form10qfirstqtr_2012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark
One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2012
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OR
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______________ to ______________
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Commission file number 1-12626
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EASTMAN CHEMICAL COMPANY
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(Exact name of registrant as specified in its charter)
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Delaware
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62-1539359
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(State or other jurisdiction of
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(I.R.S. employer
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incorporation or organization)
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identification no.)
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200 South Wilcox Drive
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Kingsport, Tennessee
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37662
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area code: (423) 229-2000
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X] NO [ ]
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class
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Number of Shares Outstanding at March 31, 2012
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Common Stock, par value $0.01 per share
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137,958,478
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PAGE 1 OF 49 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 48
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
1.
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Financial Statements
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3
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4
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5
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6
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2.
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25
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3.
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44
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4.
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44
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PART II. OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
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First Three Months
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(Dollars in millions, except per share amounts)
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2012
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2011
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Sales
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$ |
1,821 |
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$ |
1,758 |
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Cost of sales
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1,390 |
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1,300 |
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Gross profit
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431 |
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458 |
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Selling, general and administrative expenses
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126 |
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108 |
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Research and development expenses
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41 |
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36 |
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Operating earnings
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264 |
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314 |
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Net interest expense
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19 |
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19 |
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Other charges (income), net
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1 |
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(6 |
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Earnings from continuing operations before income taxes
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244 |
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301 |
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Provision for income taxes from continuing operations
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85 |
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100 |
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Earnings from continuing operations
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159 |
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201 |
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Earnings from discontinued operations, net of tax
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-- |
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9 |
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Gain (loss) from disposal of discontinued operations, net of tax
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(1 |
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30 |
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Net earnings
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$ |
158 |
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$ |
240 |
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Basic earnings per share
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Earnings from continuing operations
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$ |
1.15 |
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$ |
1.42 |
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Earnings from discontinued operations
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-- |
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0.28 |
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Basic earnings per share
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$ |
1.15 |
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$ |
1.70 |
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Diluted earnings per share
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Earnings from continuing operations
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$ |
1.13 |
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$ |
1.39 |
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Earnings (loss) from discontinued operations
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(0.01 |
) |
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0.27 |
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Diluted earnings per share
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$ |
1.12 |
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$ |
1.66 |
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Comprehensive Income
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Net earnings
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$ |
158 |
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$ |
240 |
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Other comprehensive income (loss), net of tax
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Change in cumulative translation adjustment
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15 |
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25 |
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Defined benefit pension and other postretirement benefit plans:
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Amortization of unrecognized prior service credit included in net periodic costs
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(5 |
) |
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(8 |
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Derivatives and hedging:
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Unrealized gain (loss) during period
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10 |
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(13 |
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Reclassification adjustment for gains included in net income
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(5 |
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(1 |
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Total other comprehensive income (loss), net of tax
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15 |
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3 |
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Comprehensive income
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$ |
173 |
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$ |
243 |
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Retained Earnings
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Retained earnings at beginning of period
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$ |
2,760 |
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$ |
2,253 |
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Net earnings
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158 |
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240 |
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Cash dividends declared
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(36 |
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(34 |
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Retained earnings at end of period
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$ |
2,882 |
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$ |
2,459 |
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
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March 31,
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December 31,
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(Dollars in millions, except per share amounts)
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2012
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2011
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(Unaudited)
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Assets
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Current assets
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Cash and cash equivalents
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$ |
569 |
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$ |
577 |
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Short-term time deposits
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80 |
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200 |
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Trade receivables, net
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740 |
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632 |
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Miscellaneous receivables
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68 |
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72 |
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Inventories
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768 |
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779 |
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Other current assets
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39 |
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42 |
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Total current assets
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2,264 |
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2,302 |
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Properties
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Properties and equipment at cost
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8,479 |
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8,383 |
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Less: Accumulated depreciation
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5,343 |
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5,276 |
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Net properties
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3,136 |
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3,107 |
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Goodwill
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408 |
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406 |
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Other noncurrent assets
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383 |
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369 |
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Total assets
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$ |
6,191 |
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$ |
6,184 |
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Liabilities and Stockholders' Equity
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Current liabilities
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Payables and other current liabilities
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$ |
846 |
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$ |
961 |
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Borrowings due within one year
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151 |
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153 |
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Total current liabilities
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997 |
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1,114 |
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Long-term borrowings
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1,444 |
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1,445 |
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Deferred income tax liabilities
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223 |
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210 |
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Post-employment obligations
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1,395 |
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1,411 |
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Other long-term liabilities
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107 |
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134 |
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Total liabilities
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4,166 |
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4,314 |
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Stockholders' equity
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Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 197,409,655 and 196,455,131 for 2012 and 2011, respectively)
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2 |
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2 |
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Additional paid-in capital
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918 |
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900 |
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Retained earnings
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2,882 |
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2,760 |
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Accumulated other comprehensive income
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153 |
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138 |
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3,955 |
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3,800 |
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Less: Treasury stock at cost (59,539,633 shares for 2012 and 2011)
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1,930 |
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1,930 |
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Total stockholders' equity
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2,025 |
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1,870 |
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Total liabilities and stockholders' equity
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$ |
6,191 |
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$ |
6,184 |
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The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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First Three Months
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(Dollars in millions)
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2012
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2011
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Cash flows from operating activities
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Net earnings
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$ |
158 |
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$ |
240 |
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Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
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Depreciation and amortization
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69 |
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68 |
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Gain on sale of assets
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-- |
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(52 |
) |
Provision (benefit) for deferred income taxes
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13 |
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(40 |
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Pension and other postretirement contributions (in excess of) less than expenses
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(27 |
) |
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(114 |
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Variable compensation (in excess of) less than expenses
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(71 |
) |
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(82 |
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Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
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(Increase) decrease in trade receivables
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(103 |
) |
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(229 |
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(Increase) decrease in inventories
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14 |
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(49 |
) |
Increase (decrease) in trade payables
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(20 |
) |
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8 |
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Other items, net
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(14 |
) |
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104 |
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Net cash provided by (used in) operating activities
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19 |
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(146 |
) |
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Cash flows from investing activities
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Additions to properties and equipment
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(90 |
) |
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(97 |
) |
Proceeds from sale of short-term time deposits
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120 |
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-- |
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Proceeds from sale of assets and investments
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6 |
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617 |
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Acquisitions and investments in joint ventures
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(10 |
) |
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-- |
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Additions to short-term time deposits
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-- |
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(200 |
) |
Additions to capitalized software
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(1 |
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(2 |
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Other items, net
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(35 |
) |
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(11 |
) |
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Net cash provided by (used in) investing activities
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(10 |
) |
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307 |
|
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Cash flows from financing activities
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Net increase in commercial paper, credit facility, and other borrowings
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(1 |
) |
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1 |
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Dividends paid to stockholders
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(36 |
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(34 |
) |
Treasury stock purchases
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|
-- |
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(74 |
) |
Proceeds from stock option exercises and other items, net
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|
20 |
|
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|
70 |
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Net cash used in financing activities
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(17 |
) |
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(37 |
) |
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Effect of exchange rate changes on cash and cash equivalents
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|
-- |
|
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-- |
|
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Net change in cash and cash equivalents
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(8 |
) |
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124 |
|
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Cash and cash equivalents at beginning of period
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|
577 |
|
|
|
516 |
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Cash and cash equivalents at end of period
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$ |
569 |
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$ |
640 |
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The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company ("Eastman" or the "Company") in accordance and consistent with the accounting policies stated in the Company's 2011 Annual Report on Form 10-K and the change in accounting for pension and other postretirement benefit ("OPEB") plans described in Note 2, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans", and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of the Company's 2011 Annual Report on Form 10-K. The unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States ("GAAP") and of necessity include some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, sales revenue, and expenses of all majority-owned subsidiaries and joint ventures in which a controlling interest is maintained. Eastman accounts for other joint ventures and investments where it exercises significant influence on the equity basis. Intercompany transactions and balances are eliminated in consolidation. Certain prior period data has been reclassified in the Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.
Other comprehensive income
Beginning January 1, 2012, the Company adopted amended accounting guidance related to the presentation of other comprehensive income which became effective for reporting periods beginning after December 15, 2011. This change has been retrospectively applied to all periods presented.
Stock split
On August 5, 2011, the Company's Board of Directors declared a two-for-one split of the Company's common stock in the form of a 100 percent stock dividend. Stockholders of record as of September 15, 2011 were issued one additional share of common stock on October 3, 2011 for each share held. Treasury shares were treated as shares outstanding in the stock split. All shares and per share amounts in this Quarterly Report on Form 10-Q have been adjusted for all periods presented for the stock split.
2.
|
ACCOUNTING METHODOLOGY CHANGE FOR PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
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As previously reported on March 7, 2012, Eastman has elected to change its method of accounting for actuarial gains and losses for its pension and OPEB plans to a more preferable method permitted under GAAP. The new method recognizes actuarial gains and losses in the Company's operating results in the year in which the gains and losses occur rather than amortizing them over future periods. Eastman's management believes that this change in accounting will improve transparency of reporting of its operating results by recognizing the effects of economic and interest rate trends on pension and OPEB plan investments and assumptions in the year these actuarial gains and losses are incurred. Historically, Eastman has recognized pension and OPEB actuarial gains and losses annually in its Consolidated Statements of Financial Position as Accumulated Other Comprehensive Income and Loss as a component of Stockholders' Equity, and then amortized these gains and losses each period in its Consolidated Statements of Earnings. The expected return on assets component of Eastman's pension expense has historically been calculated using a five-year smoothing of asset gains and losses, and the gain or loss component of pension and OPEB expense has historically been based on amortization of actuarial gains and losses that exceed 10 percent of the greater of plan assets or projected benefit obligations over the average future service period of active employees. Under the new method of accounting, these gains and losses are now measured annually at the plan's December 31 measurement date and recorded as a mark-to-market ("MTM") adjustment during the fourth quarter of each year and any quarters in which an interim remeasurement is triggered. This methodology is preferable under GAAP since it aligns more closely with fair value principles and does not delay the recognition of gains and losses into future periods. The new method has been retrospectively applied to the financial results of all periods presented.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Under the new method of accounting, Eastman's pension and OPEB costs consist of two elements: 1) ongoing costs recognized quarterly, which are comprised of service and interest costs, expected returns on plan assets, and amortization of prior service credits; and 2) MTM gains and losses recognized annually, in the fourth quarter of each year, resulting from changes in actuarial assumptions and the differences between actual and expected returns on plan assets and discount rates. Any interim remeasurement triggered by a curtailment, settlement, or significant plan change is recognized as an MTM adjustment in the quarter in which such remeasurement event occurs.
Eastman's operating segment results follow internal management reporting, which is used for making operating decisions and assessing performance. Historically, total pension and OPEB costs have been allocated to each segment. In conjunction with the change in accounting principle, the service cost, which represents the benefits earned by active employees during the period, and amortization of prior service credits will continue to be allocated to each segment. Interest costs, expected return on assets, and the MTM adjustment (including any interim remeasurement) for actuarial gains and losses will be included in corporate expense and not allocated to segments. Management believes this change in expense allocation better reflects the operating results of each business.
Management has also elected to change its method of accounting for certain costs included in inventory. Effective in first quarter 2012, the portion of pension and OPEB costs attributable to former employees (inactives) is not a component of inventoriable costs and instead is charged directly to the cost of sales line item as a period cost. Applying this change in inventory retrospectively did not have a material impact on previously reported inventory, cost of sales, or financial results in any prior period and prior period results have not been retrospectively adjusted for this change in accounting for certain related costs included in inventory.
The cumulative effect of the change in accounting for pension and OPEB plans was a decrease in Retained Earnings as of December 31, 2011 (the most recent measurement date prior to the change) of $676 million, and an equivalent increase in Accumulated Other Comprehensive Income, leaving total stockholders' equity unchanged. See Note 10, "Retirement Plans".
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Following are the changes to financial statement line items as a result of the accounting methodology change for the periods presented in the accompanying unaudited consolidated financial statements:
Unaudited Condensed Consolidated Statement of Earnings
|
|
|
|
Three Months Ended March 31, 2012
|
|
(Dollars in millions, except per share amounts, unaudited)
|
|
Previous Accounting Method
|
|
|
Effect of Accounting Change
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As Reported
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$ |
1,405 |
|
|
$ |
(15 |
) |
|
$ |
1,390 |
|
Gross profit
|
|
|
416 |
|
|
|
15 |
|
|
|
431 |
|
Selling, general and administrative expenses
|
|
|
130 |
|
|
|
(4 |
) |
|
|
126 |
|
Operating earnings
|
|
|
245 |
|
|
|
19 |
|
|
|
264 |
|
Earnings from continuing operations before income taxes
|
|
|
225 |
|
|
|
19 |
|
|
|
244 |
|
Provision for income taxes from continuing operations
|
|
|
78 |
|
|
|
7 |
|
|
|
85 |
|
Earnings from continuing operations
|
|
|
147 |
|
|
|
12 |
|
|
|
159 |
|
Net earnings
|
|
|
146 |
|
|
|
12 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$ |
1.06 |
|
|
$ |
0.09 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$ |
1.05 |
|
|
$ |
0.08 |
|
|
$ |
1.13 |
|
Diluted earnings per share
|
|
|
1.04 |
|
|
|
0.08 |
|
|
|
1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
146 |
|
|
$ |
12 |
|
|
$ |
158 |
|
Amortization of prior service credit included in net periodic costs (1)
|
|
|
8 |
|
|
|
(13 |
) |
|
|
(5 |
) |
Total other comprehensive income (loss), net of tax
|
|
|
28 |
|
|
|
(13 |
) |
|
|
15 |
|
Comprehensive income
|
|
|
174 |
|
|
|
(1 |
) |
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings at beginning of period
|
|
$ |
3,436 |
|
|
$ |
(676 |
) |
|
$ |
2,760 |
|
Net earnings
|
|
|
146 |
|
|
|
12 |
|
|
|
158 |
|
Retained earnings at end of period
|
|
|
3,546 |
|
|
|
(664 |
) |
|
|
2,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Updated to reflect first quarter 2012 presentation of other comprehensive income.
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Statement of Earnings
|
|
|
|
Three Months Ended March 31, 2011
|
|
(Dollars in millions, except per share amounts, unaudited)
|
|
As Previously Reported (Before Accounting Change)
|
|
|
Effect of Accounting Change
|
|
|
As Adjusted (After Accounting Change)
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$ |
1,325 |
|
|
$ |
(25 |
) |
|
$ |
1,300 |
|
Gross profit
|
|
|
433 |
|
|
|
25 |
|
|
|
458 |
|
Selling, general and administrative expenses
|
|
|
113 |
|
|
|
(5 |
) |
|
|
108 |
|
Operating earnings
|
|
|
284 |
|
|
|
30 |
|
|
|
314 |
|
Earnings from continuing operations before income taxes
|
|
|
271 |
|
|
|
30 |
|
|
|
301 |
|
Provision for income taxes from continuing operations
|
|
|
89 |
|
|
|
11 |
|
|
|
100 |
|
Earnings from continuing operations
|
|
|
182 |
|
|
|
19 |
|
|
|
201 |
|
Earnings from discontinued operations, net of tax
|
|
|
8 |
|
|
|
1 |
|
|
|
9 |
|
Net earnings
|
|
|
220 |
|
|
|
20 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$ |
1.29 |
|
|
$ |
0.13 |
|
|
$ |
1.42 |
|
Earnings from discontinued operations
|
|
|
0.26 |
|
|
|
0.02 |
|
|
|
0.28 |
|
Basic earnings per share
|
|
$ |
1.55 |
|
|
$ |
0.15 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$ |
1.26 |
|
|
$ |
0.13 |
|
|
$ |
1.39 |
|
Earnings from discontinued operations
|
|
|
0.26 |
|
|
|
0.01 |
|
|
|
0.27 |
|
Diluted earnings per share
|
|
$ |
1.52 |
|
|
$ |
0.14 |
|
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
220 |
|
|
$ |
20 |
|
|
$ |
240 |
|
Amortization of prior service credit included in net periodic costs (1)
|
|
|
4 |
|
|
|
(12 |
) |
|
|
(8 |
) |
Total other comprehensive income (loss), net of tax
|
|
|
15 |
|
|
|
(12 |
) |
|
|
3 |
|
Comprehensive income
|
|
|
235 |
|
|
|
8 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings at beginning of period
|
|
$ |
2,880 |
|
|
$ |
(627 |
) |
|
$ |
2,253 |
|
Net earnings
|
|
|
220 |
|
|
|
20 |
|
|
|
240 |
|
Retained earnings at end of period
|
|
|
3,066 |
|
|
|
(607 |
) |
|
|
2,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Updated to reflect first quarter 2012 presentation of other comprehensive income.
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Position
|
|
|
|
March 31, 2012
|
|
(Dollars in millions, unaudited)
|
|
Previous Accounting Method
|
|
|
Effect of Accounting Change
|
|
|
As Reported
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$ |
382 |
|
|
$ |
1 |
|
|
$ |
383 |
|
Post-employment obligations
|
|
|
1,393 |
|
|
|
2 |
|
|
|
1,395 |
|
Retained earnings
|
|
|
3,546 |
|
|
|
(664 |
) |
|
|
2,882 |
|
Accumulated other comprehensive income (loss)
|
|
|
(510 |
) |
|
|
663 |
|
|
|
153 |
|
|
|
December 31, 2011
|
|
(Dollars in millions)
|
|
As Previously Reported (Before Accounting Change)
|
|
|
Effect of Accounting Change
|
|
|
As Adjusted (After Accounting Change)
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$ |
3,436 |
|
|
$ |
(676 |
) |
|
$ |
2,760 |
|
Accumulated other comprehensive income (loss)
|
|
|
(538 |
) |
|
|
676 |
|
|
|
138 |
|
Unaudited Consolidated Statements of Cash Flows
|
|
|
|
Three Months Ended March 31, 2012
|
|
(Dollars in millions)
|
|
Previous Accounting Method
|
|
|
Effect of Accounting Change
|
|
|
As Reported
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
146 |
|
|
$ |
12 |
|
|
$ |
158 |
|
Provision (benefit) for deferred income taxes
|
|
|
6 |
|
|
|
7 |
|
|
|
13 |
|
Pension and other postretirement contributions (in excess of) less than expenses
|
|
|
(16 |
) |
|
|
(11 |
) |
|
|
(27 |
) |
Other items, net
|
|
|
(6 |
) |
|
|
(8 |
) |
|
|
(14 |
) |
|
|
Three Months Ended March 31, 2011
|
|
(Dollars in millions)
|
|
As Previously Reported (Before Accounting Change)
|
|
|
Effect of Accounting Change
|
|
|
As Adjusted (After Accounting Change)
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
220 |
|
|
$ |
20 |
|
|
$ |
240 |
|
Provision (benefit) for deferred income taxes
|
|
|
(52 |
) |
|
|
12 |
|
|
|
(40 |
) |
Pension and other postretirement contributions (in excess of) less than expenses (1)
|
|
|
(88 |
) |
|
|
(26 |
) |
|
|
(114 |
) |
Other items, net (1)
|
|
|
110 |
|
|
|
(6 |
) |
|
|
104 |
|
(1)
|
Updated to reflect first quarter 2012 presentation of cash flows from operating activities.
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3.
|
ACQUISITIONS AND INVESTMENTS IN JOINT VENTURES
|
Sterling Chemicals, Inc. and Scandiflex do Brasil S.A. Indústrias Químicas
During third quarter 2011, the Company completed two acquisitions in the Performance Chemicals and Intermediates ("PCI") segment. On August 9, 2011, Eastman acquired Sterling Chemicals, Inc. ("Sterling"), a single site North American petrochemical producer, to produce non-phthalate plasticizers, including Eastman 168™ non-phthalate plasticizers, and acetic acid. On September 1, 2011, Eastman acquired Scandiflex do Brasil S.A. Indústrias Químicas ("Scandiflex"), a manufacturer of plasticizers located in São Paulo, Brazil. The total purchase price for both acquisitions was $133 million, including a post-closing payment of $10 million to the previous shareholders of Scandiflex. Transaction costs of $4 million associated with these acquisitions were expensed as incurred and are included in the "Selling, general and administrative expenses" line item in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. The table below shows the final fair value purchase price allocation for these acquisitions:
|
|
Dollars in millions
|
|
|
|
|
|
Current assets
|
|
$ |
33 |
|
Properties and equipment
|
|
|
129 |
|
Intangible assets
|
|
|
11 |
|
Other noncurrent assets
|
|
|
20 |
|
Goodwill
|
|
|
33 |
|
Current liabilities
|
|
|
(23 |
) |
Long-term liabilities
|
|
|
(70 |
) |
Total purchase price
|
|
$ |
133 |
|
Acquired intangible assets primarily relate to perpetual air emission credits which management has assigned indefinite lives. Goodwill, which represents the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed, was primarily for the Scandiflex acquisition and was attributed to the benefits of access to Brazilian markets and also the synergies between the acquired companies and Eastman. Long-term liabilities primarily include Sterling pension and other postretirement welfare plan obligations, as well as Scandiflex contingent liabilities for environmental and other contingencies. In connection with the Sterling acquisition, Sterling's debt was repaid at closing and therefore not included in the above purchase price allocation.
Other 2011 Acquisitions and Investments in Joint Ventures
On July 1, 2011, the Company acquired Dynaloy, LLC ("Dynaloy"), a producer of formulated solvents. The acquisition was accounted for as a business combination and is reported in the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment. Dynaloy adds materials science capabilities that are expected to complement growth of the CASPI segment's electronic materials product line. On November 2, 2011, the Company acquired TetraVitae Bioscience, Inc., a developer of renewable chemicals, including bio-based butanol and acetone. Also in 2011, the Company entered into a joint venture for a 30,000 metric ton acetate tow manufacturing facility in China, that is expected to be operational in mid-2013, with investment primarily during 2011 and 2012.
Pro forma financial information for the acquisitions is not required to be presented due to the immaterial financial impact to the Company.
On January 31, 2011, the Company completed the sale of the polyethylene terephthalate ("PET") business, related assets at the Columbia, South Carolina site, and technology of its Performance Polymers segment for $615 million and recognized a gain of approximately $30 million, net of tax. The Company contracted with the buyer for transition services to supply certain raw materials and services for a period of less than one year. Transition supply agreement revenues of approximately $220 million, relating to raw materials, were more than offset by costs and reported net in cost of sales. The PET business, assets, and technology sold were substantially all of the Performance Polymers segment and therefore the segment operating results are presented as discontinued operations for all periods presented and are not included in results from continuing operations.
12
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Operating results of the discontinued operations which were formerly included in the Performance Polymers segment are summarized below:
|
|
For three months ended March 31, |
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
-- |
|
|
$ |
105 |
|
Earnings before income taxes
|
|
|
-- |
|
|
|
18 |
|
Earnings from discontinued operations, net of tax
|
|
|
-- |
|
|
|
9 |
|
Gain (loss) from disposal of discontinued operations, net of tax
|
|
|
(1 |
) |
|
|
30 |
|
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
At FIFO or average cost (approximates current cost)
|
|
|
|
|
|
|
Finished goods
|
|
$ |
745 |
|
|
$ |
777 |
|
Work in process
|
|
|
229 |
|
|
|
239 |
|
Raw materials and supplies
|
|
|
374 |
|
|
|
353 |
|
Total inventories
|
|
|
1,348 |
|
|
|
1,369 |
|
LIFO Reserve
|
|
|
(580 |
) |
|
|
(590 |
) |
Total inventories
|
|
$ |
768 |
|
|
$ |
779 |
|
Inventories valued on the LIFO method were approximately 70 percent of total inventories as of both March 31, 2012 and December 31, 2011.
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Trade creditors
|
|
$ |
512 |
|
|
$ |
529 |
|
Accrued payrolls, vacation, and variable-incentive compensation
|
|
|
51 |
|
|
|
146 |
|
Accrued taxes
|
|
|
67 |
|
|
|
40 |
|
Post-employment obligations
|
|
|
57 |
|
|
|
58 |
|
Interest payable
|
|
|
26 |
|
|
|
26 |
|
Other
|
|
|
133 |
|
|
|
162 |
|
Total payables and other current liabilities
|
|
$ |
846 |
|
|
$ |
961 |
|
The current portion of post-employment obligations is an estimate of current year payments.
7.
|
PROVISION FOR INCOME TAXES
|
|
|
First Quarter
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
85 |
|
|
$ |
100 |
|
Effective tax rate
|
|
|
35 |
% |
|
|
33 |
% |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The first quarter 2012 effective tax rate was impacted by the non-deductibility of certain transaction costs related to the pending acquisition of Solutia Inc. ("Solutia"). Excluding the impact of certain non-deductible transaction costs, the Company's expected full year tax rate on reported earnings from continuing operations before income tax is approximately 33 percent.
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Borrowings consisted of:
|
|
|
|
|
|
|
7% notes due 2012
|
|
$ |
147 |
|
|
$ |
147 |
|
3% debentures due 2015
|
|
|
250 |
|
|
|
250 |
|
6.30% notes due 2018
|
|
|
175 |
|
|
|
176 |
|
5.5% notes due 2019
|
|
|
250 |
|
|
|
250 |
|
4.5% debentures due 2021
|
|
|
250 |
|
|
|
250 |
|
7 1/4% debentures due 2024
|
|
|
243 |
|
|
|
243 |
|
7 5/8% debentures due 2024
|
|
|
54 |
|
|
|
54 |
|
7.60% debentures due 2027
|
|
|
222 |
|
|
|
222 |
|
Credit facility borrowings
|
|
|
-- |
|
|
|
-- |
|
Other
|
|
|
4 |
|
|
|
6 |
|
Total borrowings
|
|
|
1,595 |
|
|
|
1,598 |
|
Borrowings due within one year
|
|
|
(151 |
) |
|
|
(153 |
) |
Long-term borrowings
|
|
$ |
1,444 |
|
|
$ |
1,445 |
|
In December 2011, the Company entered into a $750 million revolving credit agreement (the "Credit Facility") expiring December 2016. The Credit Facility replaces, and has terms substantially similar to, the $700 million revolving credit agreement entered into in April 2006 (the "Prior Credit Facility") which was terminated concurrently with the entry into the Credit Facility. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. At March 31, 2012 and December 31, 2011, the Company had no outstanding borrowings under the Credit Facility.
The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce capacity for borrowings available under the Credit Facility. Given the expiration date of the Credit Facility, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability and intent to refinance such borrowings on a long-term basis.
At March 31, 2012, the Company also had a $200 million line of credit under its accounts receivable securitization agreement ("A/R Facility"). Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and the Company pays a fee to maintain availability of the A/R Facility. At March 31, 2012 and December 31, 2011, the Company had no outstanding borrowings under the A/R Facility.
The Credit Facility and the A/R Facility contain a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. In addition, the entire amount of these facilities was available without violating applicable covenants as of March 31, 2012 and December 31, 2011.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On February 29, 2012, Eastman entered into a $1.2 billion five-year Term Loan Agreement ("Term Loan Agreement") and a $2.3 billion Bridge Loan Agreement ("Bridge Loan Agreement"). Eastman intends to use financing from the Term Loan Agreement and, in certain circumstances, the Bridge Loan Agreement, to pay, in part, the cash portion of the pending acquisition of Solutia and a portion of the fees and expenses related to the acquisition, which may include the repayment of certain outstanding borrowings of Solutia. Each of the Term Loan Agreement and the Bridge Loan Agreement contains certain customary representations, warranties and covenants, including maintenance of certain financial ratios. The Company has been in compliance with all such covenants since February 29, 2012.
Fair Value of Borrowings
The Company has determined that its long-term borrowings at March 31, 2012 and December 31, 2011 were classified within level 1 in the fair value hierarchy as defined in the accounting policies in the Company's 2011 Annual Report on Form 10-K. The fair value for fixed-rate borrowings is based on current market quotes. The Company's floating-rate borrowings approximate fair value.
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
(Dollars in millions)
|
|
Recorded Amount
|
|
|
Fair Value
|
|
|
Recorded Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
$ |
1,444 |
|
|
$ |
1,617 |
|
|
$ |
1,445 |
|
|
$ |
1,656 |
|
Hedging Programs
The Company is exposed to market risk, such as changes in currency exchange rates, raw material and energy costs, and interest rates. The Company uses various derivative financial instruments when appropriate pursuant to the Company's hedging policies to mitigate these market risk factors and their effect on the cash flows of the underlying transactions. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. For further information, see Note 12, "Derivatives", to the consolidated financial statements in Part II, Item 8 of the Company's 2011 Annual Report on Form 10-K.
Fair Value Hedges
Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. As of March 31, 2012 and December 31, 2011, the Company had no fair value hedges.
Cash Flow Hedges
Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income, net of income taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2012, the total notional amounts of the Company's foreign exchange forward and option contracts were €347 million (approximately $465 million equivalent) and ¥12.5 billion (approximately $155 million equivalent), and the total notional volume hedged for raw materials was approximately 1 million barrels. Additionally, at March 31, 2012, the total notional value of interest rate swaps for the future issuance of debt ("forward starting interest rate swaps") was $750 million as the Company entered into interest rate hedges in anticipation of the acquisition of Solutia and the expected related offering of new debt securities. The Company had no hedges for energy at March 31, 2012.
As of December 31, 2011, the total notional amounts of the Company's foreign exchange forward and option contracts were €270 million (approximately $350 million equivalent) and ¥13.7 billion (approximately $185 million equivalent), respectively, the total notional volume hedged for energy was approximately 1 million mmbtu (million british thermal units), and the total notional volume hedged for raw materials was approximately 2 million barrels. Additionally, the total notional value of forward starting interest rate swaps was $200 million.
Fair Value Measurements
For additional information on fair value measurement, see Note 1, "Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of the Company's 2011 Annual Report on Form 10-K.
The Company has determined that its derivative assets and liabilities at March 31, 2012 and December 31, 2011 were classified within level 2 in the fair value hierarchy. The following chart shows the financial assets and liabilities valued on a recurring basis and their location in the Statement of Financial Position. The Company had no nonqualifying derivatives or derivatives that are not designated as hedges.
Fair Value of Derivatives Designated as Hedging Instruments
(Dollars in millions)
|
|
|
Fair Value Measurements
Significant Other Observable Inputs
(Level 2)
|
|
Derivative Assets
|
Statement of Financial Position Location
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Commodity contracts
|
Other current assets
|
|
$ |
-- |
|
|
$ |
1 |
|
Commodity contracts
|
Other noncurrent assets
|
|
|
-- |
|
|
|
1 |
|
Foreign exchange contracts
|
Other current assets
|
|
|
14 |
|
|
|
20 |
|
Foreign exchange contracts
|
Other noncurrent assets
|
|
|
11 |
|
|
|
12 |
|
Forward starting interest rate swap contracts
|
Other current assets
|
|
|
10 |
|
|
|
-- |
|
|
|
|
$ |
35 |
|
|
$ |
34 |
|
(Dollars in millions)
|
|
|
Fair Value Measurements
Significant Other Observable Inputs
(Level 2)
|
|
Derivative Liabilities
|
Statement of Financial Position Location
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Commodity contracts
|
Payables and other current liabilities
|
|
$ |
2 |
|
|
$ |
8 |
|
Commodity contracts
|
Other long-term liabilities
|
|
|
1 |
|
|
|
-- |
|
Foreign exchange contracts
|
Payables and other current liabilities
|
|
|
4 |
|
|
|
7 |
|
Foreign exchange contracts
|
Other long-term liabilities
|
|
|
1 |
|
|
|
7 |
|
Forward starting interest rate swap contracts
|
Payables and other current liabilities
|
|
|
-- |
|
|
|
1 |
|
|
|
|
$ |
8 |
|
|
$ |
23 |
|
The fair value of the Company's derivative assets is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. The fair value of commodity contracts is derived using forward curves supplied by an industry recognized and unrelated third party. In addition, on an ongoing basis, the Company tests a subset of its valuations against valuations received from the transaction's counterparty to validate the accuracy of its standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry only a minimal risk of nonperformance.
16
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Derivatives' Hedging Relationships
(Dollars in millions)
|
|
Amount after tax of gain/ (loss) recognized in Other Comprehensive Income on derivatives (effective portion)
|
|
Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into |
|
Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
|
|
Derivatives' Cash Flow Hedging Relationships
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
income (effective portion) |
|
March 31, 2012
|
|
|
March 31, 2011
|
|
Commodity contracts
|
|
$ |
(7 |
) |
|
$ |
2 |
|
Cost of sales
|
|
$ |
-- |
|
|
$ |
-- |
|
Foreign exchange contracts
|
|
|
(1 |
) |
|
|
(16 |
) |
Sales
|
|
|
8 |
|
|
|
1 |
|
Forward starting interest rate swap contracts
|
|
|
13 |
|
|
|
-- |
|
Interest Expense
|
|
|
-- |
|
|
|
-- |
|
|
|
$ |
5 |
|
|
$ |
(14 |
) |
|
|
$ |
8 |
|
|
$ |
1 |
|
For three months ended March 31, 2012 and March 31, 2011, there was no material ineffectiveness with regard to the Company's qualifying hedges.
Hedging Summary
At March 31, 2012 and 2011, monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in accumulated other comprehensive income before taxes totaled approximately $3 million and $5 million in losses, respectively. If realized, approximately $21 million in gains in first quarter 2012 will be reclassified into earnings during the next 12 months, including foreign exchange contracts monetized and prospectively dedesignated in fourth quarter 2011. Ineffective portions of hedges are immediately recognized in cost of sales or other charges (income), net. There were no material gains or losses related to the ineffective portion of hedges recognized in 2012 or 2011.
The gains or losses on nonqualifying derivatives or derivatives that are not designated as hedges are marked to market in the line item "Other charges (income), net" of the Statements of Earnings, and, in all periods presented, represent foreign exchange derivatives denominated in multiple currencies. The Company recognized approximately $1 million and $4 million net losses on nonqualifying derivatives during first quarter 2012 and 2011, respectively.
As described in more detail below, Eastman offers various postretirement benefits to its employees.
DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT WELFARE PLANS
Pension Plans:
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined.
In August 2011, in connection with its acquisition of Sterling, the Company assumed Sterling's U.S. defined benefit pension plan. Prior to the acquisition, the plan had been closed to new participants and was no longer accruing additional benefits. For more information, see Note 3, "Acquisitions and Investments in Joint Ventures".
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Postretirement Welfare Plans:
Eastman provides a subsidy toward life insurance, health care, and dental benefits for eligible retirees hired prior to January 1, 2007, and a subsidy toward health care and dental benefits for retirees' eligible survivors. In general, Eastman provides those benefits to retirees eligible under the Company's U.S. plans.
Eligible employees hired on or after January 1, 2007 have access to postretirement health care benefits, but Eastman does not provide a subsidy toward the premium cost of postretirement benefits for those employees. A few of the Company's non-U.S. operations have supplemental health benefit plans for certain retirees, the cost of which is not significant to the Company.
Costs recognized for benefits for eligible retirees hired prior to January 1, 2007 are recognized using estimated amounts, which may change as actual costs for the year are determined. Components of net periodic benefit cost were as follows:
|
|
First Quarter
|
|
|
|
Pension Plans
|
|
|
Postretirement Welfare Plans
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
12 |
|
|
$ |
12 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest cost
|
|
|
21 |
|
|
|
21 |
|
|
|
11 |
|
|
|
11 |
|
Expected return on assets
|
|
|
(25 |
) |
|
|
(25 |
) |
|
|
-- |
|
|
|
(1 |
) |
Curtailment gain (1)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(7 |
) |
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
Mark-to-market gain (2)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(15 |
) |
Net periodic benefit cost
|
|
$ |
7 |
|
|
$ |
5 |
|
|
$ |
8 |
|
|
$ |
(15 |
) |
(1)
|
Gain for the Performance Polymers segment that was sold January 31, 2011 and is included in discontinued operations. For more information, see Note 4, "Discontinued Operations."
|
(2)
|
Mark-to-market gain due to the interim remeasurement of the OPEB plan obligation, triggered by the exit of employees associated with the sale of the PET business.
|
The Company contributed $25 million and $100 million to its U.S. defined benefit pension plans in first quarter 2012 and 2011, respectively.
Purchase Obligations and Lease Commitments
The Company had various purchase obligations at March 31, 2012 totaling approximately $1.5 billion over a period of approximately 15 years for materials, supplies and energy incident to the ordinary conduct of business. The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling $134 million over a period of several years. Of the total lease commitments, approximately 10 percent relate to machinery and equipment, including computer and communications equipment and production equipment; approximately 50 percent relate to real property, including office space, storage facilities, and land; and approximately 40 percent relate to railcars.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Guarantees
The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease. These residual value guarantees at March 31, 2012 totaled $110 million and consisted primarily of leases for railcars and company aircraft and will expire beginning in 2016. Management believes, based on current facts and circumstances, that the likelihood of material residual guarantee payments is remote.
Variable Interest Entities
The Company has evaluated its material contractual relationships under accounting guidance for consolidation of Variable Interest Entities ("VIEs") and has concluded that the entities involved in these relationships are not VIEs or, in the case of Primester, a joint venture that manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the Company has shared control of the VIE. As such, the Company is not required to consolidate these entities.
Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP"), by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure and postclosure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2011 Annual Report on Form 10-K. Because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations or cash flows. The Company's total reserve for environmental contingencies was $39 million at both March 31, 2012 and December 31, 2011. At both March 31, 2012 and December 31, 2011, this reserve included $6 million related to previously closed and impaired sites, as well as sites that have been divested but for which the Company retains the environmental liability related to these sites.
Estimated future environmental expenditures for remediation costs ranged from the minimum or best estimate of $11 million to the maximum of $29 million at both March 31, 2012 and December 31, 2011. The best estimate accrued to date over the facilities' estimated useful lives for asset retirement obligation costs were $28 million at both March 31, 2012 and December 31, 2011.
During third quarter 2011, as described in Note 3, "Acquisitions and Investments in Joint Ventures" the Company completed the acquisitions of Sterling and Scandiflex, resulting in a $4 million increase to the reserve for environmental contingencies consisting of an additional $1 million in asset retirement obligation costs and a minimum or best estimate of $3 million to a maximum of $4 million of estimated future environmental expenditures for remediation.
The Company completed the sale of the PET business on January 31, 2011. As a result, $3 million in asset retirement obligation costs were divested.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. In addition, certain putative shareholder class and derivative action complaints have been filed against, among others, the Company in connection with Eastman's pending acquisition of Solutia. For additional information, see Part II, Item 1, "Legal Proceedings" in this Quarterly Report on Form 10-Q. 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.
A reconciliation of the changes in stockholders' equity for first three months 2012 is provided below:
(Dollars in millions)
|
|
Common Stock at Par Value
$
|
|
|
Paid-in Capital
$
|
|
|
Retained Earnings
$
|
|
|
Accumulated Other Comprehensive Income
$
|
|
|
Treasury Stock at Cost
$
|
|
|
Total Stockholders' Equity
$
|
|
Balance at December 31, 2011 (1) (2)
|
|
|
2 |
|
|
|
900 |
|
|
|
2,760 |
|
|
|
138 |
|
|
|
(1,930 |
) |
|
|
1,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
-- |
|
|
|
-- |
|
|
|
158 |
|
|
|
-- |
|
|
|
-- |
|
|
|
158 |
|
Cash Dividends Declared (3)
|
|
|
-- |
|
|
|
-- |
|
|
|
(36 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(36 |
) |
Other Comprehensive Income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
15 |
|
|
|
-- |
|
|
|
15 |
|
Share-Based Compensation Expense (4)
|
|
|
-- |
|
|
|
7 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
7 |
|
Stock Option Exercises
|
|
|
-- |
|
|
|
7 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
7 |
|
Other (5)
|
|
|
-- |
|
|
|
4 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
4 |
|
Stock Repurchases
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Balance at March 31, 2012
|
|
|
2 |
|
|
|
918 |
|
|
|
2,882 |
|
|
|
153 |
|
|
|
(1,930 |
) |
|
|
2,025 |
|
(3)
|
Includes cash dividends declared, but unpaid.
|
(4)
|
Includes the fair value of equity share-based awards recognized for share-based compensation.
|
(5)
|
Includes tax benefits relating to the difference between the amounts deductible for federal income taxes over the amounts charged to income for book value purposes credited to paid-in capital and other items.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
(Dollars in millions)
|
|
Cumulative Translation Adjustment
$
|
|
|
Unrecognized Prior Service Credits for Benefit Plans (1)
$
|
|
|
Unrealized Gains (Losses) on Derivative Instruments
$
|
|
|
Unrealized Losses on Investments
$
|
|
|
Accumulated Other Comprehensive Income (Loss)
$
|
|
Balance at December 31, 2010 (1)
|
|
|
79 |
|
|
|
99 |
|
|
|
17 |
|
|
|
(1 |
) |
|
|
194 |
|
Period change
|
|
|
(15 |
) |
|
|
(21 |
) |
|
|
(20 |
) |
|
|
-- |
|
|
|
(56 |
) |
Balance at December 31, 2011 (1)
|
|
|
64 |
|
|
|
78 |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
138 |
|
Period change
|
|
|
15 |
|
|
|
(5 |
) |
|
|
5 |
|
|
|
-- |
|
|
|
15 |
|
Balance at March 31, 2012
|
|
|
79 |
|
|
|
73 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
153 |
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Amounts of other comprehensive income (loss) are presented net of applicable taxes. The Company records deferred income taxes on the cumulative translation adjustment related to branch operations and other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are provided on the cumulative translation adjustment of subsidiaries outside the United States, as such cumulative translation adjustment is considered to be a component of permanently invested, unremitted earnings of these foreign subsidiaries.
15.
|
EARNINGS AND DIVIDENDS PER SHARE
|
|
|
First Quarter
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Shares used for earnings per share calculation (in millions):
|
|
|
|
|
|
|
Basic
|
|
|
137.3 |
|
|
|
141.4 |
|
Diluted
|
|
|
140.7 |
|
|
|
144.6 |
|
On August 5, 2011, the Company's Board of Directors declared a two-for-one split of the Company's common stock. The stock split was in the form of a 100 percent stock dividend and was distributed on October 3, 2011 to stockholders of record as of September 15, 2011. Stockholders were issued one additional share for each share owned. Treasury shares were treated as shares outstanding in the stock split. All shares and per share amounts in this Quarterly Report on Form 10-Q have been adjusted for all periods presented for the stock split.
In first quarter 2012, there were no outstanding options to purchase shares of common stock excluded from the computation of diluted earnings per share. In first quarter 2011, common shares underlying options to purchase 161,800 shares of common stock were excluded from the computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total proceeds that would be received for these awards. There were no share repurchases in first quarter 2012. First quarter 2011 reflects the impact of share repurchases of 1.7 million shares.
The Company declared cash dividends of $0.26 and $0.235 per share in first quarter 2012 and 2011, respectively.
16.
|
ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES (GAINS), NET
|
Changes in Reserves for Asset Impairments, Restructuring Charges, and Severance Charges
The following table summarizes the changes in other asset impairments and restructuring charges and gains, the non-cash reductions attributable to asset impairments, and the cash reductions in shutdown reserves for severance costs and site closure costs paid for full year 2011 and first three months 2012:
(Dollars in millions)
|
|
Balance at
January 1, 2011
|
|
|
Provision/ Adjustments
|
|
|
Non-cash Reductions
|
|
|
Cash Reductions
|
|
|
Balance at
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash charges
|
|
$ |
-- |
|
|
$ |
(15 |
) |
|
$ |
15 |
|
|
$ |
-- |
|
|
$ |
-- |
|
Severance costs
|
|
|
15 |
|
|
|
7 |
|
|
|
-- |
|
|
|
(20 |
) |
|
|
2 |
|
Total
|
|
$ |
15 |
|
|
$ |
(8 |
) |
|
$ |
15 |
|
|
$ |
(20 |
) |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2012
|
|
|
Provision/ Adjustments
|
|
|
Non-cash Reductions
|
|
|
Cash Reductions
|
|
|
Balance at March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash charges
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Severance costs
|
|
|
2 |
|
|
|
-- |
|
|
|
-- |
|
|
|
(1 |
) |
|
|
1 |
|
Total
|
|
$ |
2 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
(1 |
) |
|
$ |
1 |
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
17.
|
SHARE-BASED COMPENSATION AWARDS
|
The Company utilizes share-based awards under employee and non-employee director compensation programs. These share-based awards may include restricted and unrestricted stock, restricted stock units, stock options, and performance shares. In first quarter 2012 and 2011, approximately $9 million and $7 million, respectively, of compensation expense before tax were recognized in selling, general and administrative expense in the earnings statement for all share-based awards. The impact on first quarter 2012 and 2011 net earnings of approximately $5 million and $4 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.
For additional information regarding share-based compensation plans and awards, see Note 20, "Share-Based Compensation Plans and Awards", to the consolidated financial statements in Part II, Item 8 of the Company's 2011 Annual Report on Form 10-K.
18.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
(Dollars in millions)
|
|
First Three Months
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
2 |
|
|
$ |
13 |
|
Other assets
|
|
|
12 |
|
|
|
24 |
|
Current liabilities
|
|
|
(3 |
) |
|
|
90 |
|
Long-term liabilities and equity
|
|
|
(25 |
) |
|
|
(23 |
) |
Total
|
|
$ |
(14 |
) |
|
$ |
104 |
|
These changes included transactions such as monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, accrued taxes, value-added taxes, and other miscellaneous accruals.
The Company's products and operations are currently managed and reported in four reportable operating segments -- CASPI, Fibers, PCI, and Specialty Plastics. For additional information concerning the Company's segments' businesses and products, see Note 22, "Segment Information" to the consolidated financial statements in Part II, Item 8 of the Company's 2011 Annual Report on Form 10-K.
Research and development ("R&D"), pension and OPEB, and other expenses not identifiable to an operating segment are not included in segment operating results for any of the periods presented and are shown in the tables below as "other" operating earnings (loss).
The Company continues to explore and invest in R&D initiatives at a corporate level that are aligned with macro trends in sustainability, consumerism, and energy efficiency through high performance materials, advanced cellulosics, and environmentally-friendly chemistry. These initiatives include the completion of a demonstration facility for market testing of acetylated wood, branded as Perennial WoodTM, in second half 2011 and commercial introduction in first quarter 2012 to select markets; the initial commercial introduction of the new Eastman CerfisTM technology, with anticipation that the application will be expanded nationwide by the end of 2012; and the announcement of the new EastmanTM microfiber technology.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 2, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans", Eastman has elected to change its method of accounting for actuarial gains and losses for its pension and OPEB plans. The new method recognizes actuarial gains and losses in the Company's operating results in the year in which the gains and losses occur rather than amortizing them over future periods. Historically, total pension and OPEB costs have been allocated to each segment. In conjunction with the change in accounting principle, the service cost, which represents the benefits earned by active employees during the period, and amortization of prior service credits will continue to be allocated to each segment. Interest costs, expected return on assets, and the MTM adjustment for pension and OPEB plans actuarial gains and losses will be included in corporate expense and not allocated to segments. Management believes this change in expense allocation will better reflect the operating results of each business. The following tables show for each business segment the retrospective application of this expense allocation change for each period presented.
In first quarter 2012, the Company entered into a definitive agreement to acquire Solutia, a global leader in performance materials and specialty chemicals, which is expected to close mid-year. Included in first quarter 2012 "other" operating loss are $9 million in transaction costs related to the pending acquisition.
|
|
First Three Months
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
Sales
|
|
|
|
|
|
|
CASPI
|
|
$ |
470 |
|
|
$ |
467 |
|
Fibers
|
|
|
323 |
|
|
|
290 |
|
PCI
|
|
|
736 |
|
|
|
694 |
|
Specialty Plastics
|
|
|
292 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$ |
1,821 |
|
|
$ |
1,758 |
|
|
|
First Three Months
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
Operating Earnings (Loss)
|
|
|
|
|
|
|
CASPI
|
|
$ |
98 |
|
|
$ |
104 |
|
Fibers
|
|
|
101 |
|
|
|
86 |
|
PCI
|
|
|
77 |
|
|
|
94 |
|
Specialty Plastics
|
|
|
30 |
|
|
|
35 |
|
Total Operating Earnings by Segment
|
|
|
306 |
|
|
|
319 |
|
Other (1)(2)
|
|
|
|
|
|
|
|
|
Growth initiatives
|
|
|
(26 |
) |
|
|
(14 |
) |
Pension and OPEB costs not allocated to operating segments
|
|
|
(7 |
) |
|
|
9 |
|
Transaction costs related to the pending acquisition of Solutia
|
|
|
(9 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Total Operating Earnings
|
|
$ |
264 |
|
|
$ |
314 |
|
(1)
|
Research and development, pension and OPEB, and other expenses not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown as "other" operating earnings (loss).
|
(2)
|
First quarter 2011 included a $15 million MTM gain due to an interim remeasurement of the OPEB plan obligation, triggered by the exit of employees associated with the sale of the PET business. See Note 4, "Discontinued Operations" for additional information.
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
Assets by Segment (1)
|
|
|
|
|
|
|
CASPI
|
|
$ |
1,398 |
|
|
$ |
1,373 |
|
Fibers
|
|
|
932 |
|
|
|
921 |
|
PCI
|
|
|
1,533 |
|
|
|
1,471 |
|
Specialty Plastics
|
|
|
1,210 |
|
|
|
1,194 |
|
Total Assets by Segment
|
|
|
5,073 |
|
|
|
4,959 |
|
Corporate Assets
|
|
|
1,118 |
|
|
|
1,225 |
|
Total Assets
|
|
$ |
6,191 |
|
|
$ |
6,184 |
|
(1)
|
The chief operating decision maker holds segment management accountable for accounts receivable, inventory, fixed assets, goodwill, and intangible assets.
|
In December 2011, the Financial Accounting Standards Board and International Accounting Standards Board jointly issued amended accounting guidance to enhance disclosure requirements for instruments and transactions no longer eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. This guidance is effective for reporting periods beginning on or after January 1, 2013. The Company has concluded that no such netting has been in effect and that the change will have no impact on the Company's financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM
|
Page
|
|
|
|
26
|
|
|
|
26
|
|
|
|
27
|
|
|
|
28
|
|
|
|
31
|
|
|
|
35
|
|
|
|
36
|
|
|
|
40
|
|
|
|
40
|
|
|
|
41
|
|
|
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") 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 audited consolidated financial statements, including related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2011 Annual Report on Form 10-K, and the Company's unaudited consolidated financial statements, including related notes, included elsewhere in this Quarterly Report on Form 10-Q. All references to earnings per share ("EPS") contained in this report are diluted earnings per share unless otherwise noted.
As previously reported, Eastman has elected to change its method of accounting for actuarial gains and losses for its pension and other postretirement benefit ("OPEB") plans to a more preferable method permitted under GAAP. The new method recognizes actuarial gains and losses in the Company's operating results in the year in which the gains and losses occur rather than amortizing them over future periods. Under the new method of accounting, these gains and losses are now measured annually at December 31 and recorded as a mark-to-market ("MTM") adjustment during the fourth quarter of each year. Any interim remeasurements triggered by a curtailment, settlement, or significant plan changes will be recognized as an MTM adjustment in the quarter in which such remeasurement event occurs. The new method has been retrospectively applied to financial results of all periods presented. For additional information, see Note 2, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans " to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
In third quarter 2011, the Company's Board of Directors declared a two-for-one split of the Company's common stock, distributed October 3, 2011 in the form of a 100 percent stock dividend. All shares and per share amounts in this Quarterly Report on Form 10-Q have been adjusted for all periods presented for the stock split. For additional information, see Note 15, "Earnings and Dividends Per Share" to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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, pension and other post-employment benefits, litigation and contingent liabilities, income taxes, and purchase accounting. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's management believes the critical accounting estimates described in Part II, Item 7 of the Company's 2011 Annual Report on Form 10-K are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.
PRESENTATION OF NON-GAAP FINANCIAL MEASURES
In addition to evaluating the Company’s financial condition, results of operations, and liquidity and cash flow as reported in accordance with GAAP, management also reviews and evaluates certain alternative financial measures not prepared in accordance with GAAP. Non-GAAP measures do not have definitions under GAAP and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management considers and evaluates non-GAAP measures in connection with a review of the most directly comparable measure calculated in accordance with GAAP. Management cautions investors not to place undue reliance on such non-GAAP measures, but also to consider them with the most directly comparable GAAP measure.
This MD&A includes the following non-GAAP financial measures:
·
|
Company other charges (income), net, earnings from continuing operations, and diluted earnings per share excluding financing costs related to the pending acquisition of Solutia Inc. ("Solutia"), described below; and
|
·
|
Company gross profit, selling, general and administrative ("SG&A") and research and development ("R&D") expenses, operating earnings, earnings from continuing operations, and diluted earnings per share excluding transaction costs related to the pending acquisition of Solutia and OPEB plan interim MTM gain, also described below.
|
In first quarter 2012, the Company recognized $9 million in transaction costs (reported as SG&A expenses) and $5 million in financing costs (reported as other charges (income), net) related to the pending acquisition of Solutia. In first quarter 2011, the Company recognized a $15 million MTM gain under the new method of accounting for actuarial gains and losses for its pension and OPEB plans due to the interim remeasurement of the OPEB plan obligation. The exit of employees associated with the sale of the polyethylene terephthalate ("PET") business in first quarter 2011 triggered the interim MTM remeasurement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Eastman management evaluates and analyzes results and the impact on the Company of strategic decisions and actions relating to, among other things, cost reduction, growth, and profitability improvement initiatives, and other non-recurring or unusual events outside of normal business and operations, by considering Company and segment financial results and measures both including and excluding certain items. The items excluded by Eastman management in its evaluation of results do not directly arise from Eastman’s core operations, and generally are expected to be of an unusual or non-recurring nature. Specifically, as presented in this report, Eastman has excluded financing and transaction costs related to the pending acquisition of Solutia, which are expected to be non-recurring and result from an unusual transaction, and MTM pension and OPEB plan adjustments, as these adjustments arise from a change in accounting principle on a Company-wide basis retrospectively applied to all prior periods. Because these non-recurring or non-core costs and gains may materially affect the Company’s financial condition or results in a specific period in which they are recognized, management also evaluates, and makes resource allocation and performance evaluation decisions based on, the related non-GAAP measures excluding such items. In addition to using such measures to evaluate results in a specific period, management believes that such measures may provide more complete and consistent comparisons of the Company’s operational performance on a period-over-period historical basis and a better indication of expected future trends. Management discloses these non-GAAP measures, and the related reconciliations, because it believes investors use these metrics in evaluating longer-term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company’s and its segments’ operating performance, make resource allocation decisions, and evaluate organizational and individual performance in determining certain performance-based compensation.
These non-GAAP financial measures and the accompanying reconciliations to the most comparable GAAP measures are presented in "Results of Operations" in this MD&A.
In addition to the non-GAAP measures presented in this Quarterly Report and other periodic reports, from time to time management evaluates and discloses to investors and securities analysts the non-GAAP measure cash provided by operating activities excluding certain items when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Eastman management uses this non-GAAP measure in conjunction with the GAAP measure cash provided by operating activities because it believes it is a more appropriate metric to evaluate the cash flows from Eastman’s core operations that are available to grow the business and create stockholder value, as well as because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, Eastman management generally excludes the impact of certain non-core, unusual, or non-recurring activities and decisions of management because such activities and decisions are not considered core, on-going components of continuing operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from continuing operations. From time to time, management discloses this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.
Similarly, from time to time, Eastman discloses to investors and securities analysts a measure of free cash flow, which management develops based on the non-GAAP measure cash provided by operating activities, as adjusted, described above, less the amounts of capital expenditures and dividends, as management believes such items are generally funded from available cash and, as such, should be considered in determining free cash flow. Eastman management believes this is the appropriate metric to use to evaluate the Company’s overall ability to generate cash to fund future operations, inorganic growth opportunities, and to service the Company’s debt obligations. Management believes this metric is useful to investors and securities analysts in order to provide them with information similar to that used by management in evaluating potential future cash available for various initiatives and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results and value, of comparable companies.
The Company generated sales revenue of $1.8 billion in both first quarters 2012 and 2011, respectively. The increase in sales revenue was primarily due to higher selling prices in all segments which were in response to higher raw material and energy costs. An increase in sales volume in the Performance Chemicals and Intermediates ("PCI") segment was offset by a decrease in the Specialty Plastics segment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating earnings were $264 million in first quarter 2012 compared with $314 million in first quarter 2011. Operating earnings in first quarter 2012 include $9 million of transaction costs related to the pending acquisition of Solutia. Operating earnings in first quarter 2011 include a $15 million MTM gain due to an interim remeasurement of the OPEB plan obligation under the new method of accounting for actuarial gains and losses for pension and OPEB plans, triggered by the exit of employees associated with the sale of the PET business. Operating earnings in first quarter 2012 compared to first quarter 2011 declined in all segments except the Fibers segment.
The Company generated $19 million in cash from operating activities during first three months 2012, which included $25 million cash contributed to its U.S. defined benefit pension plans, compared to $146 million cash used in operating activities during first three months 2011, which included $100 million cash contributed to its U.S. defined benefit pension plans. The increase in cash from operating activities was primarily due to lower working capital requirements, primarily accounts receivable and inventory, and less cash used for pension plan contributions.
In the first three months of 2012 the Company progressed on both organic (internal growth) and inorganic (external growth through joint venture and acquisition) growth initiatives including:
·
|
expanding PCI segment capacity to support its non-phthalate plasticizer business, including retrofitting the acquired Sterling Chemicals, Inc. ("Sterling") idled plasticizer manufacturing unit and increasing capacity of 2-ethyl hexanol ("2-EH") to support expected growth in the plasticizers, coatings, and fuel additive markets;
|
·
|
completing Specialty Plastics segment capacity expansions for cyclohexane dimethanol ("CHDM"), a monomer used in the manufacture of copolyesters, and cellulose triacetate;
|
·
|
completing the formal commercial introduction of acetylated wood, branded as Perennial WoodTM, to select markets;
|
·
|
commercial introduction of the new Eastman CerfisTM technology, with anticipation that the application will be expanded nationwide by the end of 2012; and
|
·
|
entering into a definitive agreement to acquire Solutia, a global leader in performance materials and specialty chemicals, which is expected to:
|
o
|
broaden Eastman's global presence, particularly in Asia Pacific;
|
o
|
establish a combined platform with extensive organic growth opportunities through complementary technologies and business capabilities and an overlap of key end-markets; and
|
o
|
expand Eastman's portfolio of sustainable products.
|
|
First Quarter
|
|
Volume Effect
|
|
Price Effect
|
|
Product
Mix Effect
|
|
Exchange
Rate
Effect
|
(Dollars in millions)
|
2012
|
|
2011
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,821
|
$
|
1,758
|
|
4 %
|
|
-- %
|
|
3 %
|
|
1 %
|
|
-- %
|
Sales revenue in first quarter 2012 compared to first quarter 2011 increased $63 million. The increase was primarily due to higher selling prices in all segments in response to higher raw material and energy costs. An increase in sales volume in the PCI segment was offset by a decrease in the Specialty Plastics segment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
|
First Quarter
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$ |
431 |
|
|
$ |
458 |
|
|
|
(6 |
) % |
As a percentage of sales
|
|
|
24 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market pension and other postretirement benefit adjustments
|
|
|
-- |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit excluding item
|
|
$ |
431 |
|
|
$ |
446 |
|
|
|
(3 |
) % |
As a percentage of sales
|
|
|
24 |
% |
|
|
25 |
% |
|
|
|
|
Gross profit and gross profit as a percentage of sales in first quarter 2012 decreased in all segments except the Fibers segment.
|
|
First Quarter
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
$ |
126 |
|
|
$ |
108 |
|
|
|
17 |
% |
Research and Development Expenses
|
|
|
41 |
|
|
|
36 |
|
|
|
14 |
% |
|
|
$ |
167 |
|
|
$ |
144 |
|
|
|
16 |
% |
As a percentage of sales
|
|
|
9 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs related to the pending acquisition of Solutia
|
|
|
(9 |
) |
|
|
-- |
|
|
|
|
|
Mark-to-market pension and other postretirement benefit adjustments
|
|
|
-- |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and Administrative Expenses and Research and Development Expenses excluding items
|
|
$ |
158 |
|
|
$ |
147 |
|
|
|
7 |
% |
As a percentage of sales
|
|
|
9 |
% |
|
|
8 |
% |
|
|
|
|
Selling, general and administrative expenses in first quarter 2012 were higher compared to first quarter 2011 primarily due to higher costs of growth and business development initiatives, including transaction costs related to the pending acquisition of Solutia and the recent market launch of Perennial WoodTM.
R&D expenses were higher for first quarter 2012 compared to first quarter 2011 due to higher R&D expenses for growth initiatives, including Eastman CerfisTM technology and EastmanTM microfiber technology.
Operating Earnings
|
|
First Quarter
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
$ |
264 |
|
|
$ |
314 |
|
|
|
(16 |
) % |
Transaction costs related to the pending acquisition of Solutia
|
|
|
9 |
|
|
|
-- |
|
|
|
|
|
Mark-to-market pension and other postretirement benefit adjustments
|
|
|
-- |
|
|
|
(15 |
) |
|
|
|
|
Operating earnings excluding items
|
|
$ |
273 |
|
|
$ |
299 |
|
|
|
(9 |
) % |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net Interest Expense
|
|
First Quarter
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest costs
|
|
$ |
23 |
|
|
$ |
23 |
|
|
|
|
Less: Capitalized interest
|
|
|
2 |
|
|
|
2 |
|
|
|
|
Interest expense
|
|
|
21 |
|
|
|
21 |
|
|
|
-- |
% |
Interest income
|
|
|
2 |
|
|