EMN 2014.06.30 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|
| |
(Mark One) | |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2014 |
| 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)
|
| |
Delaware | 62-1539359 |
(State or other jurisdiction of | (I.R.S. employer |
incorporation or organization) | identification no.) |
| |
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.
|
| | | | |
Large accelerated filer | [X] | | Accelerated filer | [ ] |
Non-accelerated filer | [ ] | (Do not check if a smaller reporting company) | 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.
|
| |
Class | Number of Shares Outstanding at June 30, 2014 |
Common Stock, par value $0.01 per share | 149,131,297 |
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PAGE 1 OF 57 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 56
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
(Dollars in millions, except per share amounts) | 2014 | | 2013 | | 2014 | | 2013 |
Sales | $ | 2,460 |
| | $ | 2,440 |
| | $ | 4,765 |
| | $ | 4,747 |
|
Cost of sales | 1,803 |
| | 1,763 |
| | 3,513 |
| | 3,454 |
|
Gross profit | 657 |
| | 677 |
| | 1,252 |
| | 1,293 |
|
Selling, general and administrative expenses | 172 |
| | 180 |
| | 340 |
| | 351 |
|
Research and development expenses | 56 |
| | 51 |
| | 109 |
| | 100 |
|
Asset impairments and restructuring charges (gains), net | (7 | ) | | 18 |
| | 6 |
| | 21 |
|
Operating earnings | 436 |
| | 428 |
| | 797 |
| | 821 |
|
Net interest expense | 45 |
| | 46 |
| | 87 |
| | 93 |
|
Other charges (income), net | (8 | ) | | — |
| | (11 | ) | | 1 |
|
Earnings from continuing operations before income taxes | 399 |
| | 382 |
| | 721 |
| | 727 |
|
Provision for income taxes from continuing operations | 107 |
| | 116 |
| | 195 |
| | 213 |
|
Earnings from continuing operations | 292 |
| | 266 |
| | 526 |
| | 514 |
|
Earnings from discontinued operations, net of tax | 2 |
| | — |
| | 2 |
| | — |
|
Net earnings | $ | 294 |
| | $ | 266 |
| | $ | 528 |
| | $ | 514 |
|
Less: Net earnings attributable to noncontrolling interest | 2 |
| | 2 |
| | 3 |
| | 3 |
|
Net earnings attributable to Eastman | $ | 292 |
| | $ | 264 |
| | $ | 525 |
| | $ | 511 |
|
Amounts attributable to Eastman stockholders | | | | | | | |
Earnings from continuing operations, net of tax | $ | 290 |
| | $ | 264 |
| | $ | 523 |
| | $ | 511 |
|
Earnings from discontinued operations, net of tax | 2 |
| | — |
| | 2 |
| | — |
|
Net earnings attributable to Eastman stockholders | $ | 292 |
| | $ | 264 |
| | $ | 525 |
| | $ | 511 |
|
Basic earnings per share attributable to Eastman | | | | | | | |
Earnings from continuing operations | $ | 1.94 |
| | $ | 1.71 |
| | $ | 3.47 |
| | $ | 3.31 |
|
Earnings from discontinued operations | 0.02 |
| | — |
| | 0.02 |
| | — |
|
Basic earnings per share attributable to Eastman | $ | 1.96 |
| | $ | 1.71 |
| | $ | 3.49 |
| | $ | 3.31 |
|
Diluted earnings per share attributable to Eastman | |
| | |
| | |
| | |
|
Earnings from continuing operations | $ | 1.92 |
| | $ | 1.69 |
| | $ | 3.43 |
| | $ | 3.26 |
|
Earnings from discontinued operations | 0.01 |
| | — |
| | 0.02 |
| | — |
|
Diluted earnings per share attributable to Eastman | $ | 1.93 |
| | $ | 1.69 |
| | $ | 3.45 |
| | $ | 3.26 |
|
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS (continued)
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
(Dollars in millions, except per share amounts) | 2014 | | 2013 | | 2014 | | 2013 |
Comprehensive Income | |
| | |
| | |
| | |
|
Net earnings including noncontrolling interest | $ | 294 |
| | $ | 266 |
| | $ | 528 |
| | $ | 514 |
|
Other comprehensive income (loss), net of tax | |
| | |
| | |
| | |
|
Change in cumulative translation adjustment | 9 |
| | 15 |
| | 13 |
| | (35 | ) |
Defined benefit pension and other postretirement benefit plans: | |
| | |
| | |
| | |
|
Amortization of unrecognized prior service credits included in net periodic costs | (4 | ) | | (3 | ) | | (8 | ) | | (7 | ) |
Derivatives and hedging: | |
| | |
| | |
| | |
|
Unrealized (loss) gain during period | 6 |
| | (10 | ) | | 6 |
| | 4 |
|
Reclassification adjustment for (losses) gains included in net income | (6 | ) | | 3 |
| | (9 | ) | | 5 |
|
Total other comprehensive income (loss), net of tax | 5 |
| | 5 |
| | 2 |
| | (33 | ) |
Comprehensive income including noncontrolling interest | 299 |
| | 271 |
| | 530 |
| | 481 |
|
Comprehensive income attributable to noncontrolling interest | 2 |
| | 2 |
| | 3 |
| | 3 |
|
Comprehensive income attributable to Eastman | $ | 297 |
| | $ | 269 |
| | $ | 527 |
| | $ | 478 |
|
Retained Earnings | |
| | |
| | |
| | |
|
Retained earnings at beginning of period | $ | 4,191 |
| | $ | 3,239 |
| | $ | 4,012 |
| | $ | 3,038 |
|
Net earnings attributable to Eastman | 292 |
| | 264 |
| | 525 |
| | 511 |
|
Cash dividends declared | (52 | ) | | (47 | ) | | (106 | ) | | (93 | ) |
Retained earnings at end of period | $ | 4,431 |
| | $ | 3,456 |
| | $ | 4,431 |
| | $ | 3,456 |
|
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
| | | | | | | |
| June 30, | | December 31, |
(Dollars in millions, except per share amounts) | 2014 | | 2013 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 175 |
| | $ | 237 |
|
Trade receivables, net | 1,071 |
| | 880 |
|
Miscellaneous receivables | 155 |
| | 208 |
|
Inventories | 1,354 |
| | 1,264 |
|
Other current assets | 231 |
| | 251 |
|
Total current assets | 2,986 |
| | 2,840 |
|
Properties | |
| | |
|
Properties and equipment at cost | 10,147 |
| | 9,958 |
|
Less: Accumulated depreciation | 5,804 |
| | 5,668 |
|
Net properties | 4,343 |
| | 4,290 |
|
Goodwill | 2,701 |
| | 2,637 |
|
Intangible assets, net of accumulated amortization | 1,881 |
| | 1,761 |
|
Other noncurrent assets | 327 |
| | 317 |
|
Total assets | $ | 12,238 |
| | $ | 11,845 |
|
Liabilities and Stockholders' Equity | |
| | |
|
Current liabilities | |
| | |
|
Payables and other current liabilities | $ | 1,274 |
| | $ | 1,470 |
|
Total current liabilities | 1,274 |
| | 1,470 |
|
Long-term borrowings | 4,773 |
| | 4,254 |
|
Deferred income tax liabilities | 572 |
| | 496 |
|
Post-employment obligations | 1,272 |
| | 1,297 |
|
Other long-term liabilities | 388 |
| | 453 |
|
Total liabilities | 8,279 |
| | 7,970 |
|
Stockholders' equity | |
| | |
|
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 216,121,916 and 215,131,237 for 2014 and 2013, respectively) | 2 |
| | 2 |
|
Additional paid-in capital | 1,803 |
| | 1,778 |
|
Retained earnings | 4,431 |
| | 4,012 |
|
Accumulated other comprehensive income | 173 |
| | 171 |
|
| 6,409 |
| | 5,963 |
|
Less: Treasury stock at cost (67,041,417 shares for 2014 and 62,714,861 shares for 2013) | 2,527 |
| | 2,167 |
|
Total Eastman stockholders' equity | 3,882 |
| | 3,796 |
|
Noncontrolling interest | 77 |
| | 79 |
|
Total equity | $ | 3,959 |
| | $ | 3,875 |
|
Total liabilities and stockholders' equity | $ | 12,238 |
| | $ | 11,845 |
|
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| First Six Months |
(Dollars in millions) | 2014 | | 2013 |
Cash flows from operating activities | | | |
Net earnings | $ | 528 |
| | $ | 514 |
|
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation and amortization | 217 |
| | 218 |
|
Asset impairment charges | 8 |
| | 6 |
|
Gain on sale of assets | (5 | ) | | — |
|
Provision for deferred income taxes | 61 |
| | 46 |
|
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | |
| | |
|
(Increase) decrease in trade receivables | (191 | ) | | (214 | ) |
(Increase) decrease in inventories | (54 | ) | | (35 | ) |
Increase (decrease) in trade payables | (44 | ) | | (32 | ) |
Pension and other postretirement contributions (in excess of) less than expenses | (45 | ) | | (42 | ) |
Variable compensation (in excess of) less than expenses | (53 | ) | | (9 | ) |
Other items, net | (33 | ) | | (85 | ) |
Net cash provided by operating activities | 389 |
| | 367 |
|
Cash flows from investing activities | |
| | |
|
Additions to properties and equipment | (254 | ) | | (187 | ) |
Proceeds from sale of assets | 12 |
| | 5 |
|
Acquisitions, net of cash acquired | (283 | ) | | — |
|
Additions to capitalized software | (1 | ) | | (1 | ) |
Other items, net | 2 |
| | (8 | ) |
Net cash used in investing activities | (524 | ) | | (191 | ) |
Cash flows from financing activities | |
| | |
|
Net increase in commercial paper borrowings | 26 |
| | 300 |
|
Proceeds from borrowings | 615 |
| | 150 |
|
Repayment of borrowings | (125 | ) | | (555 | ) |
Dividends paid to stockholders | (106 | ) | | (47 | ) |
Treasury stock purchases | (360 | ) | | (78 | ) |
Dividends paid to noncontrolling interest | (9 | ) | | (7 | ) |
Proceeds from stock option exercises and other items, net | 30 |
| | 47 |
|
Net cash provided by (used in) financing activities | 71 |
| | (190 | ) |
Effect of exchange rate changes on cash and cash equivalents | 2 |
| | (1 | ) |
Net change in cash and cash equivalents | (62 | ) | | (15 | ) |
Cash and cash equivalents at beginning of period | 237 |
| | 249 |
|
Cash and cash equivalents at end of period | $ | 175 |
| | $ | 234 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company (the "Company" or "Eastman") in accordance and consistent with the accounting policies stated in the Company's 2013 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K. The December 31, 2013 financial position data included herein was derived from the audited consolidated financial statements included in the 2013 Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP"). The unaudited consolidated financial statements are prepared in conformity with 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.
In second quarter 2014, the Company recognized $2 million, net of tax, in earnings from discontinued operations from final settlement of commercial litigation related to the previously discontinued polyethylene terephthalate ("PET") business.
BP plc's Global Aviation Turbine Engine Oil Business
On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business ("aviation turbine oil business") for a total cash purchase price of $283 million, prior to post-closing adjustments. The acquisition was accounted for as a business combination and is reported in the Specialty Fluids & Intermediates ("SFI") segment. Added to the Skydrol® aviation hydraulic fluids, the acquired aviation turbine oil business enables Eastman to better supply the global aviation industry. The initial accounting is not complete for all acquired assets and liabilities. The table below shows the preliminary fair value purchase price allocation for this acquisition:
|
| | | |
(Dollars in millions) | As of June 2, 2014 |
Current assets | $ | 42 |
|
Machinery and equipment | 11 |
|
Goodwill | 68 |
|
Intangible assets | 162 |
|
Total purchase price | $ | 283 |
|
Current assets consist primarily of inventory acquired. Machinery and equipment acquired included manufacturing operations in Linden, New Jersey and technology resources in Naperville, Illinois. Management valued machinery and equipment using the cost approach supported by published industry sources.
In connection with the purchase transaction, 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. All goodwill recognized is expected to be deductible for tax purposes.
Intangible assets acquired included brands that are business-to-business in nature. Also acquired were customer relationships in the aviation industry. 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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | |
Intangible Assets acquired on June 2, 2014 | | | |
(Dollars in millions) | Fair Value | | Weighted-Average Amortization Period (Years) |
Amortizable intangible assets | | | |
Customer relationships | $ | 66 |
| | 15 |
Indefinite-lived intangible assets | | | |
Brands | 96 |
| | |
Total | $ | 162 |
| | |
In second quarter 2014, the Company recognized $3 million and $1 million in transaction and integration costs, respectively, related to the acquisition. Transaction and integration costs 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. As required by purchase accounting, the acquired inventories were marked to fair value. Approximately one quarter of these inventories were sold in second quarter 2014 resulting in a $2 million increase in cost of sales.
Beginning in June, the Company's consolidated results of operations included the results of the acquired aviation turbine oil business. Based on applicable accounting and reporting guidance, the acquisition is not material to the Company's consolidated financial statements; therefore, pro forma financial information has not been presented.
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| | | | | | | |
| June 30, | | December 31, |
(Dollars in millions) | 2014 | | 2013 |
At FIFO or average cost (approximates current cost) | | | |
Finished goods | $ | 1,046 |
| | $ | 976 |
|
Work in process | 301 |
| | 300 |
|
Raw materials and supplies | 509 |
| | 494 |
|
Total inventories | 1,856 |
| | 1,770 |
|
LIFO Reserve | (502 | ) | | (506 | ) |
Total inventories | $ | 1,354 |
| | $ | 1,264 |
|
Inventories valued on the LIFO method were approximately 60 percent of total inventories as of both June 30, 2014 and December 31, 2013.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
4. | PAYABLES AND OTHER CURRENT LIABILITIES |
|
| | | | | | | |
| June 30, | | December 31, |
(Dollars in millions) | 2014 | | 2013 |
Trade creditors | $ | 704 |
| | $ | 762 |
|
Accrued payrolls, vacation, and variable-incentive compensation | 123 |
| | 205 |
|
Accrued taxes | 68 |
| | 80 |
|
Post-employment obligations | 56 |
| | 59 |
|
Interest payable | 49 |
| | 46 |
|
Environmental contingent liabilities, current portion | 40 |
| | 40 |
|
Other | 234 |
| | 278 |
|
Total payables and other current liabilities | $ | 1,274 |
| | $ | 1,470 |
|
Included in "Other" above are certain accruals for payroll deductions and employee benefits, dividends payable, the current portion of hedging liabilities, divestitures, and other payables and accruals.
| |
5. | PROVISION FOR INCOME TAXES |
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
(Dollars in millions) | 2014 | | 2013 | | 2014 | | 2013 |
Provision for income taxes from continuing operations | $ | 107 |
| | $ | 116 |
| | $ | 195 |
| | $ | 213 |
|
Effective tax rate | 27 | % | | 30 | % | | 27 | % | | 29 | % |
The second quarter and first six months 2014 effective tax rate reflects benefit from the integration of Eastman and Solutia business operations and legal entity structures. The first six months 2013 effective tax rate was impacted by enactment of the American Taxpayer Relief Act of 2012 in January 2013, which resulted in a $10 million benefit primarily related to a research and development ("R&D") tax credit.
|
| | | | | | | |
| June 30, | | December 31, |
(Dollars in millions) | 2014 | | 2013 |
Borrowings consisted of: | | | |
3% notes due 2015 | $ | 250 |
| | $ | 250 |
|
2.4% notes due 2017 | 998 |
| | 998 |
|
6.30% notes due 2018 | 170 |
| | 171 |
|
5.5% notes due 2019 | 250 |
| | 250 |
|
4.5% notes due 2021 | 250 |
| | 250 |
|
3.6% notes due 2022 | 893 |
| | 894 |
|
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 | 497 |
| | 497 |
|
4.65% notes due 2044 | 495 |
| | — |
|
Credit facilities and commercial paper borrowings | 451 |
| | 425 |
|
Total borrowings | 4,773 |
| | 4,254 |
|
Borrowings due within one year | — |
| | — |
|
Long-term borrowings | $ | 4,773 |
| | $ | 4,254 |
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On May 15, 2014, the Company issued 4.65% notes due 2044 in the principal amount of $500 million. Proceeds from the sale of the notes, net of approximately $10 million in transaction costs, were $490 million.
Credit Facility and Commercial Paper Borrowings
The Company has access to borrowings under a $1 billion revolving credit agreement (the "Credit Facility") expiring October 2018. 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 June 30, 2014 and December 31, 2013, 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 June 30, 2014 the Company's commercial paper borrowings were $451 million with a weighted average interest rate of 0.29 percent. At December 31, 2013 the Company's commercial paper borrowings were $425 million with a weighted average interest rate of 0.35 percent.
The Company also has a $250 million line of credit under its accounts receivable securitization agreement (the "A/R Facility"), expiring April 2016. 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 June 30, 2014 and December 31, 2013 the Company had no outstanding borrowings under the A/R Facility. During first quarter 2014 $125 million of the available amount under the A/R Facility was borrowed and then repaid during second quarter 2014.
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. Total available borrowings under the Credit Facility and A/R Facility were $799 million and $825 million as of June 30, 2014 and December 31, 2013, respectively. The Company would not violate applicable covenants for these periods if the total available amounts of the facilities had been borrowed.
Fair Value of Borrowings
The Company has classified its long-term borrowings at June 30, 2014 and December 31, 2013 under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K. The fair value for fixed-rate borrowings is based on current market prices and is classified as Level 1. The fair value for the Company's floating-rate borrowings, which relate to the A/R Facility and commercial paper, equals the carrying value and is classified as Level 2.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at June 30, 2014 |
(Dollars in millions) | | Recorded Amount June 30, 2014 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Long-term borrowings | | $ | 4,773 |
| | $ | 5,097 |
| | $ | 4,646 |
| | $ | 451 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2013 |
(Dollars in millions) | | Recorded Amount December 31, 2013 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Long-term borrowings | | $ | 4,254 |
| | $ | 4,366 |
| | $ | 3,941 |
| | $ | 425 |
| | $ | — |
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Hedging Programs
The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, 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 10, "Derivatives", to the consolidated financial statements in Part II, Item 8 of the Company's 2013 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. In second quarter 2014, the Company entered into interest rate swaps to hedge the interest rate risk on the 3.6% notes due 2022. As of June 30, 2014, the total notional amount of the Company's interest rate swaps was $400 million. As of December 31, 2013, 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 June 30, 2014, the total notional amounts of the Company's foreign exchange forward and option contracts were €954 million (approximately $1,320 million equivalent) and ¥6.6 billion (approximately $65 million equivalent). The total notional volume hedged for feedstock was 15 million barrels and for energy was 4 million mmbtu ("million british thermal units"). The Company had no outstanding hedges for energy or interest rate swaps for the future issuance of debt ("forward starting interest rate swaps") at June 30, 2014.
As of December 31, 2013, the total notional amounts of the Company's foreign exchange forward and option contracts were €954 million (approximately $1,320 million equivalent) and ¥8.3 billion (approximately $80 million equivalent). The total notional volume hedged for feedstock was approximately 8 million barrels. The Company had no outstanding hedges for energy or forward starting interest rate swaps.
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 2013 Annual Report on Form 10-K.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following chart shows the gross financial assets and liabilities valued on a recurring basis.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | Fair Value Measurements at June 30, 2014 |
Description | | June 30, 2014 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative Assets | | $ | 45 |
| | $ | — |
| | $ | 45 |
| | $ | — |
|
Derivative Liabilities | | (36 | ) | | — |
| | (36 | ) | | — |
|
| | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | Fair Value Measurements at December 31, 2013 |
Description | | December 31, 2013 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative Assets | | $ | 58 |
| | $ | — |
| | $ | 58 |
| | $ | — |
|
Derivative Liabilities | | (46 | ) | | — |
| | (46 | ) | | — |
|
| | $ | 12 |
| | $ | — |
| | $ | 12 |
| | $ | — |
|
The Company's derivative assets are currently 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.
From time to time, 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. Level 3 hedges typically will mature within one year or less. The Company determines the fair value of Level 3 commodity 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.
The table below presents a rollforward of activity for these assets (liabilities) for the period ended June 30, 2014:
|
| | | | | | | | | | | | | | | | |
Fair Value Measurements Using Level 3 Inputs | | | | | | | | |
Commodity Contracts | | Second Quarter | | First Six Months |
(Dollars in millions) | | 2014 | | 2013 | | 2014 | | 2013 |
Balance at beginning of period | | $ | — |
| | $ | (12 | ) | | $ | — |
| | $ | (5 | ) |
Realized gain (loss) in sales revenue | | — |
| | (3 | ) | | — |
| | (7 | ) |
Change in unrealized gain (loss) | | — |
| | 5 |
| | — |
| | (2 | ) |
Settlements | | — |
| | 3 |
| | — |
| | 7 |
|
Transfers (out) in of Level 3 | | — |
| | — |
| | — |
| | — |
|
Balance at end of period | | $ | — |
| | $ | (7 | ) | | $ | — |
| | $ | (7 | ) |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following chart shows the financial assets and liabilities valued on a recurring basis and their location in the Unaudited Consolidated Statements of Financial Position. The Company had no nonqualifying derivatives or derivatives that are not designated as hedges as of June 30, 2014 and December 31, 2013. All of the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option to settle contracts on a net basis when they settle on the same day and the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company has elected to present the derivative contracts on a gross basis in the Unaudited Consolidated Statements of Financial Position. Had it chosen to present the derivatives contracts on a net basis, it would have a derivative in a net asset position of $29 million and a derivative in a net liability position of $20 million as of June 30, 2014. The Company does not have any cash collateral due under such agreements.
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 |
| June 30, 2014 |
| December 31, 2013 |
Cash Flow Hedges |
| |
| |
| |
Commodity contracts |
| Other current assets |
| $ | 15 |
|
| $ | 20 |
|
Commodity contracts |
| Other noncurrent assets |
| 9 |
|
| 7 |
|
Foreign exchange contracts |
| Other current assets |
| 14 |
|
| 17 |
|
Foreign exchange contracts |
| Other noncurrent assets |
| 7 |
|
| 14 |
|
|
| |
| $ | 45 |
|
| $ | 58 |
|
|
| | | | | | | | | | |
(Dollars in millions) | | | | Fair Value Measurements Significant Other Observable Inputs |
Derivative Liabilities | | Statement of Financial Position Location | | June 30, 2014 | | December 31, 2013 |
Fair Value Hedges | | | | | | |
Interest rate swaps | | Other long-term liabilities | | $ | 1 |
| | $ | — |
|
Cash Flow Hedges | | | | | | |
Commodity contracts | | Payables and other current liabilities | | 2 |
| | — |
|
Commodity contracts | | Other long-term liabilities | | 1 |
| | — |
|
Foreign exchange contracts | | Payables and other current liabilities | | 16 |
| | 21 |
|
Foreign exchange contracts | | Other long-term liabilities | | 16 |
| | 25 |
|
| | | | $ | 36 |
| | $ | 46 |
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Derivatives' Hedging Relationships
|
| | | | | | | | | | |
|
| Second Quarter |
(Dollars in millions) |
| Location of Gain/(Loss) Recognized in Income on Derivatives |
| Amount of Gain/ (Loss) Recognized Income on Derivatives |
Derivatives in Fair Value Hedging Relationships |
|
| June 30, 2014 |
| June 30, 2013 |
Interest rate contracts |
| Net interest expense |
| $ | 1 |
|
| $ | — |
|
|
|
|
| $ | 1 |
|
| $ | — |
|
|
| | | | | | | | | | |
| | First Six Months |
(Dollars in millions) | | Location of Gain/(Loss) Recognized in Income on Derivatives | | Amount of Gain/ (Loss) Recognized Income on Derivatives |
Derivatives in Fair Value Hedging Relationships | | | June 30, 2014 | | June 30, 2013 |
Interest rate contracts | | Net interest expense | | $ | 1 |
| | $ | — |
|
| | | | $ | 1 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | |
| | Second Quarter |
(Dollars in millions) | | Change in 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 | | June 30, 2014 | | June 30, 2013 | | June 30, 2014 | | June 30, 2013 |
Commodity contracts | | $ | (3 | ) | | $ | (2 | ) | | Sales | | $ | — |
| | $ | (3 | ) |
| | | | | | Cost of Sales | | 11 |
| | (3 | ) |
Foreign exchange contracts | | 4 |
| | (6 | ) | | Sales | | — |
| | 4 |
|
Forward starting interest rate swap contracts | | (1 | ) | | 1 |
| | Net interest expense | | (2 | ) | | (2 | ) |
| | $ | — |
| | $ | (7 | ) | | | | $ | 9 |
| | $ | (4 | ) |
| | | | | | | | | | |
| | First Six Months |
(Dollars in millions) | | Change in 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 | | June 30, 2014 | | June 30, 2013 | | June 30, 2014 | | June 30, 2013 |
Commodity contracts | | $ | (5 | ) | | $ | (4 | ) | | Sales | | $ | — |
| | $ | (7 | ) |
| | | | | | Cost of sales | | 19 |
| | (3 | ) |
Foreign exchange contracts | | 2 |
| | 11 |
| | Sales | | (1 | ) | | 6 |
|
Forward starting interest rate swap contracts | | — |
| | 2 |
| | Net interest expense | | (4 | ) | | (4 | ) |
| | $ | (3 | ) | | $ | 9 |
| | | | $ | 14 |
| | $ | (8 | ) |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Hedging Summary
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 losses of approximately $67 million at June 30, 2014 and $60 million at June 30, 2013. If realized, $4 million net gains in second quarter 2014 will be reclassified into earnings during the next 12 months. 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 second quarter and first six months 2014 or second quarter and first six months 2013.
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 Unaudited Consolidated 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 $2 million net gains or losses during second quarter 2014 and no net losses during second quarter 2013 on nonqualifying derivatives. The Company recognized approximately $3 million net gains and $2 million net losses on nonqualifying derivatives during the first six months of 2014 and 2013, respectively.
As described in more detail below, Eastman offers various postretirement benefits to its employees.
Defined Benefit Pension Plans and Other Postretirement Benefit Plans
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. In addition, Eastman provides a subsidy for life insurance, health care, and dental benefits to eligible retirees hired prior to January 1, 2007, and a subsidy for health care and dental benefits to retirees' eligible survivors. Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined.
For additional information regarding retirement plans, see Note 11, "Retirement Plans", to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Components of net periodic benefit cost were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter |
| Pension Plans | | Other Postretirement Benefit Plans |
| 2014 | | 2013 | | 2014 | | 2013 |
(Dollars in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 10 |
| | $ | 4 |
| | $ | 11 |
| | $ | 3 |
| | $ | 2 |
| | $ | 3 |
|
Interest cost | 25 |
| | 8 |
| | 22 |
| | 7 |
| | 11 |
| | 11 |
|
Expected return on assets | (35 | ) | | (10 | ) | | (32 | ) | | (8 | ) | | (1 | ) | | (2 | ) |
Amortization of: | | | | | | | | | | | |
Prior service cost (credit) | (1 | ) | | — |
| | (1 | ) | | — |
| | (6 | ) | | (5 | ) |
Net periodic benefit cost | $ | (1 | ) | | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | 6 |
| | $ | 7 |
|
| | | | | | | | | | | |
| First Six Months |
| Pension Plans | | Other Postretirement Benefit Plans |
| 2014 | | 2013 | | 2014 | | 2013 |
(Dollars in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 20 |
| | $ | 7 |
| | $ | 21 |
| | $ | 7 |
| | $ | 4 |
| | $ | 6 |
|
Interest cost | 50 |
| | 16 |
| | 44 |
| | 14 |
| | 22 |
| | 22 |
|
Expected return on assets | (71 | ) | | (19 | ) | | (64 | ) | | (17 | ) | | (3 | ) | | (4 | ) |
Amortization of: | | | | | | | | | | | |
Prior service cost (credit) | (2 | ) | | — |
| | (2 | ) | | — |
| | (12 | ) | | (10 | ) |
Net periodic benefit cost | $ | (3 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | 4 |
| | $ | 11 |
| | $ | 14 |
|
The Company contributed $27 million and $24 million to its U.S. defined benefit pension plans in first six months 2014 and 2013, respectively.
Purchase Obligations and Lease Commitments
The Company had various purchase obligations at June 30, 2014 totaling $2.1 billion over a period of approximately 30 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 $261 million over a similar number of years. Of the total lease commitments, approximately 60 percent relate to real property, including office space, storage facilities, and land; approximately 30 percent relate to railcars; and approximately 10 percent relate to machinery and equipment, including computer and communications equipment and production equipment.
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 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 June 30, 2014 totaled $121 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.
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 between 1 and 15 years with maximum potential future payments of $22 million in the aggregate, with none of these guarantees being 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.
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 2013 Annual Report on Form 10-K. The Company's total reserve for environmental contingencies was $354 million and $368 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014 and December 31, 2013, this reserve included $10 million and $9 million, respectively, related to sites previously closed and impaired by Eastman and sites that have been divested by Eastman 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 $334 million to the maximum of $570 million and from the minimum or best estimate of $341 million to the maximum of $581 million at June 30, 2014 and December 31, 2013, respectively. The maximum estimated future costs are considered to be reasonably possible and include the amounts accrued at both June 30, 2014 and December 31, 2013. 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 the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and if applicable, the expected sharing of costs, 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 environmental asset retirement obligations, the best estimate accrued to date over the facilities' estimated useful lives for these environmental asset retirement obligation costs was $20 million and $27 million at June 30, 2014 and December 31, 2013, respectively.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Reserves for environmental remediation that management believes to be probable and estimable are recorded as current and long-term liabilities in the Unaudited Consolidated Statements of Financial Position. These reserves include liabilities expected to be paid out within 30 years. The amounts charged to pre-tax earnings for environmental remediation and related charges are included in cost of sales and other charges (income), net, and are summarized below:
|
| | | |
(Dollars in millions) | Environmental Remediation Liabilities |
Balance at December 31, 2013 | $ | 341 |
|
Changes in estimates recorded to earnings and other | 4 |
|
Cash reductions | (11 | ) |
Balance at June 30, 2014 | $ | 334 |
|
The Company's total environmental reserve for environmental contingencies, including remediation costs and asset retirement obligations, is recorded in the Unaudited Consolidated Statements of Financial Position as follows:
|
| | | | | | | |
(Dollars in millions) | June 30, 2014 | | December 31, 2013 |
Environmental contingent liabilities, current | $ | 40 |
| | $ | 40 |
|
Environmental contingent liabilities, long-term | 314 |
| | 328 |
|
Total | $ | 354 |
| | $ | 368 |
|
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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the changes in stockholders' equity for first six months 2014 is provided below:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Common Stock at Par Value $ | | Paid-in Capital $ | | Retained Earnings $ | | Accumulated Other Comprehensive Income (Loss) $ | | Treasury Stock at Cost $ | | Total Stockholders' Equity Attributed to Eastman $ | | Noncontrolling Interest $ | | Total Stockholders' Equity $ |
Balance at December 31, 2013 | 2 |
| | 1,778 |
| | 4,012 |
| | 171 |
| | (2,167 | ) | | 3,796 |
| | 79 |
| | 3,875 |
|
Net Earnings | — |
| | — |
| | 525 |
| | — |
| | — |
| | 525 |
| | 3 |
| | 528 |
|
Cash Dividends Declared (1) ($0.70 per share) | — |
| | — |
| | (106 | ) | | — |
| | — |
| | (106 | ) | | — |
| | (106 | ) |
Other Comprehensive Income | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 2 |
|
Share-Based Compensation Expense (2) | — |
| | 16 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | 16 |
|
Stock Option Exercises | — |
| | 11 |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Other (3) | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) | | (1 | ) | | (3 | ) |
Share Repurchase | — |
| | — |
| | — |
| | — |
| | (360 | ) | | (360 | ) | | — |
| | (360 | ) |
Distributions to Noncontrolling Interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Balance at June 30, 2014 | 2 |
| | 1,803 |
| | 4,431 |
| | 173 |
| | (2,527 | ) | | 3,882 |
| | 77 |
| | 3,959 |
|
| |
(1) | Includes cash dividends paid and dividends declared, but unpaid. |
| |
(2) | Includes the fair value of equity share-based awards recognized for share-based compensation. |
| |
(3) | Paid in capital includes tax benefits/charges relating to the difference between the amounts deductible for federal income taxes over the amounts charged to income for book value purposes have been adjusted to paid-in capital and other items. Equity attributable to noncontrolling interest includes adjustments for currency revaluation. |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Cumulative Translation Adjustment | | Benefit Plans Unrecognized Prior Service Credits | | Unrealized Gains (Losses) on Derivative Instruments | | Unrealized Losses on Investments | | Accumulated Other Comprehensive Income (Loss) |
Balance at December 31, 2012 | $ | 105 |
| | $ | 65 |
| | $ | (46 | ) | | $ | (1 | ) | | $ | 123 |
|
Period change | 28 |
| | 13 |
| | 7 |
| | — |
| | 48 |
|
Balance at December 31, 2013 | 133 |
| | 78 |
| | (39 | ) | | (1 | ) | | 171 |
|
Period change | 13 |
| | (8 | ) | | (3 | ) | | — |
| | 2 |
|
Balance at June 30, 2014 | $ | 146 |
| | $ | 70 |
| | $ | (42 | ) | | $ | (1 | ) | | $ | 173 |
|
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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Components of other comprehensive income recorded in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings are presented below, before tax and net of tax effects:
|
| | | | | | | | | | | | | | | |
| Second Quarter |
| 2014 | | 2013 |
(Dollars in millions) | Before Tax | | Net of Tax | | Before Tax | | Net of Tax |
Other comprehensive income (loss) | | | | | | | |
Change in cumulative translation adjustment | $ | 9 |
| | $ | 9 |
| | $ | 15 |
| | $ | 15 |
|
Defined benefit pension and other postretirement benefit plans: | | | | | | | |
|
Amortization of unrecognized prior service credits included in net periodic costs (1) | (7 | ) | | (4 | ) | | (6 | ) | | (3 | ) |
Derivatives and hedging: (2) | | | | | | | |
|
Unrealized (loss) gain | 9 |
| | 6 |
| | (16 | ) | | (10 | ) |
Reclassification adjustment for gains included in net income | (9 | ) | | (6 | ) | | 5 |
| | 3 |
|
Change in derivatives and hedging | — |
| | — |
| | (11 | ) | | (7 | ) |
Total other comprehensive income (loss) | $ | 2 |
| | $ | 5 |
| | $ | (2 | ) | | $ | 5 |
|
| | | | | | | |
| First Six Months |
| 2014 | | 2013 |
(Dollars in millions) | Before Tax | | Net of Tax | | Before Tax | | Net of Tax |
Other comprehensive income (loss) | | | | | | | |
Change in cumulative translation adjustment | $ | 12 |
| | $ | 13 |
| | $ | (35 | ) | | $ | (35 | ) |
Defined benefit pension and other postretirement benefit plans: | | | | | | | |
|
Amortization of unrecognized prior service credits included in net periodic costs (1) | (14 | ) | | (8 | ) | | (12 | ) | | (7 | ) |
Derivatives and hedging:(2) | | | | | | | |
|
Unrealized gain (loss) during period | 9 |
| | 6 |
| | 7 |
| | 4 |
|
Reclassification adjustment for gains included in net income | (14 | ) | | (9 | ) | | 8 |
| | 5 |
|
Change in derivatives and hedging | (5 | ) | | (3 | ) | | 15 |
| | 9 |
|
Total other comprehensive income (loss) | $ | (7 | ) | | $ | 2 |
| | $ | (32 | ) | | $ | (33 | ) |
| |
(1) | Included in the calculation of net periodic benefit costs for pension and other postretirement benefit plans. See Note 8, "Retirement Plans". |
| |
(2) | For additional information regarding the impact of reclassifications into earnings, refer to Note 7, "Derivatives". |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
13. | EARNINGS AND DIVIDENDS PER SHARE |
The following table sets forth the computation of basic and diluted earnings per share ("EPS") from continuing operations: |
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2014 | | 2013 | | 2014 | | 2013 |
(In millions, except per share amounts) | | | | |
| |
|
Numerator | | | | | | | |
Earnings attributable to Eastman stockholders: | | | | | | | |
Earnings from continuing operations, net of tax | $ | 290 |
| | $ | 264 |
| | $ | 523 |
| | $ | 511 |
|
| | | | | | | |
Denominator | | | | | | | |
Weighted average shares used for basic EPS | 149.5 |
| | 154.4 |
| | 150.4 |
| | 154.4 |
|
Dilutive effect of stock options and other award plans | 1.8 |
| | 2.3 |
| | 1.8 |
| | 2.3 |
|
Weighted average shares used for diluted EPS | 151.3 |
| | 156.7 |
| | 152.2 |
| | 156.7 |
|
| | | | | | | |
EPS from continuing operations (1) | | | | | | | |
Basic | $ | 1.94 |
| | $ | 1.71 |
| | $ | 3.47 |
| | $ | 3.31 |
|
Diluted | $ | 1.92 |
| | $ | 1.69 |
| | $ | 3.43 |
| | $ | 3.26 |
|
| |
(1) | Earnings per share are calculated using whole dollars and shares. |
In both second quarter and first six months 2014, common shares underlying options to purchase 210,143 shares of common stock were excluded from the shares treated as outstanding for computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total cash proceeds that would be received for these exercises. Second quarter and first six months 2014 reflect the impact of share repurchases of 1,153,784 and 4,326,556 shares, respectively.
In second quarter and first six months 2013, common shares underlying options to purchase 317,879 and 121,070 shares of common stock, respectively, were excluded from the shares treated as outstanding for computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total cash proceeds that would be received for these exercises. Second quarter and first six months 2013 reflect the impact of share repurchases of 670,200 and 1,115,700 shares, respectively.
The Company declared cash dividends of $0.35 and $0.30 per share in second quarter 2014 and 2013, respectively, and $0.70 and $0.60 per share in first six months 2014 and 2013, respectively.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
14. | ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES (GAINS), NET |
In second quarter and first six months 2014, there were net asset impairments and restructuring gains of $7 million and charges of $6 million, respectively.
During second quarter 2014, the Company recognized gains from the sales of previously impaired assets at the former Photovoltaics production facility in Germany and a former polymers production facility in China of $5 million and $2 million, respectively.
In first six months 2014, charges consisted of $8 million of asset impairments, including intangible assets, and $2 million of restructuring charges in the Advanced Materials ("AM") segment primarily due to the closure of a production facility in Taiwan for the Flexvue® product line. First six months 2014 also included $3 million of restructuring charges for severance associated with the continued integration of Solutia.
In second quarter and first six months 2013, there were net asset impairments and restructuring charges of $18 million and $21 million, respectively.
During second quarter 2013, management decided to shut-down the Photovoltaics product line, including the primary production facility in Germany. This resulted in the Company recognizing asset impairments of $7 million and restructuring charges of $5 million including charges for severance. During second quarter 2013, management also approved and recorded severance charges of $6 million primarily for a voluntary separation plan for certain employees.
During second quarter 2013, a change in estimate for certain costs associated with the fourth quarter 2012 termination of the operating agreement for the Sao Jose dos Campos, Brazil site resulted in a reduction of $4 million to previously recorded asset impairments and restructuring charges.
In second quarter and first six months 2013, there were $3 million and $6 million, respectively, of restructuring charges primarily for severance associated with the continued integration of Solutia.
Changes in Reserves for Asset Impairments, Restructuring Charges (Gains), and Severance Charges
The following table summarizes the changes in other asset impairments and restructuring gains and charges, 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 2013 and first six months 2014:
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Balance at January 1, 2013 | | Provision/ Adjustments | | Non-cash Reductions | | Cash Reductions | | Balance at December 31, 2013 |
Non-cash charges | $ | — |
| | $ | 28 |
| | $ | (28 | ) | | $ | — |
| | $ | — |
|
Severance costs | 4 |
| | 27 |
| | 2 |
| | (11 | ) | | 22 |
|
Site closure and restructuring costs | 21 |
| | 21 |
| | (16 | ) | | (12 | ) | | 14 |
|
Total | $ | 25 |
| | $ | 76 |
| | $ | (42 | ) | | $ | (23 | ) | | $ | 36 |
|
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Balance at January 1, 2014 | | Provision/ Adjustments | | Non-cash Reductions | | Cash Reductions | | Balance at June 30, 2014 |
Non-cash charges | $ | — |
| | $ | 8 |
| | $ | (8 | ) | | $ | — |
| | $ | — |
|
Severance costs | 22 |
| | 3 |
| | — |
| | (14 | ) | | 11 |
|
Site closure and restructuring costs | 14 |
| | (5 | ) | | — |
| | (1 | ) | | 8 |
|
Total | $ | 36 |
| | $ | 6 |
| | $ | (8 | ) | | $ | (15 | ) | | $ | 19 |
|
During 2013, the Company accrued for employee separations associated with the acquisition and integration of Solutia. Substantially all separation payments for the 2013 accruals will be completed by December 31, 2014.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
15. | 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 both second quarter 2014 and 2013, approximately $8 million, of compensation expense before tax were recognized in selling, general and administrative expense in the Unaudited Consolidated Statements of Earnings for all share-based awards. The impact on both second quarter 2014 and 2013 net earnings of approximately $5 million is net of deferred tax expense related to share-based award compensation for each period.
In first six months 2014 and 2013, approximately $17 million and $19 million, respectively, of compensation expense before tax were recognized in selling, general and administrative expense in the Unaudited Consolidated Statements of Earnings for all share-based awards. The impact on first six months 2014 and 2013 net earnings of approximately $10 million and $12 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 18, "Share-Based Compensation Plans and Awards", to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.
| |
16. | SUPPLEMENTAL CASH FLOW INFORMATION |
Included in the line item "Other items, net" of the "Cash flows from operating activities" section of the Unaudited Consolidated Statements of Cash Flows are the following changes to Unaudited Consolidated Statement of Financial Position line items:
|
| | | | | | | |
(Dollars in millions) | First Six Months |
| 2014 | | 2013 |
Other current assets | $ | 21 |
| | $ | 22 |
|
Other noncurrent assets | 16 |
| | 19 |
|
Payables and other current liabilities | (28 | ) | | (60 | ) |
Long-term liabilities and equity | (42 | ) | | (66 | ) |
Total | $ | (33 | ) | | $ | (85 | ) |
These changes included monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, accrued taxes, interest accruals, and environmental accruals.
The Company's products and operations are currently managed and reported in five operating segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids &
Intermediates ("SFI"). For additional information concerning the Company's segments' businesses and products, see Note 21, "Segment Information" to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.
Included in second quarter and first six months 2013 "other" sales revenue and operating earnings were the Perennial Wood™ growth initiative and the Photovoltaics product line acquired from Solutia. There were no sales revenue or operating losses related to Perennial Wood™ included in second quarter or first six months 2014 as a result of decisions made by management in 2013 not to continue its Perennial WoodTM growth initiative.
Included in second quarter 2014 "other" operating loss were acquisition transaction and integration costs of $3 million and $7 million, respectively and a gain from the sale of previously impaired assets at the former Photovoltaics production facility in Germany of $5 million. Included in first six months 2014 "other" operating loss were acquisition transaction and integration costs of $3 million and $16 million, respectively, for the Solutia and aviation turbine oil business acquisitions. Included in first six months 2014 "other" operating loss were restructuring charges of $3 million, primarily for severance associated with the continued integration of Solutia. Included in second quarter and first six months 2013 "other" operating loss were Solutia integration costs of $8 million and $15 million, respectively, and restructuring charges of $3 million and $6 million, respectively, for the severance associated with the continued integration of Solutia.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | |
| Second Quarter |
(Dollars in millions) | 2014 | | 2013 |
Sales | | | |
Additives & Functional Products | $ | 452 |
| | $ | 430 |
|
Adhesives & Plasticizers | 358 |
| | 339 |
|
Advanced Materials | 631 |
| | 625 |
|
Fibers | 386 |
| | 363 |
|
Specialty Fluids & Intermediates | 633 |
| | 677 |
|
Total Sales by Segment | 2,460 |
| | 2,434 |
|
Other | — |
| | 6 |
|
Total Sales | $ | 2,460 |
| | $ | 2,440 |
|
| | | |
| First Six Months |
(Dollars in millions) | 2014 | | 2013 |
Sales | | | |
Additives & Functional Products | $ | 875 |
| | $ | 849 |
|
Adhesives & Plasticizers | 703 |
| | 684 |
|
Advanced Materials | 1,212 |
| | 1,209 |
|
Fibers | 740 |
| | 709 |
|
Specialty Fluids & Intermediates | 1,234 |
| | 1,284 |
|
Total Sales by Segment | 4,764 |
| | 4,735 |
|
Other | 1 |
| | 12 |
|
Total Sales | $ | 4,765 |
| | $ | 4,747 |
|
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | |
| Second Quarter |
(Dollars in millions) | 2014 | | 2013 |
Operating Earnings (Loss) | | | |
Additives & Functional Products (1)(2)(3) | $ | 105 |
| | $ | 104 |
|
Adhesives & Plasticizers (2) | 56 |
| | 49 |
|
Advanced Materials (2)(3) | 80 |
| | 82 |
|
Fibers | 123 |
| | 116 |
|
Specialty Fluids & Intermediates (2)(4) | 94 |
| | 117 |
|
Total Operating Earnings by Segment | 458 |
| | 468 |
|
Other (5) | |
| | |
|
|