EMN

Eastman Chemical Co. 10-Q Summary: Period Ended September 30, 1999

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for Eastman Chemical Company for the period ended September 30, 1999. The company operates in three primary segments: Specialty and Performance, Core Plastics, and Chemical Intermediates. The reporting period includes the impact of the acquisition of Lawter International, Inc., completed on June 9, 1999, and the expiration of the contract to manage the Holston Army Ammunition Plant on December 31, 1998.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Q3 sales increased 5% year-over-year due to higher volumes, partially offset by lower selling prices. Year-to-date sales declined 3% as lower prices outweighed volume gains.
• Profitability: Net earnings dropped 59% in Q3 and 60% year-to-date. Operating earnings fell 47% in Q3 and 45% year-to-date. The decline is attributed to worldwide price pressure and a sharp increase in propane costs.
• Segment Performance:
  • Specialty and Performance: Sales up 7% in Q3; operating earnings down 31% due to weakness in fibers and fine chemicals.
  • Core Plastics: Sales up 3% in Q3; operating loss widened to $16 million from $8 million due to lower prices and higher propane costs.
  • Chemical Intermediates: Sales up 2% in Q3; operating earnings down 74% to $7 million.
• Acquisition Impact: The acquisition of Lawter International added volume to coatings, inks, and resins but increased interest expense due to assumed debt ($145 million) and commercial paper borrowings.
• Debt: Long-term borrowings increased from $1,649 million to $2,090 million, driven by the Lawter acquisition and increased commercial paper usage.

Outlook, Risks, and Unusual Items

• Cost Reduction Plan: On October 18, 1999, management announced a plan to reduce costs by approximately $200 million, including a reduction of 1,200 employees. Estimated charges of $100–$150 million will be recognized in Q4 1999.
• Holston Defense Reimbursement: The Department of Army reimbursed approximately $20 million of previously expensed pension costs in Q4 1999, which will be credited to earnings.
• Legal Proceedings:
  • Sorbates Litigation: The company pleaded guilty to price-fixing in Canada and paid a $780,000 fine (recognized in Q4). Sixteen antitrust class-action lawsuits remain pending in the U.S. and Canada.
  • Environmental: A $2.75 million civil penalty was agreed upon with the EPA regarding hazardous waste monitoring; payments are being made in installments.
• Year 2000 Compliance: The company considers itself effectively Year 2000 ready with total costs expected to be under $20 million. Risks remain regarding third-party suppliers and potential customer inventory stockpiling in Q1 2000.
• Outlook: Management expects competitive market conditions and higher raw material costs to continue pressuring earnings in the near term, despite volume gains from acquisitions.

Investor Verification Checklist

• Verify the timing and magnitude of the $100–$150 million restructuring charge expected in Q4 1999.
• Monitor the status of the 16 pending antitrust class-action lawsuits regarding sorbates and potential liability exposure.
• Confirm the receipt of the $20 million Holston Defense pension reimbursement in Q4 earnings.
• Assess the impact of propane cost volatility on the Core Plastics and Chemical Intermediates segments.
• Review the integration progress and accretiveness of the Lawter International acquisition.
• Check for any updates on the $150 million accounts receivable securitization program and associated fees.