<PAGE> 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 June 30, 1997
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.
Number of Shares Outstanding at
Class June 30, 1997
Common Stock, par value $0.01 per share 78,373,373
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PAGE 1 OF 20 TOTAL SEQUENTIALLY NUMBER PAGES
EXHIBIT INDEX ON PAGE 16
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
1. Financial Statements 3- 6
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-12
PART II. OTHER INFORMATION
1. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
6. Exhibits and Reports on Form 8-K 14
SIGNATURES
Signatures 15
</TABLE>
2
<PAGE> 3
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $ 1,208 $ 1,241 $ 2,379 $ 2,502
Cost of sales 925 922 1,836 1,862
-------- -------- -------- ---------
Gross profit 283 319 543 640
Selling and general administrative expenses 84 85 162 169
Research and development costs 42 44 90 90
-------- -------- -------- ---------
Operating earnings 157 190 291 381
Interest expense, net 22 20 41 35
Other income, net 6 7 5 9
-------- -------- -------- --------
Earnings before income taxes 141 177 255 355
Provision for income taxes 51 65 93 131
-------- -------- -------- ---------
Net earnings $ 90 $ 112 $ 162 $ 224
======== ======== ======== =========
Net earnings per share $ 1.14 $ 1.41 $ 2.06 $ 2.80
======== ======== ======== =========
Retained earnings at beginning of period $ 1,966 $ 1,763 $ 1,929 $ 1,684
Net earnings 90 112 162 224
Cash dividends declared (34) (33) (69) (66)
--------- -------- --------- ---------
Retained earnings at end of period $ 2,022 $ 1,842 $ 2,022 $ 1,842
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 40 $ 24
Receivables 832 744
Inventories 474 465
Other current assets 112 112
--------- ---------
Total current assets 1,458 1,345
--------- ---------
Properties
Properties and equipment at cost 7,829 7,530
Less: Accumulated depreciation 4,105 4,010
--------- ---------
Net properties 3,724 3,520
--------- ---------
Other noncurrent assets 451 401
--------- ---------
Total assets $ 5,633 $ 5,266
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables $ 666 $ 708
Other current liabilities 111 79
--------- ---------
Total current liabilities 777 787
Long-term borrowings 1,766 1,523
Deferred income tax credits 336 348
Postemployment obligations 777 722
Other long-term liabilities 242 247
--------- ---------
Total liabilities 3,898 3,627
--------- ---------
Shareowners' equity
Common stock ($0.01 par-350,000,000 shares authorized;
shares issued - 84,064,451 and 83,386,459) 1 1
Paid-in capital 74 37
Retained earnings 2,022 1,929
Cumulative translation adjustment 4 31
--------- ---------
2,101 1,998
Less: Treasury stock at cost (5,889,311 and 5,766,528 shares) 366 359
--------- ---------
Total shareowners' equity 1,735 1,639
--------- ---------
Total liabilities and shareowners' equity $ 5,633 $ 5,266
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST SIX MONTHS
1997 1996
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 162 $ 224
--------- ---------
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation 159 152
Benefit for deferred income taxes (11) (9)
Increase in receivables (90) (50)
(Increase) decrease in inventories (26) 11
Increase (decrease) in incentive pay and
employee benefit liabilities 4 (102)
Increase (decrease) in liabilities excluding borrowings,
incentive pay, and employee benefit liabilities 67 (3)
Other items, net (2) 9
---------- ---------
Total adjustments 101 8
--------- ---------
Net cash provided by operating activities 263 232
--------- ---------
Cash flows from investing activities
Additions to properties and equipment (394) (310)
Proceeds from sales of assets 2 39
Capital advances to suppliers (22) (29)
Other items (2) 2
---------- ---------
Net cash used in investing activities (416) (298)
---------- ---------
Cash flows from financing activities
Net increase (decrease) in commercial paper borrowings (51) 208
Proceeds from long-term borrowings 295 -
Dividends paid to shareowners (70) (67)
Treasury stock purchases (8) (125)
Other items 3 9
--------- ---------
Net cash provided by financing activities 169 25
--------- ---------
Net change in cash and cash equivalents 16 (41)
Cash and cash equivalents at beginning of period 24 100
--------- ---------
Cash and cash equivalents at end of period $ 40 $ 59
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 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 1996 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>
JUNE 30, DECEMBER 31,
(Dollars in millions) 1997 1996
<S> <C> <C>
At FIFO or average cost (approximates current cost):
Finished goods $ 417 $ 426
Work in process 136 133
Raw materials and supplies 199 214
--------- ---------
Total inventories at FIFO or average cost 752 773
--------- ---------
Reduction to LIFO value (278) (308)
---------- ---------
Total inventories at LIFO value $ 474 $ 465
========= =========
Inventories valued on the LIFO method are approximately 80% of total
inventories in each of the periods.
</TABLE>
<TABLE>
<CAPTION>
3. DIVIDENDS SECOND QUARTER FIRST SIX MONTHS
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Cash dividends declared per share $ .44 $ .42 $ .88 $ .84
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
In March 1997 the Company issued 611,962 shares of its common stock with a
market value of $34 million to its Employee Stock Ownership Plan as partial
settlement of the Company's Eastman Performance Plan payout. This noncash
transaction is not reflected in the consolidated statement of cash flow.
6
<PAGE> 7
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
1996 Annual Report on Form 10-K, the Form 10-Q for the quarter ended March 31,
1997, and the unaudited interim consolidated financial statements included
elsewhere in this report.
RESULTS OF OPERATIONS
Second quarter 1997 reflects a reduction in net earnings compared to second
quarter 1996. However, in comparison with first quarter 1997 results, net
earnings increased 25%, primarily as a result of increased prices for EASTAPAK
polyethylene terephthalate ("PET") and lower propane feedstock costs. The
Company's net earnings for the six months produced an annualized return on
equity of 19%.
EARNINGS
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions, except 1997 1996 CHANGE 1997 1996 CHANGE
per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating earnings $ 157 $ 190 (17)% $ 291 $ 381 (24)%
Net earnings 90 112 (20) 162 224 (28)
Net earnings per share 1.14 1.41 (19) 2.06 2.80 (26)
</TABLE>
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
1997 1996 CHANGE 1997 1996 CHANGE
CHANGES IN EARNINGS PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Net earnings per share $1.14 $1.41 $(.27) $2.06 $2.80 $ (.74)
===== ======
Operations
Selling price $(.76) $(1.79)
Volume and mix .05 .15
Raw materials, supplies, and
energy costs .41 .92
Variable-incentive pay .14 .31
Other (.11) (.30)
----- ------
Change from operations (.27) (.71)
Other
Interest expense, net (.02) (.05)
Other income/charges - (.03)
Effective tax rate change .01 .01
Fewer shares outstanding .01 .04
----- -----
Total change $(.27) $(.74)
===== =====
</TABLE>
The principal factor contributing to the 1997 earnings decline was significantly
lower selling prices industry wide for PET. Increases in distribution expense
also negatively impacted operating earnings; this increase is primarily due to
costs associated with the interregional movement of PET and other products prior
to completion of new international manufacturing facilities in order to meet
market demand. Second quarter earnings were also negatively impacted by lower
unit volumes for fibers products and lower selling prices for fine chemicals.
Positive impacts on overall earnings for 1997 were lower variable-incentive
compensation and lower paraxylene, purified terephthalic acid ("PTA") and other
purchased raw material and energy costs, partially offset by higher propane
feedstock costs. Moderate increases in overall unit volumes and gains in labor
productivity also positively impacted earnings. Preproduction costs had a
moderately negative effect on earnings during 1997 and were slightly less than
those incurred during 1996. The Company estimates that foreign currency
fluctuations negatively impacted net earnings approximately $8 million for the
current quarter and $14 million year-to-date.
7
<PAGE> 8
SUMMARY BY INDUSTRY SEGMENT
SPECIALTY AND PERFORMANCE SEGMENT
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
Sales $675 $686 (2)% $1,344 $1,349 - %
Operating earnings 120 139 (14) 248 258 (4)
</TABLE>
The decrease in Specialty and Performance segment sales for second quarter was
attributable to lower selling prices, partially offset by unit volume gains.
Specialty plastics products achieved good unit volume gains, partially offset by
lower prices, primarily for amorphous EASTAPAK PET used in food packaging.
Performance chemicals results were negatively impacted by lower unit volumes
related to divestiture of several product lines in 1996, decreased sales of
EASTOTAC resins due to limited feedstock availability, and lower prices for
sorbates following start-up of new worldwide industry capacity. The Company's
coatings, inks, and resins products achieved good unit volume gains. Acetate tow
volumes in the first six months declined due to weaker sales in all markets
around the world. The decrease in operating earnings for second quarter was
primarily attributable to demand volatility for fine chemicals and lower volumes
for acetate tow. Operating earnings for fine chemicals products were also
negatively impacted in second quarter by higher costs associated with lower
capacity utilization and short-term production problems.
CORE PLASTICS SEGMENT
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
Sales $351 $373 (6)% $669 $796 (16)%
Operating earnings (loss) (3) 8 - (25) 48 -
</TABLE>
The sales change in the Core Plastics segment for second quarter and the first
six months was attributed to the segment's two major products: EASTAPAK PET and
TENITE polyethylene. Significantly lower EASTAPAK PET sales resulted from
significantly lower selling prices, partially offset by a 26% gain in container
plastics units sold during second quarter and a 19% gain in container plastics
units sold during first six months. A significant increase in TENITE
polyethylene prices was partially offset by decreased units sold. The decrease
in TENITE polyethylene units sold was primarily due to limited ethylene
availability caused by a delay in construction of the new ethylene pipeline.
Decreased operating earnings for the segment for second quarter and first six
months were attributed primarily to significantly lower EASTAPAK PET selling
prices, higher propane raw material costs, and lower TENITE polyethylene unit
volumes, partially offset by lower paraxylene and PTA raw material costs, and
significantly higher TENITE polyethylene selling prices. Increases in
distribution expense also negatively impacted operating earnings; this increase
is primarily due to costs associated with the interregional movement of PET
prior to completion of new international manufacturing facilities in order to
meet market demand.
CHEMICAL INTERMEDIATES SEGMENT
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
Sales $182 $182 - % $366 $357 3%
Operating earnings 40 43 (7) 68 75 (9)
</TABLE>
For the first six months, increased sales in the Chemical Intermediates segment
were attributed to an increase in units sold, primarily related to oxo
chemicals, partially offset by lower selling prices. Decreased operating
earnings for second quarter and the first six months were mainly attributed to
lower selling prices for oxo chemicals and plasticizers and higher propane raw
material costs.
(For supplemental analysis of Specialty and Performance, Core Plastics, and
Chemical Intermediates segment results, see Exhibit 99.01 to this Form 10-Q.)
8
<PAGE> 9
Summary by Customer Location
SALES BY REGION
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
United States and Canada $ 784 $ 832 (6)% $ 1,547 $ 1,671 (7)%
Europe, Middle East, and Africa 202 199 2 394 407 (3)
Asia Pacific 140 138 1 271 272 -
Latin America 82 72 14 167 152 10
</TABLE>
Sales in the United States for second quarter 1997 were $742 million, down 5%
from 1996 second quarter sales of $779 million. For first six months 1997, sales
in the United States were $1.462 billion compared with $1.563 billion in 1996.
Decreased sales were attributed to lower selling prices, primarily for EASTAPAK
PET, offset by a modest increase in overall units sold.
Sales outside the United States for second quarter 1997 were up 1% from 1996 and
were 39% of total sales, compared with 37% for second quarter 1996. For first
six months 1997, sales outside the United States were $917 million compared with
$939 million in 1996. First six months sales decreased in Europe, Middle East,
and Africa primarily due to lower EASTAPAK PET selling prices and negative
foreign exchange effects, partially offset by an increase in units sold.
Increased sales in Latin America resulted primarily from significantly higher
EASTAPAK PET units sold, partially offset by lower selling prices and lower
units sold for coatings, inks, and resins products. PET product availability
increased due to the start-up of a new PET manufacturing facility in Mexico.
SUMMARY OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
SALES $1,208 $1,241 (3)% $2,379 $2,502 (5)%
</TABLE>
Sales decreased in the second quarter and first six months 1997 due to lower
selling prices, partially offset by overall unit volume gains. As discussed
above, currency fluctuations had a negative effect on sales.
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
GROSS PROFIT $283 $319 (11)% $543 $640 (15)%
As a percentage of sales 23.4% 25.7% 22.8% 25.6%
</TABLE>
Gross profit decline was principally attributed to lower selling prices and
increased distribution costs, partially offset by lower overall purchased raw
material costs, decreased variable-incentive compensation, and an increase in
units sold.
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
SELLING AND GENERAL
ADMINISTRATIVE EXPENSES $84 $85 (1)% $162 $169 (4)%
As a percentage of sales 7.0% 6.8% 6.8% 6.8%
</TABLE>
The decrease in selling and general administrative expenses was primarily
attributed to decreased variable-incentive compensation costs.
9
<PAGE> 10
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT COSTS $42 $44 (5)% $90 $90 -%
As a percentage of sales 3.5% 3.5% 3.8% 3.6%
</TABLE>
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
INTEREST COSTS $31 $24 $60 $45
LESS CAPITALIZED INTEREST 9 4 19 10
--- --- --- ---
NET INTEREST EXPENSE $22 $20 10% $41 $35 17%
=== === === ===
</TABLE>
Interest costs increased due to an increase in borrowings and higher overall
effective interest rates. The increase in capitalized interest is directly
related to the major capital investment program currently underway within the
Company.
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 1997 1996 CHANGE 1997 1996 CHANGE
<S> <C> <C> <C> <C> <C> <C>
OTHER INCOME, NET $ 6 $ 7 (14)% $ 5 $ 9 (44)%
</TABLE>
Included in other income and other charges for 1997 are equity investment
results and foreign currency effects. In the second quarter 1996, the Company
recognized a $13 million pre-tax gain from the sale of the Company's food
emulsifier business, which was partially offset by equity investment losses and
unfavorable foreign currency effects. Both years include royalty and interest
income.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
FINANCIAL INDICATORS 1997 1996
<S> <C> <C>
For the first six months
Ratio of earnings to fixed charges 4.4x 7.4x
At the period ended June 30 and December 31
Current ratio 1.9x 1.7x
Percent of long-term borrowings to total capital 50% 48%
Percent of floating-rate borrowings to total borrowings 15% 21%
</TABLE>
<TABLE>
<CAPTION>
CASH FLOW FIRST SIX MONTHS
(Dollars in millions) 1997 1996
<S> <C> <C>
Net cash provided by (used in)
Operating activities $ 263 $ 232
Investing activities (416) (298)
Financing activities 169 25
------- -------
Net change in cash and cash equivalents $ 16 $ (41)
======= =======
Cash and cash equivalents at end of period $ 40 $ 59
======= =======
</TABLE>
Cash provided by operations increased primarily as a result of lower
variable-incentive compensation payments in 1997 as compared to 1996. The
increase in cash used in investing activities is consistent with the Company's
global expansion activities and primarily reflects capital expenditure
increases. Cash provided by financing activities reflects proceeds received from
a $300 million issuance of 7.60% debentures in early 1997, which were used to
repay commercial paper borrowings outstanding at that time. The outstanding
balance of commercial paper was $244 million as of June 30, 1997. An additional
factor affecting cash flows from financing activities was the decrease in
treasury stock purchases in 1997.
10
<PAGE> 11
CAPITAL EXPENDITURES
Eastman anticipates that total capital expenditures in 1997 will be
approximately $850 million, primarily for previously announced expansions in
worldwide manufacturing capacity. Depreciation expense is expected to be
approximately $330 million in 1997.
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 June 30, 1997. 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 June 30,
1997, the Company's commercial paper outstanding balance was $244 million at an
effective interest rate of 5.76%.
During first quarter 1997 the Company issued $300 million of 7.60% debentures
due February 1, 2027, and used the proceeds to repay previously outstanding
commercial paper borrowings.
In February 1996 the Company announced plans to repurchase up to $400 million of
additional Eastman common shares. In 1996 the Company repurchased $161 million
of Eastman common stock under the announced repurchase program, and during first
quarter 1997 acquired an additional 140,801 shares at a cost of $8 million.
There were no share repurchases during the second quarter. Given the Company's
capital expenditure program for 1997, Eastman does not expect to make any
significant additional share repurchases in 1997. Repurchased shares may be used
to meet common stock requirements for compensation and benefit plans and other
corporate purposes.
Receivables are increasing as a result of globalization efforts; however, there
are no collectibility issues related to this increase.
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 SECOND QUARTER FIRST SIX MONTHS
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Cash dividends declared per share $ .44 $ .42 $ .88 $ .84
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share," which is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Pro forma disclosures
of earnings per share calculated in accordance with the new standard follow:
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Pro Forma Basic EPS $ 1.15 $ 1.42 $ 2.08 $ 2.83
Pro Forma Diluted EPS 1.14 1.41 2.06 2.80
</TABLE>
11
<PAGE> 12
In January 1997 the SEC issued its Release on Derivative and Market Risk
Disclosures. The Release requires enhanced disclosure of accounting policies for
derivatives as well as quantitative and qualitative disclosures about market
risk inherent in derivatives and other financial instruments outside the
financial statements. The Company plans to comply with the provisions of this
Release which become effective for the Company's year-end 1997 financial
reporting.
In June 1997 the FASB issued two new Statements: SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 requires all items recognized
as components of other comprehensive income be reported in the financial
statements. SFAS No. 131 requires enterprises to report selected information
about operating segments and related disclosures about products and services,
geographic areas, and major customers. The Company plans to comply with the
provisions of these Statements, both of which become effective for fiscal years
beginning after December 15, 1997.
OUTLOOK
Looking forward, the Company expects continued good demand overall for its
products in 1997. For Specialty and Performance Segment products, the Company
expects low single digit revenue gains for all of 1997 with single digit volume
growth and slightly lower operating margins compared with 1996 as a result of
weaker fibers sales and pricing pressure on a number of products. The Company
expects double-digit volume growth for its Core Plastics Segment products
resulting from increased demand and additional available capacity for EASTAPAK
PET. The Company also expects EASTAPAK PET selling prices to remain under
significant pressure in 1997 due to growth in capacity over the next 1-2 years
in the worldwide PET industry, and negative earnings comparisons for Core
Plastics for 1997 compared with 1996, with flat revenues year-over year. The
Company expects the recently completed ethylene pipeline to improve its ability
to meet demand for existing and new polyethylene products during the second half
of 1997. The Company anticipates modest volume growth to more than offset lower
prices for its Chemical Intermediates segment products, with operating margins
remaining relatively flat versus 1996. 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 Company's Advantaged Cost 2000 initiative
target for 1997 is $100 million in labor and material productivity gains for
both 1997 and 1998. In 1998 the Company expects a 20% - 30% reduction in capital
spending and slightly higher depreciation expense.
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; expected depreciation;
and supply and demand, units sold, price, margin, sales and earnings
expectations 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 business conditions in North America,
improving business conditions in Europe, and continued growth in Latin America
and Asia Pacific, supporting continued good overall demand for the Company's
products; continued demand growth worldwide for PET; continued capacity
additions within the PET industry worldwide; realization of recent PET price
increases; relatively stable prices for and availability of key purchased raw
materials; good market reception of new polyethylene products; modest volume
increases for fibers; availability of manufacturing capacity increases; 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, TENITE and EASTOTAC are trademarks of Eastman Chemical Company.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's operations are parties to or targets of lawsuits,
claims, investigations, and proceedings, including product
liability, personal injury, patent, commercial, contract,
environmental, 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 will have a
material adverse effect on the Company's financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Shareowners was held on May 1,
1997. Five items of business were acted upon at the meeting: (i)
election of three directors to serve in the class for which the term
in office expires at the Annual Meeting of Shareowners in 2000 and
until their successors are duly elected and qualified; (ii) approval
of the proposed 1997 Omnibus Long-Term Compensation Plan; (iii)
approval of the Eastman Performance Plan; (iv) approval of the Eastman
Annual Performance Plan; and (v) ratification of the appointment of
Price Waterhouse LLP as independent accountants for the Company until
the Annual Meeting of Shareowners in 1998.
The results of the voting for the election of directors were as
follows:
<TABLE>
<CAPTION>
Votes Broker
Nominee Votes For Withheld Abstentions Nonvotes
----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Jerry E. Dempsey 66,397,365 292,482 0 0
Marilyn R. Marks 66,341,860 347,987 0 0
Gerald B. Mitchell 66,309,371 380,476 0 0
</TABLE>
Accordingly, each of the three nominees received a plurality of the votes cast
and was elected.
The results of the voting on the proposed 1997 Omnibus Long-Term Compensation
Plan were as follows:
Votes For Votes Against Abstentions Broker Nonvotes
---------- -------------- ----------- ----------------
46,267,643 11,035,949 645,589 8,740,666
Accordingly, the number of affirmative votes cast on the proposal
constituted a majority of the votes cast on the proposal at the meeting,
and the 1997 Omnibus Long-Term Compensation Plan was approved.
The results of the voting on the Eastman Performance Plan were as follows:
Votes For Votes Against Abstentions Broker Nonvotes
---------- ------------- ----------- ----------------
64,710,324 1,431,096 548,427 0
Accordingly, the number of affirmative votes cast on the proposal
constituted a majority of the votes cast on the proposal at the meeting,
and the Eastman Performance Plan was approved.
13
<PAGE> 14
The results of the voting on the Eastman Annual Performance Plan were as
follows:
Votes For Votes Against Abstentions Broker Nonvotes
--------- ------------- ----------- ---------------
64,535,613 1,622,636 531,598 0
Accordingly, the number of affirmative votes cast on the proposal
constituted a majority of the votes cast on the proposal at the meeting and
the Eastman Annual Performance Plan was approved.
The results of the voting on the ratification of the appointment of Price
Waterhouse LLP as independent accountants were as follows:
Votes For Votes Against Abstentions Broker Nonvotes
---------- ------------- ----------- ---------------
66,352,032 152,610 185,205 0
Accordingly, the number of affirmative votes cast on the proposal
constituted a majority of the votes cast on the proposal at the meeting,
and the appointment of Price Waterhouse LLP as independent accountants was
ratified.
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 16.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1997.
14
<PAGE> 15
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: July 29, 1997 By: /s/ H. Virgil Stephens
----------------------
H. Virgil Stephens
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
15
<PAGE> 16
<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)
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")
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
<S> <C> <C>
4.09 Officer's Certificate pursant 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 1997 Omnibus Long-Term Compensation Plan (incorporated herein
by reference to Appendix A to Eastman Chemical Company's
definitive 1997 Annual Meeting Proxy Statement filed pursuant
to Regulation 14A)
11.01 Statement re Computation of Earnings Per Common Share 18
12.01 Statement re Computation of Ratios of Earnings to Fixed 19
Charges
27.01 Financial Data Schedule (for SEC use only)
99.01 Supplemental Business Segment Information 20
</TABLE>
17
<PAGE> 1
EXHIBIT 11.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net earnings $ 90 $ 112 $ 162 $ 224
======== ======== ======== =========
Average number of common shares outstanding 78.1 78.7 77.9 79.2
Common share equivalents (1) 0.6 0.9 0.6 0.9
-------- -------- -------- ---------
Average number of common shares and
share equivalents 78.7 79.6 78.5 80.1
======== ======== ======== =========
Net earnings per share (2) $ 1.14 $ 1.41 $ 2.06 $ 2.80
======== ======== ======== =========
</TABLE>
- -----------------------
(1) Common share equivalents of the Company represent the effect of dilutive
stock options outstanding during the period.
(2) For all periods presented, primary earnings per share equals fully diluted
earnings per share.
18
<PAGE> 1
EXHIBIT 12.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Earnings before provision for income taxes $ 141 $ 177 $ 255 $ 355
Add:
Interest expense, net 22 20 41 35
Rental expense (1) 7 5 12 10
Amortization of capitalized interest 4 3 7 7
-------- -------- -------- ---------
Earnings as adjusted $ 174 $ 205 $ 315 $ 407
======== ======== ======== =========
Fixed charges:
Interest expense, net $ 22 $ 20 $ 41 $ 35
Rental expense (1) 7 5 12 10
Capitalized interest 9 4 19 10
-------- -------- -------- ---------
Total fixed charges $ 38 $ 29 $ 72 $ 55
======== ======== ======== =========
Ratio of earnings to fixed charges 4.6x 7.1x 4.4x 7.4x
======== ======== ======== =========
</TABLE>
- ----------------------
(1) For all periods presented, interest component of rental expense is
estimated to equal one-third of such expense.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EASTMAN CHEMICAL COMPANY FOR THE SIX MONTHS ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 40
<SECURITIES> 0
<RECEIVABLES> 832<F1>
<ALLOWANCES> 0
<INVENTORY> 474
<CURRENT-ASSETS> 1,458
<PP&E> 7,829
<DEPRECIATION> 4,105
<TOTAL-ASSETS> 5,633
<CURRENT-LIABILITIES> 777
<BONDS> 1,766
0
0
<COMMON> 1
<OTHER-SE> 1,734
<TOTAL-LIABILITY-AND-EQUITY> 5,633
<SALES> 2,379
<TOTAL-REVENUES> 2,379
<CGS> 1,836
<TOTAL-COSTS> 1,836
<OTHER-EXPENSES> 252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 255
<INCOME-TAX> 93
<INCOME-CONTINUING> 162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.06
<FN>
<F1>Asset values represent net amounts.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL BUSINESS SEGMENT INFORMATION
1997 CHANGE FROM 1996
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
% CHANGE % CHANGE
SALES UNIT OPERATING SALES UNIT OPERATING
REVENUE VOLUME EARNINGS(1) REVENUE VOLUME EARNINGS(1)
------- ------ ----------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
SPECIALTY & PERFORMANCE SEGMENT
Specialty plastics 4% 19% ++ 1% 19% ++
Performance chemicals (13)% (8)% - (8)% (6)% -
Fine chemicals (5)% 11% -- (1)% 5% --
Fibers (10)% (8)% -- (6)% (6)% -
Coatings, inks & resins 6% 8% ++ 7% 10% ++
Total Segment (2)% 8% (14)% -% 8% (4)%
=== == ==== === === ====
CORE PLASTICS SEGMENT
Container plastics (12)% 26% -- (25)% 19% --
Flexible plastics 7% (9)% ++ 6% (11)% ++
Total Segment (6)% 12% (138)% (16)% 7% (152)%
=== == ==== === === ====
CHEMICAL INTERMEDIATES SEGMENT
Industrial intermediates -% 2% - 3% 5% -
Total Segment -% 2% (7)% 3% 5% (9)%
=== == ==== === === ====
Total Eastman (3)% 7% (17)% (5)% 7% (24)%
=== == ==== === === ====
</TABLE>
- ------------------------------
(1) 0 = Change of approximately 0 - 2% (+ or -)
+ = Increase of approximately 2 - 10%
++ = Increase of greater than 10%
- = Decrease of approximately (2) - (10)%
-- = Decrease of greater than (10%)
Sm = Negligible change in dollar amount
Nm = Not meaningful
20
