EMN 2012.09.30 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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| |
(Mark One) | |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 30, 2012 |
| OR |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ______________ to ______________ |
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
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| |
Delaware | 62-1539359 |
(State or other jurisdiction of | (I.R.S. employer |
incorporation or organization) | identification no.) |
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200 South Wilcox Drive | |
Kingsport, Tennessee | 37662 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (423) 229-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate 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 [ ]
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.
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| | | |
Large accelerated filer | [X] | Accelerated filer | [ ] |
Non-accelerated filer | [ ] | Smaller reporting company | [ ] |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
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 | Number of Shares Outstanding at September 30, 2012 |
Common Stock, par value $0.01 per share | 153,367,116 |
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PAGE 1 OF 69 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 68
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
(Dollars in millions, except per share amounts) | 2012 | | 2011 | | 2012 | | 2011 |
Sales | $ | 2,259 |
| | $ | 1,812 |
| | $ | 5,933 |
| | $ | 5,455 |
|
Cost of sales | 1,734 |
| | 1,379 |
| | 4,496 |
| | 4,090 |
|
Gross profit | 525 |
| | 433 |
| | 1,437 |
| | 1,365 |
|
Selling, general and administrative expenses | 173 |
| | 114 |
| | 420 |
| | 340 |
|
Research and development expenses | 52 |
| | 41 |
| | 136 |
| | 115 |
|
Asset impairments and restructuring charges (gains), net | 37 |
| | 7 |
| | 37 |
| | (8 | ) |
Operating earnings | 263 |
| | 271 |
| | 844 |
| | 918 |
|
Net interest expense | 48 |
| | 20 |
| | 95 |
| | 57 |
|
Other charges (income), net | (3 | ) | | (3 | ) | | 19 |
| | (14 | ) |
Earnings from continuing operations before income taxes | 218 |
| | 254 |
| | 730 |
| | 875 |
|
Provision for income taxes from continuing operations | 64 |
| | 80 |
| | 240 |
| | 281 |
|
Earnings from continuing operations | 154 |
| | 174 |
| | 490 |
| | 594 |
|
Earnings from discontinued operations, net of tax | — |
| | — |
| | — |
| | 9 |
|
Gain from disposal of discontinued operations, net of tax | — |
| | — |
| | 1 |
| | 31 |
|
Net earnings | $ | 154 |
| | $ | 174 |
| | $ | 491 |
| | $ | 634 |
|
Basic earnings per share | |
| | |
| | |
| | |
|
Earnings from continuing operations | $ | 1.01 |
| | $ | 1.25 |
| | $ | 3.43 |
| | $ | 4.22 |
|
Earnings from discontinued operations | — |
| | — |
| | 0.01 |
| | 0.29 |
|
Basic earnings per share | $ | 1.01 |
| | $ | 1.25 |
| | $ | 3.44 |
| | $ | 4.51 |
|
Diluted earnings per share | |
| | |
| | |
| | |
|
Earnings from continuing operations | $ | 0.99 |
| | $ | 1.22 |
| | $ | 3.35 |
| | $ | 4.12 |
|
Earnings from discontinued operations | — |
| | — |
| | — |
| | 0.28 |
|
Diluted earnings per share | $ | 0.99 |
| | $ | 1.22 |
| | $ | 3.35 |
| | $ | 4.40 |
|
Comprehensive Income | |
| | |
| | |
| | |
|
Net earnings | $ | 154 |
| | $ | 174 |
| | $ | 491 |
| | $ | 634 |
|
Other comprehensive income (loss), net of tax | |
| | |
| | |
| | |
|
Change in cumulative translation adjustment | 30 |
| | (36 | ) | | 21 |
| | — |
|
Defined benefit pension and other postretirement benefit plans: | |
| | |
| | |
| | |
|
Amortization of unrecognized prior service credits included in net periodic costs | (4 | ) | | (5 | ) | | (12 | ) | | (18 | ) |
Derivatives and hedging: | |
| | |
| | |
| | |
|
Unrealized gain (loss) during period | (3 | ) | | 5 |
| | (33 | ) | | (27 | ) |
Reclassification adjustment for gains included in net income | (4 | ) | | — |
| | (5 | ) | | (1 | ) |
Total other comprehensive income (loss), net of tax | 19 |
| | (36 | ) | | (29 | ) | | (46 | ) |
Comprehensive income | $ | 173 |
| | $ | 138 |
| | $ | 462 |
| | $ | 588 |
|
Retained Earnings | |
| | |
| | |
| | |
|
Retained earnings at beginning of period | $ | 3,024 |
| | $ | 2,646 |
| | $ | 2,760 |
| | $ | 2,253 |
|
Net earnings | 154 |
| | 174 |
| | 491 |
| | 634 |
|
Cash dividends declared | (39 | ) | | (36 | ) | | (112 | ) | | (103 | ) |
Retained earnings at end of period | $ | 3,139 |
| | $ | 2,784 |
| | $ | 3,139 |
| | $ | 2,784 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
| | | | | | | |
| September 30, | | December 31, |
(Dollars in millions, except per share amounts) | 2012 | | 2011 |
| (Unaudited) | | |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 237 |
| | $ | 577 |
|
Short-term time deposits | — |
| | 200 |
|
Trade receivables, net | 954 |
| | 632 |
|
Miscellaneous receivables | 118 |
| | 72 |
|
Inventories | 1,269 |
| | 779 |
|
Other current assets | 95 |
| | 42 |
|
Total current assets | 2,673 |
| | 2,302 |
|
Properties | |
| | |
|
Properties and equipment at cost | 9,580 |
| | 8,383 |
|
Less: Accumulated depreciation | 5,467 |
| | 5,276 |
|
Net properties | 4,113 |
| | 3,107 |
|
Goodwill | 2,367 |
| | 406 |
|
Intangible assets, net of accumulated amortization | 1,882 |
| | 101 |
|
Other noncurrent assets | 610 |
| | 268 |
|
Total assets | $ | 11,645 |
| | $ | 6,184 |
|
Liabilities and Stockholders' Equity | |
| | |
|
Current liabilities | |
| | |
|
Payables and other current liabilities | $ | 1,344 |
| | $ | 961 |
|
Borrowings due within one year | 120 |
| | 153 |
|
Total current liabilities | 1,464 |
| | 1,114 |
|
Long-term borrowings | 4,865 |
| | 1,445 |
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Deferred income tax liabilities | 71 |
| | 210 |
|
Post-employment obligations | 1,644 |
| | 1,411 |
|
Other long-term liabilities | 591 |
| | 134 |
|
Total liabilities | 8,635 |
| | 4,314 |
|
Stockholders' equity | |
| | |
|
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 212,818,293 and 196,455,131 for 2012 and 2011, respectively) | 2 |
| | 2 |
|
Additional paid-in capital | 1,689 |
| | 900 |
|
Retained earnings | 3,139 |
| | 2,760 |
|
Accumulated other comprehensive income | 109 |
| | 138 |
|
| 4,939 |
| | 3,800 |
|
Less: Treasury stock at cost (59,511,662 shares for 2012 and 59,539,633 shares for 2011) | 1,929 |
| | 1,930 |
|
Total stockholders' equity | 3,010 |
| | 1,870 |
|
Total liabilities and stockholders' equity | $ | 11,645 |
| | $ | 6,184 |
|
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| First Nine Months |
(Dollars in millions) | 2012 | | 2011 |
Cash flows from operating activities | | | |
Net earnings | $ | 491 |
| | $ | 634 |
|
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation and amortization | 252 |
| | 204 |
|
Asset impairment charges | 9 |
| | — |
|
Gain on sale of assets | — |
| | (70 | ) |
Provision for deferred income taxes | 63 |
| | 5 |
|
Pension and other postretirement contributions (in excess of) less than expenses | (85 | ) | | (119 | ) |
Variable compensation (in excess of) less than expenses | (5 | ) | | (14 | ) |
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | |
| | |
|
(Increase) decrease in trade receivables | (63 | ) | | (147 | ) |
(Increase) decrease in inventories | 30 |
| | (225 | ) |
Increase (decrease) in trade payables | 13 |
| | 34 |
|
Other items, net | (17 | ) | | (29 | ) |
Net cash provided by operating activities | 688 |
| | 273 |
|
Cash flows from investing activities | |
| | |
|
Additions to properties and equipment | (297 | ) | | (333 | ) |
Proceeds from redemption of short-term time deposits | 200 |
| | — |
|
Proceeds from sale of assets and investments | 7 |
| | 651 |
|
Acquisitions and investments in joint ventures, net of cash acquired | (2,668 | ) | | (154 | ) |
Additions to short-term time deposits | — |
| | (200 | ) |
Additions to capitalized software | (4 | ) | | (7 | ) |
Other items, net | (33 | ) | | 27 |
|
Net cash used in investing activities | (2,795 | ) | | (16 | ) |
Cash flows from financing activities | |
| | |
|
Net (decrease) increase in commercial paper, credit facility, and other borrowings | (1 | ) | | 1 |
|
Proceeds from borrowings | 3,511 |
| | — |
|
Repayment of borrowings | (1,666 | ) | | (2 | ) |
Dividends paid to stockholders | (107 | ) | | (100 | ) |
Treasury stock purchases | — |
| | (292 | ) |
Proceeds from stock option exercises and other items, net | 28 |
| | 67 |
|
Net cash provided by (used in) financing activities | 1,765 |
| | (326 | ) |
Effect of exchange rate changes on cash and cash equivalents | 2 |
| | 1 |
|
Net change in cash and cash equivalents | (340 | ) | | (68 | ) |
Cash and cash equivalents at beginning of period | 577 |
| | 516 |
|
Cash and cash equivalents at end of period | $ | 237 |
| | $ | 448 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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 described in the Company's Current Report on Form 8-K dated May 16, 2012 (the "Form 8-K"), which adjusted certain items contained in the Company's 2011 Annual Report on Form 10-K to reflect the change in accounting for pension and other postretirement benefit ("OPEB") plans actuarial gains and losses described in Note 12, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans", and enhanced certain disclosures. The accompanying unaudited consolidated financial statements reflect the change in accounting for pension and OPEB plans, and should be read in conjunction with the consolidated financial statements in Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-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.
Solutia acquisition
Information related to the Solutia Inc. ("Solutia") acquisition completed July 2, 2012 is in Note 2, "Acquisitions and Investments in Joint Ventures". As of the date of acquisition, results of the acquired Solutia businesses are included in Eastman results.
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2. | ACQUISITIONS AND INVESTMENTS IN JOINT VENTURES |
Solutia Inc.
On July 2, 2012, the Company completed its acquisition of Solutia, a global leader in performance materials and specialty chemicals. In the acquisition, each outstanding share of Solutia common stock was cancelled and converted automatically into the right to receive $22.00 in cash and 0.12 shares of Eastman common stock. In total, 14.7 million shares of Eastman common stock were issued in the transaction. The fair value of total consideration transferred was approximately $4.8 billion, consisting of cash of $2.6 billion, net of cash acquired; equity in the form of Eastman stock of approximately $700 million; and the assumption and subsequent repayment of Solutia's debt at fair value of approximately $1.5 billion.
The funding of the cash portion of the purchase price, repayment of Solutia's debt, and acquisition costs was provided primarily from borrowings, including the $2.3 billion net proceeds from the public offering of notes on June 5, 2012 and borrowings of $1.2 billion on July 2, 2012 under a five-year term loan agreement (the "Term Loan"). See Note 7, "Borrowings".
The following table summarizes the preliminary purchase price allocation for the Solutia acquisition:
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| | | |
(Dollars in millions) | |
Current assets | $ | 901 |
|
Properties and equipment | 940 |
|
Intangible assets | 1,807 |
|
Other noncurrent assets | 612 |
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Goodwill | 1,965 |
|
Current liabilities | (461 | ) |
Long-term liabilities | (2,389 | ) |
Equity and cash consideration, net of $88 million cash acquired | $ | 3,375 |
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company used the income, market, or cost approach (or a combination thereof) for the preliminary valuation as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to Eastman in the principal or most advantageous market for the asset or liability. For certain items, the carrying value was determined to be a reasonable approximation of fair value based on information available to Eastman management. The preliminary fair value of receivables acquired from Solutia on July 2, 2012 was $321 million, with gross contractual amounts receivable of $335 million. Acquired intangible assets are primarily customer relationships, trade names, and developed technologies. Long-term liabilities are primarily Solutia's debt, which was repaid by Eastman at closing, deferred tax liabilities, environmental liabilities, and pension and other postretirement welfare plan obligations. The Company expects to finalize the acquisition accounting related to the transaction during fourth quarter 2012. Any adjustments are not expected to have a material impact on the Company's financial position or results of operations.
The acquisition of Solutia broadens Eastman's global presence, particularly in Asia Pacific; facilitates growth opportunities through enhanced access to markets such as the automotive and architectural industries, and expands Eastman's portfolio of sustainable products. In connection with the purchase, the Company recorded goodwill, which represents the excess of the purchase price over the estimated preliminary fair value of tangible and intangible assets acquired, net of liabilities assumed. The goodwill is attributed primarily to Solutia as a going concern and the fair value of expected cost synergies and revenues growth from combining the Eastman and Solutia businesses. The going concern element represents the ability to earn a higher return on the combined assembled collection of assets and businesses of Solutia than if those assets and businesses were to be acquired and managed separately. Other relevant elements of goodwill are the benefits of access to certain markets and work force. Goodwill from the Solutia acquisition will be allocated to certain of the Company's reportable segments. This allocation is expected to be completed during fourth quarter 2012. None of the goodwill is expected to be deducted for tax purposes.
Properties acquired included a number of manufacturing, sales, and distribution sites and related facilities, land and leased sites that include leasehold improvements, and machinery and equipment for use in manufacturing operations. Management valued properties using the cost approach supported where available by observable market data which includes consideration of obsolescence.
Intangible assets acquired included a number of trade names and trademarks that are both business-to-business and business-to-consumer in nature, including Crystex®, Saflex®, and Llumar®. Also acquired was technology related to products protected by a number of existing patents, patent applications, and trade secrets. In addition to these intangible assets, the Company acquired a number of customer relationships in industries such as automotive tires and aviation. Management valued intangible assets using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data for peer chemical companies.
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| | | | | | | |
(Dollars in millions) | Preliminary Fair Value | | Weighted-Average Amortization Period (Years) |
Amortizable intangible assets | | | |
Customer relationships | $ | 816 |
| | 22 |
|
Developed technologies | 440 |
| | 13 |
|
Indefinite-lived intangible assets | | | |
Trade names | 551 |
| | |
Total | $ | 1,807 |
| | |
Management estimated the fair market value of fixed-rate debt based on the viewpoint that the exit price approximated the entry price given the lack of observable market prices. Additionally, acquired interest rate swaps and foreign exchange contracts were terminated and settled immediately following the acquisition. Because these derivatives were recorded at fair value in the opening balance sheet, there were no gains or losses associated with these settlements.
Management also evaluated probable loss contingencies, including those for legal and environmental matters, as prescribed under applicable GAAP. Due to the lack of observable market inputs, assumed liabilities for environmental loss contingencies that were both probable and estimable were recorded based upon estimates of future cash outflows for such contingencies as of the acquisition date. See Note 11, "Environmental Matters", for more information.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Related to the acquisition of Solutia, in third quarter and first nine months 2012, the Company recognized $15 million and $28 million, respectively, in transaction costs and $7 million and $9 million, respectively, in integration costs. In first nine months 2012, the Company recognized $32 million in financing costs related to the acquisition. Transaction costs and integration costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item and financing costs are included in the "Other charges (income), net" and "Net interest expense" line items in the Unaudited Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings. In third quarter and first nine months 2012, there were $28 million in restructuring charges for severance associated with the acquisition and integration of Solutia. As required by purchase accounting, the acquired inventories were marked to fair value. These inventories were sold in third quarter 2012 resulting in a one-time $75 million increase in cost of sales, net of the LIFO impact of these inventories, in third quarter and first nine months 2012.
Beginning third quarter 2012, the Company's consolidated results of operations includes the results of the acquired Solutia businesses. Since the date of the acquisition, sales revenue of $488 million and operating losses of $1 million from the acquired Solutia businesses have been included in the Company's consolidated results of operations for both third quarter and first nine months 2012. The operating losses include the $75 million of additional costs of acquired inventories.
The unaudited pro forma financial results for three months ended September 30, 2012 and September 30, 2011 and nine months ended September 30, 2012 and September 30, 2011 combine the consolidated results of Eastman and Solutia giving effect to the acquisition of Solutia as if it had been completed on January 1, 2011, the beginning of the comparable prior annual reporting period presented. The unaudited pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisition. This unaudited pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the acquisition been completed as of January 1, 2011.
The unaudited pro forma financial results include certain adjustments for additional depreciation and amortization expense based upon the preliminary fair value step-up and estimated useful lives of Solutia depreciable fixed assets and definite-life amortizable assets acquired in the transaction. The unaudited pro forma results also include adjustments to net interest expense and elimination of early debt extinguishment costs historically recorded by Solutia based upon the retirement of Solutia's debt and issuance of additional debt related to the transaction. The provision for income taxes from continuing operations has also been adjusted for all periods, based upon the foregoing adjustments to historical results, as well as the elimination of historical net changes in valuation allowances against certain deferred tax assets of Solutia.
Additionally, in the preparation of unaudited pro forma sales and earnings from continuing operations, Solutia's historical consolidated results have been retrospectively adjusted for the change in accounting methodology for pension and OPEB plans actuarial gains and losses adopted by Eastman during first quarter 2012. For additional information, see Note 12, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans".
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| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
(Dollars in millions) | 2012 | | 2011 | | 2012 | | 2011 |
Pro forma sales | $ | 2,259 |
| | $ | 2,330 |
| | $ | 6,951 |
| | $ | 7,025 |
|
Pro forma earnings from continuing operations | 239 |
| | 228 |
| | 684 |
| | 585 |
|
Unaudited pro forma earnings from continuing operations for first nine months 2011, the beginning of the comparable prior annual reporting period presented, have been adjusted to include certain items, such as financing, integration, transaction, and restructuring costs historically recorded by Eastman and Solutia directly attributable to the acquisition, which will not have an ongoing impact. These items include transaction, integration, financing, and restructuring costs incurred by Eastman during third quarter and first nine months 2012, as well as transaction costs of $45 million and expenses of $19 million for the accelerated vesting of stock-based compensation awards incurred by Solutia prior to its acquisition by Eastman. Additionally, the unaudited pro forma financial results for first nine months 2011 have been adjusted to reflect the additional costs of acquired inventories. Accordingly, these non-recurring costs have been eliminated from unaudited pro forma earnings from continuing operations for third quarter and first nine months 2012.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Sterling Chemicals, Inc. and Scandiflex do Brasil S.A. Indústrias Químicas
During third quarter 2011, the Company completed two acquisitions. On August 9, 2011, Eastman acquired Sterling Chemicals, Inc. ("Sterling"), a single site North American petrochemical producer, to produce non-phthalate plasticizers in the Adhesives & Plasticizers segment, including Eastman 168™ non-phthalate plasticizers, and acetic acid in the Specialty Fluids & Intermediates segment. On September 1, 2011, in the Adhesives & Plasticizers segment, Eastman acquired Scandiflex do Brasil S.A. Indústrias Químicas ("Scandiflex"), a manufacturer of plasticizers located in São Paulo, Brazil. The acquisition of Scandiflex provided the Company additional access to Brazilian plasticizer markets. 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 |
|
In connection with the purchase transactions, the Company recorded goodwill, which represents the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed. Acquired intangible assets primarily relate to perpetual air emission credits to which management has assigned indefinite lives. 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 Additives & Functional Products segment. Dynaloy adds materials science capabilities that are expected to complement growth of the Additives & Functional Products segment's electronic materials product line. 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 these acquisitions is not presented due to the immaterial financial impact to the Company.
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3. | DISCONTINUED OPERATIONS |
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.
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:
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| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
(Dollars in millions) | 2012 | | 2011 | | 2012 | | 2011 |
Sales | $ | — |
| | $ | — |
| | $ | — |
| | $ | 105 |
|
Earnings before income taxes | — |
| | — |
| | — |
| | 18 |
|
Earnings from discontinued operations, net of tax | — |
| | — |
| | — |
| | 9 |
|
Gain from disposal of discontinued operations, net of tax | — |
| | — |
| | 1 |
| | 31 |
|
First nine months 2012 net gains are primarily related to PET business litigation settled during second quarter.
|
| | | | | | | |
| September 30, | | December 31, |
(Dollars in millions) | 2012 | | 2011 |
At FIFO or average cost (approximates current cost) | | | |
Finished goods | $ | 940 |
| | $ | 777 |
|
Work in process | 286 |
| | 239 |
|
Raw materials and supplies | 559 |
| | 353 |
|
Total inventories | 1,785 |
| | 1,369 |
|
LIFO Reserve | (516 | ) | | (590 | ) |
Total inventories | $ | 1,269 |
| | $ | 779 |
|
Inventories valued on the LIFO method were approximately 60 percent and 70 percent of total inventories as of September 30, 2012 and December 31, 2011, respectively. September 30, 2012 inventories included inventories from the acquired Solutia businesses, the majority of which are outside of the United States and are not valued on the LIFO method.
| |
5. | PAYABLES AND OTHER CURRENT LIABILITIES |
|
| | | | | | | |
| September 30, | | December 31, |
(Dollars in millions) | 2012 | | 2011 |
Trade creditors | $ | 722 |
| | $ | 529 |
|
Accrued payrolls, vacation, and variable-incentive compensation | 143 |
| | 146 |
|
Accrued taxes | 99 |
| | 40 |
|
Post-employment obligations | 60 |
| | 58 |
|
Interest payable | 48 |
| | 26 |
|
Other | 272 |
| | 162 |
|
Total payables and other current liabilities | $ | 1,344 |
| | $ | 961 |
|
The current portion of post-employment obligations is an estimate of current year payments.
| |
6. | PROVISION FOR INCOME TAXES |
|
| | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
(Dollars in millions) | 2012 | | 2011 | | 2012 | | 2011 |
Provision for income taxes | $ | 64 |
| | $ | 80 |
| | $ | 240 |
| | $ | 281 |
|
Effective tax rate | 29 | % | | 31 | % | | 33 | % | | 32 | % |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The third quarter and first nine months 2012 effective tax rates reflect an $8 million benefit from the settlement of U.S. and non-U.S. income tax audits and a $5 million benefit from the reversal of tax reserves due to the expiration of the relevant statute of limitations. The third quarter and first nine months 2011 effective tax rates included an $8 million benefit recognized due to an increased level of capital investment which qualified for additional state tax credits.
|
| | | | | | | |
| September 30, | | December 31, |
(Dollars in millions) | 2012 | | 2011 |
Borrowings consisted of: | | | |
7% notes due 2012 | $ | — |
| | $ | 147 |
|
3% debentures due 2015 | 250 |
| | 250 |
|
2.4% notes due 2017 | 997 |
| | — |
|
6.30% notes due 2018 | 175 |
| | 176 |
|
5.5% notes due 2019 | 250 |
| | 250 |
|
4.5% debentures due 2021 | 250 |
| | 250 |
|
3.6% notes due 2022 | 893 |
| | — |
|
7 1/4% debentures due 2024 | 243 |
| | 243 |
|
7 5/8% debentures due 2024 | 54 |
| | 54 |
|
7.60% debentures due 2027 | 222 |
| | 222 |
|
4.8% notes due 2042 | 496 |
| | — |
|
Credit facility borrowings | 1,150 |
| | — |
|
Other | 5 |
| | 6 |
|
Total borrowings | 4,985 |
| | 1,598 |
|
Borrowings due within one year | 120 |
| | 153 |
|
Long-term borrowings | $ | 4,865 |
| | $ | 1,445 |
|
On June 5, 2012, the Company issued 2.4% notes due 2017 in the principal amount of $1.0 billion, 3.6% notes due 2022 in the principal amount of $900 million, and 4.8% notes due 2042 in the principal amount of $500 million. Proceeds from the sale of the notes, net of original issue discounts, issuance costs, and the monetization of interest rate swaps, were $2.3 billion. In addition, on July 2, 2012, the Company borrowed the entire $1.2 billion available under the Term Loan. Proceeds from these borrowings were used to pay, in part, the cash portion of the Solutia acquisition, repay Solutia debt, and pay acquisition costs.
At September 30, 2012, the Company had repaid $50 million of borrowings under the Term Loan. The Term Loan 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, when the Term Loan was entered into.
The Company has a $750 million revolving credit agreement (the "Credit Facility") expiring December 2016. 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 September 30, 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.
In April 2012, the Company increased the line of credit under its accounts receivable securitization agreement ("A/R Facility") to $250 million from $200 million and extended the maturity date to April 2015. 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 September 30, 2012 and December 31, 2011, the Company had no outstanding borrowings under the A/R Facility. The entire available amount under the A/R Facility was borrowed and then repaid during third quarter 2012. This activity is presented on a net basis within the cash flows from financing activities section of the Statements of Cash Flows.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2012 and December 31, 2011.
During second quarter 2012, the Company repaid the $146 million of 7% notes that matured in April 2012.
Fair Value of Borrowings
The Company has determined that its long-term borrowings at September 30, 2012 and December 31, 2011 were classified within level 1 in the fair value hierarchy as defined in the accounting policies in Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-K. The fair value for fixed-rate borrowings is based on current market quotes. The Company's floating-rate borrowings, which relate to the Term Loan, approximate fair value and are classified within level 2.
|
| | | | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
(Dollars in millions) | Recorded Amount | | Fair Value | | Recorded Amount | | Fair Value |
Long-term borrowings | $ | 4,865 |
| | $ | 5,242 |
| | $ | 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 13, "Derivatives", to the consolidated financial statements in Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-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 September 30, 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.
As of September 30, 2012, the total notional amounts of the Company's foreign exchange forward and option contracts were €395 million (approximately $510 million equivalent) and ¥10.4 billion (approximately $135 million equivalent), and the total notional volume hedged for raw materials was approximately 2 million barrels of ethane and propane and 10 thousand tons of paraxylene. The Company had no hedges for energy or interest rate swaps for the future issuance of debt ("forward starting interest rate swaps") at September 30, 2012.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-K.
The following chart shows the financial assets and liabilities valued on a recurring basis.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | Fair Value Measurements at September 30, 2012 |
Description | | September 30, 2012 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative Assets | | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | — |
|
Derivative Liabilities | | (14 | ) | | — |
| | (13 | ) | | (1 | ) |
| | $ | 12 |
| | $ | — |
| | $ | 13 |
| | $ | (1 | ) |
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | Fair Value Measurements at December 31, 2011 |
Description | | December 31, 2011 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative Assets | | $ | 34 |
| | $ | — |
| | $ | 34 |
| | $ | — |
|
Derivative Liabilities | | (23 | ) | | — |
| | (23 | ) | | — |
|
| | $ | 11 |
| | $ | — |
| | $ | 11 |
| | $ | — |
|
The majority of the Company's derivative assets are classified as Level 2. Level 2 fair value 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.
The Company holds Level 3 assets for commodity hedges. The fair values of Level 3 instruments are determined using pricing data similar to that used in Level 2 financial instruments described above, and reflect adjustments for less liquid markets or longer contractual terms. All Level 3 hedges will mature in the current year. The Company determines the fair value of paraxylene derivative forward contracts based on related inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets, and which influence the actual forward price of the commodity. Due to the fact that the forward price of the commodity itself is considered unobservable, the Company has categorized these forward contracts as Level 3.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The table below presents a rollforward of activity for these assets for the period ended September 30, 2012:
|
| | | | | | | | |
| | Level 3 Assets |
(Dollars in millions) | | Total | | Commodity Contracts |
Beginning balance at January 1, 2012 | | $ | — |
| | $ | — |
|
Realized gain (loss) | | — |
| | — |
|
Change in unrealized gain (loss) | | (5 | ) | | (5 | ) |
Purchases, sales and settlements | | 4 |
| | 4 |
|
Transfers (out) in of Level 3 | | — |
| | — |
|
Ending balance at September 30, 2012 | | $ | (1 | ) | | $ | (1 | ) |
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 as of September 30, 2012 and December 31, 2011.
Fair Value of Derivatives Designated as Hedging Instruments
|
| | | | | | | | | | |
(Dollars in millions) | | | | Fair Value Measurements Significant Other Observable Inputs |
Derivative Assets | | Statement of Financial Position Location | | September 30, 2012 | | December 31, 2011 |
Cash Flow Hedges | | | | | | |
Commodity contracts | | Other current assets | | $ | 1 |
| | $ | 1 |
|
Commodity contracts | | Other noncurrent assets | | — |
| | 1 |
|
Foreign exchange contracts | | Other current assets | | 14 |
| | 20 |
|
Foreign exchange contracts | | Other noncurrent assets | | 11 |
| | 12 |
|
| | | | $ | 26 |
| | $ | 34 |
|
|
| | | | | | | | | | |
(Dollars in millions) | | | | Fair Value Measurements Significant Other Observable Inputs |
Derivative Liabilities | | Statement of Financial Position Location | | September 30, 2012 | | December 31, 2011 |
Cash Flow Hedges | | | | | | |
Commodity contracts | | Payables and other current liabilities | | $ | 6 |
| | $ | 8 |
|
Foreign exchange contracts | | Payables and other current liabilities | | 6 |
| | 7 |
|
Foreign exchange contracts | | Other long-term liabilities | | 2 |
| | 7 |
|
Forward starting interest rate swap contracts | | Payables and other current liabilities | | — |
| | 1 |
|
| | | | $ | 14 |
| | $ | 23 |
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Derivatives' Hedging Relationships
|
| | | | | | | | | | | | | | | | | | |
Third Quarter |
(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 income (effective portion) | | Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion) |
Derivatives' Cash Flow Hedging Relationships | | September 30, 2012 | | September 30, 2011 | | September 30, 2012 | | September 30, 2011 |
Commodity contracts | | $ | 3 |
| | $ | (3 | ) | | Cost of sales | | $ | 1 |
| | $ | — |
|
Foreign exchange contracts | | (11 | ) | | 31 |
| | Sales | | 12 |
| | (2 | ) |
Forward starting interest rate swap contracts | | 1 |
| | (23 | ) | | Interest Expense | | (2 | ) | | — |
|
| | $ | (7 | ) | | $ | 5 |
| | | | $ | 11 |
| | $ | (2 | ) |
|
| | | | | | | | | | | | | | | | | | |
First Nine Months |
(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 income (effective portion) | | Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion) |
Derivatives' Cash Flow Hedging Relationships | | September 30, 2012 | | September 30, 2011 | | September 30, 2012 | | September 30, 2011 |
Commodity contracts | | $ | (1 | ) | | $ | (4 | ) | | Cost of sales | | $ | (17 | ) | | $ | 5 |
|
Foreign exchange contracts | | (8 | ) | | 6 |
| | Sales | | 29 |
| | (5 | ) |
Forward starting interest rate swap contracts | | (29 | ) | | (30 | ) | | Interest Expense | | (3 | ) | | — |
|
| | $ | (38 | ) | | $ | (28 | ) | | | | $ | 9 |
| | $ | — |
|
In first nine months 2012, forward starting interest rate swaps related to the issuance of debt for the Solutia acquisition were settled, resulting in an additional loss, net of tax of $44 million recorded in Other Comprehensive Income.
Hedging Summary
At September 30, 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 $66 million and $18 million in losses, respectively. If realized, approximately $1 million in gains in third quarter 2012 will be reclassified into earnings during the next 12 months, including foreign exchange contracts monetized and prospectively de-designated in fourth quarter 2011. Ineffective portions of hedges are immediately recognized in cost of sales or other charges (income), net. For first nine months 2012, the ineffective portion of the Company's qualifying hedges was $2 million. For third quarter 2012 and third quarter and first nine months 2011, there was no material ineffectiveness.
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 and are transacted and settled in the same quarter. The Company recognized approximately $2 million and $3 million net gains on nonqualifying derivatives during third quarter 2012 and 2011, respectively. The Company recognized approximately $4 million net gains and $1 million net loss on nonqualifying derivatives during nine months ended September 30, 2012 and 2011, respectively.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 12, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans", effective January 1, 2012, Eastman elected to change its method of accounting for actuarial gains and losses for its pension and OPEB plans. This accounting change has been applied retrospectively to all periods presented.
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 July 2012, as part of its acquisition of Solutia, the Company assumed Solutia's U.S. and non-U.S. defined benefit pension plans. Prior to the acquisition, the U.S. plans had been closed to new participants and were no longer accruing additional benefits. For more information on the Solutia acquisition, see Note 2, "Acquisitions and Investments in Joint Ventures".
In August 2011, as part of 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 on the Sterling acquisition, see Note 2, "Acquisitions and Investments in Joint Ventures".
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.
In July 2012, as part of its acquisition of Solutia, the Company assumed Solutia's postretirement welfare plans. For more information on the Solutia acquisition, see Note 2, "Acquisitions and Investments in Joint Ventures".
In August 2011, as part of its acquisition of Sterling, the Company assumed Sterling's postretirement welfare plan. For more information on the Sterling acquisition, see Note 2, "Acquisitions and Investments in Joint Ventures".
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| Pension Plans | | Postretirement Welfare Plans | | Pension Plans | | Postretirement Welfare Plans |
(Dollars in millions) | 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 |
Service cost | $ | 12 |
| | $ | 11 |
| | $ | 2 |
| | $ | 3 |
| | $ | 35 |
| | $ | 34 |
| | $ | 7 |
| | $ | 7 |
|
Interest cost | 31 |
| | 22 |
| | 12 |
| | 11 |
| | 74 |
| | 64 |
| | 33 |
| | 33 |
|
Expected return on assets | (38 | ) | | (25 | ) | | (2 | ) | | — |
| | (88 | ) | | (74 | ) | | (3 | ) | | (2 | ) |
Curtailment gain(1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) |
Amortization of: | | | | | | | | | | | | | | | |
Prior service credit | (1 | ) | | (3 | ) | | (4 | ) | | (6 | ) | | (3 | ) | | (10 | ) | | (14 | ) | | (16 | ) |
Mark-to-market (gain) loss(2) | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | (15 | ) |
Net periodic benefit cost | $ | 4 |
| | $ | 8 |
| | $ | 8 |
| | $ | 8 |
| | $ | 18 |
| | $ | 17 |
| | $ | 23 |
| | $ | — |
|
(1) Gain for the Performance Polymers segment that was sold January 31, 2011 and is included in discontinued operations. For more information see Note 3, "Discontinued Operations".
(2) Mark-to-market gain in first nine months 2011 due to the interim remeasurement of the OPEB plan obligation, triggered by the exit of employees associated with the sale of the PET business.
Third quarter and first nine months 2012 reflect the impact on the U.S. and non-U.S. defined benefit pension plans and the other postretirement welfare plans of the Solutia and Sterling acquisitions.
The Company contributed $87 million and $102 million to its U.S. defined benefit pension plans in first nine months 2012 and 2011, respectively.
Purchase Obligations and Lease Commitments
The Company had various purchase obligations at September 30, 2012 totaling approximately $3.0 billion over a period of approximately 15 years for materials, supplies and energy incident to the ordinary conduct of business. In second quarter 2012, the Company entered into an agreement with a third party to purchase propylene from a planned propane dehydrogenation plant beginning in 2015. The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling $182 million over a period of several years. Of the total lease commitments, approximately 5 percent relate to machinery and equipment, including computer and communications equipment and production equipment; approximately 55 percent relate to real property, including office space, storage facilities, and land; and approximately 40 percent relate to railcars.
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 as well as other guarantees. Disclosures about each group of similar guarantees are provided below.
Residual Value 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 September 30, 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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other Guarantees
Guarantees and claims also arise during the ordinary course of business from relationships with joint venture partners, suppliers, customers, and other parties when the Company undertakes an obligation to guarantee the performance of others, if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating primarily to intellectual property, environmental matters, and other indemnifications and have arisen through the normal course of business. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims, if they were to occur. These other guarantees have terms of between 1 and 15 years with maximum potential future payments of approximately $80 million in the aggregate, with none of these guarantees individually significant to the Company's operating results, financial position, or liquidity. The Company's current expectation is that future payment or performance related to non-performance under other guarantees is considered 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 Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-K. The Company's total reserve for environmental contingencies was $399 million and $39 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, this reserve included $7 million and $6 million, respectively, 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. Amounts at September 30, 2012 include environmental contingencies assumed in the acquisition of Solutia on July 2, 2012. See Note 2, "Acquisitions and Investments in Joint Ventures".
Estimated future environmental expenditures for remediation costs ranged from the minimum or best estimate of $370 million to the maximum of $625 million and from the minimum or best estimate of $11 million to the maximum of $29 million at September 30, 2012 and December 31, 2011, respectively. The maximum estimated future costs are considered to be reasonably possible and are inclusive of the amounts accrued at both September 30, 2012 and December 31, 2011. Although the resolution of uncertainties related to these environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized, 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 or cash flows.
For facilities that have asset retirement obligations, the best estimate accrued to date over the facilities' estimated useful lives for these asset retirement obligation costs were $29 million and $28 million at September 30, 2012 and December 31, 2011, respectively.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Reserves for environmental remediation that management believes to be probable and estimable are recorded appropriately as current and long-term liabilities in the Consolidated Statements of Financial Position. These reserves include liabilities expected to be paid out within thirty years. The amounts charged to pre-tax earnings for environmental remediation and related charges are included in cost of goods sold and other income (charges), net and are summarized below:
|
| | | |
(Dollars in millions) | |
Balance at December 31, 2011 | $ | 11 |
|
Assumed remediation reserve from acquisition of Solutia | 366 |
|
Net charges taken | 1 |
|
Cash reductions | (8 | ) |
Balance at September 30, 2012 | $ | 370 |
|
|
| | | | | | | |
(Dollars in millions) | September 30, 2012 | | December 31, 2011 |
Environmental remediation liabilities, current | $ | 35 |
| | $ | — |
|
Environmental remediation liabilities, long-term | 364 |
| | 39 |
|
Total | $ | 399 |
| | $ | 39 |
|
On July 2, 2012, as described in Note 2, "Acquisitions and Investments in Joint Ventures", the Company completed the acquisition of Solutia, resulting in a $366 million increase to the Company's reserve for remediation costs and $1 million in additional asset retirement obligation costs. Included in the additional remediation reserve are costs associated with damages to natural resources. The additional environmental remediation reserve includes costs of $149 million and $107 million related to the Anniston, Alabama and the Sauget, Illinois plant sites, respectively.
Additionally, costs of certain remediation projects included in the assumed environmental reserve are subject to a cost-sharing arrangement with Monsanto Company ("Monsanto") under the provisions of the Amended and Restated Settlement Agreement effective February 28, 2008 (the "Effective Date") into which Solutia entered with Monsanto upon its emergence from bankruptcy ("Monsanto Settlement Agreement"). Under the provisions of the Monsanto Settlement Agreement, the Company shares responsibility with Monsanto for remediation at certain locations outside of the boundaries of plant sites in Anniston, Alabama and Sauget, Illinois (the "Shared Sites"). The Company is responsible for the funding of environmental liabilities at the Shared Sites up to a total of $325 million from the Effective Date. If remediation costs for the Shared Sites exceed this amount, such costs will thereafter be shared equally between the Company and Monsanto. Including payments by Solutia prior to its acquisition by Eastman, $43 million had been funded for costs at the Shared Sites as of September 30, 2012. As of September 30, 2012, an additional $231 million has been accrued for estimated future remediation costs at the Shared Sites, over a period of thirty years.
During third quarter 2011, as described in Note 2, "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
| |
12. | ACCOUNTING METHODOLOGY CHANGE FOR PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS |
As previously reported on March 7, 2012, Eastman 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 management believes that this change in accounting improves 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 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.
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 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 are under the changed accounting method 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 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 9, "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 September 30, 2012 |
(Dollars in millions, except per share amounts, unaudited) | Previous Accounting Method | | Effect of Accounting Change | | As Reported |
Cost of sales | $ | 1,749 |
| | $ | (15 | ) | | $ | 1,734 |
|
Gross profit | 510 |
| | 15 |
| | 525 |
|
Selling, general and administrative expenses | 175 |
| | (2 | ) | | 173 |
|
Research and development expenses | 53 |
| | (1 | ) | | 52 |
|
Operating earnings | 245 |
| | 18 |
| | 263 |
|
Other charges (income), net | (3 | ) | | — |
| | (3 | ) |
Earnings from continuing operations before income taxes | 200 |
| | 18 |
| | 218 |
|
Provision for income taxes from continuing operations | 57 |
| | 7 |
| | 64 |
|
Earnings from continuing operations | 143 |
| | 11 |
| | 154 |
|
Net earnings | 143 |
| | 11 |
| | 154 |
|
Basic earnings per share | | | | | |
Earnings from continuing operations | $ | 0.93 |
| | $ | 0.08 |
| | $ | 1.01 |
|
Earnings from discontinued operations | — |
| | — |
| | — |
|
Basic earnings per share | 0.93 |
| | 0.08 |
| | 1.01 |
|
Diluted earnings per share | | | | | |
Earnings from continuing operations | $ | 0.91 |
| | $ | 0.08 |
| | $ | 0.99 |
|
Diluted earnings per share | 0.91 |
| | 0.08 |
| | 0.99 |
|
Comprehensive Income | | | | | |
Net earnings | $ | 143 |
| | $ | 11 |
| | $ | 154 |
|
Amortization of unrecognized prior service credits included in net periodic costs (1) | 9 |
| | (13 | ) | | (4 | ) |
Total other comprehensive income (loss), net of tax | 32 |
| | (13 | ) | | 19 |
|
Comprehensive income | 175 |
| | (2 | ) | | 173 |
|
Retained Earnings | | | | | |
Retained earnings at beginning of period | $ | 3,677 |
| | $ | (653 | ) | | $ | 3,024 |
|
Net earnings | 143 |
| | 11 |
| | 154 |
|
Retained earnings at end of period | 3,781 |
| | (642 | ) | | 3,139 |
|
| |
(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 September 30, 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 | $ | 1,392 |
| | $ | (13 | ) | | $ | 1,379 |
|
Gross profit | 420 |
| | 13 |
| | 433 |
|
Selling, general and administrative expenses | 116 |
| | (2 | ) | | 114 |
|
Research and development expenses | 41 |
| | — |
| | 41 |
|
Operating earnings | 256 |
| | 15 |
| | 271 |
|
Other charges (income), net | (2 | ) | | (1 | ) | | (3 | ) |
Earnings from continuing operations before income taxes | 238 |
| | 16 |
| | 254 |
|
Provision for income taxes from continuing operations | 73 |
| | 7 |
| | 80 |
|
Earnings from continuing operations | 165 |
| | 9 |
| | 174 |
|
Net earnings | 165 |
| | 9 |
| | 174 |
|
Basic earnings per share | |
| | |
| | |
|
Earnings from continuing operations | $ | 1.19 |
| | $ | 0.06 |
| | $ | 1.25 |
|
Diluted earnings per share | |
| | |
| | |
|
Earnings from continuing operations | $ | 1.16 |
| | $ | 0.06 |
| | $ | 1.22 |
|
Comprehensive Income | |
| | |
| | |
|
Net earnings | $ | 165 |
| | $ | 9 |
| | $ | 174 |
|
Amortization of unrecognized prior service credits included in net periodic costs (1) | 7 |
| | (12 | ) | | (5 | ) |
Total other comprehensive income (loss), net of tax | (24 | ) | | (12 | ) | | (36 | ) |
Comprehensive income | 141 |
| | (3 | ) | | 138 |
|
Retained Earnings | |
| | |
| | |
|
Retained earnings at beginning of period | $ | 3,243 |
| | $ | (597 | ) | | $ | 2,646 |
|
Net earnings | 165 |
| | 9 |
| | 174 |
|
Retained earnings at end of period | 3,372 |
| | (588 | ) | | 2,784 |
|
| |
(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 |
| | | | | | | | | | | |
| Nine Months Ended September 30, 2012 |
(Dollars in millions, except per share amounts, unaudited) | Previous Accounting Method | | Effect of Accounting Change | | As Reported |
Cost of sales | $ | 4,541 |
| | $ | (45 | ) | | $ | 4,496 |
|
Gross profit | 1,392 |
| | 45 |
| | 1,437 |
|
Selling, general and administrative expenses | 429 |
| | (9 | ) | | 420 |
|
Research and development expenses | 138 |
| | (2 | ) | | 136 |
|
Operating earnings | 788 |
| | 56 |
| | 844 |
|
Other charges (income), net | 18 |
| | 1 |
| | 19 |
|
Earnings from continuing operations before income taxes | 675 |
| | 55 |
| | 730 |
|
Provision for income taxes from continuing operations | 219 |
| | 21 |
| | 240 |
|
Earnings from continuing operations | 456 |
| | 34 |
| | 490 |
|
Net earnings | 457 |
| | 34 |
| | 491 |
|
Basic earnings per share | | | | | |
Earnings from continuing operations | $ | 3.19 |
| | $ | 0.24 |
| | $ | 3.43 |
|
Basic earnings per share | 3.20 |
| | 0.24 |
| | 3.44 |
|
Diluted earnings per share | | | | | |
Earnings from continuing operations | $ | 3.12 |
| | $ | 0.23 |
| | $ | 3.35 |
|
Diluted earnings per share | 3.12 |
| | 0.23 |
| | 3.35 |
|
Comprehensive Income | | | | | |
Net earnings | $ | 457 |
| | $ | 34 |
| | $ | 491 |
|
Amortization of unrecognized prior service credits included in net periodic costs (1) | 27 |
| | (39 | ) | | (12 | ) |
Total other comprehensive income (loss), net of tax | 10 |
| | (39 | ) | | (29 | ) |
Comprehensive income | 467 |
| | (5 | ) | | 462 |
|
Retained Earnings | | | | | |
Retained earnings at beginning of period | $ | 3,436 |
| | $ | (676 | ) | | $ | 2,760 |
|
Net earnings | 457 |
| | 34 |
| | 491 |
|
Retained earnings at end of period | 3,781 |
| | (642 | ) | | 3,139 |
|
| |
(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 |
| | | | | | | | | | | |
| Nine Months Ended September 30, 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 | $ | 4,139 |
| | $ | (49 | ) | | $ | 4,090 |
|
Gross profit | 1,316 |
| | 49 |
| | 1,365 |
|
Selling, general and administrative expenses | 350 |
| | (10 | ) | | 340 |
|
Research and development expenses | 116 |
| | (1 | ) | | 115 |
|
Operating earnings | 858 |
| | 60 |
| | 918 |
|
Other charges (income), net | (14 | ) | | — |
| | (14 | ) |
Earnings from continuing operations before income taxes | 815 |
| | 60 |
| | 875 |
|
Provision for income taxes from continuing operations | 258 |
| | 23 |
| | 281 |
|
Earnings from continuing operations | 557 |
| | 37 |
| | 594 |
|
Earnings from discontinued operations, net of tax | 8 |
| | 1 |
| | 9 |
|
Net earnings | 596 |
| | 38 |
| | 634 |
|
Basic earnings per share | |
| | |
| | |
|
Earnings from continuing operations | $ | 3.96 |
| | $ | 0.26 |
| | $ | 4.22 |
|
Earnings from discontinued operations | 0.28 |
| | 0.01 |
| | 0.29 |
|
Basic earnings per share | 4.24 |
| | 0.27 |
| | 4.51 |
|
Diluted earnings per share | |
| | |
| | |
|
Earnings from continuing operations | $ | 3.86 |
| | $ | 0.26 |
| | $ | 4.12 |
|
Earnings from discontinued operations | 0.27 |
| | 0.01 |
| | 0.28 |
|
Diluted earnings per share | 4.13 |
| | 0.27 |
| | 4.40 |
|
Comprehensive Income | |
| | |
| | |
|
Net earnings | $ | 596 |
| | $ | 38 |
| | $ | 634 |
|
Amortization of unrecognized prior service credits included in net periodic costs (1) | 13 |
| | (31 | ) | | (18 | ) |
Total other comprehensive income (loss), net of tax | (15 | ) | | (31 | ) | | (46 | ) |
Comprehensive income | 581 |
| | 7 |
| | 588 |
|
Retained Earnings | |
| | |
| | |
|
Retained earnings at beginning of period | $ | 2,879 |
| | $ | (626 | ) | | $ | 2,253 |
|
Net earnings | 596 |
| | 38 |
| | 634 |
|
Retained earnings at end of period | 3,372 |
| | (588 | ) | | 2,784 |
|
| |
(1) | Updated to reflect first quarter 2012 presentation of other comprehensive income. |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial Position |
| | | | | | | | | | | |
| September 30, 2012 |
(Dollars in millions, unaudited) | Previous Accounting Method | | Effect of Accounting Change | | As Reported |
Other noncurrent assets | $ | 608 |
| | $ | 2 |
| | $ | 610 |
|
Post-employment obligations | 1,637 |
| | 7 |
| | 1,644 |
|
Retained earnings | 3,781 |
| | (642 | ) | | 3,139 |
|
Accumulated other comprehensive income (loss) | (528 | ) | | 637 |
| | 109 |
|
|
| | | | | | | | | | | |
| 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 Condensed Consolidated Statements of Cash Flows |
| | | | | | | | | | | |
| Nine Months Ended September 30, 2012 |
(Dollars in millions) | Previous Accounting Method | | Effect of Accounting Change | | As Reported |
Net earnings | $ | 457 |
| | $ | 34 |
| | $ | 491 |
|
Provision for deferred income taxes | 42 |
| | 21 |
| | 63 |
|
Pension and other postretirement contributions (in excess of) less than expenses | (53 | ) | | (32 | ) | | (85 | ) |
Other items, net | 6 |
| | (23 | ) | | (17 | ) |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2011 |
(Dollars in millions) | As Previously Reported (Before Accounting Change) | | Effect of Accounting Change | | As Adjusted (After Accounting Change) |
Net earnings | $ | 596 |
| | $ | 38 |
| | $ | 634 |
|
Provision (benefit) for deferred income taxes | (18 | ) | | 23 |
| | 5 |
|
Pension and other postretirement contributions (in excess of) less than expenses (1) | (75 | ) | | (44 | ) | | (119 | ) |
Other items, net (1) | (12 | ) | | (17 | ) | | (29 | ) |
| |
(1) | Updated to reflect first quarter 2012 presentation of cash flows from operating activities. |
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. 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 nine 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 |
| | $ | 900 |
| | $ | 2,760 |
| | $ | 138 |
| | $ | (1,930 | ) | | $ | 1,870 |
|
Net Earnings | — |
| | — |
| | 491 |
| | — |
| | — |
| | 491 |
|
Cash Dividends Declared (2) | — |
| | — |
| | (112 | ) | | — |
| | — |
| | (112 | ) |
Other Comprehensive Income | — |
| | — |
| | — |
| | (29 | ) | | — |
| | (29 | ) |
Share-Based Compensation Expense (3) | — |
| | 23 |
| | — |
| | — |
| | — |
| | 23 |
|
Stock Option Exercises | — |
| | 25 |
| | — |
| | — |
| | — |
| | 25 |
|
Shares Issued for Business Combination | — |
| | 730 |
| | — |
| | — |
| | — |
| | 730 |
|
Other (4) | — |
| | 11 |
| | — |
| | — |
| | 1 |
| | 12 |
|
Stock Repurchases | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance at September 30, 2012 | $ | 2 |
| | $ | 1,689 |
| | $ | 3,139 |
| | $ | 109 |
| | $ | (1,929 | ) | | $ | 3,010 |
|
| |
(1) | Retained Earnings and Accumulated Other Comprehensive Income have been adjusted for the change in accounting methodology for pension and OPEB plans. For additional information, see Note 12, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans". |
| |
(2) | Includes cash dividends declared, but unpaid. |
| |
(3) | Includes the fair value of share-based awards recognized for share-based compensation. |
| |
(4) | Primarily 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. |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 | ) | |