. Growth
in the U.S., Canadian, and European markets typically coincides with economic
growth in general, due to the wide variety of end uses for these applications
and their dependence on the economic conditions of the markets for packaged
goods, transportation, durable goods, and housing.
The
current regulatory environment, particularly in the U.S., Canada, and Europe,
provides both market challenges and opportunities for the CASPI
segment. Environmental regulations that impose limits on the emission
of VOCs and hazardous air pollutants ("HAPs") continue to impact coatings
formulations requiring compliant coatings raw materials. The coatings
industry is responding by promoting products and technologies designed to enable
customers and end users to reduce air emissions of VOCs and HAPs in compliance
with state and federal regulations. A variety of Eastman's CASPI
segment products are used in compliance coatings. Additional products
are currently being developed to meet the growing demand for low VOC coatings,
including the recently introduced SolusTM 2300
product.
Competition
within the CASPI segment's markets varies widely depending on the specific
product or product group. The Company's major competitors in the
CASPI segment's markets include larger companies such as BASF SE ("BASF"), Dow
Chemical Company ("Dow"), and Exxon Mobil Corporation, which may have greater
financial and other resources than Eastman. Additionally, within each
CASPI segment product market, the Company competes with other smaller,
regionally focused companies that may have advantages based upon location, local
market knowledge, manufacturing strength in a specific product, or other similar
factors. However, Eastman does not believe that any of its
competitors has a dominant position within the CASPI segment's markets, nor the
breadth of product offerings that Eastman is able to offer its CASPI segment
customers. The Company believes its competitive advantages include
its level of vertical integration; breadth of product offerings, service, and
technology offerings; low-cost manufacturing position; consistent product
quality; security of supply; and process and market knowledge. The
CASPI segment principally competes on breadth of products and through leveraging
its strong customer base and long-standing customer relationships to promote
substantial recurring business and product development.
FIBERS
SEGMENT
In the
Fibers segment, Eastman manufactures and sells EstronTM acetate tow and
EstrobondTM
triacetin plasticizers for use primarily in the manufacture of cigarette
filters; EstronTM
natural and ChromspunTM
solution-dyed acetate yarns for use in apparel, home furnishings and industrial
fabrics; and cellulose acetate flake and acetyl raw materials for other acetate
fiber producers. Eastman is one of the world's two largest suppliers
of acetate tow and has been a market leader in the manufacture and sale of
acetate tow since it began production in the early 1950s. The Company
is the world's largest producer of acetate yarn and has been in this business
for over 75 years. The Fibers segment's manufacturing operations are
primarily located at the Kingsport, Tennessee site, and also include a smaller
acetate tow production plant in Workington, England, which was expanded in
2008. In 2009, the Fibers segment had sales revenue of $1.0 billion,
representing 21 percent of Eastman's total sales. The Fibers segment
remains a strong and stable cash generator for the Company.
The
Company's long history and experience in the fibers markets are reflected in the
Fibers segment's operating expertise, both within the Company and in support of
its customers' processes. The Fibers segment's knowledge of the
industry and of customers' processes allows it to assist its customers in
maximizing their processing efficiencies, promoting repeat sales and mutually
beneficial, long-term customer relationships.
The
Company's fully integrated fiber manufacturing processes from coal-based acetyl
raw materials through acetate tow and yarn provide a competitive advantage over
companies whose processes are dependent on petrochemicals. In
addition, the Fibers segment employs unique technology that allows it to use a
broad range of high-purity wood pulps for which the Company has dependable
sources of supply. Management believes that these factors combine to
make Eastman an industry leader in reliability of supply and cost
position. In addition to the cost advantage of being coal-based, the
Fibers segment's competitive strengths include a reputation for high-quality
products, technical expertise, large scale vertically-integrated processes,
reliability of supply, acetate flake supply in excess of internal needs, a
reputation for customer service excellence, and a customer base characterized by
long-term customer relationships. The Company intends to continue to
capitalize and build on these strengths to improve the strategic position of its
Fibers segment.
Contributing
to the profitability in the Fibers segment is the limited number of competitors,
the high industry capacity utilization, and significant barriers to
entry. These barriers include, but are not limited to, high capital
costs for integrated manufacturing facilities.
In the
Fibers segment, construction of the Korean cellulose acetate tow manufacturing
facility began in first quarter 2009, and the facility is expected to be
operational in first quarter 2010. The facility and related business
will be owned by a company formed through an alliance with SK.
Eastman
manufactures acetate tow under the EstronTM
trademark according to a wide variety of customer specifications, primarily for
use in the manufacture of cigarette filters. Acetate tow is the
largest sales product of the Fibers segment. Worldwide demand for
acetate tow is expected to increase by one to two percent per year through 2012,
with higher growth rates in Asia.
The
Company manufactures acetate filament yarn under the EstronTM and
ChromspunTM
trademarks in a wide variety of specifications. EstronTM
acetate yarn is available in bright and dull luster and is suitable for
subsequent dyeing in the fabric form. ChromspunTM
acetate yarn is solution-dyed in the manufacturing process and is available in
more than 100 colors.
|
Ø
|
Acetyl Chemical
Products
|
The
Fibers segment's acetyl chemical products are sold primarily to other acetate
fiber market producers and include cellulose diacetate flake, acetic acid, and
acetic anhydride. Each is used as a raw material for the production
of cellulose acetate fibers. The Fibers segment also markets
acetyl-based triacetin plasticizers under the EstrobondTM trademark, generally
for use by cigarette manufacturers as a bonding agent in cigarette
filters.
·
|
Strategy and
Innovation
|
In the
Fibers segment, Eastman is leveraging its strong customer relationships and
knowledge of the industry to identify growth options. These growth
options are enabled by its excess acetate flake capacity at the Kingsport,
Tennessee site. In December 2008, the Company announced an alliance
with SK to form a company to acquire and operate a cellulose acetate tow
manufacturing facility and related business, with the facility to be constructed
by SK in Korea. Eastman will have controlling ownership in the
business. Construction of the Korean facility began in first quarter
2009, and the facility is expected to be operational in first quarter 2010 and
fully integrated into the Fibers segment's production and sales processes in
2011. Annual capacity at the Korean facility is expected to be
approximately 27,000 metric tons, and Eastman's total worldwide capacity for
acetate tow will exceed 200,000 metric tons, an increase of approximately 15
percent. The net impact of the added Korean facility on global
capacity is estimated to be an increase of approximately two percent versus 2008
industry capacity levels.
|
Ø
|
Continue to Capitalize on
Fibers Technology Expertise
|
The
Fibers segment intends to continue to make use of its capabilities in fibers
technology to maintain a strong focus on incremental product and process
improvements, with the goals of meeting customers' evolving needs and improving
the segment's manufacturing process efficiencies.
|
Ø
|
Maintain
Cost-Effective Operations and Consistent Cash Flows and
Earnings
|
The
Fibers segment intends to continue to operate in a cost effective manner,
capitalizing on its technology, scale and vertical integration, and to make
further productivity and efficiency improvements through continued investments
in research and development.
The
Company's Fibers segment research and development efforts focus on process and
product improvements, as well as cost reduction, with the objectives of
increasing sales and reducing costs. The Fibers segment also conducts
research to assist acetate tow customers in the effective use of the segment's
products and in the customers' product development efforts.
The
customer base in the Fibers segment is relatively concentrated, consisting of
approximately 150 companies in the tobacco, textile, and acetate fibers
industries. Eastman's Fibers segment customers are located in all
regions of the world. The largest 12 customers within the Fibers
segment include multinational as well as regional cigarette producers, fabric
manufacturers, and other acetate fiber producers. These largest 12
customers accounted for about 80 percent of the segment's total sales revenue in
2009. Sales prices for a significant portion of the Fibers segment's
products are typically negotiated on an annual basis. The segment
maintains a strong position in acetate tow exports to China, one of the largest
and fastest growing markets in the world.
Eastman
is the second largest acetate tow manufacturer in the
world. Competitors in the fibers market for acetate tow include
Celanese Corporation ("Celanese"), Daicel Chemical Industries Ltd ("Daicel"),
Mitsubishi Rayon Co., Ltd. ("Mitsubishi Rayon"), and Rhodia S.A.. In
the acetate tow market, two major competitors, Celanese and Daicel, have joint
venture capacity in China.
In the
segment's acetate yarn business, major competitors include Industrias del
Acetato de Celulosa S.A. ("INACSA"), Mitsubishi Rayon, and UAB
Korelita. Eastman is the world leader in acetate yarn production and
the only acetate yarn producer in the U.S. and Canada. The physical
properties of acetate yarn make it desirable for use in textile products such as
suit linings, women's apparel, medical tape, drapery, ribbons and other
specialty fabrics. However, over the past 20 years, demand for
acetate yarn has been adversely affected by the substitution of lower cost
polyester and rayon yarns. Accordingly, worldwide demand for acetate
yarn is expected to continue to decrease as mills substitute these cheaper yarns
for acetate yarn. Eastman, however, remains uniquely positioned
because it is the only integrated producer of acetate yarn.
As
described above under "Fibers Segment – Overview", the principal methods of
competition include maintaining the Company's large-scale vertically integrated
manufacturing process from coal-based acetyl raw materials, reliability of
supply, product quality, and sustaining long-term customer
relationships.
PCI
SEGMENT
The
Company's PCI segment manufactures diversified products that are sold
externally, as well as used internally by other segments. The PCI
segment's earnings are highly dependent on how the Company chooses to optimize
the acetyl and olefins streams. In 2009, the PCI segment had sales
revenue of $1.3 billion, representing 26 percent of Eastman's total
sales.
Many of
the segment's products are affected by the olefins cycle. See
"Corporate Overview – Manufacturing Streams" earlier in this "Part 1 – Item 1.
Business." This cyclicality is caused by periods of supply and demand
imbalance, either when incremental capacity additions are not offset by
corresponding increases in demand, or when demand exceeds existing
supply. Demand, in turn, is based on general economic conditions, raw
material and energy costs, and other factors beyond the Company's
control. Future PCI segment results will continue to fluctuate from
period to period due to these changing economic conditions.
There are
four cracking units located at the Company's Longview, Texas
facility. In 2007, the three oldest cracking units were identified
for a staged phase-out. Eastman shut down the first of the three
units in fourth quarter 2007 and idled the second cracking unit in December
2008. The timing of the permanent shut down of the second and third
cracking units including the idled cracker is dependent on feedstock and olefin
market conditions. With the divestiture of the Company's polyethylene
business in 2006, the Company has experienced excess ethylene capacity and has
reconfigured its cracker position to enhance its long-term olefin production to
better match the Company's feedstock requirements.
Approximately
75 percent of the Company's olefin derivatives are made from propylene and sold
in the U.S. and Canadian market. The PCI segment believes it is
well-positioned in the U.S. and Canadian market for most of its major products,
including both acetyl products and olefin derivatives, due to its competitive
delivered cost position and supply reliability versus
competitors.
The PCI
segment offers over 135 products that include intermediates based on oxo and
acetyl chemistries and performance chemicals. The PCI segment's 2009
sales revenue was approximately 50 percent from olefin-based and 35 percent from
acetyl-based chemistries, and 15 percent from other. Approximately 65
percent of the PCI segment's sales revenue is generated in the U.S. and Canada,
a region in which the Company has a leading market share position for most of
its key oxo and acetyl products. Sales in all regions are generated
through a mix of the Company's direct sales force and a network of
distributors. The Company's PCI segment is the largest marketer of
acetic anhydride in the United States, an intermediate that is a critical
component of analgesics, laundry care products, and nutritional supplements, and
is the only U.S. producer of acetaldehyde, a key intermediate in the production
of agricultural and other specialty products. Eastman believes that
it manufactures one of the world's broadest ranges of products derived from oxo
aldehydes. The PCI segment's other intermediate products include
plasticizers and glycols. Many of the intermediates products in the
PCI segment are priced based on supply and demand of substitute and competing
products. In order to maintain a competitive position, the Company
strives to operate with a low cost manufacturing base.
The PCI
segment also manufactures performance chemicals, complex organic molecules such
as diketene derivatives, specialty ketones, and specialty anhydrides for
pharmaceutical, fiber, and food and beverage ingredients, which are typically
used in specialty market applications. These specialty products are
typically priced based on value added rather than supply and demand
factors.
·
|
Strategy
and Innovation
|
To build
on and maintain its status as a low cost producer, the PCI segment continuously
focuses on cost control, operational efficiency, and capacity utilization to
maximize earnings. The shutdown of the first of the three cracking
units in Longview, Texas, as part of the staged phase-out of our oldest
crackers, with the continued shutdown dependent on feedstock and olefins market
conditions, has been part of the initiative to increase operational
efficiency. Through the PCI segment, the Company maximizes the
advantage of its highly integrated and world-scale manufacturing
facilities. For example, the Kingsport, Tennessee manufacturing
facility allows the PCI segment to produce acetic anhydride and other acetyl
derivatives from coal rather than natural gas or other petroleum
feedstocks. At the Longview, Texas manufacturing facility, Eastman's
PCI segment uses its proprietary oxo-technology in the world's largest
single-site, oxo aldehyde manufacturing facility to produce a wide range of
alcohols, esters, and other derivative products utilizing local propane and
ethane supplies, as well as purchased propylene. These integrated
facilities, combined with large scale production processes and a continuous
focus on additional process improvements, allow the PCI segment to remain cost
competitive with, and for some products cost-advantaged over, its
competitors.
The PCI
segment selectively focuses on continuing to develop and access markets with
high-growth potential for the Company's chemicals. One such market is
for flexible plastic products used in sensitive applications such as toys, child
care articles, medical packaging and devices, and food
contact. Eastman 168TM plasticizer
provides an effective alternative to ortho-phthalate plasticizers traditionally
used in these applications. Eastman 168TM plasticizer
allows manufacturers to meet the challenging requirements of changing government
regulations and consumer preferences without sacrificing production efficiency
or product performance.
The
Company engages in customer-focused research and development initiatives in
order to develop new PCI products and find additional applications for existing
products. The Company also evaluates licensing opportunities for
acetic acid and oxo derivatives on a selective basis, and has licensed
technology to produce acetyl products to Saudi International Petrochemical
Company ("SIPCHEM") in Saudi Arabia and to Chang Chun Petrochemical Company
("Chang Chun") in Taiwan in 2005 and 2007, respectively. SIPCHEM
started operations in 2009 at its plant based on this technology and Chang Chun
is in the process of building its plant. In first half of 2010, the
Company expects to achieve the final milestones associated with the SIPCHEM
agreement and to recognize the remaining revenue related to the
license. The Company will also purchase acetic anhydride from the
SIPCHEM facility.
The PCI
segment's products are used in a variety of markets and end uses, including
agrochemical, transportation, beverages, nutrition, pharmaceuticals, coatings,
flooring, medical devices, toys, photographic and imaging, household products,
polymers, textiles, and industrials. Because of its cost position,
reliability, and service, the Company has been able to establish and maintain
long-term arrangements and relationships with
customers. Product-specific olefin derivative market conditions vary
based upon prevailing supply and demand conditions. An important
trend for the PCI segment's business is a tendency toward regionalization of key
markets due to increased transportation costs and local supply in developing
geographies from new capacities. The PCI segment benefits from this
trend primarily in the U.S. and Canada, but may lose export volume to other
markets as this trend continues. The anhydride purchased from the new
SIPCHEM facility will give increased access to the Asian market for PCI
products. Additionally, the PCI segment is engaged in continuous
efforts to optimize product and customer mix. Approximately 80
percent of the PCI segment's sales revenue in 2009 was from 112 out of
approximately 900 customers worldwide.
Historically,
there have been significant barriers to entry for potential competitors in the
PCI segment's major product lines, including acetic acid and acetic anhydride,
primarily due to the fact that the relevant technology has been held by a small
number of companies. As this technology has become more readily
available, competition from multinational chemical manufacturers has
intensified. Eastman competes with these and other producers
primarily based on price, as products are generally interchangeable, but also on
technology, marketing, and services. Eastman's major competitors in
this segment include large multinational companies such as BASF, Celanese, Dow,
and Exxon Mobil Corporation. While some competitors in PCI's product
markets may have greater financial resources than Eastman, the Company believes
it maintains a strong competitive position due to the combination of its scale
of operations, breadth of product line, level of integration, and technology
leadership.
PERFORMANCE
POLYMERS SEGMENT
In 2009,
the Performance Polymers segment had sales revenue of $719 million, representing
14 percent of the Company's total sales. The segment is comprised
primarily of the Company's PET product lines, and also includes various polymer
intermediates.
In 2008,
the Company completed strategic actions intended to improve the operating
results of the Performance Polymers segment. The Company shut down
300,000 metric tons of higher cost assets in 2008 after having shut down 100,000
metric tons of higher cost PET assets during 2007, some of which were converted
to Specialty Plastics production. In fourth quarter 2008, the Company
also completed a debottleneck of its IntegRexTM
technology facility in South Carolina, bringing its IntegRexTM
capacity to 525,000 metric tons. Operational difficulties following
this debottleneck persisted throughout 2009. These operational
difficulties resulted in additional costs as well as negative impact on sales
revenue through an unfavorable shift in customer and market mix contributing to
an operating loss for the year. The Company completed a shutdown of the
facility in fourth quarter 2009 to correct these problems. In first
quarter 2010, the IntegRexTM-based
facility located in Columbia, South Carolina is demonstrating the capability to
produce improved quality ParaStar TM PET
products at the facility's nameplate capacity of 525,000 metric tons. The
Company expects smaller Performance Polymers segment losses in 2010 based on
this improved operational performance and the resulting capability for a more
profitable mix of product sales.
The
Company's PET product pricing and profitability have historically been most
affected by raw material costs and industry capacity utilization. PET
global supply has exceeded demand since 1997 as a result of capacity being
introduced into the market at a rate exceeding that of demand
growth. While the global demand for PET continues to increase
steadily, the Company sells PET primarily in the North American Free Trade
Agreement ("NAFTA") region, which is projected to have lower Gross Domestic
Product ("GDP") and PET demand growth than the overall global PET
market. Excess Asian PET capacity and related exports are expected to
continue to have an adverse impact on PET pricing and profitability worldwide,
particularly in the NAFTA region. In addition, a significant capacity
expansion by a competitor in late 2009 is expected to contribute to a continued
challenging business environment and negatively impact PET profitability in the
NAFTA region.
PET is
used in beverage and food packaging and other applications such as personal care
and cosmetics packaging, health care and pharmaceutical uses, household
products, carpet fibers, and industrial packaging applications. PET
offers fast and easy processing, superb clarity and color consistency,
durability and strength, impact and chemical resistance, and high heat
stability. Packages made from PET are characterized by their light
weight, gloss, high strength, durability, clarity, low cost, safety, and
recyclability.
·
|
Strategy
and Innovation
|
The
Performance Polymers segment focuses on improving its performance by directing
its research and development efforts to lowering its manufacturing costs through
technology innovations and process improvement. These efforts
resulted in the development of IntegRexTM
technology, a lower cost PTA and PET manufacturing process that provides
manufacturing and capital cost savings compared to conventional
technologies.
As a
strategic initiative to create and capture additional value from the IntegRex™
technology, the Company is actively pursuing a licensing
program. IntegRex™ technology provides significant capital and
operating cost benefits relative to conventional PTA and PET technologies.
The Company is offering licensees use of its Eastman-owned patents and expertise
in the design, construction, and operation of a full range of production
facilities, including IntegRex™ PTA, IntegRex™ PET, or integrated configurations
of the two processes. Also, as the Company improves the IntegRex™
technology for its own use, it expects it may offer these enhancements to its
licensees.
Approximately
20 customers within the Performance Polymers segment accounted for more than 80
percent of the segment's total sales revenue from continuing operations in
2009. The segment serves PET customers in the NAFTA region who are
primarily PET container producers for large volume beverage markets such as
carbonated soft drinks, water, and juice, with strong participation in custom
areas such as food, liquor, sport and fruit beverages, health and beauty aids,
and household products. PET is a preferred material for recyclable,
single-serve containers and as a substitute for glass and aluminum
packaging. PET market volume growth rates in the NAFTA region are
projected to be below GDP in the region for the next several years due to
reduced consumption of carbonated soft drinks and continued light weighting of
bottles, while new capacity has been added by a competitor in the
U.S. Although near-term growth in demand is uncertain, the Company
projects the demand in the NAFTA region for PET to grow by approximately two to
three percent annually on a long-term basis.
The
Company's PET product lines compete to a large degree on price in a capital
intensive industry. Profitability is dependent on attaining low cost
positions through technology innovation, manufacturing scale, capacity
utilization, access to reliable and competitive utilities, energy and raw
materials, and efficient manufacturing and distribution processes.
The
Company's PET production is vertically integrated back to the raw material
paraxylene. This gives Eastman a cost advantage and reliable
intermediate supply.
As a
result of recent strategic actions, the Performance Polymers segment competes
primarily in the NAFTA region. Major competitors in the NAFTA region
for the Performance Polymers segment include DAK Americas LLC, Indorama Group,
Invista, Mossi & Ghisolfi Group, Nan Ya Plastics Corporation, and Wellman
Inc., as well as Asian PET exporters. Comprised of many
competitors, imports hold approximately 15 percent market share in the NAFTA
region and are expected to continue to have an adverse impact on PET pricing and
profitability due to the large excess capacity in Asia. In 2010, a
major competitor is bringing additional capacity to the market from an expansion
in late 2009, resulting in further stress on pricing and
profitability.
SPECIALTY
PLASTICS SEGMENT
In the
Specialty Plastics segment, the Company produces and markets specialized
copolyesters and cellulosic plastics that possess differentiated performance
properties for value-added end uses. In 2009, the Specialty Plastics
segment had sales revenue of $749 million, approximately 15 percent of Eastman's
total sales.
Eastman
has the ability within its Specialty Plastics segment to modify its polymers and
plastics to control and customize their final properties, creating numerous
opportunities for new application development, including the expertise to
develop new materials and new applications starting from the molecular level in
the research laboratory to the final designed application. Recent
industry trends in various markets have renewed customers' interest in some of
the unique attributes offered by Eastman materials. Such trends
include, but are not limited to, interest in halogen-free and bisphenol A
("BPA")-free plastics, as well as plastics that have superior chemical and
mechanical properties to withstand increasing demands in specific
applications. The addition of the Eastman Tritan™ family of products
significantly enhances the segment's ability to customize copolyesters and
cellulosic plastics for new markets and applications. In addition,
the Specialty Plastics segment has a long history of manufacturing excellence
with strong process improvement programs providing continuing cost
reduction.
The
Specialty Plastics segment consists of two primary product lines, specialty
copolyesters and cellulosics. Eastman estimates that the market
growth for copolyesters will continue to be higher than general domestic
economic growth due to ongoing specialty copolyester material innovations and
displacement opportunities. Eastman believes that cellulosic
materials will grow at the rate of the domestic economy in general, with the
strong demand for cellulose esters in liquid crystal displays more than
offsetting the decline in legacy photographic markets. For both
specialty copolyesters and cellulosic plastics, the Specialty Plastics segment
benefits from integration into the Company's polyester and acetyls
streams. The Specialty Plastics segment's specialty copolyesters are
currently produced in Kingsport, Tennessee; Columbia, South Carolina; and
Kuantan, Malaysia. The cellulosic products are produced in Kingsport,
Tennessee.
Eastman's
specialty copolyesters accounted for approximately 80 percent of the Specialty
Plastics segment's 2009 sales revenue. Eastman's specialty
copolyesters, which generally are based on Eastman's production of cyclohexane
dimethanol ("CHDM") modified polymers, typically fill a market position between
polycarbonates and acrylics. Polycarbonates traditionally have
offered some superior performance characteristics, while acrylics have been less
expensive. Specialty copolyesters combine superior performance with
competitive pricing and are being substituted for both polycarbonates and
acrylics in some applications.
The
Specialty Plastics segment continues to develop new applications for its core
copolyesters to meet growing demand for more environmentally-friendly
copolyester products. During 2009, Eastman commercialized a new
copolyester for the personal care packaging segment, which now represents the
clearest copolyester with the highest chemical resistance used in this
application. The segment also experienced significant growth in
copolyesters for clear handleware applications, where Eastman's materials offer
a unique merchandising solution. Through broadening its Embrace™
family of products, Eastman has continued to see growth in shrink packaging in
Embace LV™ as well as Embrace HY™. The family of offerings in the
shrink segment has made Eastman the leading provider of resins for full body
shrink labels. Eastman's newest copolyester, Tritan™, enables the
Company to move to higher value applications by adding high temperature
resistance to the other properties of copolyesters, including toughness,
chemical resistance, and excellent processability.
Cellulosics
and cellulosic plastics accounted for approximately 20 percent of the Specialty
Plastics segment's 2009 sales revenue. Sold under the TeniteTM
brand, these products are known for their excellent balance of properties,
including toughness, hardness, strength, surface gloss, clarity, chemical
resistance, and warmth to the touch. This product line includes
TeniteTM
acetate, TeniteTM
butyrate, and TeniteTM
propionate flake and polymers, as well as a family of colored products for each
line.
In 2006,
Eastman first commercialized a new family of cellulosic polymers, VisualizeTM
cellulosics, for the liquid crystal display ("LCD") market. Through
the development of new formulations and applications, Eastman's LCD product line
has continued to benefit from demand growth in the LCD market.
·
|
Strategy
and Innovation
|
The
Specialty Plastics segment is focused on providing consistent profit margins and
generating cash which the Company can reinvest in the Specialty Plastics
segment's business for continued growth. The Company continues to
leverage the advantages of being an integrated polyester manufacturer and
expects to continue to pursue opportunities within the integrated polyester
stream. The Company is utilizing rationalized PET assets to reduce
Specialty Plastics copolyester conversion costs and expand production with
larger scale assets.
Through
Eastman's advantaged asset position and innovation efforts around applications
development, the segment has increased specialty copolyesters sales volume to
twice U.S. GDP growth over the past 5 years. During 2009, Eastman
significantly increased its share in the shrink film market by developing new
applications for its family of products that now include Embrace™, Embrace LV™
and Embrace HY™. The trend of influencing the purchasing decision
with product design has also benefited Eastman's clear handleware solutions for
large containers. Additionally, increased health concerns related to
BPA have created new opportunities for various applications for legacy
copolyesters. Also during 2009, Eastman developed a proprietary
copolyester resin for the coating of hard surfaces. This surface
offers a low VOC, paintable and highly durable alternative to current coating
technologies.
The LCD
market is a developing growth market for the Specialty Plastics
segment. The Company continues to invest in the development of
copolyester and cellulosic-based product solutions for this high-growth market,
with the objective of being a strategic raw material supplier in the LCD
market. The downturn which began during the fourth quarter 2008 in
the LCD industry created renewed interest in solutions that provide an optimum
balance between cost and performance, and Eastman's developmental product
pipeline in LCDs we believe is now well positioned for anticipated growth in
this market.
The
addition of Tritan™ copolyester to Eastman's Specialty Plastics product offering
has created new opportunities for applications previously occupied by materials
such as polycarbonate or polysulfone. During 2009, Eastman has gained
substantial market share in certain food contact applications such as water
bottles and other consumer houseware applications through OEMs and brand owners
requirement for Tritan™ copolyester properties. The construction of a
new monomer facility as well as a new polymer facility was completed in
2009. Both facilities will be operational in early
2010. The monomer facility will produce a proprietary monomer
required in the production of Tritan™ copolyester while the polymer facility
will be capable of producing 30,000 metric tons of Tritan™
polymer. Given the successful market introduction of Tritan™
copolyester and rapid demand growth, the monomer facility was designed to be
capable of supplying a second Tritan™ copolyester manufacturing facility of
30,000 metric tons per year. The timing for the construction of the
second Tritan™ polyester facility is dependent on the market adoption rate for
these products.
The
customer base in the Specialty Plastics segment is broad and diverse, consisting
of approximately 620 companies worldwide in a variety of
industries. Approximately 80 percent of the Specialty Plastics
segment's 2009 sales revenue was attributable to approximately 65
customers. The Specialty Plastics segment seeks to develop mutually
beneficial relationships with its customers throughout various stages of product
life cycles. By doing so, it is better able to understand its
customers' needs as those customers develop new products and more effectively
bring new solutions to market.
Specialty
copolyesters are sold into a wide range of markets and applications including
specialty packaging (medical and electronic component trays, shrink label films,
general purpose packaging, and multilayer films); in-store fixtures and displays
(point of purchase displays including indoor sign and store fixtures); consumer
and durable goods (appliances, housewares, toys, and sporting goods); medical
goods (disposable medical devices, health care equipment and instruments, and
pharmaceutical packaging); personal care and consumer packaging (food and
beverage packaging and consumer packaging); photographic film, optical film,
fibers/nonwovens, tapes/labels, and LCD. The new Tritan™ family of
products is being sold into a range of markets including, but not limited to,
consumer housewares, infant care, small appliances and other consumer durables
segments. Additional applications and markets are currently under
development.
The
segment principally competes by leveraging price and product performance in
specific applications. The customers' product selection is typically
determined on an application-by-application basis and often by OEMs rather than
by resin converters. New market opportunities are coming from
substitution of plastic for other materials, and displacement of other plastic
resins in existing applications. While historically the Specialty
Plastics segment's ability to compete was very closely tied to supply-demand
balances of competing plastics, the addition of Tritan™, a material based on
Eastman proprietary technology, opens new market opportunities in which Eastman
expects to leverage the unique combination of properties of the new family of
products. In certain cases, the Company believes that Tritan™ offers
a unique solution by bringing properties similar to polycarbonate without
containing any BPA. In food applications, the fact that copolyesters
are both BPA and halogen-free makes them an attractive alternative to materials
such as polycarbonate and other plastics, respectively. In addition,
the combination of excellent clarity and superior processability allows for the
production of unique and attractive packaging that allows brand owners to
differentiate themselves on the retail shelf. Examples of such
applications include, but are not limited to, shrink film made from Eastman's
Embrace™ copolyester family of products, as well as clear handleware containers
produced from Eastman copolyesters.
The
Specialty Plastics segment believes that it maintains competitive advantages
throughout the product life cycle. At product introduction, the
segment's breadth of offerings combined with its research and development
capabilities and customer service orientation enable it to quickly bring a wide
variety of products to market. As products enter the growth phase of
the life cycle, the Specialty Plastics segment is able to continue to leverage
its product breadth by generating sales revenue from multiple sources, as well
as retaining customers from long-term relationships. As products
become more price sensitive, the Specialty Plastics segment can take advantage
of Eastman's scale of operations, including conversion of rationalized PET
assets and vertical integration to maintain a superior product conversion cost
position.
In recent
years, the industry has been confronted by unprecedented raw material cost
volatility. While raw material cost volatility is expected to
continue into the future, Eastman maintains a competitive advantage from
diversification of its raw materials base by using both coal for cellulosics, as
well as petrochemical-based feedstocks for copolyesters.
Eastman's
primary competitors for copolyester products include Bayer AG, Dow, Evonvik
Industries, Saudi Basic Industries Corporation ("SABIC"), and SK Chemical
Industries. Competition for cellulosic plastics is primarily from
other producers of cellulose ester polymers such as Acetati SpA and
Daicel.
REGIONAL
BUSINESS OVERVIEW
Eastman
operates as a global business with approximately 45 percent of its sales and 50
percent of its operating earnings, excluding asset impairments and restructuring
charges, generated from outside of the U.S. and Canadian region in
2009. As the Company focuses on growth in emerging markets, these
percentages are expected to increase. While manufacturing is centered
in the U.S., the Company has the ability to transport products globally to meet
demand. In 2009, all regions were affected by the global recession,
but the degree of the impact on the various regions was dependent on the mix of
the Company's segments in the region. Regions are classified as
United States and Canada; Asia Pacific; Europe, Middle East, and Africa; and
Latin America. In 2009, the mix of regional revenue from the segments was
as follows:
|
United
States and Canada
|
Asia
Pacific
|
Europe,
Middle East, and Africa
|
Latin
America
|
CASPI
|
25
%
|
20
%
|
35
%
|
25
%
|
Fibers
|
10
%
|
45
%
|
30
%
|
15
%
|
PCI
|
30
%
|
20
%
|
15
%
|
20
%
|
Performance
Polymers
|
20
%
|
--
%
|
--
%
|
35
%
|
Specialty
Plastics
|
15
%
|
15
%
|
20
%
|
5
%
|
|
|
|
|
|
Total
|
100
%
|
100
%
|
100
%
|
100
%
|
The
United States and Canada region contains the highest concentration of the
Company's long-lived assets with approximately 90 percent located in the United
States. We believe that the location of these manufacturing
facilities provides the Company with an advantaged delivered cost position
for our domestic customers, particularly for commodity and bulk
products. The PCI segment accounts for approximately one-third of the
region's revenue, as the segment is well-positioned in this region's market for
most of its major products, including acetic acid and acetic
anhydride. As the PCI and Performance Polymers segments account for
one-half of the region's revenue, the region is subject to increased variability
in revenues due to the effect of raw material and energy prices on these
segments' selling prices.
A large
percentage of revenue in the Asia Pacific region is from acetate tow products in
the Fibers segment while minimal PET products in the Performance Polymers
segment are sold in the region. Both factors contribute to less
volatile price effect on revenue. The region consists of many
emerging growth markets served by Eastman products, including specialty products
in the CASPI segment and acetate tow for filters, particularly in
China. The Company is responding to the growth by strengthening its
position through joint ventures and acquisitions such as the alliance with
SK.
The
Europe, Middle East, and Africa region benefits from fewer sales from commodity
product lines than any other region and therefore is less affected by economic
downturns and price is less dependent on raw material costs compared to other
regions. The favorable product mix is a result of a higher percentage
of the region's revenue being derived from the Fibers and Specialty Plastics
segments and less from the PCI and Performance Polymers segments.
The Latin
America region has the largest impact from the Performance Polymers segment of
all the regions. Combined with sales revenue from the PCI segment of
approximately 20 percent, the region is subject to increased volatility in sales
volume and selling prices.
CORPORATE
INITIATIVES
In
addition to its business segments, the Company manages certain costs and
initiatives at the corporate level, including certain research and development
("R&D") costs not allocated to any one operating segment. The
Company uses a disciplined decision making framework for evaluating targeted
opportunities.
One such
corporate initiative was the Company's Beaumont, Texas industrial gasification
project. In fourth quarter 2009, the Company announced the
discontinuation of this project. However, the Company continues to
explore global industrial gasification opportunities as a long-term growth
option. The Company also continues to explore and invest in R&D
initiatives that are aligned with macro trends in sustainability, consumerism,
and energy efficiency through high performance materials, advanced cellulosics,
environmentally-friendly chemistry, and process improvements.
In 2009,
operating losses for corporate initiatives were $217 million, including $179
million in asset impairments related to the discontinuance of its Beaumont,
Texas industrial gasification project, compared with $52 million in
2008.
EASTMAN
CHEMICAL COMPANY GENERAL INFORMATION
Sales, Marketing, and
Distribution
The
Company markets and sells products primarily through a global marketing and
sales organization which has a presence in the United States and in over 35
other countries selling into approximately 100 countries around the
world. Eastman has a marketing and sales strategy targeting
industries and applications where Eastman products and services provide
differentiated value. Market, customer, and technical expertise are
critical capabilities. Through a highly skilled and specialized sales
force that is capable of providing customized business solutions for each of its
five operating segments, Eastman is able to establish long-term customer
relationships and strives to become the preferred supplier of specialty
chemicals and plastics worldwide.
The
Company's products are also marketed through indirect channels, which include
distributors and contract representatives. Non-U.S. sales tend to be
made more frequently through distributors and contract representatives than U.S.
sales. The combination of direct and indirect sales channels,
including sales online through its website, allows Eastman to reliably serve
customers throughout the world.
The
Company's products are shipped to customers directly from Eastman's
manufacturing plants, as well as from distribution centers
worldwide.
Sources
and Availability of Raw Material and Energy
Eastman
purchases a substantial portion, estimated to be approximately 75 percent, of
its key raw materials and energy through long-term contracts, generally of three
to five years in initial duration with renewal or cancellation options for each
party. Most of these agreements do not require the Company to
purchase materials or energy if its operations are reduced or
idle. The cost of raw materials and energy is generally based on
market price at the time of purchase, and Eastman uses derivative financial
instruments, valued at quoted market prices, to mitigate the impact of
short-term market price fluctuations. Key raw materials include
propane, ethane, paraxylene, ethylene glycol, PTA, coal, cellulose, methanol,
and a wide variety of precursors for specialty organic
chemicals. Key purchased energy sources include natural gas,
steam, coal, and electricity. The Company has multiple suppliers for
most key raw materials and energy and uses quality management principles, such
as the establishment of long-term relationships with suppliers and on-going
performance assessment and benchmarking, as part of its supplier selection
process. When appropriate, the Company purchases raw materials from a
single source supplier to maximize quality and cost improvements, and has
developed contingency plans designed to minimize the impact of any supply
disruptions from single source suppliers.
While
temporary shortages of raw materials and energy may occasionally occur, these
items are generally sufficiently available to cover current and projected
requirements. However, their continuous availability and cost are
subject to unscheduled plant interruptions occurring during periods of high
demand, or due to domestic or world market and political conditions, changes in
government regulation, natural disasters, war or other outbreak of hostilities
or terrorism or other political factors, or breakdown or degradation of
transportation infrastructure. Eastman's operations or products have
been in the past and may be in the future, at times, adversely affected by these
factors. The Company's raw material and energy costs as a percent of
total cost of operations were approximately 60 percent in 2009 compared to 70
percent in 2008 and 2007.
Capital
Expenditures
Capital
expenditures were $310 million, $634 million, and $518 million for 2009, 2008,
and 2007, respectively. The decreased capital spending in 2009 was
primarily due to the Company's response to the current global recession and
consisted of required maintenance and certain strategic growth initiatives
including the creation of increased capacity for Eastman TritanTM
copolyester, the front-end engineering and design for the industrial
gasification project, reconfiguration of the Longview, Texas facility, and
expansion of the Company's hydrogenated hydrocarbon resins manufacturing
capacity in Middelburg, the Netherlands.
Employees
Eastman
employs approximately 10,000 men and women worldwide. Approximately 4
percent of the total worldwide labor force is represented by unions, mostly
outside the United States.
Customers
Eastman
has an extensive customer base and, while it is not dependent on any one
customer, loss of certain top customers could adversely affect the Company until
such business is replaced. The top 100 customers accounted for
approximately 70 percent of the Company's 2009 sales revenue.
Intellectual
Property and Trademarks
While the
Company's intellectual property portfolio is an important Company asset which it
expands and vigorously protects globally through a combination of patents that
expire at various times, trademarks, copyrights, and trade secrets, neither its
business as a whole nor any particular segment is materially dependent upon any
one particular patent, trademark, copyright, or trade secret. As a
producer of a broad and diverse portfolio of both specialty and commodity
chemicals, plastics, and fibers, Eastman owns over 750 active United States
patents and more than 1,200 active foreign patents, expiring at various times
over several years, and also owns over 2,500 active worldwide trademark
applications and registrations. The Company's intellectual property
relates to a wide variety of products and processes. Eastman
continues to actively protect its intellectual property. As the laws of many
countries do not protect intellectual property to the same extent as the laws of
the United States, Eastman cannot ensure that it will be able to adequately
protect its intellectual property assets outside the United States.
The
Company pursues opportunities to license proprietary technology to third parties
in areas where it has determined competitive impact to core businesses will be
minimal. These
arrangements typically are structured to require payments at significant project
milestones such as signing, completion of design, and start-up. To date,
efforts have been focused on acetyls technology in the PCI segment. The
Company also is actively pursuing licensing opportunities for oxo derivatives in
the PCI segment and its IntegRexTM
technology in the Performance Polymers segment.
Research
and Development
For 2009,
2008, and 2007, Eastman's research and development expenses totaled $137
million, $158 million, and $156 million, respectively.
Environmental
Eastman
is subject to significant and complex laws, regulations, and legal requirements
relating to the use, storage, handling, generation, transportation, emission,
discharge, disposal, and remediation of, and exposure to, hazardous and
non-hazardous substances and wastes in all of the countries in which it does
business. These health, safety, and environmental considerations are
a priority in the Company's planning for all existing and new products and
processes. The Health, Safety, Environmental and Security Committee
of Eastman's Board of Directors oversees the Company's policies and practices
concerning health, safety, and the environment and its processes for complying
with related laws and regulations, and monitors related matters.
The
Company's policy is to operate its plants and facilities in a manner that
protects the environment and the health and safety of its employees and the
public. The Company intends to continue to make expenditures for
environmental protection and improvements in a timely manner consistent with its
policies and with the technology available. In some cases, applicable
environmental regulations such as those adopted under the U.S. Clean Air Act and
Resource Conservation and Recovery Act, and related actions of regulatory
agencies, determine the timing and amount of environmental costs incurred by the
Company. Likewise, when finalized, proposed legislation related to
climate change and implementing regulations could impact the timing and amount
of environmental costs incurred by the Company.
The
Company accrues environmental costs when it is probable that the Company has
incurred a liability and the amount can be reasonably estimated. In
some instances, the amount cannot be reasonably estimated due to insufficient
information, particularly as to the nature and timing of future
expenditures. In these cases, the liability is monitored until such
time that sufficient data exists. With respect to a contaminated
site, the amount accrued reflects the Company's assumptions about remedial
requirements at the site, the nature of the remedy, the outcome of discussions
with regulatory agencies and other potentially responsible parties at
multi-party sites, and the number and financial viability of other potentially
responsible parties. Changes in the estimates on which the accruals
are based, unanticipated government enforcement action, or changes in health,
safety, environmental, and chemical control regulations, and testing
requirements could result in higher or lower costs.
The
Company's cash expenditures related to environmental protection and improvement
were estimated to be approximately $173 million, $218 million, and $209 million,
in 2009, 2008, and 2007, respectively. These amounts were primarily
for operating costs associated with environmental protection equipment and
facilities, but also included expenditures for construction and
development. The Company does not expect future environmental capital
expenditures arising from requirements of recently promulgated environmental
laws and regulations to materially increase the Company's planned level of
annual capital expenditures for environmental control facilities.
Other
matters concerning health, safety, and the environment are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II Item 7 and in Notes 1, "Significant Accounting Policies",
12, "Environmental Matters", and 25, "Reserve Rollforwards" to the
Company's consolidated financial statements in Part II, Item 8 of this Annual
Report.
On
January 1, 2010 and 2009, Eastman's backlog of firm sales orders represented
less than 10 percent of the Company's total consolidated revenue for the
previous year. These orders are primarily short-term and all orders
are expected to be filled in the following year. The Company manages
its inventory levels to control the backlog of products depending on customers'
needs. In areas where the Company is the single source of supply, or
competitive forces or customers' needs dictate, the Company may carry additional
inventory to meet customer requirements.
Financial
Information About Geographic Areas
For sales
revenue and long-lived assets by geographic areas, see Note 22, "Segment
Information", to the Company's consolidated financial statements in Part II,
Item 8 of this Annual Report. For information about regional sales
and earnings, see "Regional Business Overview" above in this "Business" section
of this Annual Report.
Available
Information – SEC Filings and Corporate Governance Materials
The
Company makes available free of charge, through the "Investors – SEC
Information" section of its Internet website (www.eastman.com), its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably
practicable after electronically filing such material with, or furnishing it to,
the Securities and Exchange Commission (the "SEC"). Once filed with
the SEC, such documents may be read and/or copied at the SEC's Public Reference
Room at 100 F Street N.E., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers, including Eastman Chemical Company, that electronically file
with the SEC at www.sec.gov.
The
Company also makes available free of charge, through the "Investors – Corporate
Governance" section of its Internet website (www.eastman.com), the Corporate
Governance Guidelines of its Board of Directors, the charters of each of the
committees of the Board, and codes of ethics and business conduct for directors,
officers and employees. Such materials are also available in print
upon the written request of any stockholder to Eastman Chemical Company, P.O.
Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor
Relations.
ITEM
1A. RISK FACTORS
For
identification and discussion of the most significant risks applicable to the
Company and its business, see Part II – Item 7 – "Management's Discussion and
Analysis of Financial Condition and Results of Operations – Forward-Looking
Statements and Risk Factors" of this Annual Report.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
EXECUTIVE
OFFICERS OF THE COMPANY
Certain
information about the Company's executive officers is provided
below:
J. Brian
Ferguson, age 55, is Executive Chairman of the Board. Mr. Ferguson
joined the Company in 1977. He was named Vice President, Industry and
Federal Affairs in 1994, became Managing Director, Greater China in 1996, was
named President, Eastman Chemical Asia Pacific in 1998, became President,
Polymers Group in 1999, became President, Chemicals Group in 2001, and was
elected Chairman of the Board and Chief Executive Officer in
2002. Mr. Ferguson was appointed to his current position in May 2009
when James P. Rogers succeeded him as Chief Executive Officer.
James P.
Rogers, age 58, is Chief Executive Officer, President of Eastman Chemical
Company, and is a member of the Board of Directors. He served as
President and head of the Chemicals & Fibers Business Group at the time of
his current appointment. Mr. Rogers was appointed Executive Vice
President of the Company and President of Eastman Division effective November
2003. Mr. Rogers joined the Company in 1999 as Senior Vice President
and Chief Financial Officer and in 2002 was also appointed Chief Operations
Officer of Eastman Division. Mr. Rogers served previously as
Executive Vice President and Chief Financial Officer of GAF Materials
Corporation ("GAF"). He also served as Executive Vice President,
Finance, of International Specialty Products, Inc., which was spun off from GAF
in 1997. Mr. Rogers was appointed to his current position in May
2009.
Mark J.
Costa, age 43, is Executive Vice President, Specialty Polymers, Coatings
and Adhesives, and Chief Marketing Officer. Mr. Costa joined the
Company in June 2006 as Senior Vice President, Corporate Strategy &
Marketing and was appointed Executive Vice President, Polymers Business Group
Head and Chief Marketing Officer in August 2008. Prior to joining
Eastman, Mr. Costa was a senior partner within Monitor Group's integrated North
American and global client service networks. He joined Monitor in
1988 and his experience included corporate and business unit strategies, asset
portfolio strategies, innovation and marketing, and channel strategies across a
wide range of industries, including specialty and commodity chemicals,
electricity, natural gas and truck/auto manufacturing. Mr. Costa was
appointed to his current position in May 2009.
Richard
L. Johnson, age 60, is Senior Vice President, Fibers and Global Supply Chain.
Prior to being named to this position, Mr. Johnson was Vice President and
General Manager of Fibers. Mr. Johnson joined Eastman in 1971 and
held numerous positions in environmental programs, operations and manufacturing
until he became Superintendent of the Cellulose Esters Division in
1991. He was named Superintendent of the Acetate Tow Division in
1993, became Vice President and General Manager of Fibers in 1996, and Group
Vice President of Fibers in 2002. Mr. Johnson was named Group Vice
President of Performance Chemicals, Intermediates, and Fibers in
2006. Mr. Johnson was appointed to his current position in May
2009.
Ronald C.
Lindsay, age 51, is Executive Vice President, Performance Polymers and Chemical
Intermediates. He joined
Eastman in 1980 and held a number of positions in various manufacturing and
business organizations. In 2003, Mr. Lindsay was appointed Vice
President and General Manager of Intermediates, in 2005 became Vice President,
Performance Chemicals, in 2006 was appointed Senior Vice President and Chief
Technology Officer, and in 2008 was appointed Senior Vice President, Corporate
Strategy and Regional Leadership. He was appointed to his current
position in May 2009.
Curtis E.
Espeland, age 45, is Senior Vice President and Chief Financial
Officer. Mr. Espeland joined Eastman in 1996, and has served in
various financial management positions of increasing responsibility, including
Vice President, Finance, Polymers; Vice President, Finance, Eastman Division;
Vice President and Controller; Director of Corporate Planning and Forecasting;
Director of Finance, Asia Pacific; and Director of Internal Auditing. He served as the Company's
Chief Accounting Officer from December 2002 to 2008. Prior to joining
Eastman, Mr. Espeland was an audit and business advisory manager with Arthur
Andersen LLP in the United States, Eastern Europe, and Australia. Mr.
Espeland was appointed to his current position in September 2008.
Theresa
K. Lee, age 57, is Senior Vice President, Chief Legal Officer and Corporate
Secretary. Ms. Lee joined Eastman as a staff attorney in 1987, and
has served in various legal management positions of increasing responsibility,
including Assistant General Counsel for the health, safety, and environmental
legal staff, Assistant General Counsel for the corporate legal staff, and Vice
President, Associate General Counsel and Secretary. She became Vice
President, General Counsel, and Corporate Secretary of Eastman in 2000 and was
appointed to her current position in 2002.
Greg W.
Nelson, age 47, is Senior Vice President and Chief Technology
Officer. Dr. Nelson joined Eastman in 1988 in the Research and
Development organization, and served in various positions in technology,
including Technology Manager for the Flexible Plastics business, Vice President,
Polymers Technology, and Vice President Corporate Technology from 2007 until
appointed to his current position in August 2008.
Norris P.
Sneed, age 54, is Senior Vice President, Manufacturing Support and Chief
Administrative Officer. Mr. Sneed joined the Company as a chemical
engineer at Eastman's South Carolina Operations in 1979. He has
served in various management positions of increasing responsibility, including
superintendent for different manufacturing and new business development
departments at Eastman's Arkansas operations, assistant to the Chief
Executive Officer, managing director for Eastman's Argentina
operations, Vice President of Organization Effectiveness, and Senior Vice
President, Human Resources, Communications and Public
Affairs. Mr. Sneed was appointed to his current position in May
2009.
Scott V.
King, age 41, is Vice President, Controller and Chief Accounting
Officer. Since joining Eastman in 1999 as Manager, Corporate
Consolidations and External Reporting, he has held various positions of
increasing responsibility in the financial organization, and was appointed Vice
President and Controller in August 2007. Prior to joining Eastman,
Mr. King was an audit and business advisory manager with PricewaterhouseCoopers
LLP. Mr. King was appointed to his current position in September
2008.
PROPERTIES
At
December 31, 2009, Eastman operated eleven manufacturing sites in seven
countries. Utilization of these facilities may vary with product mix
and economic, seasonal, and other business conditions; however, none of the
principal plants are substantially idle. The Company's plants,
including approved expansions, generally have sufficient capacity for existing
needs and expected near-term growth. These plants are generally well
maintained, in good operating condition, and suitable and adequate for their
use. Unless otherwise indicated, all of the properties are
owned. The locations and general character of the major manufacturing
facilities are:
|
Segment using manufacturing
facility
|
Location
|
CASPI
|
Fibers
|
PCI
|
Performance
Polymers
|
Specialty
Plastics
|
|
|
|
|
|
|
USA
|
|
|
|
|
|
Jefferson,
Pennsylvania
|
x
|
|
|
|
|
Columbia,
South Carolina
|
|
|
|
x
|
x
|
Kingsport,
Tennessee
|
x
|
x
|
x
|
x
|
x
|
Longview,
Texas
|
x
|
|
x
|
x
|
x
|
Franklin,
Virginia(1)
|
x
|
|
|
|
|
Europe
|
|
|
|
|
|
Workington,
England
|
|
x
|
|
|
|
Middelburg,
the Netherlands
|
x
|
|
|
|
|
Asia
Pacific
|
|
|
|
|
|
Kuantan,
Malaysia (1)
|
|
|
|
|
x
|
Jurong
Island, Singapore (1)
|
x
|
|
x
|
|
|
Zibo
City, China(2)
|
x
|
|
x
|
|
|
Latin
America
|
|
|
|
|
|
Uruapan,
Mexico
|
x
|
|
|
|
|
(1)
|
Indicates
a location that Eastman leases from a third
party.
|
(2)
|
Eastman
holds a 51 percent share in the joint venture Qilu Eastman Specialty
Chemical Ltd.
|
Eastman
has a 50 percent interest in Primester, a joint venture that manufactures
cellulose acetate at Eastman's Kingsport, Tennessee plant. The
production of cellulose acetate is an intermediate step in the manufacture of
acetate tow and other cellulose acetate based products. The Company
also has a 50 percent interest in a manufacturing facility in Nanjing,
China. The Nanjing facility produces EastotacTM
hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and
sealants. EastotacTM
hydrocarbon resins are also used to produce hot melt adhesives for packaging
applications in addition to glue sticks, tapes, labels, and other adhesive
applications.
Eastman
has distribution facilities at all of its plant sites. In addition,
the Company owns or leases approximately 75 stand-alone distribution facilities
in the United States and 15 other countries. Corporate headquarters
are in Kingsport, Tennessee. The Company's regional headquarters are
in Miami, Florida; Capelle aan den Ijssel, the Netherlands; Zug, Switzerland;
Singapore; and Kingsport, Tennessee. Technical service is provided to
the Company's customers from technical service centers in Kingsport, Tennessee;
Kirkby, England; Shanghai, China and Singapore. Customer service
centers are located in Kingsport, Tennessee; Capelle aan den Ijssel, the
Netherlands; Miami, Florida; and Singapore.
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 in excess of $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.
There
were no matters submitted to a vote of the Company's stockholders during fourth
quarter of 2009.
PART
II
(a) Eastman
Chemical Company's ("Eastman" or the "Company") common stock is traded on the
New York Stock Exchange ("NYSE") under the symbol "EMN". The
following table presents the high and low sales prices of the common stock on
the NYSE and the cash dividends per share declared by the Company's Board of
Directors for each quarterly period of 2009 and 2008.
|
High
|
|
Low
|
|
Cash
Dividends Declared
|
2009
|
First
Quarter
|
$
|
34.15
|
$
|
17.76
|
$
|
0.44
|
|
Second
Quarter
|
45.85
|
|
26.14
|
|
0.44
|
|
Third
Quarter
|
55.88
|
|
34.57
|
|
0.44
|
|
Fourth
Quarter
|
61.95
|
|
49.85
|
|
0.44
|
2008
|
First
Quarter
|
$
|
67.77
|
$
|
56.31
|
$
|
0.44
|
|
Second
Quarter
|
78.29
|
|
62.16
|
|
0.44
|
|
Third
Quarter
|
69.45
|
|
52.91
|
|
0.44
|
|
Fourth
Quarter
|
55.22
|
|
25.87
|
|
0.44
|
As of
December 31, 2009, there were 72,468,042 shares of the Company's common stock
issued and outstanding, which shares were held by 23,712 stockholders of
record. These shares include 82,674 shares held by the Company's
charitable foundation. The Company has declared a cash dividend of
$0.44 per share during the first quarter of 2010, payable on April 1, 2010 to
stockholders of record on March 15, 2010. Quarterly dividends on
common stock, if declared by the Company's Board of Directors, are usually paid
on or about the first business day of the month following the end of each
quarter. The payment of dividends is a business decision made by the
Board of Directors from time to time based on the Company's earnings, financial
position and prospects, and such other considerations as the Board considers
relevant. Accordingly, while management currently expects that the
Company will continue to pay the quarterly cash dividend, its dividend practice
may change at any time.
See Part
III, Item 12 — "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters—Securities Authorized for Issuance Under Equity
Compensation Plans" of this 2009 Annual Report on Form 10-K ("Annual Report")
for the information required by Item 201(d) of Regulation S-K.
(b) Not
applicable.
(c) Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
Period
|
Total
Number
of
Shares
Purchased
(1)
|
|
Average
Price Paid Per Share
(2)
|
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
or
Programs
(3)
|
|
Approximate
Dollar
Value
(in Millions) that May Yet Be Purchased Under the Plans or
Programs
(3)
|
October
1- 31, 2009
|
--
|
$
|
--
|
|
0
|
$
|
117
|
November
1-30, 2009
|
54,400
|
$
|
59.35
|
|
54,400
|
$
|
113
|
December
1-31, 2009
|
300,000
|
$
|
59.01
|
|
300,000
|
$
|
96
|
Total
|
354,400
|
$
|
59.06
|
|
354,400
|
$
|
96
|
(1)
|
Shares
repurchased under a previously announced Company repurchase
plan.
|
(2)
|
Average
price paid per share reflects the weighted average purchase price paid for
share repurchases.
|
(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 December 31, 2009, a total of 9.7 million
shares have been repurchased under this authorization for a total amount
of $604 million. For
additional information, see Note 14, "Stockholders' Equity", to the
Company's consolidated financial statements in Part II, Item 8 of this
Annual Report.
|
Summary
of Operating Data
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
5,047 |
|
|
$ |
6,726 |
|
|
$ |
6,830 |
|
|
$ |
6,779 |
|
|
$ |
6,460 |
|
Operating
earnings
|
|
|
317 |
|
|
|
519 |
|
|
|
504 |
|
|
|
654 |
|
|
|
740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
|
136 |
|
|
|
328 |
|
|
|
321 |
|
|
|
427 |
|
|
|
541 |
|
Earnings
(loss) from discontinued operations
|
|
|
-- |
|
|
|
-- |
|
|
|
(10 |
) |
|
|
(18 |
) |
|
|
16 |
|
Gain
(loss) from disposal of discontinued operations
|
|
|
-- |
|
|
|
18 |
|
|
|
(11 |
) |
|
|
-- |
|
|
|
-- |
|
Net
earnings
|
|
$ |
136 |
|
|
$ |
346 |
|
|
$ |
300 |
|
|
$ |
409 |
|
|
$ |
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
1.88 |
|
|
$ |
4.36 |
|
|
$ |
3.89 |
|
|
$ |
5.20 |
|
|
$ |
6.70 |
|
Earnings
(loss) from discontinued operations
|
|
|
-- |
|
|
|
0.23 |
|
|
|
(0.26 |
) |
|
|
(0.22 |
) |
|
|
0.20 |
|
Net
earnings
|
|
$ |
1.88 |
|
|
$ |
4.59 |
|
|
$ |
3.63 |
|
|
$ |
4.98 |
|
|
$ |
6.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
1.85 |
|
|
$ |
4.31 |
|
|
$ |
3.84 |
|
|
$ |
5.12 |
|
|
$ |
6.61 |
|
Earnings
(loss) from discontinued operations
|
|
|
-- |
|
|
|
0.24 |
|
|
|
(0.26 |
) |
|
|
(0.21 |
) |
|
|
0.20 |
|
Net
earnings
|
|
$ |
1.85 |
|
|
$ |
4.55 |
|
|
$ |
3.58 |
|
|
$ |
4.91 |
|
|
$ |
6.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Financial Position Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
1,735 |
|
|
$ |
1,423 |
|
|
$ |
2,293 |
|
|
$ |
2,422 |
|
|
$ |
1,924 |
|
Net
properties
|
|
|
3,110 |
|
|
|
3,198 |
|
|
|
2,846 |
|
|
|
3,069 |
|
|
|
3,162 |
|
Total
assets
|
|
|
5,515 |
|
|
|
5,281 |
|
|
|
6,009 |
|
|
|
6,132 |
|
|
|
5,737 |
|
Current
liabilities
|
|
|
800 |
|
|
|
832 |
|
|
|
1,122 |
|
|
|
1,059 |
|
|
|
1,051 |
|
Long-term
borrowings
|
|
|
1,604 |
|
|
|
1,442 |
|
|
|
1,535 |
|
|
|
1,589 |
|
|
|
1,621 |
|
Total
liabilities
|
|
|
4,002 |
|
|
|
3,728 |
|
|
|
3,927 |
|
|
|
4,103 |
|
|
|
4,125 |
|
Total
stockholders' equity
|
|
|
1,513 |
|
|
|
1,553 |
|
|
|
2,082 |
|
|
|
2,029 |
|
|
|
1,612 |
|
Dividends
declared per share
|
|
|
1.76 |
|
|
|
1.76 |
|
|
|
1.76 |
|
|
|
1.76 |
|
|
|
1.76 |
|
In fourth
quarter 2009, the Company announced its decision to discontinue the Beaumont,
Texas industrial gasification project. This decision was based on a
number of factors, including high capital costs, the current and projected
reduced spread between natural gas and oil and petroleum coke prices, and
continued uncertainty regarding U.S. energy and environmental public
policy. For more information regarding the impact of this impairment
on financial results, refer to the segment discussions of Part II, Item 7 –
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Part II, Item 8 – "Notes to the Audited Consolidated Financial
Statements" – Note 2, "Asset Impairments and Restructuring Charges, Net " of
this Annual Report.
In first
quarter 2008, the Company completed the sale of its polyethylene
terephthalate ("PET")
polymers and purified terephthalic acid ("PTA") manufacturing facilities in
Rotterdam, the Netherlands and the PET manufacturing facility in Workington,
United Kingdom and related businesses. Results from, charges related
to, and gains and losses from disposal of the San Roque, Spain, the Netherlands,
and the United Kingdom assets and businesses are presented as discontinued
operations. For more information regarding the impact of these
divestitures on financial results, refer to the segment discussions of Part II,
Item 7 – "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Part II, Item 8 – "Notes to the Audited Consolidated
Financial Statements" – Note 16, "Divestitures" and Note 17, "Discontinued
Operations" of this Annual Report.
In second
quarter 2007, the Company completed the sale of its San Roque, Spain PET
manufacturing facility. During fourth quarter 2007, the Company sold
its PET polymers production facilities in Cosoleacaque, Mexico and Zarate,
Argentina and the related businesses and entered into definitive agreements to
sell its PET polymers production facilities in Rotterdam, the Netherlands and
Workington, United Kingdom and the related businesses. For more
information regarding the impact of these divestitures on financial results,
refer to the segment discussions of Part II, Item 7 – "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Part II, Item
8 – "Notes to the Audited Consolidated Financial Statements" – Note 2,
"Discontinued Operations and Assets Held for Sale" and Note 17, "Divestitures"
of the 2008 Annual Report on Form 10-K.
In fourth
quarter 2006, the Company completed the sale of its Batesville, Arkansas
manufacturing facility and related assets and specialty organic chemicals
product lines in the Performance Chemicals and Intermediates ("PCI") segment and
the sale of its polyethylene and EpoleneTM
polymer businesses and related assets located at the Longview, Texas site and
the Company's ethylene pipeline. The polyethylene assets and product
lines were in the Performance Polymers segment, while the EpoleneTM
assets and product lines were in the Coatings, Adhesives, Specialty Polymers and
Inks ("CASPI") segment. For more information regarding the impact of
these divestitures on financial results, refer to the segment discussions of
Part II, Item 7 – "Management's Discussion and Analysis of Financial Reporting
and Results of Operations" and Part II, Item 8 – "Notes to the Audited
Consolidated Financial Statements" – Note 17, "Divestitures" of the 2008 Annual
Report on Form 10-K.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
ITEM
|
Page
|
|
|
|
33
|
|
|
|
36
|
|
|
|
38
|
|
|
|
|
|
39
|
|
43
|
|
49
|
|
50
|
|
53
|
|
59
|
|
|
|
60
|
|
|
|
65
|
|
|
|
66
|
|
|
|
66
|
|
|
|
66
|
|
|
|
67
|
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the consolidated financial statements for Eastman
Chemical Company ("Eastman" or the "Company"), which have been prepared in
accordance with accounting principles generally accepted ("GAAP") in the United
States, and should be read in conjunction with the Company's consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K (this "Annual Report"). All references to earnings per
share ("EPS") contained in this report are diluted earnings per share unless
otherwise noted.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
preparing the consolidated financial statements in conformity with 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 below 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.
Allowances
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. The Company believes, based on historical results, the
likelihood of actual write-offs having a material impact on financial results is
low. However, if one of the Company's key customers was to file for
bankruptcy, or otherwise be unable to make its required payments, or there was a
significant continued slow-down in the economy, the Company could increase its
allowances. This could result in a material charge to
earnings. The Company's allowances were $10 million and $8 million at
December 31, 2009 and 2008, respectively.
Impairment
of Long-Lived Assets
Long-lived
assets and certain identifiable intangibles to be held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the
carrying amount is not considered to be recoverable, an analysis of fair value
is triggered. An impairment is recorded for the excess of the
carrying amount of the asset over the fair value.
The
Company conducts its annual testing of goodwill and indefinite-lived intangible
assets in third quarter of each year, unless events warrant more frequent
testing. Reporting units are identified for the purpose of assessing
potential impairments of goodwill. The carrying value of
indefinite-lived intangibles is considered impaired when their fair value, as
established by appraisal or based on undiscounted future cash flows of certain
related products, is less than their carrying value. If the fair
value of a reporting unit is less than the carrying value of goodwill,
additional steps, including an allocation of the estimated fair value to the
assets and liabilities of the reporting unit, would be necessary to determine
the amount, if any, of goodwill impairment. Goodwill and
indefinite-lived intangibles primarily consist of goodwill in the Coatings,
Adhesives, Specialty Polymers and Inks ("CASPI") segment. The Company
also had recorded goodwill and other intangibles associated with the Beaumont,
Texas industrial gasification project. In fourth quarter 2009, the
Company announced the discontinuance of the Beaumont, Texas industrial
gasification project, which resulted in an impairment of the Beaumont industrial
gasification project goodwill and other intangible assets.
As the
Company's assumptions related to long-lived assets are subject to change,
additional write-downs may be required in the future. If estimates of
fair value less costs to sell are revised, the carrying amount of the related
asset is adjusted, resulting in a charge to earnings. The Company
recognized fixed (tangible) asset impairment costs of $133 million and goodwill
and definite-lived intangible asset impairment costs of $46 million in results
from continuing operations during 2009, related to the discontinuance of the
Beaumont, Texas industrial gasification project. The Company
recognized no fixed (tangible) asset impairment costs and no definite-lived
intangible asset impairment costs in results from continuing operations during
2008.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Environmental
Costs
The
Company accrues environmental remediation costs when it is probable that the
Company has incurred a liability at a contaminated site and the amount can be
reasonably estimated. When a single amount cannot be reasonably
estimated but the cost can be estimated within a range, the Company accrues the
minimum amount. This undiscounted accrued amount reflects the
Company's assumptions about remediation requirements at the contaminated site,
the nature of the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites, and the number
and financial viability of other potentially responsible
parties. Changes in the estimates on which the accruals are based,
unanticipated government enforcement action, or changes in health, safety,
environmental, and chemical control regulations and testing requirements could
result in higher or lower costs. Estimated future environmental
expenditures for remediation costs range from the minimum or best estimate of
$10 million to the maximum of $20 million at December 31, 2009.
In
accordance with GAAP, the Company also establishes reserves for
closure/postclosure costs associated with the environmental and other assets it
maintains. Environmental assets, as defined by GAAP, include but are
not limited to waste management units, such as landfills, water treatment
facilities, and ash ponds. When these types of assets are constructed
or installed, a reserve is established for the future costs anticipated to be
associated with the retirement or closure of the asset based on an expected life
of the environmental assets and the applicable regulatory closure
requirements. These future expenses are charged against earnings over
the estimated useful life of the assets. Currently, the Company
estimates the useful life of each individual asset is up to 50
years. If the Company changes its estimate of the asset retirement
obligation costs or its estimate of the useful lives of these assets, expenses
to be charged against earnings could increase or decrease.
In
accordance with GAAP, the Company also monitors conditional obligations and will
record reserves associated with them when and to the extent that more detailed
information becomes available concerning applicable retirement
costs.
The
Company's reserve, including the above remediation, was $42 million at December
31, 2009 and $41 million at December 31, 2008, representing the minimum or best
estimate for remediation costs and the best estimate of the amount accrued to
date over the regulated assets' estimated useful lives for asset retirement
obligation costs.
Pension
and Other Post-employment Benefits
The
Company maintains defined benefit pension plans that provide eligible employees
with retirement benefits. Additionally, Eastman provides life
insurance and health care and dental benefits for eligible retirees and health
care benefits for retirees' eligible survivors. The costs and
obligations related to these benefits reflect the Company's assumptions related
to general economic conditions (particularly interest rates) and expected return
on plan assets. For the U.S. plans, at December 31, 2009, the Company
assumed a discount rate of 5.72 percent on its defined benefit pension plans,
5.79 percent on its other post-employment benefit plan and an expected return on
assets of 9 percent. The cost of providing plan benefits also depends
on demographic assumptions including retirements, mortality, turnover, and plan
participation.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company expects its 2010 pension expense to be slightly higher than
2009. The December 31, 2009 projected benefit obligation and 2010
expense are affected by year-end 2009 assumptions. The sensitivities
below are specific to the time periods noted. They also may not be
additive, so the impact of changing multiple factors simultaneously cannot be
calculated by combining the individual sensitivities shown. The
following table illustrates the sensitivity to changes in the Company's
long-term assumptions in the expected return on assets and assumed discount rate
for the U.S. pension plans and other postretirement welfare plans:
Change
in
Assumption
|
Impact
on
2010
Pre-tax U.S.
Benefits
Expense
|
Impact
on
December
31, 2009 Projected Benefit Obligation for U.S. Pension
Plans
|
Impact
on
December
31, 2009 Benefit Obligation for Other U.S. Postretirement
Plans
|
|
|
|
|
25
basis point
decrease
in discount
rate
|
+$5
Million
|
+$40
Million
|
+$23
Million
|
|
|
|
|
25
basis point
increase
in discount
rate
|
-$5
Million
|
-$38
Million
|
-$22
Million
|
|
|
|
|
25
basis point
decrease
in expected
return
on assets
|
+$3
Million
|
No
Impact
|
N/A
|
|
|
|
|
25
basis point
increase
in expected
return
on assets
|
-$3
Million
|
No
Impact
|
N/A
|
The
expected return on assets and assumed discount rate used to calculate the
Company's pension and other post-employment benefit obligations are established
each December 31. The expected return on assets is based upon the
long-term expected returns in the markets in which the pension trust invests its
funds, primarily the domestic, international, and private equity
markets. Historically, over a ten year period, excluding 2008 which
is considered an anomaly due to the global recession, the Company's average
achieved actual return has been equal to or greater than the expected return on
assets. The assumed discount rate is based upon a portfolio of
high-grade corporate bonds, which are used to develop a yield
curve. This yield curve is applied to the expected durations of the
pension and post-employment benefit obligations. As future benefits
under the U.S. benefit plan have been fixed at a certain contribution amount,
changes in the health care cost trend assumptions do not have a material impact
on the results of operations.
The
Company uses the market related valuation method to determine the value of plan
assets, which recognizes the change of the fair value of the plan assets over
five years. If actual experience differs from these long-term
assumptions, the difference is recorded as an unrecognized actuarial gain (loss)
and then amortized into earnings over a period of time based on the average
future service period, which may cause the expense related to providing these
benefits to increase or decrease. The charges applied to earnings in
2009, 2008, and 2007 due to the amortization of these unrecognized actuarial
losses, largely due to actual experience versus assumptions of discount rates,
were $45 million, $37 million, and $47 million,
respectively.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company does not anticipate that a change in pension and other post-employment
obligations caused by a change in the assumed discount rate during 2010 will
impact the cash contributions to be made to the pension plans during
2010. However, an after-tax charge or credit will be recorded
directly to accumulated other comprehensive income (loss), a component of
stockholders' equity, as of December 31, 2010 for the impact on the pension's
projected benefit obligation of the change in interest rates, if
any. While the amount of the change in these obligations does not
correspond directly to cash funding requirements, it is an indication of the
amount the Company will be required to contribute to the plans in future
years. The amount and timing of such cash contributions is dependent
upon interest rates, actual returns on plan assets, retirement, attrition rates
of employees, and other factors. For further information regarding
pension and other post-employment obligations, see Note 10, "Retirement Plans",
to the Company's consolidated financial statements in Part II, Item 8 of this
Annual Report.
Litigation
and Contingent Liabilities
From time
to time, the Company and its operations are parties to or targets of lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which are
handled and defended in the ordinary course of business. The Company
accrues a liability for such matters when it is probable that a liability has
been incurred and the amount can be reasonably estimated. When a
single amount cannot be reasonably estimated but the cost can be estimated
within a range, the Company accrues the minimum amount. The Company
expenses legal costs, including those expected to be incurred in connection with
a loss contingency, as incurred. Based upon facts and information
currently available, the Company believes the amounts reserved are adequate for
such pending matters; however, results of operations could be affected by
monetary damages, costs or expenses, and charges against earnings in particular
periods.
Income
Taxes
The
Company records deferred tax assets and liabilities based on temporary
differences between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates expected to be in effect for the year in
which the differences are expected to reverse. The ability to realize
the deferred tax assets is evaluated through the forecasting of taxable income
using historical and projected future operating results, the reversal of
existing temporary differences, and the availability of tax planning
strategies. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be
realized. In the event that the actual outcome from future tax
consequences differs from our estimates and assumptions, the resulting change to
the provision for income taxes could have a material adverse impact on the
consolidated results of operations and statement of financial
position. As of December 31, 2009, a valuation allowance of $88
million has been provided against the deferred tax assets.
The
Company recognizes income tax positions that meet the more likely than not
threshold and accrues interest related to unrecognized income tax positions,
which is recorded as a component of the income tax provision.
During
2009, the Company recognized $200 million in asset impairment and restructuring
charges, primarily consisting of $179 million in asset impairments related to
the Company's previously announced discontinuance of its Beaumont, Texas
industrial gasification project and $23 million, net, for severance resulting
from a reduction in force. The Company's decision to discontinue the
industrial gasification project was due to a number of factors, including high
capital costs, the current and projected reduced spread between natural gas and
oil and petroleum coke prices, and continued uncertainty regarding U.S. energy
and environmental public policy.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In 2008,
the Company sold certain mineral rights at an operating manufacturing site,
recognizing $16 million of other operating income.
During
2007 and 2008, the Company took certain strategic actions in its Performance
Polymers segment to address its underperforming polyethylene terephthalate
("PET") manufacturing facilities outside the United States. In second
quarter 2007, the Company completed the sale of its PET manufacturing facility
in Spain and in first quarter 2008, the Company completed the sale of its PET
polymers and purified terephthalic acid ("PTA") manufacturing facilities in the
Netherlands and the PET manufacturing facility in the United Kingdom and related
businesses. Results from, charges related to, and gains and losses
from disposal of the Spain, the Netherlands, and the United Kingdom assets and
businesses are presented as discontinued operations. In fourth
quarter 2007, the Company completed the sale of its Mexico and Argentina
manufacturing facilities. As part of this divestiture, the Company
entered into transition supply agreements for polymer intermediates from which
sales revenue and operating results are included in the Performance Polymers
segment results in 2008.
In fourth
quarter 2006, the Company sold its polyethylene ("PE") and EpoleneTM
polymer businesses and related assets of the Performance Polymers and CASPI
segments. As part of the PE divestiture, the Company entered into a
transition supply agreement for contract ethylene sales, from which sales
revenue and operating earnings are included in the Performance Chemicals and
Intermediates ("PCI") segment results in 2009, 2008, and 2007.
Also in
fourth quarter 2006, the Company made strategic decisions relating to the
scheduled shutdown of cracking units in Longview, Texas and a planned shutdown
of higher cost PET assets in Columbia, South Carolina. Accelerated
depreciation costs resulting from these decisions were $9 million and $49
million in 2008 and 2007, respectively. For more information on
accelerated depreciation costs, see "Gross Profit" in the "Results of
Operations" section of this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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
sales and segment sales and results from continuing operations excluding
sales revenue and results from continuing operations from sales in Latin
America of PET products manufactured at the divested Mexico and Argentina
PET manufacturing sites;
|
·
|
Company
and segment sales excluding contract ethylene sales under a transition
agreement related to the divestiture of the PE product
lines;
|
·
|
Company
and segment sales excluding contract polymer intermediates sales under a
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and
Argentina;
|
·
|
Company
and segment gross profit, operating earnings, earnings from continuing
operations, and diluted earnings per share excluding accelerated
depreciation costs, asset impairments and restructuring charges, and other
operating income; and
|
·
|
Company
earnings from continuing operations and diluted earnings per share
excluding net deferred tax benefits related to the previous divestiture of
businesses.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Eastman's
management believes that contract ethylene sales under the transition agreement
related to the divestiture of the PE product lines, the contract polymer
intermediates sales under the transition supply agreement related to the
divestiture of the PET manufacturing facilities and related businesses in Mexico
and Argentina, and the other operating income from the sale of mineral rights do
not reflect the continuing and expected future business of the PCI and
Performance Polymers segments or of the Company. In addition, for
evaluation and analysis of ongoing business results and the impact on the
Company and segments of strategic decisions and actions to reduce costs and to
improve the profitability of the Company, management believes that Company and
segment earnings from continuing operations should be considered both with and
without accelerated depreciation costs, asset impairments and restructuring
charges, and deferred tax benefits related to the previous divestiture of
businesses, and that Company and segment sales and results from continuing
operations should be considered both with and without sales revenue and results
from continuing operations from sales in Latin America of PET products
manufactured at the divested Mexico and Argentina manufacturing
facilities. 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 identified
items. Management utilizes Company and segment results including and
excluding the identified items in the measures it uses to evaluate business
performance 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.
The
Company generated sales revenue of $5.0 billion and $6.7 billion for 2009 and
2008, respectively. Excluding the results of contract ethylene sales
and contract polymer intermediates sales, sales revenue decreased by 20
percent. The sales revenue decrease was due to lower selling prices
in response to lower raw material and energy costs and lower sales volume
primarily attributed to weakened demand due to the global
recession.
Operating
earnings were $317 million in 2009 compared to $519 million in
2008. Excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and other operating income, operating earnings were
$517 million in 2009 compared with $558 million in
2008. Eastman's reduced earnings reflect continued weakness in
demand for the Company's products that caused lower sales volume and continued
low capacity utilization which resulted in higher unit costs. This
weakness in demand, which is attributed to the global recession, moderated
throughout 2009 resulting in stronger sales volume and operating earnings in
second half of the year. The decline was partially offset by lower
raw material and energy costs more than offsetting lower selling
prices. Operating earnings also benefited from cost reduction actions
which positively impacted results throughout the year.
During
2009, operating earnings were negatively impacted by $200 million in asset
impairment and restructuring charges, net, primarily consisting of $179 million
in asset impairments related to the Company's discontinuance of its Beaumont,
Texas industrial gasification project and $23 million, net, for severance
resulting from a reduction in force.
Primarily
as a result of strategic actions related to the Performance Polymers and PCI
segments, as well as a corporate severance program, operating earnings in 2008
were negatively impacted by $46 million in asset impairments and restructuring
charges and $9 million of accelerated depreciation costs, and were positively
impacted by $16 million in other operating income.
Earnings from continuing operations
were $136 million in 2009 compared to $328 million in 2008. Excluding
accelerated depreciation costs, asset impairments and restructuring charges,
net, and net deferred tax benefits, earnings from continuing operations were
$266 million and $342 million, respectively. Earnings from continuing
operations were $1.85 per diluted share in 2009 compared to $4.31 per diluted
share in 2008. Excluding accelerated depreciation costs, asset
impairments and restructuring charges, net, and net deferred tax benefits,
earnings were $3.63 per diluted share and $4.50 per diluted share,
respectively.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company generated $758 million in cash from operating activities during 2009
compared to $653 million generated by operating activities in
2008. The increase was primarily due to cash received from a change
in tax accounting method, as well as a reduction in working capital in 2009 as
compared to an increase in working capital in 2008. In 2009, the Company
received proceeds from a public debt offering of $248 million, contributed $181
million to the U.S. defined benefit pension plan, and repaid $88 million of its
euro credit facility and $13 million of short term borrowings. In
2008, the Company received proceeds from sale of assets of $337 million,
repurchased shares totaling $501 million, and repaid $175 million of
borrowings.
The
Company continued its growth initiatives in 2009. In the Fibers
segment, construction of the Korean acetate tow facility began in first quarter
2009, with the facility expected to be operational in first quarter
2010. In the Specialty Plastics segment, the introduction of its new
Eastman TritanTM
copolyester progressed with the monomer manufacturing facility and its first
TritanTM
copolyester polymer manufacturing facility in Kingsport, Tennessee which were
both completed in 2009 and are expected to be operational in early
2010. In the CASPI segment, the 30 percent expansion of the Company's
hydrogenated hydrocarbon resins manufacturing capacity in Middelburg, the
Netherlands which was completed in 2009 with expected production in 2010 to meet
growing demand for specialty hydrocarbon resins.
The
Company's results of operations as presented in the Company's consolidated
financial statements in Part II, Item 8 of this Annual Report are summarized and
analyzed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Volume
Effect
|
|
|
Price
Effect
|
|
|
Product
Mix
Effect
|
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
5,047 |
|
|
$ |
6,726 |
|
|
|
(25 |
)
% |
|
|
(13 |
)
% |
|
|
(12 |
)
% |
|
|
-- |
% |
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– contract polymer intermediates sales (1)
|
|
|
-- |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
- contract ethylene sales (2)
|
|
|
28 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– excluding listed items
|
|
$ |
5,019 |
|
|
$ |
6,274 |
|
|
|
(20 |
)
% |
|
|
(7 |
)
% |
|
|
(12 |
)
% |
|
|
(1 |
)
% |
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included
in 2008 sales revenue are contract polymer intermediates sales under the
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and Argentina in
fourth quarter 2007.
|
(2)
|
Included
in 2009 and 2008 sales revenue are contract ethylene sales under the
transition supply agreement related to the divestiture of the PE
businesses.
|
Sales
revenue for 2009 compared to 2008 decreased $1,679 million. Excluding
contract ethylene sales and contract polymer intermediates sales, sales revenue
decreased 20 percent due to lower selling prices in response to lower raw
material and energy costs, particularly in the PCI and Performance Polymers
segments, and lower sales volume primarily attributed to weakened demand due to
the global recession.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$ |
1,053 |
|
|
$ |
1,126 |
|
|
|
(6 |
)
% |
As
a percentage of sales
|
|
|
21 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation included in cost of sales
|
|
|
-- |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit excluding accelerated depreciation costs
|
|
|
1,053 |
|
|
|
1,135 |
|
|
|
(7 |
)
% |
As
a percentage of sales
|
|
|
21 |
% |
|
|
17 |
% |
|
|
|
|
Gross
profit for 2009 decreased compared with 2008 in the PCI, Performance Polymers,
and Specialty Plastics segments due to continued weakness in demand for the
Company's products attributed to the global recession. This weak
demand caused lower sales volume and lower capacity utilization which, resulted
in higher unit costs. In addition, the Performance Polymers segment
was negatively impacted by operational challenges with the South Carolina PET
manufacturing facility. Gross profit as a percentage of sales
increased due to improved performance in the Fibers and CASPI
segments. The Fibers segment benefited from higher selling prices,
while the CASPI segment had lower raw material and energy costs more than
offsetting lower selling prices. The Company also benefited from cost
reduction actions in 2009. In addition, 2009 results included
approximately $20 million in costs related to the reconfiguration of the
Longview, Texas facility, which impacted the PCI and CASPI
segments. Gross profit included accelerated depreciation costs of $9
million in 2008 resulting from the previously reported shutdown of the cracking
units in Longview, Texas and higher cost PET polymer assets in Columbia, South
Carolina. The Company's 2009 raw material and energy costs decreased
by approximately $900 million compared with 2008.
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses ("SG&A")
|
|
$ |
399 |
|
|
$ |
419 |
|
|
|
(5 |
)
% |
Research
and Development Expenses ("R&D")
|
|
|
137 |
|
|
|
158 |
|
|
|
(13 |
)
% |
|
|
$ |
536 |
|
|
$ |
577 |
|
|
|
(7 |
)
% |
As
a percentage of sales
|
|
|
11 |
% |
|
|
9 |
% |
|
|
|
|
SG&A
expenses decreased for 2009 compared to 2008 primarily due to lower
discretionary spending and compensation expense resulting from cost reduction
actions partially offset by increased compensation expense linked to the
Company's higher stock price.
R&D
expenses decreased for 2009 compared to 2008 primarily due to lower R&D
expenses for corporate growth initiatives, including the industrial gasification
project in Beaumont, Texas and the commercialized Eastman TritanTM
copolyester.
Asset
Impairments and Restructuring Charges, Net
Asset impairments and
restructuring charges, net, totaled $200 million and $46 million in 2009 and
2008, respectively. Asset impairments and restructuring
charges in 2009 consists primarily of $179 million in asset impairments related
to the Company's previously announced discontinuance of its Beaumont, Texas
industrial gasification project and $23 million, net for severance resulting
from a reduction in force. Asset impairments and restructuring
charges in 2008 were primarily for restructuring at the South Carolina facility
in the Performance Polymers segment, severance and pension costs from the
decision to close a previously impaired site in the United Kingdom in the PCI
segment, and severance costs resulting from a corporate severance
program. For more information regarding asset impairments and
restructuring charges, primarily related to recent strategic decisions and
actions, see the Performance Polymers and PCI segments discussion and Note 2,
"Asset Impairments and Restructuring Charges, Net", to the Company's
consolidated financial statements in Part II, Item 8 of this Annual
Report.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Other
Operating Income, Net
Other
operating income, net for 2008 reflected proceeds of $16 million from the sale
of certain mineral rights at an operating manufacturing site.
Operating Earnings
(Dollars
in millions) |
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
$ |
317 |
|
|
$ |
519 |
|
|
|
(39 |
)
% |
Accelerated
depreciation included in cost of sales
|
|
|
-- |
|
|
|
9 |
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
|
200 |
|
|
|
46 |
|
|
|
|
|
Other
operating income, net
|
|
|
-- |
|
|
|
(16 |
) |
|
|
|
|
Operating
earnings excluding accelerated depreciation costs, asset impairment and
restructuring charges, net, and other operating income,
net
|
|
$ |
517 |
|
|
$ |
558 |
|
|
|
(7 |
)
% |
Net
Interest Expense
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Gross
interest costs
|
|
$ |
99 |
|
|
$ |
106 |
|
|
|
|
Less:
capitalized interest
|
|
|
14 |
|
|
|
12 |
|
|
|
|
Interest
expense
|
|
|
85 |
|
|
|
94 |
|
|
|
(10 |
)
% |
Interest
income
|
|
|
7 |
|
|
|
24 |
|
|
|
|
|
Net
interest expense
|
|
$ |
78 |
|
|
$ |
70 |
|
|
|
11 |
% |
Net
interest expense increased $8 million in 2009 compared to 2008. Gross
interest costs for 2009 compared to 2008 were lower due to lower average
borrowings and lower average interest rates. Interest income in 2009
compared to 2008 was lower due to lower average interest rates and lower average
cash balances.
For 2010,
the Company expects net interest expense to increase compared with 2009
primarily due to lower capitalized interest and higher borrowings.
Other
Charges (Income), Net
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Foreign
exchange transactions losses
|
|
$ |
5 |
|
|
$ |
17 |
|
Investments
losses, net
|
|
|
5 |
|
|
|
6 |
|
Other,
net
|
|
|
3 |
|
|
|
(3 |
) |
Other
charges (income), net
|
|
$ |
13 |
|
|
$ |
20 |
|
Included
in other charges (income), net are gains or losses on foreign exchange
transactions, results from equity investments, gains or losses on business
venture investments, other non-operating income or charges related to Holston
Defense Corporation ("HDC"), gains from the sale of non-operating assets,
certain litigation costs, fees on securitized receivables, other non-operating
income, and other miscellaneous items.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Investments
losses, net include gains of $4 million in both 2009 and 2008 resulting from a
favorable decision in 2006 of the U.S. Department of the Army to reimburse
post-employment benefits being provided to retirees of HDC, a wholly owned
subsidiary. This gain reflected a portion of the unrecognized gain
resulting from the reimbursement decision that will be amortized into earnings
over future periods. For additional information, see Note 19,
"Other Charges (Income), Net", to the Company's consolidated financial
statements in Part II, Item 8 of this Annual Report.
Provision
for Income Taxes
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$ |
90 |
|
|
$ |
101 |
|
|
|
(11 |
)
% |
Effective
tax rate
|
|
|
39 |
% |
|
|
24 |
% |
|
|
|
|
The 2009
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 37
percent. The 2009 effective tax rate reflects a $11 million tax
charge associated with the recapture of gasification investment tax credits, a
$7 million tax charge associated with a change in accounting method for tax
purposes to accelerate timing of deductions for manufacturing repairs expense
and a $5 million tax benefit from the reversal of tax reserves due to the
expiration of the relevant statute of limitations.
The 2008
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 27
percent. The 2008 effective tax rate was impacted by a $16 million
benefit resulting from a gasification investment tax credit of $11 million and a
research and development credit of $5 million, a $14 million benefit from state
income tax credits (net of federal tax effect), and a $6 million benefit from
the settlement of a non-U.S. income tax audit.
The Company expects
its effective tax rate in 2010 will be approximately 33 percent.
Earnings
from Continuing Operations and Diluted Earnings per Share
|
|
|
|
2009
|
|
|
2008
|
|
(Dollars
in millions, except diluted EPS)
|
|
$ |
|
|
EPS |
|
|
$ |
|
|
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
136 |
|
|
$ |
1.85 |
|
|
$ |
328 |
|
|
$ |
4.31 |
|
Accelerated
depreciation included in cost of sales, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
6 |
|
|
|
0.08 |
|
Asset
impairments and restructuring charges, net of tax
|
|
|
130 |
|
|
|
1.78 |
|
|
|
32 |
|
|
|
0.42 |
|
Other
operating income, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
(10 |
) |
|
|
(0.13 |
) |
Net
deferred tax benefits related to the previous divestiture of
businesses
|
|
|
-- |
|
|
|
-- |
|
|
|
(14 |
) |
|
|
(0.18 |
) |
Earnings
from continuing operations excluding accelerated depreciation costs, net
of tax, asset impairments and restructuring charges, net of tax, other
operating income, net of tax, and net deferred tax benefits related to the
previous divesture of businesses
|
|
$ |
266 |
|
|
$ |
3.63 |
|
|
$ |
342 |
|
|
$ |
4.50 |
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Net
Earnings and Diluted Earnings per Share
(Dollars
in millions, except diluted EPS)
|
|
2009
|
|
|
2008
|
|
|
|
$ |
|
|
EPS |
|
|
$ |
|
|
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
136 |
|
|
$ |
1.85 |
|
|
$ |
328 |
|
|
$ |
4.31 |
|
Gain
from disposal of discontinued operations, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
18 |
|
|
|
0.24 |
|
Net
earnings
|
|
$ |
136 |
|
|
$ |
1.85 |
|
|
$ |
346 |
|
|
$ |
4.55 |
|
The gain
on disposal of discontinued operations, net of tax of $18 million in 2008 is
from the sale of the Company's PET polymers and PTA production facilities in the
Netherlands and its PET production facility in the United Kingdom and related
businesses for approximately $329 million in first quarter
2008. For additional information, see Note 17, "Discontinued
Operations", to the Company's consolidated financial statements in Part II, Item
8 of this Annual Report.
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, refer to Note
22, "Segment Information", to the consolidated financial statements in Part II,
Item 8 of this Annual Report.
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 22, "Segment Information", as "other" sales revenue and operating
losses. As discussed in Note 22, these "other" operating losses are
$217 million and $52 million in 2009 and 2008, respectively. Included
in 2009 is $179 million in asset impairments related to the discontinuance of
its Beaumont, Texas industrial gasification project.
CASPI
Segment
|
|
|
|
|
|
|
|
|
|
Change
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,217 |
|
|
$ |
1,524 |
|
|
$ |
(307 |
) |
|
|
(20 |
)
% |
Volume
effect
|
|
|
|
|
|
|
|
|
|
|
(184 |
) |
|
|
(12 |
)
% |
Price
effect
|
|
|
|
|
|
|
|
|
|
|
(96 |
) |
|
|
(6 |
)
% |
Product
mix effect
|
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
(2 |
)
% |
Exchange rate effect
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
227 |
|
|
|
202 |
|
|
|
25 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
|
3 |
|
|
|
-- |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
|
-- |
|
|
|
(5 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding asset impairments and restructuring charges, net, and
other operating income
|
|
|
230 |
|
|
|
197 |
|
|
|
33 |
|
|
|
17 |
% |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue for 2009 decreased $307 million compared to 2008 due primarily to lower
sales volume and lower selling prices. The lower sales volume was due
to weak customer demand in all regions except Asia Pacific, attributed to the
global recession, particularly for products sold into the building and
construction, transportation, and packaging markets. The lower
selling prices were primarily due to lower raw material and energy
costs.
Excluding
asset impairments and restructuring charges, net, and other operating income,
operating earnings for 2009 increased $33 million compared to 2008 due primarily
to lower raw material and energy costs and cost reduction actions partially
offset by lower sales volume and 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
and an adjustment to a reserve for previously divested businesses and product
lines. Other operating income for 2008 reflects the segment's
allocated portion of proceeds from the sale of certain mineral rights at an
operating manufacturing site.
Fibers
Segment
|
|
|
|
|
|
|
|
Change
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,032 |
|
|
$ |
1,045 |
|
|
$ |
(13 |
) |
|
|
(1 |
)
% |
Volume
effect
|
|
|
|
|
|
|
|
|
|
|
(88 |
) |
|
|
(8 |
)
% |
Price
effect
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
|
8 |
% |
Product
mix effect
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(1 |
)
% |
Exchange
rate effect
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
296 |
|
|
|
238 |
|
|
|
58 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges
|
|
|
4 |
|
|
|
-- |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding asset impairments and restructuring
charges
|
|
|
300 |
|
|
|
238 |
|
|
|
62 |
|
|
|
26 |
% |
Sales
revenue for 2009 decreased $13 million compared to 2008 due primarily to lower
sales volume mostly offset by higher selling prices. The lower sales
volume was primarily for acetyl chemical products. The higher selling
prices were in response to higher wood pulp costs.
Excluding
the segment's portion of the severance charge for a reduction in force in first
quarter 2009, operating earnings for 2009 increased $62 million compared to 2008
primarily due to higher selling prices and cost reduction actions, partially
offset by lower sales volume.
In
December 2008, the Company announced an alliance with SK to form a company to
acquire and operate a cellulose acetate tow manufacturing facility and related
business, with the facility being constructed by SK Chemicals Company Ltd.
("SK") in Korea. Eastman will have majority ownership in the
business. Construction began in first quarter 2009 and the facility
is expected to be operational in first quarter 2010.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
PCI
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,330 |
|
|
$ |
2,160 |
|
|
$ |
(830 |
) |
|
|
(38 |
)
% |
Volume
effect
|
|
|
|
|
|
|
|
|
|
|
(375 |
) |
|
|
(17 |
)
% |
Price
effect
|
|
|
|
|
|
|
|
|
|
|
(481 |
) |
|
|
(22 |
)
% |
Product
mix effect
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
1 |
% |
Exchange
rate effect
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– contract ethylene sales (1)
|
|
|
28 |
|
|
|
314 |
|
|
|
(286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– excluding listed items
|
|
|
1,302 |
|
|
|
1,846 |
|
|
|
(544 |
) |
|
|
(29 |
)
% |
Volume
effect
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
(2 |
)
% |
Price
effect
|
|
|
|
|
|
|
|
|
|
|
(472 |
) |
|
|
(26 |
)
% |
Product
mix effect
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
(1 |
)
% |
Exchange
rate effect
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
63 |
|
|
|
153 |
|
|
|
(90 |
) |
|
|
(59 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation costs included in cost of sales
|
|
|
-- |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
|
6 |
|
|
|
22 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
|
-- |
|
|
|
(9 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and other operating income
|
|
|
69 |
|
|
|
171 |
|
|
|
(102 |
) |
|
|
(60 |
)
% |
(1)
|
Sales revenue for 2009 and 2008 included
contract ethylene sales under the transition supply agreement related to
the divestiture of the PE businesses in fourth quarter
2006.
|
Sales
revenue for 2009 decreased $830 million compared to 2008. Excluding
contract ethylene sales under the transition agreement resulting from the
divestiture of the Performance Polymers segment's PE business in fourth quarter
2006, sales revenue decreased $544 million in 2009 compared to 2008 due to lower
selling prices. The lower selling prices were primarily due to lower
raw material and energy costs.
Excluding
accelerated depreciation costs, asset impairments and restructuring charges,
net, and other operating income, operating earnings in 2009 decreased $102
million compared to 2008. The decline was primarily due to lower
selling prices and lower capacity utilization resulting in higher unit costs,
including approximately $15 million in costs related to the reconfiguration of
the Longview, Texas facility, partially offset by lower raw material and energy
costs and cost reduction actions. A restructuring charge in first quarter
2009 consisted of the segment's portion of the severance charge for a reduction
in force. Asset impairments and restructuring charges in 2008
consisted primarily of severance and pension costs from the decision to close a
previously impaired site in the United Kingdom. The accelerated
depreciation costs for 2008 are related to the continuation of the previously
reported planned staged phase-out of older cracking units in 2007 at the
Company's Longview, Texas facility.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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. For more information, see Exhibit
99.01 to this Annual Report.
The
Company also evaluates licensing opportunities for acetic acid and oxo
derivatives on a selective basis, and has licensed technology to produce acetyl
products to Saudi International Petrochemical Company ("SIPCHEM") in Saudi
Arabia and to Chang Chun Petrochemical Company ("Chang Chun") in Taiwan in 2005
and 2007, respectively. SIPCHEM started operations in 2009 at its
plant based on this technology and Chang Chun is in the process of building its
plant. In first half of 2010, the Company expects to achieve the
final milestones under the SIPCHEM agreement and to recognize the remaining
revenue related to the license. The Company will also purchase acetic
anhydride from the SIPCHEM facility.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
719 |
|
|
$ |
1,074 |
|
|
$ |
(355 |
) |
|
|
(33 |
)
% |
Volume
effect
|
|
|
|
|
|
|
|
|
|
|
(137 |
) |
|
|
(13 |
)
% |
Price
effect
|
|
|
|
|
|
|
|
|
|
|
(233 |
) |
|
|
(22 |
)
% |
Product
mix effect
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
2 |
% |
Exchange
rate effect
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– contract polymer intermediates sales (1)
|
|
|
-- |
|
|
|
138 |
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
– U.S. PET manufacturing facilities
|
|
|
719 |
|
|
|
936 |
|
|
|
(217 |
) |
|
|
(23 |
)
% |
Volume
effect
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
-- |
% |
Price
effect
|
|
|
|
|
|
|
|
|
|
|
(233 |
) |
|
|
(25 |
)
% |
Product
mix effect
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
2 |
% |
Exchange
rate effect
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
-- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss (2)
|
|
|
(66 |
) |
|
|
(57 |
) |
|
|
(9 |
) |
|
|
(16 |
)
% |
Operating
loss - from sales from Mexico and Argentina PET
manufacturing facilities (2)
|
|
|
-- |
|
|
|
(3 |
) |
|
|
3 |
|
|
|
|
|
Operating
loss - U.S. PET manufacturing facilities (3)
|
|
|
(66 |
) |
|
|
(54 |
) |
|
|
(12 |
) |
|
|
(22 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss excluding certain items - U.S. PET manufacturing
facilities (3)
|
|
|
(62 |
) |
|
|