1 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 March 31, 1998 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.) 100 N. EASTMAN ROAD KINGSPORT, TENNESSEE 37660 (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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. <TABLE> <CAPTION> Number of Shares Outstanding at Class March 31, 1998 <S> <C> Common Stock, par value $0.01 per share 79,119,423 </TABLE> (including rights to purchase shares of Common Stock or Participating Preferred Stock) - -------------------------------------------------------------------------------- PAGE 1 OF 57 TOTAL SEQUENTIALLY NUMBER PAGES EXHIBIT INDEX ON PAGE 18
2 TABLE OF CONTENTS <TABLE> <CAPTION> - -------------------------------------------------------------------------------- ITEM PAGE - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION <S> <C> <C> 1. Financial Statements 3 - 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-15 PART II. OTHER INFORMATION 1. Legal Proceedings 16 2. Changes in Securities 16 6. Exhibits and Reports on Form 8-K 16 SIGNATURES Signatures 17 </TABLE> 2
3 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE INCOME, AND RETAINED EARNINGS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> FIRST QUARTER 1998 1997 <S> <C> <C> EARNINGS Sales $ 1,148 $ 1,171 Cost of sales 894 911 -------- --------- Gross profit 254 260 Selling and general administrative expenses 75 78 Research and development costs 46 48 -------- --------- Operating earnings 133 134 Interest expense, net 21 19 Other (income) charges, net (2) 1 --------- -------- Earnings before income taxes 114 114 Provision for income taxes 40 42 -------- --------- Net earnings $ 74 $ 72 ======== ========= Net earnings per share --Basic earnings per share $ .95 $ .93 ======== ========= --Diluted earnings per share $ .94 $ .92 ======== ========= COMPREHENSIVE INCOME Net earnings $ 74 $ 72 Other comprehensive income (1) (23) -------- ---------- Comprehensive income $ 73 $ 49 ======== ========= RETAINED EARNINGS Retained earnings at beginning of period $ 2,078 $ 1,929 Net earnings 74 72 Cash dividends declared (35) (35) -------- --------- Retained earnings at end of period $ 2,117 $ 1,966 ======== ========= </TABLE> The accompanying notes are an integral part of these financial statements. 3
4 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (DOLLARS IN MILLIONS) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1998 1997 <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 43 $ 29 Receivables 843 793 Inventories 519 511 Other current assets 154 157 --------- --------- Total current assets 1,559 1,490 --------- --------- Properties Properties and equipment at cost 8,210 8,104 Less: Accumulated depreciation 4,282 4,223 --------- --------- Net properties 3,928 3,881 --------- --------- Other noncurrent assets 423 407 ---------- --------- Total assets $ 5,910 $ 5,778 ========= ========= LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities Payables and other current liabilities $ 825 $ 954 ---------- --------- Total current liabilities 825 954 Long-term borrowings 1,860 1,714 Deferred income tax credits 383 397 Postemployment obligations 775 724 Other long-term liabilities 234 236 --------- --------- Total liabilities 4,077 4,025 --------- --------- Shareowners' equity Common stock ($0.01 par - 350,000,000 shares authorized; shares issued -- 84,287,989 and 84,144,672) 1 1 Paid-in capital 85 77 Retained earnings 2,117 2,078 Other comprehensive income (38) (37) ----------- ---------- 2,165 2,119 Less: Treasury stock at cost (5,353,123 and 5,889,311 shares) 332 366 --------- --------- Total shareowners' equity 1,833 1,753 --------- --------- Total liabilities and shareowners' equity $ 5,910 $ 5,778 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. 4
5 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (DOLLARS IN MILLIONS) <TABLE> <CAPTION> FIRST QUARTER 1998 1997 <S> <C> <C> Cash flows from operating activities Net earnings $ 74 $ 72 --------- --------- Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation 82 79 Provision (benefit) for deferred income taxes (6) 3 Increase in receivables (52) (53) Increase in inventories (7) (19) Decrease in incentive pay and employee benefit liabilities (56) (43) Increase in liabilities excluding borrowings, incentive pay, and employee benefit liabilities 10 24 Other items, net 5 (10) --------- --------- Total adjustments (24) (19) --------- --------- Net cash provided by operating activities 50 53 --------- --------- Cash flows from investing activities Additions to properties and equipment (135) (168) Proceeds from sales of assets 1 1 Capital advances to suppliers (21) (22) --------- --------- Net cash used in investing activities (155) (189) ---------- ---------- Cash flows from financing activities Net increase (decrease) in commercial paper borrowings 147 (91) Proceeds from long-term borrowings - 295 Dividends paid to shareowners (34) (34) Treasury stock purchases - (8) Other items 6 1 --------- --------- Net cash provided by financing activities 119 163 --------- --------- Net change in cash and cash equivalents 14 27 Cash and cash equivalents at beginning of period 29 24 --------- --------- Cash and cash equivalents at end of period $ 43 $ 51 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. 5
6 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance and consistent with the accounting policies stated in the Company's 1997 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements appearing therein. In the opinion of the Company, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included in the interim consolidated financial statements. The interim consolidated financial statements are based in part on approximations and have not been audited by independent accountants. 2. INVENTORIES <TABLE> <CAPTION> MARCH 31, DECEMBER 31, (Dollars in millions) 1998 1997 <S> <C> <C> At FIFO or average cost (approximates current cost): Finished goods $ 449 $ 436 Work in process 144 140 Raw materials and supplies 199 211 --------- --------- Total inventories at FIFO or average cost 792 787 --------- --------- Reduction to LIFO value (273) (276) --------- --------- Total inventories at LIFO value $ 519 $ 511 ========= ========= </TABLE> Inventories valued on the LIFO method are approximately 75% of total inventories in each of the periods. 3. EARNINGS PER SHARE The weighted average number of common shares outstanding used to compute basic earnings per share was 78.4 million and 77.6 million, and for diluted earnings per share was 79.2 million and 78.2 million, reflecting the effect of dilutive options outstanding, at March 31, 1998 and 1997, respectively. Certain options outstanding at March 31, 1998 and 1997, respectively, were excluded from the computation of diluted earnings per share because the options' exercise prices were greater than average market price of the common shares. Excluded were options to purchase 767,350 shares of common stock at a range of prices from $62.88 to $74.25 and 579,753 shares of common stock at a range of prices from $55.25 to $74.25 outstanding at March 31, 1998 and 1997, respectively. 4. DIVIDENDS <TABLE> <CAPTION> FIRST QUARTER 1998 1997 <S> <C> <C> Cash dividends declared per share $ .44 $ .44 </TABLE> 6
7 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. SUPPLEMENTAL CASH FLOW INFORMATION In March 1998 the Company issued 536,188 treasury shares to its Employee Stock Ownership Plan as partial settlement of the Company's Eastman Performance Plan payout. The shares issued had a market value of $35 million and a carrying value of $33 million. In March 1997 the Company issued 611,962 shares of previously unissued common stock with a market value of $34 million to the Employee Stock Ownership Plan as partial settlement of the Eastman Performance Plan payout. These noncash transactions are not reflected in the Consolidated Statements of Cash Flow. 6. COMPREHENSIVE INCOME The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. Components of other comprehensive income are cumulative translation adjustments and minimum pension liabilities. Amounts of other comprehensive income are presented net of applicable taxes. Because cumulative translation adjustments are considered a component of permanently invested unremitted earnings of subsidiaries outside the United States, no taxes are provided on such amounts. 7
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and Management's Discussion and Analysis contained in the 1997 Annual Report on Form 10-K and the unaudited interim consolidated financial statements included elsewhere in this report. All references to earnings per share contained in this report are basic earnings per share unless otherwise noted. MAJOR FACTORS AFFECTING EARNINGS FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997 Overall higher sales volumes, except for fibers and fine chemicals Significantly higher selling prices and volume for container plastics Lower purchased raw materials and energy costs Higher preproduction costs related to new manufacturing facilities RESULTS OF OPERATIONS EARNINGS <TABLE> <CAPTION> (Dollars in millions, except FIRST QUARTER per share amounts) 1998 1997 CHANGE <S> <C> <C> <C> Operating earnings $ 133 $ 134 (1)% Net earnings 74 72 3 Net earnings per share --Basic Earnings Per Share .95 .93 2% --Diluted Earnings Per Share .94 .92 2 </TABLE> Although operating results were overall relatively unchanged from first quarter 1997, significant changes occurred in several product lines, notably container plastics, fibers and fine chemicals. Significantly higher volumes, selling prices and margins for container plastics were the result of increased food, beverage and non-food applications and additional capacity following the mid-1997 startup of manufacturing facilities in Spain. However, decreased sales and earnings for fibers and fine chemicals reflected decreased customer demand, which in the case of fibers resulted from industry overcapacity and customer inventory reductions, mainly in China. Major factors affecting unit costs were significantly lower costs for most major raw materials including propane feedstock, paraxylene, purified terephthalic acid ("PTA"), ethylene glycol and natural gas; productivity gains achieved as a result of the Company's Advantaged Cost 2000 initiative; and higher preproduction costs resulting from three new manufacturing sites nearing completion. Other factors affecting results were increased income from equity investments and a lower effective tax rate. A stronger U.S. dollar produced an unfavorable effect on sales denominated in currencies other than U.S. dollars, although the earnings impact was partially offset by gains realized on currency hedging transactions. The negative effect on net earnings from foreign currency fluctuations was not significant. 8
9 SUMMARY BY INDUSTRY SEGMENT SPECIALTY AND PERFORMANCE SEGMENT <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> Sales $ 620 $ 669 (7)% Operating earnings 96 128 (25) </TABLE> Significantly lower sales volume and prices for acetate tow reflecting industry overcapacity and customer inventory reductions, mainly in China, substantially decreased sales and earnings for the segment overall. However, strong volume gains and moderate price increases for specialty plastics, particularly in Europe, were experienced during first quarter reflecting growth in the SPECTAR market and new customer applications. Sales and earnings were negatively impacted by a decline in customer demand and decreased volume for fine chemicals. Sales of coatings, inks and resins were essentially level with first quarter 1997, but earnings improved significantly due to lower raw materials costs, primarily propane feedstock. Performance chemicals sales declined, reflecting the effect of businesses discontinued in 1997 and decreased volume and selling prices for sorbates. Operating earnings for the segment overall were positively impacted by lower costs for raw materials and energy and cost structure improvements. CORE PLASTICS SEGMENT <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> Sales $ 340 $ 318 7% Operating loss (1) (22) 95 </TABLE> Higher sales volumes and selling prices for EASTAPAK polymers reflect increased customer demand for container plastics as applications move away from glass and aluminum, and the effect of new available capacity following the mid-1997 startup of manufacturing facilities in Spain. Flexible plastics volumes were moderately higher overall, but sales and earnings reflected price and margin pressure on commodity polyethylene products resulting from excess ethylene industry capacities, partially offset by increased sales of recently introduced HIFOR and MXSTEN polyethylene performance polymers. Operating results were positively impacted by improved margins for container plastics, lower costs for major raw materials and energy, and cost structure improvements, offset partially by higher preproduction expenses related to new container plastics manufacturing facilities. CHEMICAL INTERMEDIATES SEGMENT <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> Sales $ 188 $ 184 2% Operating earnings 38 28 36 </TABLE> Sales reflect overall higher volume and favorable product mix, partially offset by lower selling prices for commodity oxo products, and unfavorable currency effects. Cost structure improvements and favorable raw materials and energy costs, including a significant reduction in the cost of propane feedstock, positively impacted earnings. (For supplemental analysis of Specialty and Performance, Core Plastics, and Chemical Intermediates segment results, see Exhibit 99.01 to this Form 10-Q.) 9
10 SUMMARY BY CUSTOMER LOCATION SALES BY REGION <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> United States and Canada $ 754 $ 763 (1)% Europe, Middle East, and Africa 207 192 8% Asia Pacific 98 131 (25)% Latin America 89 85 5% </TABLE> Sales in the United States for first quarter 1998 were $713 million, down 1% from 1997 first quarter sales of $720 million. Higher overall sales volume was offset by overall lower selling prices and the effect of a shift in the mix of products sold. Sales outside the United States for first quarter 1998 were $435 million, down 4% from 1997 first quarter sales of $451 million. Sales outside the United States were 38% of total sales in first quarter 1998 compared with 39% for first quarter 1997. Decreased sales in Asia Pacific reflect significantly lower sales of acetate tow resulting from excess worldwide capacity and customer inventory reductions, mainly in China. Higher sales in Europe, Middle East and Africa reflect higher EASTAPAK polymer volume due to increased customer demand and new manufacturing capacity in Spain. A strong U.S. dollar against foreign currencies resulted in unfavorable currency exchange effects, primarily in Europe. SUMMARY OF CONSOLIDATED RESULTS <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> SALES $ 1,148 $ 1,171 (2)% </TABLE> Sales reflect significantly higher volume and prices for the Company's container plastics and lower volume and prices for fibers and fine chemicals. Sales were negatively impacted by the strength of the U.S. dollar against foreign currencies, primarily in Europe. <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> GROSS PROFIT $ 254 $ 260 (2)% As a percentage of sales 22.1% 22.2% </TABLE> Gross profit declined slightly as the effects of overall higher sales volume, favorable raw materials and energy prices and productivity gains were offset by unfavorable foreign currency effects, higher preproduction expenses related to new manufacturing capacities, and a shift in the mix of products sold. <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 75 $ 78 (4)% As a percentage of sales 6.5% 6.7% </TABLE> 10
11 <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> RESEARCH AND DEVELOPMENT COSTS $ 46 $ 48 (4)% As a percentage of sales 4.0% 4.1% FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE GROSS INTEREST COSTS $ 32 $ 29 LESS CAPITALIZED INTEREST 11 10 --------- --------- NET INTEREST EXPENSE $ 21 $ 19 11% ========= ========= </TABLE> Interest costs increased due to an increase in long-term borrowings and commercial paper and higher overall effective interest rates. <TABLE> <CAPTION> FIRST QUARTER (Dollars in millions) 1998 1997 CHANGE <S> <C> <C> <C> OTHER (INCOME) CHARGES, NET $ (2) $ 1 -% </TABLE> Other income and other charges include interest income, royalty income, gains and losses on asset sales, results from equity investments, foreign exchange transactions, and other items. LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA <TABLE> <CAPTION> FINANCIAL INDICATORS 1998 1997 <S> <C> <C> For the first three months Ratio of earnings to fixed charges 3.8x 4.1x At the period ended March 31 and December 31 Current ratio 1.9x 1.6x Percent of long-term borrowings to total capital 50% 49% Percent of floating-rate borrowings to total borrowings 19% 12% </TABLE> <TABLE> <CAPTION> CASH FLOW FIRST QUARTER (Dollars in millions) 1998 1997 <S> <C> <C> Net cash provided by (used in) Operating activities $ 50 $ 53 Investing activities (155) (189) Financing activities 119 163 ------- ------- Net change in cash and cash equivalents $ 14 $ 27 ======= ======= Cash and cash equivalents at end of period $ 43 $ 51 ======= ======= </TABLE> Cash provided by operating activities was essentially level with first quarter 1997. As of April 30 funding related to the 1997 partial settlement/curtailment of the pension plan has been made. Cash used in investing activities declined as a result of reduced capital expansion activity in 1998. Cash provided by financing activities reflects an increase in commercial paper borrowings in 1998, proceeds received in 1997 from a $300 million issuance of 7.60% debentures due February 1, 2027 which were used to repay commercial paper borrowings outstanding at that time, treasury stock purchases in 1997, and the payment of dividends in both years. 11
12 CAPITAL EXPENDITURES AND OTHER COMMITMENTS Eastman anticipates that total capital expenditures in 1998 will be between $550 million and $600 million and depreciation expense is expected to be approximately $350 million. Long-term commitments related to planned capital expenditures are not material. The Company had various purchase commitments at March 31, 1998 for materials, supplies, and energy incident to the ordinary conduct of business totaling approximately $800 million. LIQUIDITY Eastman has access to an $800 million revolving credit facility ("Credit Facility") expiring in December 2000. Although the Company does not have any amounts outstanding under the Credit Facility, any such borrowings would be subject to interest at varying spreads above quoted market rates, principally LIBOR. The Credit Facility also requires a facility fee on the total commitment that varies based on Eastman's credit rating. The annual rate for such fee was 0.075% as of March 31, 1998. The Credit Facility contains a number of covenants and events of default, including the maintenance of certain financial ratios. Eastman was in compliance with all such covenants for all periods. Eastman utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. The Company's commercial paper, supported by the Credit Facility, is classified as long-term borrowings because the Company has the ability and intent to refinance such borrowings long-term. As of March 31, 1998 the Company's commercial paper outstanding balance was $360 million at an effective interest rate of 5.72%. At March 31, 1997 the Company's commercial paper outstanding balance was $204 million at an effective interest rate of 5.59%. The Company repurchased a total of 5,935,301 shares of common stock during 1995, 1996 and 1997 at a cost of $369 million, and is currently authorized to purchase up to an additional $231 million of its common stock. Repurchased shares may be used to meet common stock requirements for compensation and benefit plans and other corporate purposes. In March 1998 the Company issued 536,188 treasury shares to the Eastman Employee Stock Ownership Plan in partial settlement of the 1997 Eastman Performance Plan obligation. Existing sources of capital, together with cash flows from operations, are expected to be sufficient to meet the Company's foreseeable cash flow requirements. <TABLE> <CAPTION> DIVIDENDS FIRST QUARTER 1998 1997 <S> <C> <C> Cash dividends declared per share $ .44 $ .44 </TABLE> YEAR 2000 ISSUE The year 2000 issue is the result of computer programs written using two digits rather than four to define the applicable year. Without corrective action, programs with time-sensitive software could potentially recognize a date ending in "00" as the year 1900 rather than the year 2000, causing many computer applications to fail or create erroneous results. This is a significant issue for most, if not all, companies, with far reaching implications, some of which cannot be anticipated or predicted with any degree of certainty. 12
13 Assessment and remediation of the Company's business computer systems, manufacturing control systems, and other embedded-chip devices for compliance with the year 2000 is underway or in some cases completed. As a result of assessments, modifications, upgrades, or replacements planned, ongoing, or already completed, the Company believes that the year 2000 issue will not pose significant problems for the Company's business, operations, or operating systems. The Company believes that the costs of modifications, upgrades, or replacements of software, hardware, or capital equipment which would not be incurred but for year 2000 compatibility requirements have not and will not have a material impact on the Company's financial position or results of operations. The Company has identified and is contacting customers, suppliers, and other critical business partners to determine if entities with which the Company transacts business have an effective plan in place to address the year 2000 issue, and to determine the extent of the Company's vulnerability to the failure of third parties to remediate their own year 2000 issue. Contingency plans are being developed as needed. HOLSTON DEFENSE CORPORATION Holston Defense Corporation, a wholly owned subsidiary of the Company, has managed the government-owned Holston Army Ammunition Plant in Kingsport, Tennessee since 1942 under contract with the Department of Army. The current contract expires December 31, 1998. Holston Defense Corporation has been notified that it is not a participant in the bidding process for the contract period beginning after December 31, 1998. The bidding process is still in progress, and its outcome and impact on Holston's continued management of the facility is currently uncertain. In the event that Holston Defense Corporation's management of the ammunition plant is terminated, payments to Holston Defense Corporation's employees, additional funding of pension and other postretirement benefits, and other termination costs could result. The Company expects that substantially all of these costs and payments would be ultimately reimbursed by the Department of Army, although delays in reimbursement may require the Company to advance funds to pay such costs. The management of the Company believes that the amounts, if any, not paid or recovered, or the advancement of funds by the Company pending such reimbursement or recovery, should not have a material effect on the consolidated financial position of the Company. The Company estimates the range of additional liabilities which it would accrue if Holston's management of the Facility were to terminate on December 31, 1998, without giving effect to any payment or reimbursement by the Department of Army, to be approximately $50 million to $75 million. Any unreimbursable amounts charged to future earnings are not expected to have a material adverse effect on the Company, although earnings in a particular quarter could be negatively impacted. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which requires enterprises to report selected information about operating segments and related disclosures about products and services, geographic areas, and major customers. The Company believes that no significant changes to current segment reporting will be required by the new standard. In February 1998 the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which standardizes and improves disclosures related to pensions and other postretirement benefits. The Company will comply with requirements of these new standards which become effective for the Company's year-end 1998 financial reporting. 13
14 OUTLOOK The Company expects higher sales and earnings for 1998 compared to 1997, driven by good demand and strong volume growth for products in all three segments as a result of new applications and new production capacity. However, ethylene and propylene derivatives such as oxo chemicals and polyethylene may face price and margin pressure as a result of additional industry capacity. Significant SPECTAR copolymer volume growth is expected due to strong demand and added production capacity in Malaysia. Volume growth is expected for the coatings line, driven by good demand for auto coatings and architectural coatings. Acetate tow volume is expected to stabilize as new industry capacity is absorbed and customer inventory reductions are completed, but prices will not improve from first quarter, 1998 levels and margin pressure is expected to continue. Modest growth in sales revenue is expected for fine chemicals based on increased volumes of pharmaceutical and agrochemical intermediates and the impact of new Epoxybutene-based derivatives. Moderate revenue growth is expected for performance chemicals. Within the Core Plastics segment, demand for EASTAPAK polymers is expected to continue to grow as new applications are developed and as applications move away from alternative packaging materials. Increased revenues and operating earnings are expected for container plastics products, driven by additional available capacity, reduced costs, and stable pricing. Recently introduced polyethylene performance polymers, MXSTEN and TENITE HIFOR, are expected to provide more profitable and less cyclical niche markets as they gain market acceptance. Within the Chemical Intermediates segment, a recently completed U.S. oxo plant expansion is expected to produce continued volume gains. Preproduction expenses related to new manufacturing facilities are expected to decline by the end of 1998 as these facilities begin production. Due to our limited exposure in Asia Pacific, the Company has not experienced any significant impact from the Asian financial crisis. However, if demand continues to weaken in Asia Pacific, it may have an indirect impact on our business in other regions. The Company is focused on improving management of working capital by accelerating cash receipts, reducing inventories, and improving credit payment policies with suppliers. The Company is prepared to take the necessary steps through its capital spending program and its Advantaged Cost 2000 initiative to maintain the financial flexibility necessary to realize its full potential to create value. The 1998 target for the Company's Advantaged Cost 2000 initiative is $100 million in labor and material productivity gains. In 1998 the Company expects a 20% reduction in capital spending, and depreciation expense is expected to be approximately $350 million. The above-stated expectations, other forward-looking statements in this report, and other statements of the Company relating to matters such as cost reduction targets; planned capacity increases and capital spending; the year 2000 issue; the Asian financial crisis; expected tax rates and depreciation; and supply and demand, unit volume, price, margin, and sales and earnings expectations and strategies for individual products, businesses, and segments, as well as for the whole of the Company, are based upon certain underlying assumptions. These assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions, and other factors and are subject to risks and uncertainties inherent in projecting future conditions and results. The forward-looking statements in this Management's Discussion and Analysis are based upon the following assumptions and those mentioned in the context of the specific statements: relatively stable economic business conditions in North America, improving business conditions in Europe, and continued growth in Latin America, supporting continued good overall demand for the Company's products; no significant impact on results of operations due to the Asian financial crisis; no significant decline in overall selling prices, except for fibers and commodity polyethylene products; continued demand growth worldwide for EASTAPAK polymers; continued capacity additions within the PET industry worldwide; capacity additions within the ethylene industry worldwide; declines in 14
15 preproduction expenses related to new manufacturing facilities; realization of recent EASTAPAK polymers price increases; stabilization of acetate tow demand and volume; relatively stable prices for and availability of key purchased raw materials; good market reception of new polyethylene products and continued shift of polyethylene product mix to less commodity products; availability of announced manufacturing capacity increases for container plastics, SPECTAR, coatings, and oxo products; and labor and material productivity gains sufficient to meet targeted cost structure reductions. Actual results could differ materially from current expectations if one or more of these assumptions prove to be inaccurate or are unrealized. - ----------------------------------- EASTAPAK, SPECTAR, MXSTEN, TENITE and TENITE HIFOR are trademarks of Eastman Chemical Company. 15
16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS LEGAL PROCEEDINGS As previously reported, in May 1997 the Company received notice from the Tennessee Department of Environment and Conservation ("TDEC") alleging that the manner in which hazardous waste was fed into certain boilers at the Tennessee Eastman facility in Kingsport, Tennessee violated provisions of the Tennessee Hazardous Waste Management Act. Based upon subsequent communications with the TDEC and the U.S. Environmental Protection Agency, the Company believes that these agencies may be contemplating enforcement proceedings which, if commenced, could result in monetary sanctions in excess of the $100,000 threshold of Regulation S-K, Item 103, Instruction 5.C. under the Securities Exchange Act of 1934 for reporting such contemplated proceedings in this Report. The Company's operations are parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, patent, 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 of such pending matters, including the TDEC allegations described in the preceding paragraph, will have a material adverse effect on the Company's financial position or results of operations. ITEM 2. CHANGES IN SECURITIES (c) On January 1, 1998, the Company granted options to purchase an aggregate of 840 shares of its common stock on or after July 1, 1998 at an exercise price of $59.5625 per share. Such options were granted to non-employee directors who elected under the 1996 Non-Employee Director Stock Option Plan to receive options in lieu of all or a portion of their semi-annual cash retainer fee. The Company issued the options in reliance upon the exemption from registration of Section 4(2) of the Securities Act of 1933. The Company did not sell any other equity securities during the quarterly period ended March 31, 1998 in transactions not registered under the Securities Act of 1933. For information concerning issuance of shares of Common Stock in March 1998 to the Company's ESOP, see Part I. Financial Information -- Item 1. Financial Statements -- Note 5 to Consolidated Financial Statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 18. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended March 31, 1998. 16
17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Eastman Chemical Company Date: April 30, 1998 By: /s/ Allan R. Rothwell --------------------- Allan R. Rothwell Senior Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer) 17
18 <TABLE> <CAPTION> EXHIBIT INDEX EXHIBIT DESCRIPTION SEQUENTIAL NUMBER PAGE NUMBER <S> <C> <C> 3.01 Amended and Restated Certificate of Incorporation of Eastman Chemical Company (incorporated herein by reference to Exhibit 3.01 to Eastman Chemical Company's Registration Statement on Form S-1, File No. 33-72364, as amended) 3.02 Amended and Restated By-laws of Eastman Chemical Company, as amended October 1, 1994 (incorporated by reference to Exhibit 3.02 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1994) 4.01 Form of Eastman Chemical Company Common Stock certificate (incorporated herein by reference to Exhibit 3.02 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1993) 4.02 Stockholder Protection Rights Agreement dated as of December 13, 1993, between Eastman Chemical Company and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.4 to Eastman Chemical Company's Registration Statement on Form S-8 relating to the Eastman Investment Plan, File No. 33-73810) 4.03 Indenture, dated as of January 10, 1994, between Eastman Chemical Company and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4(a) to Eastman Chemical Company's current report on Form 8-K dated January 10, 1994 (the "8-K")) 4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by reference to Exhibit 4(c) to the 8-K) 4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the 8-K) 4.06 Officers' Certificate pursuant to Sections 201 and 301 of the Indenture (incorporated herein by reference to Exhibit 4(a) to Eastman Chemical Company's Current Report on Form 8-K dated June 8, 1994 (the "June 8-K")) 4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the June 8-K) </TABLE> 18
19 <TABLE> <CAPTION> EXHIBIT INDEX EXHIBIT DESCRIPTION SEQUENTIAL NUMBER PAGE <S> <C> <C> 4.08 Form of 7.60% Debenture due February 1, 2027 (incorporated herein by reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 10-K") 4.09 Officer's Certificate pursuant to Sections 201 and 301 of the Indenture related to 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.09 to the 1996 10-K) 4.10 Credit Agreement, dated as of December 19, 1995 (the "Credit Agreement") among Eastman Chemical Company, the Lenders named therein, and The Chase Manhattan Bank, as Agent (incorporated herein by reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1995) *10.01 Eastman Annual Performance Plan (amended and restated effective March 4, 1998) 20-25 *10.02 Eastman Performance Plan (amended and restated effective March 4, 1998) 26-38 *10.03 Eastman 1996-1998 Long-Term Performance Subplan (as amended) of 1994 Omnibus Long-Term Compensation Plan 39-46 *10.04 Eastman 1998-2000 Long-Term Performance Subplan (as amended) of 1997 Omnibus Long-Term Compensation Plan 47-55 12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 56 27.01 Financial Data Schedule (for SEC use only) 27.02-27.08 Restated Financial Data Schedules for 1996 and 1997 (for SEC use only) 99.01 Supplemental Business Segment Information 57 - --------------------------------------------------------------------------------------------------- </TABLE> *Management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K. 19