EASTMAN CHEMICAL CO - Quarter Report: 2019 June (Form 10-Q)



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q



(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	June 30, 2019
	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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	EMN	New York Stock Exchange
1.50% Notes Due 2023	EMN23	New York Stock Exchange
1.875% Notes Due 2026	EMN26	New York Stock Exchange

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

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, 2019
Common Stock, par value $0.01 per share	136,994,148

--------------------------------------------------------------------------------------------------------------------------------



Table of Contents

TABLE OF CONTENTS



ITEM		PAGE



	Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION



1.	Financial Statements

	Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings	4
	Unaudited Consolidated Statements of Financial Position	5
	Unaudited Consolidated Statements of Cash Flows	6
	Notes to the Unaudited Consolidated Financial Statements	7

2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

3.	Quantitative and Qualitative Disclosures About Market Risk	50

4.	Controls and Procedures	51

PART II. OTHER INFORMATION



1.	Legal Proceedings	51

1A.	Risk Factors	52

2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

6.	Exhibits	53

SIGNATURES



	Signatures	55



Table of Contents

FORWARD-LOOKING STATEMENTS

Certain statements made or incorporated by reference in this Quarterly Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act (Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended). Forward-looking statements are all statements, other than statements of historical fact, that may be made by Eastman Chemical Company ("Eastman" or the "Company") from time to time. In some cases, you can identify forward-looking statements by terminology such as "anticipates", "believes", "estimates", "expects", "intends", "may", "plans", "projects", "will", "would", and similar expressions or expressions of the negative of these terms. Forward-looking statements may relate to, among other things, such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters and opportunities (including potential risks associated with physical impacts of climate change and related voluntary and regulatory carbon requirements); exposure to, and effects of hedging of, raw material and energy prices and costs; foreign currencies and interest rates; disruption or interruption of operations and of raw material or energy supply; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin and sales; pending and future legal proceedings; earnings, cash flow, dividends, stock repurchases and other expected financial results, events, and conditions; expectations, strategies, and plans for individual assets and products, businesses, and operating segments, as well as for the whole of Eastman; cash requirements and uses of available cash; financing plans and activities; pension expenses and funding; credit ratings; anticipated and other future restructuring, acquisition, divestiture, and consolidation activities; cost reduction and control efforts and targets; the timing and costs of, and benefits from, the integration of, and expected business and financial performance of, acquired businesses; strategic and technology and product innovation initiatives and development, production, commercialization and acceptance of new products, services and technologies and related costs; asset, business, and product portfolio changes; and expected tax rates and net interest costs.

Forward-looking statements are based upon certain underlying assumptions as of the date such statements were made. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. Forward-looking statements and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. The most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements are identified and discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part I, Item 2 of this Quarterly Report. Other factors, risks or uncertainties of which management is not aware, or presently deems immaterial, could also cause actual results to differ materially from those in the forward-looking statements.

The Company cautions you not to place undue reliance on forward-looking statements, which speak only as of the date such statements are made. Except as may be required by law, the Company undertakes no obligation to update or alter these forward-looking statements, whether as a result of new information, future events, or otherwise. Investors are advised, however, to consult any further public Company disclosures (such as filings with the Securities and Exchange Commission or in Company press releases) on related subjects.



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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,

COMPREHENSIVE INCOME AND RETAINED EARNINGS



	Second Quarter						First Six Months
(Dollars in millions, except per share amounts)	2019			2018			2019			2018
Sales	$	2,363		$	2,621		$	4,743		$	5,228
Cost of sales	1,774			1,917			3,580			3,943
Gross profit	589			704			1,163			1,285
Selling, general and administrative expenses	165			189			352			379
Research and development expenses	57			60			115			116
Asset impairments and restructuring charges, net	18			4			50			6
Other components of post-employment (benefit) cost, net	(21		)	(30		)	(42		)	(60		)
Other (income) charges, net	(1		)	(10		)	(3		)	(56		)
Earnings before interest and taxes	371			491			691			900
Net interest expense	55			61			111			120
Earnings before income taxes	316			430			580			780
Provision for income taxes	57			84			112			144
Net earnings	259			346			468			636
Less: Net earnings attributable to noncontrolling interest	1			2			1			2
Net earnings attributable to Eastman	$	258		$	344		$	467		$	634

Basic earnings per share attributable to Eastman	$	1.87		$	2.42		$	3.37		$	4.45
Diluted earnings per share attributable to Eastman	$	1.85		$	2.39		$	3.34		$	4.39



Comprehensive Income
Net earnings including noncontrolling interest	$	259		$	346		$	468		$	636
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment	(13		)	(34		)	17			(7		)
Defined benefit pension and other postretirement benefit plans:
Amortization of unrecognized prior service credits	(8		)	(8		)	(15		)	(15		)
Derivatives and hedging:
Unrealized gain (loss) during period	(22		)	64			(12		)	41
Reclassification adjustment for (gains) losses included in net income, net	2			(3		)	—			(3		)
Total other comprehensive income (loss), net of tax	(41		)	19			(10		)	16
Comprehensive income including noncontrolling interest	218			365			458			652
Less: Comprehensive income attributable to noncontrolling interest	1			2			1			2
Comprehensive income attributable to Eastman	$	217		$	363		$	457		$	650
Retained Earnings
Retained earnings at beginning of period	$	7,675		$	7,026		$	7,573		$	6,802
Cumulative effect adjustment resulting from adoption of new accounting standards	—			—			(20		)	16
Net earnings attributable to Eastman	258			344			467			634
Cash dividends declared	(85		)	(78		)	(172		)	(160		)
Retained earnings at end of period	$	7,848		$	7,292		$	7,848		$	7,292

The accompanying notes are an integral part of these consolidated financial statements.



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UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



	June 30,			December 31,
(Dollars in millions, except per share amounts)	2019			2018
Assets
Current assets
Cash and cash equivalents	$	186		$	226
Trade receivables, net of allowance for doubtful accounts	1,232			1,154
Miscellaneous receivables	286			329
Inventories	1,730			1,583
Other current assets	82			73
Total current assets	3,516			3,365
Properties
Properties and equipment at cost	12,848			12,731
Less: Accumulated depreciation	7,298			7,131
Net properties	5,550			5,600
Goodwill	4,481			4,467
Intangible assets, net of accumulated amortization	2,093			2,185
Other noncurrent assets	616			378
Total assets	$	16,256		$	15,995

Liabilities and Stockholders' Equity
Current liabilities
Payables and other current liabilities	$	1,495		$	1,608
Borrowings due within one year	731			243
Total current liabilities	2,226			1,851
Long-term borrowings	5,624			5,925
Deferred income tax liabilities	888			884
Post-employment obligations	892			925
Other long-term liabilities	680			532
Total liabilities	10,310			10,117
Stockholders' equity
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 219,607,125 and 219,140,523 for 2019 and 2018, respectively)	2			2
Additional paid-in capital	2,079			2,048
Retained earnings	7,848			7,573
Accumulated other comprehensive income (loss)	(235		)	(245		)
	9,694			9,378
Less: Treasury stock at cost (82,663,775 shares for 2019 and 79,413,989 shares for 2018)	3,825			3,575
Total Eastman stockholders' equity	5,869			5,803
Noncontrolling interest	77			75
Total equity	5,946			5,878
Total liabilities and stockholders' equity	$	16,256		$	15,995

The accompanying notes are an integral part of these consolidated financial statements.



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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS



	First Six Months
(Dollars in millions)	2019			2018
Operating activities
Net earnings	$	468		$	636
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	311			300
Gain from property insurance	—			(65		)
Provision for deferred income taxes	11			5
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
(Increase) decrease in trade receivables	(80		)	(213		)
(Increase) decrease in inventories	(148		)	(158		)
Increase (decrease) in trade payables	(88		)	(10		)
Pension and other postretirement contributions (in excess of) less than expenses	(65		)	(78		)
Variable compensation (in excess of) less than expenses	(45		)	(24		)
Other items, net	53			15
Net cash provided by operating activities	417			408
Investing activities
Additions to properties and equipment	(198		)	(244		)
Proceeds from property insurance	—			65
Acquisitions, net of cash acquired	(19		)	—
Other items, net	(2		)	—
Net cash used in investing activities	(219		)	(179		)
Financing activities
Net increase (decrease) in commercial paper and other borrowings	239			268
Proceeds from borrowings	225			350
Repayment of borrowings	(275		)	(428		)
Dividends paid to stockholders	(173		)	(160		)
Treasury stock purchases	(250		)	(250		)
Dividends paid to noncontrolling interest	(1		)	(2		)
Other items, net	(2		)	(1		)
Net cash used in financing activities	(237		)	(223		)
Effect of exchange rate changes on cash and cash equivalents	(1		)	(4		)
Net change in cash and cash equivalents	(40		)	2
Cash and cash equivalents at beginning of period	226			191
Cash and cash equivalents at end of period	$	186		$	193

The accompanying notes are an integral part of these consolidated financial statements.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



		Page

Note 1.	Significant Accounting Policies	8
Note 2.	Inventories	9
Note 3.	Payables and Other Current Liabilities	10
Note 4.	Income Taxes	10
Note 5.	Borrowings	11
Note 6.	Derivative and Non-Derivative Financial Instruments	12
Note 7.	Retirement Plans	18
Note 8.	Leases and Off Balance Sheet Items	19
Note 9.	Environmental Matters and Asset Retirement Obligations	21
Note 10.	Legal Matters	22
Note 11.	Stockholders' Equity	23
Note 12.	Earnings and Dividends Per Share	26
Note 13.	Asset Impairments and Restructuring Charges, Net	26
Note 14.	Share-Based Compensation Awards	27
Note 15.	Other (Income) Charges, Net	28
Note 16.	Supplemental Cash Flow Information	28
Note 17.	Segment Information	28



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.	SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company ("Eastman" or the "Company") in accordance and consistent with the accounting policies stated in the Company's 2018 Annual Report on Form 10-K, and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of that report, with the exception of the items noted below. The December 31, 2018 financial position data included herein was derived from the audited consolidated financial statements included in the 2018 Annual Report on Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP").

In the opinion of management, the unaudited consolidated financial statements include all normal recurring adjustments necessary for fair statement of the interim financial information in conformity with GAAP. These statements contain 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.

Recently Adopted Accounting Standards

Accounting Standards Update ("ASU") 2016-02 Leases: On January 1, 2019, Eastman adopted this standard, and related releases, under the modified retrospective optional transition method such that prior period financial statements have not been adjusted to reflect the impact of the new standard and adoption did not result in an impact to retained earnings. Upon adoption, operating right-to-use assets and lease liabilities were $208 million. The new standard establishes two types of leases: finance and operating. Both finance and operating leases have associated right-to-use assets and lease liabilities that have been valued at the present value of the lease payments and recognized on the Unaudited Consolidated Statement of Financial Position. For further information, see Note 8, "Leases and Off Balance Sheet Items".

ASU 2018-02 Income Statement - Reporting Comprehensive Income: On January 1, 2019, Eastman adopted this standard in the current period resulting in the reclassification of $20 million of stranded tax expense from accumulated other comprehensive income (loss) ("AOCI") to retained earnings as a result of the 2017 Tax Cuts and Jobs Act ("Tax Reform Act"). The amount of the reclassification is the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances related to items remaining in AOCI.

ASU 2018-15 Internal-Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract: On January 1, 2019, Eastman adopted this standard prospectively which did not result in a material impact on the Company's financial statements and related disclosures.

ASU 2018-16 Derivatives and Hedging - Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes: On January 1, 2019, Eastman adopted this standard prospectively for qualifying new or redesignated hedging relationships. Management does not expect the adoption of this standard will materially impact the Company's financial statements and related disclosures.

Accounting Standards Issued But Not Adopted as of June 30, 2019

ASU 2016-13 Financial Instruments - Credit Losses: In June 2016, the Financial Accounting Standards Board ("FASB") issued this standard relating to credit losses and subsequent related releases. The amendments require a financial asset (including trade receivables) to be presented at the net amount expected to be collected through the use of allowances for credit losses valuation account. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period and early adoption is permitted, including adoption in an interim period, beginning after December 15, 2018. The new standard application is mixed among the various elements that include modified retrospective and prospective transition methods. Management does not expect that changes in its accounting required by the new standard will materially impact the Company's financial statements and related disclosures.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

ASU 2018-13 Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued this update as a part of its disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The primary change impacting Eastman in this update is in regards to disclosures of fair value levels, assessment thereof, and transfers between those levels. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption was permitted upon issuance of this update and an entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until the effective date. Certain disclosure amendments are to be applied prospectively for only the most recent interim or annual period presented, while other amendments are to be applied retrospectively to all periods presented. Management is currently evaluating implementation options and impact on the Company's related disclosures.

ASU 2018-14 Retirement Benefits - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans: In August 2018, the FASB issued this update as a part of its disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The primary change impacting Eastman is the addition of disclosures related to significant gains and losses related to changes in the benefit obligation for the period and weighted-average interest crediting rates for cash balance plans. This standard is effective for fiscal years ending after December 15, 2020 and early adoption is permitted. Upon adoption, this update is to be applied on a retrospective basis to all periods presented. Management is currently evaluating the impact on the Company's related disclosures.

ASU 2018-18 Collaborative Arrangements - Clarifying the Interaction between Topic 808 (Collaborative Arrangements) and Topic 606 (Revenue from Contracts with Customers): In November 2018, the FASB issued clarification in regards to which contracts are accounted for under Topic 808 and Topic 606 as well as alignment of guidance between the two pronouncements. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. Upon adoption, this update is to be applied retrospectively to the date of initial application of Topic 606. Management is currently evaluating the impact on the Company's financial statements and related disclosures.

ASU 2019-01 Leases - Codification Improvements: In March 2019, the FASB issued this update in response to stakeholder inquiries regarding the new leasing standard. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. Upon adoption, this update is to be applied as of the adoption date and using the same transition methodology of ASU 2016-02 Leases. Management is currently evaluating the impact on the Company's financial statements and related disclosures.


2.	INVENTORIES



	June 30,		December 31,
(Dollars in millions)	2019		2018
Finished goods	$	1,205	$	1,143
Work in process	252		262
Raw materials and supplies	573		515
Total inventories at FIFO or average cost	2,030		1,920
Less: LIFO reserve	300		337
Total inventories	$	1,730	$	1,583

Inventories valued on the last-in, first-out ("LIFO") method were approximately 55 percent of total inventories at both June 30, 2019 and December 31, 2018.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


3.	PAYABLES AND OTHER CURRENT LIABILITIES



	June 30,		December 31,
(Dollars in millions)	2019		2018
Trade creditors	$	814	$	914
Accrued payroll and variable compensation	116		197
Accrued taxes	89		94
Other	476		403
Total payables and other current liabilities	$	1,495	$	1,608

"Other" consists primarily of accruals for post-employment obligations, dividends payable, interest payable, the current portion of operating lease liabilities, the current portion of derivative hedging liabilities, the current portion of environmental liabilities, and miscellaneous accruals.


4.	INCOME TAXES



	Second Quarter								First Six Months
(Dollars in millions)	2019				2018				2019				2018
	$		%		$		%		$		%		$		%
Provision for income taxes and tax rate	$	57	18	%	$	84	20	%	$	112	19	%	$	144	19	%

Second quarter and first six months 2019 effective tax rates include adjustments to the tax provision to reflect amendments to and finalization of prior year's income tax returns in foreign jurisdictions. In second quarter and first six months 2018, the Company recognized an increase to the provision for income taxes of $10 million from an adjustment of the provisional net tax benefit recognized in fourth quarter 2017 resulting from the Tax Reform Act and tax impact of outside-U.S. entity reorganizations as part of the transition to an international treasury services center. The adjustment increased the one-time transition tax on deferred foreign income resulting from the Tax Reform Act. First six months 2018 effective tax rate included the impact of the U.S. corporate tax rate reduction resulting from the Tax Reform Act.

The U.S. Department of Treasury has issued a number of proposed regulations related to implementation of the provisions of the Tax Reform Act and certain states may issue clarifying guidance regarding state income tax conformity to the current federal tax code. Finalization of these regulations in 2019 or future periods may result in changes in the period of enactment to the amounts currently reported in the Unaudited Consolidated Statements of Financial Position.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


5.	BORROWINGS



	June 30,		December 31,
(Dollars in millions)	2019		2018
Borrowings consisted of:
2.7% notes due January 2020	$	250	$	250
4.5% notes due January 2021	185		185
3.5% notes due December 2021	298		297
3.6% notes due August 2022	739		739
1.50% notes due May 2023 ⁽¹⁾	851		855
7 1/4% debentures due January 2024	197		197
7 5/8% debentures due June 2024	43		43
3.8% notes due March 2025	695		691
1.875% notes due November 2026 ⁽¹⁾	563		566
7.60% debentures due February 2027	195		195
4.5% notes due December 2028	492		492
4.8% notes due September 2042	493		493
4.65% notes due October 2044	873		872
Commercial paper and short-term borrowings	481		243
Credit facilities borrowings	—		50
Total borrowings	6,355		6,168
Borrowings due within one year	731		243
Long-term borrowings	$	5,624	$	5,925

⁽¹⁾

The carrying value of the euro-denominated 1.50% notes due May 2023 and 1.875% notes due November 2026 will fluctuate with changes in the euro exchange rate. The carrying value of these euro-denominated borrowings have been designated as non-derivative net investment hedges of a portion of the Company's net investments in euro functional-currency denominated subsidiaries to offset foreign currency fluctuations.

Credit Facilities and Commercial Paper Borrowings

The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring October 2023. 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. The Credit Facility provides available liquidity for general corporate purposes and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. At June 30, 2019 and December 31, 2018, the Company had no outstanding borrowings under the Credit Facility. At June 30, 2019, the Company's commercial paper borrowings were $373 million with a weighted average interest rate of 2.63 percent. At December 31, 2018, the Company's commercial paper borrowings were $130 million with a weighted average interest rate of 2.91 percent.

The Company has access to up to $250 million under an accounts receivable securitization agreement (the "A/R Facility") that expires April 2020. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. In first quarter 2019, $125 million available under the A/R Facility was borrowed and $175 million repaid using available cash. In second quarter 2019, $100 million available under the A/R Facility was borrowed and $100 million repaid using available cash. At June 30, 2019, the Company had no borrowings outstanding under the A/R Facility. At December 31, 2018, the Company's borrowings under the A/R Facility were $50 million with an interest rate of 3.39 percent.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company has access to borrowings of up to €150 million ($171 million) under a receivables facility based on the discounted value of selected customer accounts receivable. This facility expires December 2020 and renews for another one year period if not terminated with 90 days notice by either party. These arrangements include receivables in the United States, Belgium, and Finland, and are subject to various eligibility requirements. Borrowings under this facility are subject to interest at an agreed spread above LIBOR and EURIBOR plus administration and insurance fees and are classified as short-term. At June 30, 2019, the Company's outstanding borrowings under this facility were $108 million with a weighted average interest rate of 1.58 percent. At December 31, 2018, the Company's amount of outstanding borrowings under this facility were $112 million with a weighted average interest rate of 1.70 percent.

The Credit and A/R Facilities and other borrowing agreements contain customary covenants and events of default, some of which require the Company to maintain certain financial ratios that determine the amounts available and terms of borrowings. The Company was in compliance with all covenants at both June 30, 2019 and December 31, 2018.

Fair Value of Borrowings

Eastman has classified its total borrowings at June 30, 2019 and December 31, 2018 under the fair value hierarchy as described in the accounting policies in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K. The fair value for fixed-rate debt securities is based on quoted market prices for the same or similar debt instruments and is classified as Level 2. The fair value for the Company's other borrowings primarily under the commercial paper and receivables facility equals the carrying value and is classified as Level 2. At June 30, 2019 and December 31, 2018, the fair value of total borrowings was $6.781 billion and $6.216 billion, respectively. The Company had no borrowings classified as Level 3 as of June 30, 2019 and December 31, 2018.


6.	DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS

Overview of Hedging Programs

Eastman is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transactions and investments in foreign subsidiaries, the Company uses various derivative and non-derivative financial instruments, when appropriate, in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The Company does not enter into derivative transactions for speculative purposes.

For further information on hedging programs, see Note 9, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K.

Cash Flow Hedges

Cash flow hedges are derivative instruments designated and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative instruments that are designated and qualify as a cash flow hedge are reported on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The change in the hedge instrument is reported as a component of AOCI located in the Unaudited Consolidated Statements of Financial Position and reclassified in earnings in the same period or periods during which the hedged transaction affects earnings.

Fair Value Hedges

Fair value hedges are defined as derivative or non-derivative instruments designated 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. The derivative instruments that are designated and qualify as fair value hedges are recognized on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated fair value of the underlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for qualifying fair value hedges is recognized in earnings in the same period or periods during which the hedged transaction affects earnings.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Net Investment Hedges

Net investment hedges are defined as derivative or non-derivative instruments designated and used to hedge the foreign currency exposure of the net investments in certain foreign operations. The net of the change in the hedge instrument and item being hedged for qualifying net investment hedges is reported as a component of the "Cumulative Translation Adjustment" ("CTA") within AOCI located in the Unaudited Consolidated Statements of Financial Position. Recognition in earnings of amounts previously recognized in CTA is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation.

For derivative cross-currency interest rate swap net investment hedges, gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in CTA within AOCI and recognized in earnings through the periodic swap interest accruals. The cross-currency interest rate swaps designated as net investment hedges are included as part of "Other long-term liabilities" or "Other noncurrent assets" within the Unaudited Consolidated Statements of Financial Position.

In January 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €150 million ($180 million) maturing January 2021 and €266 million ($320 million) maturing August 2022.

In October 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €165 million ($190 million) maturing January 2024, €104 million ($120 million) maturing March 2025, and €165 million ($190 million) maturing February 2027.

Summary of Financial Position and Financial Performance of Hedging Instruments

The following table presents the notional amounts outstanding at June 30, 2019 and December 31, 2018 associated with Eastman's hedging programs.



Notional Outstanding		June 30, 2019	December 31, 2018

Derivatives designated as cash flow hedges:
Foreign Exchange Forward and Option Contracts (in millions)
	EUR/USD (in EUR)	€377	€263
Commodity Forward and Collar Contracts
	Feedstock (in million barrels)	3	5
	Energy (in million british thermal units)	32	40

Derivatives designated as fair value hedges:
Fixed-for-floating interest rate swaps (in millions)		$75	$75

Derivatives designated as net investment hedges:
Cross-currency interest rate swaps (in millions)
	EUR/USD (in EUR)	€851	€851

Non-derivatives designated as net investment hedges:
Foreign Currency Net Investment Hedges (in millions)
	EUR/USD (in EUR)	€1,242	€1,241



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

All of the Company's derivative assets and liabilities are currently classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs that 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 transaction counterparties to validate the accuracy of its standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance, and the Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an ongoing basis. The Company did not recognize a credit loss during second quarter 2019 and 2018.

All 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 in 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 does not have any cash collateral due under such agreements.

The Company has elected to present derivative contracts on a gross basis within the Unaudited Consolidated Statements of Financial Position. The following table presents the financial assets and liabilities valued on a recurring and gross basis and includes where the financial assets and liabilities are located within the Unaudited Consolidated Statements of Financial Position as of June 30, 2019 and December 31, 2018.



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The Financial Position and Fair Value Measurements of Hedging Instruments on a Gross Basis
(Dollars in millions)
Derivative Type	Statements of Financial Position Classification	June 30, 2019 Level 2		December 31, 2018 Level 2
Derivatives designated as cash flow hedges:
Commodity contracts	Other current assets	$	—	$	4
Foreign exchange contracts	Other current assets	10		15
Foreign exchange contracts	Other noncurrent assets	3		4

Derivatives designated as fair value hedges:
Fixed-for-floating interest rate swap	Other current assets	1		1

Derivatives designated as net investment hedges:
Cross-currency interest rate swaps	Other noncurrent assets	45		26
Total Derivative Assets		$	59	$	50

Derivatives designated as cash flow hedges:
Commodity contracts	Payables and other current liabilities	$	25	$	24
Commodity contracts	Other long-term liabilities	4		5
Foreign exchange contracts	Payables and other current liabilities	1		—
Foreign exchange contracts	Other long-term liabilities	1		—

Derivatives designated as fair value hedges:
Fixed-for-floating interest rate swap	Long-term borrowings	1		4
Total Derivative Liabilities		$	32	$	33
Total Net Derivative Assets (Liabilities)		$	27	$	17

In addition to the fair value associated with derivative instruments designated as cash flow hedges, fair value hedges, and net investment hedges noted in the table above, the Company had a carrying value of $1.4 billion associated with non-derivative instruments designated as foreign currency net investment hedges at both June 30, 2019 and December 31, 2018. The designated foreign currency-denominated borrowings are included as part of "Long-term borrowings" within the Unaudited Consolidated Statements of Financial Position.

For additional fair value measurement information, see Note 1, "Significant Accounting Policies", and Note 9, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K.



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As of June 30, 2019 and December 31, 2018, the following amounts were included on the Unaudited Consolidated Statements of Financial Position related to cumulative basis adjustments for fair value hedges.



(Dollars in millions)	Carrying amount of the hedged liabilities				Cumulative amount of fair value hedging loss adjustment included in the carrying amount of the hedged liability
Line item in the Unaudited Consolidated Statements of Financial Position in which the hedged item is included	June 30, 2019		December 31, 2018		June 30, 2019			December 31, 2018
Long-term borrowings ⁽¹⁾	$	762	$	759	$	(8	)	$	(12	)


⁽¹⁾	At both June 30, 2019 and December 31, 2018, the cumulative amount of fair value hedging loss adjustment remaining for hedged liabilities for which hedge accounting has been discontinued was $7 million.

The following table presents the effect of the Company's hedging instruments on "Other comprehensive income (loss), net of tax" ("OCI") and financial performance for second quarter and first six months 2019 and 2018.



	Change in amount of after tax gain (loss) recognized in OCI on derivatives											Pre-tax amount of gain (loss) reclassified from OCI into earnings
(Dollars in millions)	Second Quarter					First Six Months						Second Quarter						First Six Months
Hedging Relationships	2019			2018		2019			2018			2019			2018			2019			2018
Derivatives in cash flow hedging relationships:
Commodity contracts	$	(13	)	$	40	$	(6	)	$	29		$	(8	)	$	(3	)	$	(11	)	$	(5	)
Foreign exchange contracts	(7		)	20		(6		)	7			7			8			13			11
Forward starting interest rate and treasury lock swap contracts	1			1		2			2			(1		)	(1		)	(2		)	(2		)
Non-derivatives in net investment hedging relationships (pre-tax):
Net investment hedges	(18		)	81		8			39			—			—			—			—
Derivatives in net investment hedging relationships (pre-tax):
Cross-currency interest rate swaps	(13		)	26		6			15			—			—			—			—
Cross-currency interest rate swaps excluded component	7			—		13			(11		)	—			—			—			—



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The following table presents the effect of fair value and cash flow hedge accounting on the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for second quarter 2019 and 2018.



Location and Amount of Gain or (Loss) Recognized in Earnings on Fair Value and Cash Flow Hedging Relationships
	Second Quarter
	2019								2018
(Dollars in millions)	Sales		Cost of Sales			Net Interest Expense			Sales		Cost of Sales			Net Interest Expense
Total amounts of income and expense line items presented in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in which the effects of fair value or cash flow hedges are recognized	$	2,363	$	1,774		$	55		$	2,621	$	1,917		$	61

The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships:
Interest contracts (forward starting interest rate and treasury lock swap contracts):
Amount reclassified from AOCI into earnings						(1		)						(1		)
Commodity Contracts:
Amount reclassified from AOCI into earnings			(8		)						(3		)
Foreign Exchange Contracts:
Amount reclassified from AOCI into earnings	7								8



Location and Amount of Gain or (Loss) Recognized in Earnings on Fair Value and Cash Flow Hedging Relationships
	First Six Months
	2019								2018
(Dollars in millions)	Sales		Cost of Sales			Net Interest Expense			Sales		Cost of Sales			Net Interest Expense
Total amounts of income and expense line items presented in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in which the effects of fair value or cash flow hedges are recognized	$	4,743	$	3,580		$	111		$	5,228	$	3,943		$	120

The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships:
Interest contracts (forward starting interest rate and treasury lock swap contracts):
Amount reclassified from AOCI into earnings						(2		)						(2		)
Commodity Contracts:
Amount reclassified from AOCI into earnings			(11		)						(5		)
Foreign Exchange Contracts:
Amount reclassified from AOCI into earnings	13								11

The Company enters into foreign exchange derivatives denominated in multiple currencies which are transacted and settled in the same quarter. These derivatives are not designated as hedges due to the short-term nature and the gains or losses on these derivatives are marked-to-market in line item "Other (income) charges, net" of the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. The Company recognized a net loss on these derivatives of $1 million and a net gain of $2 million during second quarter 2019 and 2018, respectively, and recognized a net loss of $4 million and $6 million during first six months 2019 and 2018, respectively.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Pre-tax monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in AOCI included net losses of $100 million and $112 million at June 30, 2019 and December 31, 2018, respectively. Losses in AOCI decreased June 30, 2019 compared to December 31, 2018 primarily as a result of a decrease in foreign currency exchange rates associated with the euro, partially offset by commodity price decreases. If realized, approximately $26 million in pre-tax losses, as of June 30, 2019, would be reclassified into earnings during the next 12 months.


7.	RETIREMENT PLANS

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 life insurance for eligible retirees hired prior to January 1, 2007. The Company provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for eligible Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. Costs recognized for these benefits are estimated amounts, which may change as actual costs for the year are determined.

For additional information regarding retirement plans, see Note 10, "Retirement Plans", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K.

Components of net periodic benefit (credit) cost were as follows:



	Second Quarter
	Pension Plans												Other Postretirement Benefit Plans
	2019						2018						2019			2018
(Dollars in millions)	U.S.			Non-U.S.			U.S.			Non-U.S.
Service cost	$	7		$	4		$	8		$	4		$	—		$	—
Interest cost	19			5			17			5			7			5
Expected return on assets	(33		)	(8		)	(37		)	(10		)	(1		)	—
Amortization of:
Prior service credit, net	—			—			—			—			(10		)	(10		)
Net periodic benefit (credit) cost	$	(7	)	$	1		$	(12	)	$	(1	)	$	(4	)	$	(5	)

	First Six Months
	Pension Plans												Other Postretirement Benefit Plans
	2019						2018						2019			2018
(Dollars in millions)	U.S.			Non-U.S.			U.S.			Non-U.S.
Service cost	$	14		$	7		$	17		$	8		$	—		$	—
Interest cost	38			10			34			10			13			11
Expected return on assets	(65		)	(16		)	(74		)	(19		)	(2		)	(2		)
Amortization of:
Prior service credit, net	—			—			—			—			(20		)	(20		)
Net periodic benefit (credit) cost	$	(13	)	$	1		$	(23	)	$	(1	)	$	(9	)	$	(11	)



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


8.	LEASES AND OFF BALANCE SHEET ITEMS

Leases

On January 1, 2019, Eastman adopted ASU 2016-02 Leases and related releases under the modified retrospective optional transition method such that prior period financial statements have not been adjusted to reflect the impact of the new standard. The new standard establishes two types of leases: finance and operating. Both types of leases have associated right-to-use assets and lease liabilities that have been valued at the present value of the lease payments and recognized on the Unaudited Consolidated Statement of Financial Position which did not result in an impact to retained earnings. The discount rate used in the measurement of a right-to-use asset and lease liability is the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, the collateralized incremental borrowing rate is used.

Upon adoption, the Company elected the practical expedient package wherein: expired or existing contracts were not reassessed as to whether these contracts are or contained a lease; expired or existing contracts were not reassessed for operating or financing classification; and initial direct costs for existing leases were not reassessed. The Company also elected the practical expedient not to assess whether existing or expired land easements that were not previously accounted for under the prior standard are or contain a lease. Lastly, the Company elected the accounting policy not to apply the recognition and measurement requirements to short-term leases with a term of 12 months or less and do not include a bargain purchase option.

The Company has operating leases, as a lessee, with customary terms that do not include: significant variable lease payments; significant reasonably certain extensions or options required to be included in the lease term; restrictions; or other covenants for real property, rolling stock, and machinery and equipment. Real property leases primarily consist of office space and rolling stock leases primarily for railcars and fleet vehicles. At June 30, 2019, operating right-to-use assets of $211 million are included as a part of "Other noncurrent assets" in the Unaudited Consolidated Statement of Financial Position and includes $9 million of assets previously classified as lease intangibles. Operating lease liabilities are included as a part of "Payables and other current liabilities" and "Other long-term liabilities" in the Unaudited Consolidated Statement of Financial Position. There have been no material changes to the future minimum lease payments as of December 31, 2018 as accounted for under the previous lease standard, for these obligations, see Note 11, "Commitments and Off Balance Sheet Arrangements", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K. As of June 30, 2019, reconciliation of minimum lease payments and operating lease liabilities is provided below:



(Dollars in millions)	Operating lease liabilities
Remainder of 2019	$	40
2020	57
2021	45
2022	33
2023	22
2024 and beyond	35
Total minimum lease payments	232
Less: amounts of lease payments representing interest	30
Present value of future minimum lease payments	202
Less: current obligations under leases	56
Long-term lease obligations	$	146

The Company has operating leases, primarily leases for railcars, with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease that will expire beginning in first quarter 2020. Residual guarantee payments that become probable and estimable are recognized as rent expense over the remaining life of the applicable lease. Management's current expectation is that the likelihood of material residual guarantee payments is remote.



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Lease costs during the period and other information is provided below:



		Second Quarter			First Six Months
(Dollars in millions)		2019			2019
Lease costs:
	Operating lease costs	$	17		$	32
	Short-term lease costs	9			20
	Sublease income	(1		)	(1		)
	Total	$	25		$	51

Other operating lease information:
	Cash paid for amounts included in the measurement of lease liabilities	$	18		$	35
	Right-to-use assets obtained in exchange for new lease liabilities	10			21

	Weighted-average remaining lease term, in years				6
	Weighted-average discount rate				4.2		%

Off Balance Sheet Items

Supplier Purchase Obligations

The Company had various purchase obligations at June 30, 2019, totaling approximately $2.7 billion over a period of approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business.

Guarantees

Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, 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 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 up to 30 years with maximum potential future payments of approximately $30 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. Management's current expectation is that future payment or performance related to non-performance under other guarantees is remote.

Accounts Receivable Factoring

The Company has uncommitted accounts receivable factoring agreements under which entire invoices may be sold, without recourse, to third-party financial institutions. Under these agreements, the Company sells the invoices at face value, less a transaction fee, which substantially equals the carrying value and fair value with no gain or loss recognized and no credit loss exposure is retained. Available capacity under these agreements, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. In addition, certain agreements also require that the Company continue to service, administer and collect the sold accounts receivable at market rates. The total amount of receivables sold in second quarter 2019 and 2018 were $169 million and $44 million, respectively, and $270 million and $85 million in first six months 2019 and 2018, respectively.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


9.	ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS

Certain Eastman manufacturing facilities 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 certain cleanup costs. In addition, the Company will incur costs for environmental remediation and closure and post-closure 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 2018 Annual Report on Form 10-K. The resolution of uncertainties related to environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized. However, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and the extended period of time that the obligations are expected to be satisfied, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will have a material adverse effect on the Company's future liquidity or financial condition. The Company's total reserve for environmental loss contingencies was $292 million and $296 million at June 30, 2019 and December 31, 2018, respectively.

Environmental Remediation and Environmental Asset Retirement Obligations

The Company's total environmental reserve that management believes to be probable and reasonably estimable for environmental contingencies, including remediation costs and asset retirement obligations, is included as part of "Payables and other current liabilities" and "Other long-term liabilities" in the Unaudited Consolidated Statements of Financial Position as follows:



(Dollars in millions)	June 30, 2019		December 31, 2018
Environmental contingent liabilities, current	$	20	$	25
Environmental contingent liabilities, long-term	272		271
Total	$	292	$	296

Environmental Remediation

Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $267 million to the maximum of $497 million at June 30, 2019 and from the best estimate or minimum of $271 million to the maximum of $508 million at December 31, 2018. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts accrued at both June 30, 2019 and December 31, 2018.

Reserves for environmental remediation include liabilities expected to be paid within approximately 30 years. The amounts charged to pre-tax earnings for environmental remediation and related charges are included within "Cost of sales" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Changes in the reserves for environmental remediation liabilities during first six months 2019 are summarized below:



(Dollars in millions)	Environmental Remediation Liabilities
Balance at December 31, 2018	$	271
Changes in estimates recognized in earnings and other	2
Cash reductions	(6		)
Balance at June 30, 2019	$	267



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Environmental Asset Retirement Obligations

An asset retirement obligation is an obligation for the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying value of the long-lived assets and depreciated over their useful life. Environmental asset retirement obligations consist primarily of closure and post-closure costs. For sites that have environmental asset retirement obligations, the best estimate recognized to date for these environmental asset retirement obligation costs was $25 million at both June 30, 2019 and December 31, 2018.

Non-Environmental Asset Retirement Obligations

The Company has contractual asset retirement obligations not associated with environmental liabilities. Eastman's non-environmental asset retirement obligations are primarily associated with the future closure of leased manufacturing assets at Pace, Florida and Oulu, Finland. These recognized non-environmental asset retirement obligations were $47 million and $46 million at June 30, 2019 and December 31, 2018, respectively, and is included as part of "Other long-term liabilities" in the Unaudited Consolidated Statements of Financial Position.


10.	LEGAL MATTERS

From time to time, Eastman 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 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.



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11.	STOCKHOLDERS' EQUITY

Reconciliations of the changes in stockholders' equity for second quarter 2019 and 2018 are provided below:



(Dollars in millions)	Common Stock at Par Value		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock at Cost			Total Eastman Stockholders' Equity			Noncontrolling Interest		Total Equity
Balance at March 31, 2019	$	2	$	2,060	$	7,675		$	(194	)	$	(3,700	)	$	5,843		$	76	$	5,919
Net Earnings	—		—		258			—			—			258			1		259
Cash Dividends Declared⁽¹⁾ ($0.62 per share)	—		—		(85		)	—			—			(85		)	—		(85		)
Other Comprehensive Loss	—		—		—			(41		)	—			(41		)	—		(41		)
Share Based Compensation Expense ⁽²⁾	—		15		—			—			—			15			—		15
Stock Option Exercises	—		4		—			—			—			4			—		4
Share Repurchase	—		—		—			—			(125		)	(125		)	—		(125		)
Balance at June 30, 2019	$	2	$	2,079	$	7,848		$	(235	)	$	(3,825	)	$	5,869		$	77	$	5,946



(Dollars in millions)	Common Stock at Par Value		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock at Cost			Total Eastman Stockholders' Equity			Noncontrolling Interest			Total Equity
Balance at March 31, 2018	$	2	$	2,004	$	7,026		$	(212	)	$	(3,275	)	$	5,545		$	75		$	5,620
Net Earnings	—		—		344			—			—			344			2			346
Cash Dividends Declared⁽¹⁾($0.56 per share)	—		—		(78		)	—			—			(78		)	—			(78		)
Other Comprehensive Income	—		—		—			19			—			19			—			19
Share Based Compensation Expense ⁽²⁾	—		14		—			—			—			14			—			14
Stock Option Exercises	—		3		—			—			—			3			—			3
Other	—		—		—			—			—			—			1			1
Share Repurchase	—		—		—			—			(150		)	(150		)	—			(150		)
Distributions to noncontrolling interest	—		—		—			—			—			—			(1		)	(1		)
Balance at June 30, 2018	$	2	$	2,021	$	7,292		$	(193	)	$	(3,425	)	$	5,697		$	77		$	5,774


⁽¹⁾	Cash dividends declared includes cash dividends paid and dividends declared but unpaid.


⁽²⁾	Share-based compensation expense is the fair value of share-based awards.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Reconciliations of the changes in stockholders' equity for first six months 2019 and 2018 are provided below:



(Dollars in millions)	Common Stock at Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock at Cost			Total Eastman Stockholders' Equity			Noncontrolling Interest		Total Equity
Balance at December 31, 2018	$	2	$	2,048		$	7,573		$	(245	)	$	(3,575	)	$	5,803		$	75	$	5,878
Cumulative Effect of Adoption of New Accounting Standards ⁽¹⁾	—		—			(20		)	20			—			—			—		—
Net Earnings	—		—			467			—			—			467			1		468
Cash Dividends Declared ⁽²⁾ ($1.24 per share)	—		—			(172		)	—			—			(172		)	—		(172		)
Other Comprehensive Loss	—		—			—			(10		)	—			(10		)	—		(10		)
Share-Based Compensation Expense ⁽³⁾	—		33			—			—			—			33			—		33
Stock Option Exercises	—		8			—			—			—			8			—		8
Other ⁽⁴⁾	—		(10		)	—			—			—			(10		)	1		(9		)
Share Repurchases	—		—			—			—			(250		)	(250		)	—		(250		)
Balance at June 30, 2019	$	2	$	2,079		$	7,848		$	(235	)	$	(3,825	)	$	5,869		$	77	$	5,946



(Dollars in millions)	Common Stock at Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock at Cost			Total Eastman Stockholders' Equity			Noncontrolling Interest			Total Equity
Balance at December 31, 2017	$	2	$	1,983		$	6,802		$	(209	)	$	(3,175	)	$	5,403		$	77		$	5,480
Cumulative Effect of Adoption of New Accounting Standards ⁽⁵⁾	—		—			16			—			—			16			—			16
Net Earnings	—		—			634			—			—			634			2			636
Cash Dividends Declared ⁽²⁾ ($1.12 per share)	—		—			(160		)	—			—			(160		)	—			(160		)
Other Comprehensive Income	—		—			—			16			—			16			—			16
Share-Based Compensation Expense ⁽³⁾	—		38			—			—			—			38			—			38
Stock Option Exercises	—		16			—			—			—			16			—			16
Other ⁽⁴⁾	—		(16		)	—			—			—			(16		)	1			(15		)
Share Repurchases	—		—			—			—			(250		)	(250		)	—			(250		)
Distributions to Noncontrolling Interest	—		—			—			—			—			—			(3		)	(3		)
Balance at June 30, 2018	$	2	$	2,021		$	7,292		$	(193	)	$	(3,425	)	$	5,697		$	77		$	5,774


⁽¹⁾	On January 1, 2019, the Company adopted a new accounting standard for reporting comprehensive income, which resulted in a reclassification of stranded tax effects from the Tax Reform Act from AOCI to retained earnings. See Note 1, "Significant Accounting Policies", for additional information.


⁽²⁾	Cash dividends declared includes cash dividends paid and dividends declared but unpaid.


⁽³⁾	Share-based compensation expense is the fair value of share-based awards.


⁽⁴⁾	Additional paid-in capital includes value of shares withheld for employees' taxes on vesting of share-based compensation awards.


⁽⁵⁾	On January 1, 2018, the Company adopted new accounting standards for revenue recognition, income taxes, and derivatives and hedging, which resulted in adjustments to beginning retained earnings. See Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K for specific amounts related to each standard.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017	$	(296	)	$	136		$	(48	)	$	(1	)	$	(209	)
Period change	(13		)	(30		)	7			—			(36		)
Balance at December 31, 2018	(309		)	106			(41		)	(1		)	(245		)
Period change ⁽¹⁾	17			14			(21		)	—			10
Balance at June 30, 2019	$	(292	)	$	120		$	(62	)	$	(1	)	$	(235	)


⁽¹⁾	Benefit plans unrecognized prior service credits includes $29 million reclassification of stranded tax expense from AOCI to retained earnings and unrealized gains (losses) on derivative instruments includes $9 million reclassification of stranded tax benefit from AOCI to retained earnings. See Note 1, "Significant Accounting Policies", for additional information.

Amounts of other comprehensive income (loss) are presented net of applicable taxes. Eastman records deferred income taxes

on the CTA related to branch operations and income from other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are provided on the CTA of other subsidiaries outside the United States, because the CTA is considered to be a component of indefinitely invested, unremitted earnings of these foreign subsidiaries.

Components of other comprehensive income recognized in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings are presented below, before tax and net of tax effects:



	Second Quarter
	2019						2018
(Dollars in millions)	Before Tax			Net of Tax			Before Tax			Net of Tax
Other comprehensive income (loss)
Change in cumulative translation adjustment	$	(13	)	$	(13	)	$	(34	)	$	(34	)
Defined benefit pension and other postretirement benefit plans:
Amortization of unrecognized prior service credits	(10		)	(8		)	(10		)	(8		)
Derivatives and hedging:
Unrealized gain (loss) during period	(29		)	(22		)	85			64
Reclassification adjustment for (gains) losses included in net income, net	2			2			(4		)	(3		)
Total other comprehensive income (loss)	$	(50	)	$	(41	)	$	37		$	19

	First Six Months
	2019						2018
(Dollars in millions)	Before Tax			Net of Tax			Before Tax			Net of Tax
Other comprehensive income (loss)
Change in cumulative translation adjustment	$	17		$	17		$	(7	)	$	(7	)
Defined benefit pension and other postretirement benefit plans:
Amortization of unrecognized prior service credits	(20		)	(15		)	(20		)	(15		)
Derivatives and hedging:
Unrealized gain (loss) during period	(16		)	(12		)	55			41
Reclassification adjustment for (gains) losses included in net income, net	—			—			(4		)	(3		)
Total other comprehensive income (loss)	$	(19	)	$	(10	)	$	24		$	16



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


12.	EARNINGS AND DIVIDENDS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share ("EPS"):



	Second Quarter				First Six Months
(In millions, except per share amounts)	2019		2018		2019		2018
Numerator
Earnings attributable to Eastman, net of tax	$	258	$	344	$	467	$	634

Denominator
Weighted average shares used for basic EPS	137.8		141.9		138.4		142.3
Dilutive effect of stock options and other awards	1.3		2.1		1.3		2.1
Weighted average shares used for diluted EPS	139.1		144.0		139.7		144.4

(Calculated using whole dollars and shares)
EPS
Basic	$	1.87	$	2.42	$	3.37	$	4.45
Diluted	$	1.85	$	2.39	$	3.34	$	4.39

Shares underlying stock options excluded from both second quarter and first six months 2019 calculations of diluted EPS were 2,242,478 because the market value of exercises of these options were less than the cash proceeds that would be received from these exercises. Second quarter and first six months 2019 reflect the impact of share repurchases of 1,667,710 and 3,249,786, respectively.

Shares underlying stock options excluded from both second quarter and first six months 2018 calculations of diluted EPS were 407,573 because the market value of exercises of these options were less than the cash proceeds that would be received from these exercises. Second quarter and first six months 2018 reflect the impact of share repurchases of 1,415,539 and 2,409,774, respectively.

The Company declared cash dividends of $0.62 and $0.56 per share in second quarter 2019 and 2018, respectively, and $1.24 and $1.12 per share in first six months 2019 and 2018, respectively.


13.	ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET



	Second Quarter				First Six Months
(Dollars in millions)	2019		2018		2019		2018
Severance charges	$	16	$	4	44		6
Other restructuring costs	2		—		6		—
Total	$	18	$	4	$	50	$	6

Second quarter and first six months 2019 restructuring charges included $18 million and $46 million, respectively, for severance and related costs as part of business improvement and cost reduction initiatives. First six months 2019 also included an additional $4 million restructuring charge related to a capital project in the Additives & Functional Products ("AFP") segment that was discontinued in 2016. In second quarter and first six months 2018, the Company recognized restructuring charges of $4 million and $6 million, respectively, for corporate severance.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Changes in Reserves

The following table summarizes the changes in asset impairments and restructuring charges and gains, the non-cash reductions attributable to asset impairments, and the cash reductions in restructuring reserves for severance costs and site closure costs paid in first six months 2019 and full year 2018:



(Dollars in millions)	Balance at January 1, 2019		Provision/ Adjustments		Non-cash Reductions/ Additions		Cash Reductions			Balance at June 30, 2019
Severance costs	$	6	$	44	$	—	$	(15	)	$	35
Other restructuring costs	8		6		1		(4		)	11
Total	$	14	$	50	$	1	$	(19	)	$	46



(Dollars in millions)	Balance at January 1, 2018		Provision/ Adjustments		Non-cash Reductions/ Additions			Cash Reductions			Balance at December 31, 2018
Non-cash charges	$	—	$	39	$	(39	)	$	—		$	—
Severance costs	19		6		1			(20		)	6
Other restructuring costs	10		—		—			(2		)	8
Total	$	29	$	45	$	(38	)	$	(22	)	$	14

Substantially all severance costs remaining are expected to be applied to the reserves within one year.


14.	SHARE-BASED COMPENSATION AWARDS

The Company utilizes share-based awards under employee and non-employee director compensation programs. These share-based awards have included restricted and unrestricted stock, restricted stock units, stock options, and performance shares. In second quarter 2019 and 2018, $15 million and $14 million, respectively, of compensation expense before tax were recognized in "Selling, general and administrative expenses" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for all share-based awards. The impact on second quarter 2019 and 2018 net earnings of $11 million and $10 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.

In first six months 2019 and 2018, $33 million and $38 million, respectively, of compensation expense before tax were recognized in "Selling, general and administrative expenses" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for all share-based awards. The impact on first six months 2019 and 2018 net earnings of $25 million and $28 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 17, "Share-Based Compensation Plans and Awards", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


15.	OTHER (INCOME) CHARGES, NET



	Second Quarter						First Six Months
(Dollars in millions)	2019			2018			2019			2018
Foreign exchange transaction (gains) losses, net	$	2		$	7		$	2		$	7
Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations	—			5			—			13
(Income) loss from equity investments and other investment (gains) losses, net	(3		)	(7		)	(6		)	(12		)
Coal gasification incident property insurance	—			(15		)	—			(65		)
Other, net	—			—			1			1
Other (income) charges, net	$	(1	)	$	(10	)	$	(3	)	$	(56	)


16.	SUPPLEMENTAL CASH FLOW INFORMATION

Included in the line item "Other items, net" of the "Operating activities" section of the Unaudited Consolidated Statements of Cash Flows are the following changes to Unaudited Consolidated Statements of Financial Position:



(Dollars in millions)	First Six Months
	2019			2018
Other current assets	$	(12	)	$	(53	)
Other noncurrent assets	6			19
Payables and other current liabilities	62			31
Long-term liabilities and equity	(3		)	18
Total	$	53		$	15

The above changes resulted primarily from accrued taxes, deferred taxes, environmental liabilities, monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, value-added taxes, and other miscellaneous receivables and accruals.


17.	SEGMENT INFORMATION

Eastman's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. The economic factors that impact the nature, amount, timing, and uncertainty of revenue and cash flows vary between the Company's business operating segments and the geographical regions in which they serve. For disaggregation of revenue by major product lines and regions for each business operating segment, see Note 19, "Segment Information", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K. For additional financial information for each segment, see Part I, Item 1, "Business - Business Segments", in the Company's 2018 Annual Report on Form 10-K.

The timing of Eastman's customer billings does not always match the timing of revenue recognition. When the Company is entitled to bill a customer in advance of the recognition of revenue, a contract liability is recognized. When the Company is not entitled to bill a customer until a period after the related recognition of revenue, a contract asset is recognized. Contract assets represent the Company's right to consideration for the exchange of goods under a contract, but which are not yet billable to a customer for consignment inventory or pursuant to certain shipping terms. Contract liabilities were not material as of June 30, 2019 or December 31, 2018. Contract assets were $63 million and $62 million as of June 30, 2019 and December 31, 2018, respectively, and are included as a component of "Miscellaneous receivables" in the Unaudited Consolidated Statements of Financial Position.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



(Dollars in millions)	Second Quarter				First Six Months
Sales by Segment	2019		2018		2019		2018
Additives & Functional Products	$	823	$	942	$	1,678	$	1,881
Advanced Materials	696		729		1,353		1,422
Chemical Intermediates	631		709		1,286		1,439
Fibers	213		241		426		486
Total Sales	$	2,363	$	2,621	$	4,743	$	5,228



(Dollars in millions)	Second Quarter						First Six Months
Earnings Before Interest and Taxes by Segment	2019			2018			2019			2018
Additives & Functional Products	$	147		$	192		$	293		$	368
Advanced Materials	145			150			247			285
Chemical Intermediates	63			85			136			155
Fibers	51			83			93			126
Total Earnings Before Interest and Taxes by Operating Segment	406			510			769			934
Other
Growth initiatives and businesses not allocated to operating segments	(25		)	(27		)	(52		)	(53		)
Pension and other postretirement benefits income (expense), net not allocated to operating segments	11			20			23			41
Asset impairments and restructuring charges, net	(18		)	(4		)	(46		)	(6		)
Other income (charges), net not allocated to operating segments	(3		)	(8		)	(3		)	(16		)
Total Earnings Before Interest and Taxes	$	371		$	491		$	691		$	900



(Dollars in millions)	June 30,		December 31,
Assets by Segment ⁽¹⁾	2019		2018
Additives & Functional Products	$	6,520	$	6,545
Advanced Materials	4,593		4,456
Chemical Intermediates	2,851		2,934
Fibers	1,045		978
Total Assets by Operating Segment	15,009		14,913
Corporate Assets	1,247		1,082
Total Assets	$	16,256	$	15,995


⁽¹⁾	Segment assets include accounts receivable, inventory, fixed assets, goodwill, and intangible assets.



(Dollars in millions)	Second Quarter				First Six Months
Sales by Customer Location	2019		2018		2019		2018
United States and Canada	$	995	$	1,108	$	1,995	$	2,208
Asia Pacific	574		639		1,127		1,281
Europe, Middle East, and Africa	649		725		1,338		1,452
Latin America	145		149		283		287
Total Sales	$	2,363	$	2,621	$	4,743	$	5,228



Table of Contents


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Page

Critical Accounting Estimates	30

Non-GAAP Financial Measures	31

Overview	34

Results of Operations	36

Summary by Operating Segment	40

Sales by Customer Location	44

Liquidity, Capital Resources, and Other Financial Information	44

Recently Issued Accounting Standards	47

Outlook	47

Risk Factors	47

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), and should be read in conjunction with the Company's audited consolidated financial statements, including related notes, and MD&A contained in the Company's 2018 Annual Report on Form 10-K, and the Company's unaudited consolidated financial statements, including related notes, included elsewhere in this Quarterly Report on Form 10-Q. All references to earnings per share ("EPS") contained in this report are diluted EPS unless otherwise noted.

CRITICAL ACCOUNTING ESTIMATES

In preparing the consolidated financial statements in conformity with GAAP, management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, sales revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, Eastman evaluates its estimates, including those related to impairment of long-lived assets, environmental costs, pension and other postretirement benefits, litigation and contingent liabilities, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the critical accounting estimates described in Part II, Item 7 of the Company's 2018 Annual Report on Form 10-K are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.



Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

NON-GAAP FINANCIAL MEASURES

Non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented below in this section and in "Overview", "Results of Operations", "Summary by Operating Segment", "Liquidity, Capital Resources, and Other Financial Information - Cash Flows", and "Outlook" in this MD&A.

Management discloses non-GAAP financial measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's and its operating segments' performances, make resource allocation decisions, and evaluate organizational and individual performances in determining certain performance-based compensation. Non-GAAP financial measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP financial measure, but to consider such measures alongside the most directly comparable GAAP measure.

Company Use of Non-GAAP Financial Measures

Non-Core Items and any Unusual or Non-Recurring Items Excluded from Non-GAAP Earnings

In addition to evaluating Eastman's financial condition, results of operations, liquidity, and cash flows as reported in accordance with GAAP, management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly result from Eastman's normal, or "core", business and operations or are otherwise of an unusual or non-recurring nature.

•

Non-core transactions, costs, and losses or gains relate to, among other things, cost reductions, growth and profitability improvement initiatives, and other events outside of core business operations, and have included asset impairments and restructuring charges and gains, costs of and related to acquisitions, gains and losses from and costs related to dispositions of businesses, financing transaction costs, and mark-to-market losses or gains for pension and other postretirement benefit plans.

•

In second quarter and first six months 2018, the Company recognized an unusual net gain from insurance in excess of costs of the disruption, repairs, and reconstruction of the Kingsport site's coal gasification operations area resulting from the previously reported October 4, 2017 explosion (the "coal gasification incident"). Management considers the coal gasification incident unusual because of the Company's operational and safety history and the magnitude of the unplanned disruption.

•

In second quarter and first six months 2018, the Company recognized unusual costs resulting from the fourth quarter 2017 Tax Cuts and Jobs Act ("Tax Reform Act") and related outside-U.S. entity reorganizations as part of the transition to an international treasury services center. In second quarter 2019, the Company recognized an unusual increase to earnings and in first six months 2019 and 2018, the Company recognized an unusual decrease to earnings from adjustments of the provision for income taxes resulting from tax law changes, primarily the Tax Reform Act, and the tax impact of the related outside-U.S. entity reorganizations. Management considers these actions and associated costs and income unusual because of the infrequent nature of such changes in tax law and resulting actions and the significant one-time impacts on earnings.

Because non-core, unusual, or non-recurring transactions, costs, and losses or gains may materially affect the Company's, or any particular operating segment's, financial condition or results in a specific period in which they are recognized, management believes it is appropriate to evaluate both the financial measures prepared and calculated in accordance with GAAP and the related non-GAAP financial measures excluding the effect on the Company's results of these non-core, unusual, or non-recurring items. In addition to using such measures to evaluate results in a specific period, management evaluates such non-GAAP measures, and believes that investors may also evaluate such measures, because such measures may provide more complete and consistent comparisons of the Company's and its segments' operational performance on a period-over-period historical basis and, as a result, provide a better indication of expected future trends.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Adjusted Tax Rate and Provision for Income Taxes

In interim periods, Eastman discloses non-GAAP earnings with an adjusted effective tax rate and a resulting adjusted provision for income taxes using the Company's forecasted tax rate for the full year as of the end of the interim period. The adjusted effective tax rate and resulting adjusted provision for income taxes are equal to the Company's projected full year effective tax rate and provision for income taxes on earnings excluding non-core, unusual, or non-recurring items for completed periods. The adjusted effective tax rate and resulting adjusted provision for income taxes may fluctuate during the year for changes in events and circumstances that change the Company's forecasted annual effective tax rate and resulting provision for income taxes excluding non-core, unusual, or non-recurring items. Management discloses this adjusted effective tax rate, and the related reconciliation to the GAAP effective tax rate, to provide investors more complete and consistent comparisons of the Company's operational performance on a period-over-period interim basis and on the same basis as management evaluates quarterly financial results to provide a better indication of expected full year results.

Non-GAAP Cash Flow Measure

Eastman regularly evaluates and discloses to investors and securities analysts an alternative non-GAAP measure of "free cash flow", which management defines as cash provided by or used in operating activities less the amount of net capital expenditures (typically the GAAP measure additions to properties and equipment, and in 2018 net of proceeds from property insurance). Such net capital expenditures are generally funded from available cash and, as such, management believes they should be considered in determining free cash flow. Management believes this is an appropriate metric to assess the Company's ability to fund priorities for uses of available cash. The priorities for cash after funding operations include payment of quarterly dividends, repayment of debt, funding targeted growth opportunities, and repurchasing shares. Management believes this metric is useful to investors and securities analysts in order to provide them with information similar to that used by management in evaluating financial performance and potential future cash available for various initiatives and assessing organizational performance in determining certain performance-based compensation and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies. In addition, Eastman may disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow yield", which management defines as annual free cash flow divided by the Company's market capitalization. Management believes this metric is useful to investors and securities analysts in comparing cash flow generation with that of peer and other companies.

Non-GAAP Measures in this Quarterly Report

The following non-core item is excluded by management in its evaluation of certain earnings results in this Quarterly Report:


•	Asset impairments and restructuring charges, net.

The following unusual items are excluded by management in its evaluation of certain earnings results in this Quarterly Report:


•	Gains from the fourth quarter 2017 coal gasification incident insurance income in excess of costs,


•	Costs of currency transaction and professional fees resulting from fourth quarter 2017 tax law changes and related outside-U.S. entity reorganizations, and


•	Adjustments to the provision for income taxes resulting from fourth quarter 2017 tax law changes, primarily the Tax Reform Act, and related outside-U.S. entity reorganizations.

As described above, the alternative non-GAAP measure of cash flow, free cash flow, is presented in this Quarterly Report.



Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Excluded Non-Core and Unusual Items and Adjustments to Provision for Income Taxes



	Second Quarter						First Six Months
(Dollars in millions)	2019			2018			2019			2018
Non-core item impacting earnings before interest and taxes:
Asset impairments and restructuring charges, net	$	18		$	4		$	50		$	6
Unusual items impacting earnings before interest and taxes:
Coal gasification incident insurance in excess of costs	—			(56		)	—			(19		)
Costs resulting from tax law changes and outside-U.S. entity reorganizations	—			8			—			19
Total non-core and unusual items impacting earnings before interest and taxes	18			(44		)	50			6
Less: Items impacting provision for income taxes:
Tax effect of non-core and unusual items	6			(9		)	12			2
Adjustments from tax law changes and outside-U.S. entity reorganizations	3			(10		)	(7		)	(10		)
Interim adjustment to tax provision	(10		)	—			(13		)	5
Total items impacting provision for income taxes	(1		)	(19		)	(8		)	(3		)
Total items impacting net earnings attributable to Eastman	$	19		$	(25	)	$	58		$	9

This MD&A includes an analysis of the effect of the foregoing on the following GAAP financial measures:


•	Gross profit,


•	Selling, general and administrative expenses ("SG&A"),


•	Other (income) charges, net,


•	Earnings before interest and taxes ("EBIT"),


•	Provision for income taxes,


•	Net earnings attributable to Eastman,


•	Diluted EPS, and


•	Net cash provided by operating activities.

Other Non-GAAP Financial Measures

Alternative Non-GAAP Cash Flow Measures

In addition to the non-GAAP measures presented in this Quarterly Report and other periodic reports, management occasionally has evaluated and disclosed to investors and securities analysts the non-GAAP measure cash provided by or used in operating activities excluding certain non-core, unusual, or non-recurring sources or uses of cash or including cash from or used by activities that are managed as part of core business operations ("adjusted cash provided by or used in operating activities") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Management has used this non-GAAP measure in conjunction with the GAAP measure cash provided by or used in operating activities because it believes it is a more appropriate metric to evaluate the cash flows from Eastman's core operations that are available for organic and inorganic growth initiatives and because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, management generally excludes the impact of certain non-core activities and decisions of management because such activities and decisions are not considered core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations, and generally includes cash from or used in activities that are managed as operating activities and in business operating decisions. Management has disclosed this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision-making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Alternative Non-GAAP Earnings Measures

From time to time, Eastman may also disclose to investors and securities analysts the non-GAAP earnings measures "EBIT Margin", "Adjusted EBITDA", "EBITDA Margin", and "Return on Invested Capital" (or "ROIC"). Management defines EBIT Margin as the GAAP measure EBIT adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods divided by the GAAP measure sales revenue in the Company's income statement for the same period. Adjusted EBITDA is EBITDA (net earnings before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. EBITDA Margin is Adjusted EBITDA divided by the GAAP measure sales revenue in the Company's income statement for the same periods. Management defines ROIC as net earnings plus interest expense after tax divided by average total borrowings plus average stockholders' equity for the periods presented, each derived from the GAAP measures in the Company's financial statements for the periods presented. Management believes that EBIT Margin, Adjusted EBITDA, EBITDA Margin, and ROIC are useful as supplemental measures in evaluating the performance of and returns from Eastman's operating businesses, and from time to time uses such measures in internal performance calculations. Further, management understands that investors and securities analysts often use similar measures of EBIT Margin, Adjusted EBITDA, EBITDA Margin, and ROIC to compare the results, returns, and value of the Company with those of peer and other companies.

OVERVIEW

Eastman's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. Eastman uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development capabilities, and relentlessly engaging the market. The Company's world class technology platforms form the foundation of sustainable growth by differentiated products through significant scale advantages in research and development ("R&D") and advantaged global market access. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a deeper understanding of the value of Eastman's products and how they perform within customers' and end-user products. Key areas of application development include thermoplastic processing, functional films, coatings formulations, rubber additive formulations, adhesives formulations, nonwovens and textiles, and animal nutrition. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. Management believes that these elements of the Company's innovation-driven growth model combined with disciplined portfolio management and balanced capital deployment will result in consistent, sustainable earnings growth and strong cash flow.

The Company generated sales revenue of $2.4 billion and $2.6 billion in second quarter 2019 and 2018, respectively, and $4.7 billion and $5.2 billion in first six months 2019 and 2018, respectively. Sales revenue decreased $258 million and $485 million in second quarter and first six months 2019 compared to second quarter and first six months 2018, respectively, as a result of decreases in all operating segments.

EBIT was $371 million and $491 million in second quarter 2019 and 2018, respectively, and $691 million and $900 million in first six months 2019 and 2018, respectively. Excluding the non-core and unusual items identified in "Non-GAAP Financial Measures", adjusted EBIT was $389 million and $447 million in second quarter 2019 and 2018, respectively, and $741 million and $906 million in first six months 2019 and 2018, respectively. Adjusted EBIT decreased in second quarter 2019 compared to second quarter 2018, as a result of decreases in all operating segments except for a slight increase in the AM segment. Adjusted EBIT decreased in first six months 2019 compared to first six months 2018 as a result of decreases in all operating segments.

Further discussion of sales revenue and EBIT changes by operating segment is presented in "Summary by Operating Segment" in this MD&A.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net earnings and EPS and adjusted net earnings and EPS were as follows:



	Second Quarter
	2019				2018
(Dollars in millions, except EPS)	$		EPS		$			EPS
Net earnings attributable to Eastman	$	258	$	1.85	$	344		$	2.39
Total non-core and unusual items, net of tax ⁽¹⁾⁽²⁾	9		0.07		(25		)	(0.17		)
Interim adjustment to tax provision ⁽¹⁾	10		0.07		—			—
Adjusted net earnings	$	277	$	1.99	$	319		$	2.22

	First Six Months
	2019				2018
(Dollars in millions, except EPS)	$		EPS		$			EPS
Net earnings attributable to Eastman	$	467	$	3.34	$	634		$	4.39
Total non-core and unusual items, net of tax ⁽¹⁾⁽²⁾	45		0.32		14			0.10
Interim adjustment to tax provision ⁽¹⁾	13		0.10		(5		)	(0.04		)
Adjusted net earnings	$	525	$	3.76	$	643		$	4.45


⁽¹⁾	See "Results of Operations - Provision for Income Taxes" for adjusted provision for income taxes for second quarter and first six months 2019 and 2018.


⁽²⁾	Provision for income taxes for non-core and unusual items are calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible. See "Results of Operations - Net Earnings Attributable to Eastman and Diluted Earnings per Share" for the tax effected amount of non-core and unusual items.

In first six months 2019, $417 million net cash was provided by operating activities compared to $408 million net cash provided by operating activities in first six months 2018. Free cash flow was $219 million and $229 million in first six months 2019 and 2018, respectively.

As previously reported, in fourth quarter 2017 an explosion in the Kingsport site's coal gasification area disrupted manufacturing operations, primarily for the Fibers and CI segments which are significant internal users of cellulose and acetyl stream intermediates. Second quarter and first six months 2018 included $56 million and $19 million, respectively, insurance net of costs of the disruption, repairs, and reconstruction of coal gasification operations, recognized in "Cost of sales" and "Other (income) charges, net" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Sales



	Second Quarter									First Six Months
					Change									Change
(Dollars in millions)	2019		2018		$			%		2019		2018		$			%
Sales	$	2,363	$	2,621	$	(258	)	(10	)%	$	4,743	$	5,228	$	(485	)	(9	)%
Volume / product mix effect					(132		)	(5	)%					(281		)	(5	)%
Price effect					(85		)	(3	)%					(117		)	(2	)%
Exchange rate effect					(41		)	(2	)%					(87		)	(2	)%

Sales revenue decreased in second quarter and first six months 2019 compared to second quarter and first six months 2018 as a result of decreases in all operating segments. Further discussion by operating segment is presented in "Summary by Operating Segment" in this MD&A.

Gross Profit



	Second Quarter							First Six Months
(Dollars in millions)	2019		2018			Change		2019		2018		Change
Gross profit	$	589	$	704		(16	)%	$	1,163	$	1,285	(9	)%
Net coal gasification incident (insurance) costs	—		(41		)			—		46
Gross profit excluding unusual item	$	589	$	663		(11	)%	$	1,163	$	1,331	(13	)%

Excluding net coal gasification incident (insurance) costs, gross profit decreased in second quarter and first six months 2019 compared to second quarter and first six months 2018 as a result of decreases in all operating segments. Further discussion by operating segment is presented in "Summary by Operating Segment" in this MD&A.

Selling, General and Administrative Expenses



	Second Quarter							First Six Months
(Dollars in millions)	2019		2018			Change		2019		2018			Change
Selling, general and administrative expenses	$	165	$	189		(13	)%	$	352	$	379		(7	)%
Costs resulting from tax law changes and outside-U.S. entity reorganizations	—		(3		)			—		(6		)
Selling, general and administrative expenses excluding unusual item	$	165	$	186		(11	)%	$	352	$	373		(6	)%

SG&A expenses in second quarter and first six months 2018 included costs for professional fees resulting from fourth quarter 2017 tax law changes and related outside-U.S. entity reorganizations as part of the transition to an international treasury services center. Excluding this unusual item, SG&A expenses decreased in second quarter and first six months 2019 compared to second quarter and first six months 2018 as a result of cost management actions and lower variable compensation costs.

Research and Development Expenses



	Second Quarter						First Six Months
(Dollars in millions)	2019		2018		Change		2019		2018		Change
Research and development expenses	$	57	$	60	(5	)%	$	115	$	116	(1	)%

R&D expenses decreased slightly in second quarter and first six months 2019 compared to second quarter and first six months 2018 primarily due to cost management actions including increased focus on project prioritization.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Asset Impairments and Restructuring Charges, Net



	Second Quarter				First Six Months
(Dollars in millions)	2019		2018		2019		2018
Severance charges	$	16	$	4	$	44	$	6
Other restructuring costs	2		—		6		—
Total	$	18	$	4	$	50	$	6

Second quarter and first six months 2019 restructuring charges included $18 million and $46 million, respectively, for severance and related costs as part of business improvement and cost reduction initiatives actions. Management anticipates total cost savings from these actions of approximately $50 million to be recognized mostly in 2019 primarily in cost of sales and SG&A expenses. First six months 2019 also included an additional $4 million restructuring charge related to a capital project in the AFP segment that was discontinued in 2016. In second quarter and first six months 2018, the Company recognized restructuring charges of $4 million and $6 million, respectively, for corporate severance.

For more information regarding asset impairments and restructuring charges, net see Note 13, "Asset Impairments and Restructuring Charges, Net", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other Components of Post-employment (Benefit) Cost, Net



	Second Quarter						First Six Months
(Dollars in millions)	2019			2018			2019			2018
Other components of post-employment (benefit) cost, net	$	(21	)	$	(30	)	$	(42	)	$	(60	)

For more information regarding other components of post-employment (benefit) cost, net see Note 7, "Retirement Plans", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other (Income) Charges, Net



	Second Quarter						First Six Months
(Dollars in millions)	2019			2018			2019			2018
Foreign exchange transaction (gains) losses, net	$	2		$	7		$	2		$	7
Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations	—			5			—			13
(Income) loss from equity investments and other investment (gains) losses, net	(3		)	(7		)	(6		)	(12		)
Coal gasification incident property insurance	—			(15		)	—			(65		)
Other, net	—			—			1			1
Other (income) charges, net	$	(1	)	$	(10	)	$	(3	)	$	(56	)
Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations	—			(5		)	—			(13		)
Coal gasification incident property insurance	—			15			—			65
Other (income) charges, net excluding unusual items	$	(1	)	$	—		$	(3	)	$	(4	)



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Earnings Before Interest and Taxes



	Second Quarter							First Six Months
(Dollars in millions)	2019		2018			Change		2019		2018			Change
Earnings before interest and taxes	$	371	$	491		(24	)%	$	691	$	900		(23	)%
Asset impairments and restructuring charges, net	18		4					50		6
Coal gasification incident insurance in excess of costs	—		(56		)			—		(19		)
Costs resulting from tax law changes and outside-U.S. entity reorganizations	—		8					—		19
Earnings before interest and taxes excluding non-core and unusual items	$	389	$	447		(13	)%	$	741	$	906		(18	)%

Net Interest Expense



	Second Quarter						First Six Months
(Dollars in millions)	2019		2018		Change		2019		2018		Change
Gross interest costs	$	56	$	64	(13	)%	$	114	$	125	(9	)%
Less: Capitalized interest	1		1				2		2
Interest expense	55		63				112		123
Less: Interest income	—		2				1		3
Net interest expense	$	55	$	61	(10	)%	$	111	$	120	(8	)%

Net interest expense decreased primarily as a result of U.S. dollar to euro cross-currency swaps and reduced commercial paper and term loan borrowings.

Provision for Income Taxes



	Second Quarter										First Six Months
	2019					2018					2019					2018
(Dollars in millions)	$			%		$			%		$			%		$			%
Provision for income taxes and effective tax rate	$	57		18	%	$	84		20	%	$	112		19	%	$	144		19	%
Tax provision for non-core and unusual items ⁽¹⁾	6					(9		)			12					2
Adjustments from tax law changes and outside-U.S. entity reorganizations	3					(10		)			(7		)			(10		)
Interim adjustment to tax provision ⁽²⁾	(10		)			—					(13		)			5
Adjusted provision for income taxes and effective tax rate	$	56		17	%	$	65		17	%	$	104		17	%	$	141		18	%


⁽¹⁾	Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.


⁽²⁾	Second quarter 2019 provision for income taxes were adjusted to reflect the current forecasted full year effective tax rate. The adjusted provision for income taxes for first six months 2019 and 2018 are calculated applying the forecasted full year effective tax rates as shown below.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS



	First Six Months
	2019		2018
Effective tax rate	19	%	19	%
Tax impact of non-core and unusual items ⁽¹⁾	1	%	(1	)%
Forecasted full year impact of expected tax events	(3	)%	—	%
Forecasted full year effective tax rate	17	%	18	%


⁽¹⁾	Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.

Net Earnings Attributable to Eastman and Diluted Earnings per Share



	Second Quarter
	2019						2018
(Dollars in millions, except EPS)	$			EPS			$			EPS
Net earnings and diluted earnings per share attributable to Eastman	$	258		$	1.85		$	344		$	2.39
Non-core item, net of tax: ⁽¹⁾
Asset impairments and restructuring charges, net	12			0.09			2			0.02
Unusual items, net of tax: ⁽¹⁾
Coal gasification incident insurance in excess of costs	—			—			(43		)	(0.30		)
Costs resulting from tax law changes and outside-U.S. entity reorganizations	—			—			6			0.04
Adjustments from tax law changes and outside-U.S. entity reorganizations	(3		)	(0.02		)	10			0.07
Interim adjustment to tax provision	10			0.07			—			—
Adjusted net earnings and diluted earnings per share attributable to Eastman	$	277		$	1.99		$	319		$	2.22



	First Six Months
	2019				2018
(Dollars in millions, except EPS)	$		EPS		$			EPS
Net earnings and diluted earnings per share attributable to Eastman	$	467	$	3.34	$	634		$	4.39
Non-core items, net of tax: ⁽¹⁾
Asset impairments and restructuring charges, net	38		0.27		4			0.03
Unusual items, net of tax: ⁽¹⁾
Coal gasification incident insurance in excess of costs	—		—		(14		)	(0.10		)
Costs resulting from tax law changes and outside-U.S. entity reorganizations	—		—		14			0.10
Adjustments from tax law changes and outside-U.S. entity reorganizations	7		0.05		10			0.07
Interim adjustment to tax provision	13		0.10		(5		)	(0.04		)
Adjusted net earnings and diluted earnings per share attributable to Eastman	$	525	$	3.76	$	643		$	4.45


⁽¹⁾	Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.



Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SUMMARY BY OPERATING SEGMENT

Eastman's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. For additional financial and product information for each operating segment, see Part I, Item 1, "Business - Business Segments" and Part II, Item 8, Note 19, "Segment Information", in the Company's 2018 Annual Report on Form 10-K.

Additives & Functional Products Segment



	Second Quarter										First Six Months
						Change										Change
	2019		2018			$			%		2019		2018			$			%
(Dollars in millions)
Sales	$	823	$	942		$	(119	)	(13	)%	$	1,678	$	1,881		$	(203	)	(11	)%
Volume / product mix effect						(69		)	(8	)%						(115		)	(6	)%
Price effect						(30		)	(3	)%						(45		)	(3	)%
Exchange rate effect						(20		)	(2	)%						(43		)	(2	)%


Earnings before interest and taxes	$	147	$	192		$	(45	)	(23	)%	$	293	$	368		$	(75	)	(20	)%
Asset impairments and restructuring charges, net	—		—			—					4		—			4
Coal gasification incident insurance in excess of costs	—		(4		)	4					—		(2		)	2
Earnings before interest and taxes excluding non-core and unusual items	147		188			(41		)	(22	)%	297		366			(69		)	(19	)%

Sales revenue in second quarter and first six months 2019 decreased compared to second quarter and first six months 2018 due to lower sales volume, lower selling prices, and an unfavorable shift in foreign currency exchange rates. The lower sales volume was primarily attributed to weaker end-market demand resulting from global trade-related pressures, particularly for coatings additives and tire additives in transportation markets in China and Europe. In addition, weakened demand for animal nutrition products was attributed to outbreaks of swine fever impacting pork markets in China. Lower selling prices were primarily due to lower raw material prices, particularly for care chemicals, and increased competitive pressure in markets for adhesives resins and tire additives.

First six months 2019 EBIT included a restructuring charge related to a capital project. Second quarter and first six months 2018 EBIT included insurance in excess of costs from the coal gasification incident. Excluding this non-core item and unusual item, EBIT decreased in second quarter and first six months 2019 compared to second quarter and first six months 2018 primarily due to lower sales volume of $36 million and $54 million, respectively, lower selling prices of $31 million and $48 million, respectively, and an unfavorable shift in foreign currency exchange rates of $8 million and $16 million, respectively, partially offset by lower raw material costs and continued cost management of $41 million and $54 million, respectively.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Advanced Materials Segment



	Second Quarter										First Six Months
						Change										Change
	2019		2018			$			%		2019		2018			$			%
(Dollars in millions)
Sales	$	696	$	729		$	(33	)	(5	)%	$	1,353	$	1,422		$	(69	)	(5	)%
Volume / product mix effect						(24		)	(3	)%						(54		)	(4	)%
Price effect						5			—	%						14			1	%
Exchange rate effect						(14		)	(2	)%						(29		)	(2	)%


Earnings before interest and taxes	$	145	$	150		$	(5	)	(3	)%	$	247	$	285		$	(38	)	(13	)%
Coal gasification incident insurance in excess of costs	—		(6		)	6					—		(3		)	3
Earnings before interest and taxes excluding unusual item	145		144			1			1	%	247		282			(35		)	(12	)%

Sales revenue in second quarter and first six months 2019 decreased compared to second quarter and first six months 2018 due to lower sales volume and an unfavorable shift in foreign currency exchange rates. Lower specialty plastics sales volume was attributed to uncertainty caused by the U.S. - China trade dispute. Lower advanced interlayers and performance films sales volume was primarily attributed to reduced global automotive sales, partially offset by increased sales of certain premium products including paint protection film and acoustic and architectural interlayers.

Second quarter 2018 EBIT included insurance in excess of costs from the coal gasification incident. Excluding this unusual item, EBIT increased slightly in second quarter 2019 compared to second quarter 2018 as a result of lower raw material costs and continued cost management of $17 million, being mostly offset by lower sales volume and an unfavorable shift in foreign currency exchange rates of $16 million.

First six months 2018 EBIT included insurance in excess of costs from the coal gasification incident. Excluding this unusual item, EBIT decreased first six months 2019 compared to first six months 2018 primarily due to lower sales volume of $29 million and an unfavorable shift in foreign currency exchange rates of $17 million, partially offset by continued cost management of $12 million.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Chemical Intermediates Segment



	Second Quarter										First Six Months
						Change										Change
	2019		2018			$			%		2019		2018			$			%
(Dollars in millions)
Sales	$	631	$	709		$	(78	)	(11	)%	$	1,286	$	1,439		$	(153	)	(11	)%
Volume / product mix effect						(13		)	(2	)%						(60		)	(4	)%
Price effect						(59		)	(8	)%						(80		)	(6	)%
Exchange rate effect						(6		)	(1	)%						(13		)	(1	)%


Earnings before interest and taxes	$	63	$	85		$	(22	)	(26	)%	$	136	$	155		$	(19	)	(12	)%
Coal gasification incident insurance in excess of costs	—		(21		)	21					—		(2		)	2
Earnings before interest and taxes excluding unusual item	63		64			(1		)	(2	)%	136		153			(17		)	(11	)%

Sales revenue in second quarter and first six months 2019 decreased compared to second quarter and first six months 2018 primarily due to lower selling prices for both olefins and acetyls products resulting from raw material price declines and increased competitive activity. Sales revenue was also negatively impacted by lower functional amines products sales volume attributed to weakened demand, particularly in agricultural end-markets.

Second quarter and first six months 2018 EBIT included insurance in excess of costs from the coal gasification incident. Excluding this unusual item, EBIT decreased second quarter and first six months 2019 compared to second quarter and first six months 2018 primarily due to lower selling prices of $62 million and $85 million, respectively, primarily for acetyls and functional amines products, more than offsetting lower raw material costs and continued cost management of $46 million and $64 million, respectively, and lower planned maintenance and other manufacturing costs of $14 million and $8 million, respectively.

Fibers Segment



	Second Quarter										First Six Months
						Change										Change
	2019		2018			$			%		2019		2018			$			%
(Dollars in millions)
Sales	$	213	$	241		$	(28	)	(12	)%	$	426	$	486		$	(60	)	(12	)%
Volume / product mix effect						(26		)	(11	)%						(52		)	(11	)%
Price effect						(1		)	(1	)%						(6		)	(1	)%
Exchange rate effect						(1		)	—	%						(2		)	—	%


Earnings before interest and taxes	$	51	$	83		$	(32	)	(39	)%	$	93	$	126		$	(33	)	(26	)%
Coal gasification incident insurance in excess of costs	—		(25		)	25					—		(12		)	12
Earnings before interest and taxes excluding unusual item	51		58			(7		)	(12	)%	93		114			(21		)	(18	)%

Sales revenue in second quarter and first six months 2019 decreased compared to second quarter and first six months 2018 primarily due to lower acetate tow sales volume attributed to weakened market demand resulting from global trade-related pressures, customer buying patterns, and a general market decline.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Second quarter 2018 EBIT included insurance in excess of costs from the coal gasification incident. Excluding this unusual item, adjusted EBIT decreased second quarter 2019 compared to second quarter 2018 primarily due to the net impact of $5 million of lower acetate tow sales volume partially offset by lower raw material costs and continued cost management.

First six months 2018 EBIT included insurance in excess of costs from the coal gasification incident. Excluding this unusual item, adjusted EBIT decreased first six months 2019 compared to first six months 2018 primarily due to the net impact of $19 million of lower acetate tow sales volume and lower selling prices, partially offset by lower raw material costs and continued cost management.

Other



	Second Quarter						First Six Months
	2019			2018			2019			2018
(Dollars in millions)
Loss before interest and taxes
Growth initiatives and businesses not allocated to operating segments	$	(25	)	$	(27	)	$	(52	)	$	(53	)
Pension and other postretirement benefits income (expense), net not allocated to operating segments	11			20			23			41
Asset impairments and restructuring charges, net	(18		)	(4		)	(46		)	(6		)
Other income (charges), net not allocated to operating segments	(3		)	(8		)	(3		)	(16		)
Loss before interest and taxes before non-core and unusual items	$	(35	)	$	(19	)	$	(78	)	$	(34	)
Costs resulting from tax law changes and outside-U.S. entity reorganizations	—			8			—			19
Asset impairments and restructuring charges, net	18			4			46			6
Loss before interest and taxes excluding non-core and unusual items	(17		)	(7		)	(32		)	(9		)

Costs related to growth initiatives, R&D costs, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in operating segment results for any of the periods presented and are included in "Other".



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SALES BY CUSTOMER LOCATION



	Sales Revenue
	Second Quarter									First Six Months
					Change									Change
(Dollars in millions)	2019		2018		$			%		2019		2018		$			%
United States and Canada	$	995	$	1,108	$	(113	)	(10	)%	$	1,995	$	2,208	$	(213	)	(10	)%
Asia Pacific	574		639		(65		)	(10	)%	1,127		1,281		(154		)	(12	)%
Europe, Middle East, and Africa	649		725		(76		)	(10	)%	1,338		1,452		(114		)	(8	)%
Latin America	145		149		(4		)	(3	)%	283		287		(4		)	(1	)%
Total Eastman Chemical Company	$	2,363	$	2,621	$	(258	)	(10	)%	$	4,743	$	5,228	$	(485	)	(9	)%

Sales revenue in United States and Canada decreased in second quarter 2019 compared to second quarter 2018 primarily due to lower sales volume in all operating segments, and lower selling prices, particularly in the CI segment. Sales revenue in United States and Canada decreased in first six months 2019 compared to first six months 2018 primarily due to lower sales volume in all operating segments, particularly in the CI segment, and lower selling prices, particularly in the CI segment.

Sales revenue in Asia Pacific decreased in second quarter 2019 compared to second quarter 2018 primarily due to lower sales volume, particularly in the AFP and AM segments, and lower selling prices, particularly in the CI and AFP segments. Sales revenue in Asia Pacific decreased in first six months 2019 compared to first six months 2018 primarily due to lower sales volume in all operating segments, particularly in the AM, AFP, and Fibers segments, and lower selling prices, particularly in the CI and AFP segments.

Sales revenue in Europe, Middle East, and Africa decreased in second quarter and first six months 2019 compared to second quarter and first six months 2018 primarily due to unfavorable foreign currency exchange rates and lower sales volume, particularly in the AFP and Fibers segments, partially offset by higher sales volume in the AM segment.

LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION

Cash Flows



	First Six Months
(Dollars in millions)	2019			2018
Net cash provided by (used in)
Operating activities	$	417		$	408
Investing activities	(219		)	(179		)
Financing activities	(237		)	(223		)
Effect of exchange rate changes on cash and cash equivalents	(1		)	(4		)
Net change in cash and cash equivalents	(40		)	2
Cash and cash equivalents at beginning of period	226			191
Cash and cash equivalents at end of period	$	186		$	193

Cash provided by operating activities increased $9 million in first six months 2019 compared with first six months 2018. First six months 2018 included net cash of $70 million used in operating activities related to the coal gasification incident. Excluding this item, net cash provided by operating activities decreased $61 million in 2019 due to lower net earnings, partially offset by lower net working capital (trade receivables, inventories, and trade payables).

Cash used in investing activities increased $40 million in first six months 2019 compared with first six months 2018. First six months 2018 included $65 million proceeds from coal gasification incident insurance for property damage. Excluding this item, cash used in investing activities decreased due to lower additions to properties and equipment.

Cash used in financing activities increased $14 million in first six months 2019 compared with first six months 2018. The increase was primarily due to higher dividend payments.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS



	First Six Months
(Dollars in millions)	2019			2018
Net cash provided by operating activities	$	417		$	408
Capital expenditures
Additions to properties and equipment	(198		)	(244		)
Proceeds from property insurance ⁽¹⁾	—			65
Net capital expenditures	(198		)	(179		)
Free cash flow	$	219		$	229


⁽¹⁾	Cash proceeds from insurance for coal gasification incident property damage.

Liquidity and Capital Resources

Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company's cash flows from operations can be affected by numerous factors including risks associated with global operations, raw material availability and cost, demand for and pricing of Eastman's products, capacity utilization, and other factors described under "Risk Factors" in this MD&A. Management believes maintaining a financial profile consistent with an investment grade credit rating is important to its long-term strategic and financial flexibility.

The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring October 2023. 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. The Credit Facility provides available liquidity for general corporate purposes and supports commercial paper borrowings. At June 30, 2019, the Company had no outstanding borrowings under the Credit Facility. At June 30, 2019, the Company's commercial paper borrowings were $373 million with a weighted average interest rate of 2.63 percent. See Note 5, "Borrowings", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The Company has access to up to $250 million under an accounts receivable securitization agreement (the "A/R Facility") that expires April 2020. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. At June 30, 2019, the Company had no borrowings outstanding under the A/R Facility. See Note 5, "Borrowings", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The Company has access to borrowings of up to €150 million ($171 million) under a receivables facility based on the discounted value of selected customer accounts receivable. This facility expires December 2020 and renews for another one year period if not terminated with 90 days notice by either party. These arrangements include receivables in the United States, Belgium, and Finland, and are subject to various eligibility requirements. Borrowings under this facility are subject to interest at an agreed spread above LIBOR and EURIBOR plus administration and insurance fees. At June 30, 2019, the Company's amount of outstanding borrowings under this facility were $108 million with a weighted average interest rate of 1.58 percent. See Note 5, "Borrowings", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

available borrowings under the A/R and Credit Facilities was approximately $1.75 billion as of June 30, 2019. For additional information, see Section 5.03 of the Credit Facility at Exhibit 10.03 to the Company's Current Report on Form 8-K dated October 9, 2014.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Debt and Other Commitments

At June 30, 2019, the Company's borrowings totaled $6.4 billion with various maturities. See Note 5, "Borrowings", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The resolution of uncertainties related to environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized. However, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and the extended period of time that the obligations are expected to be satisfied, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will have a material adverse effect on the Company's future liquidity or financial condition. See Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K for the Company's accounting policy for environmental costs and see Note 9, "Environmental Matters and Asset Retirement Obligations", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding outstanding environmental matters and asset retirement obligations.

See Note 8, "Leases and Off Balance Sheet Items", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding other commitments.

Off Balance Sheet Items

See Note 8, "Leases and Off Balance Sheet Items", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding off balance sheet items.

Capital Expenditures

Capital expenditures were $198 million and $244 million in first six months 2019 and 2018, respectively. Capital expenditures in 2019 were primarily for targeted growth initiatives and site modernization projects at the Longview, Texas; Kingsport, Tennessee; and Jefferson, Pennsylvania manufacturing sites. The Company expects that 2019 capital expenditures will be between $450 million and $475 million, primarily for targeted growth initiatives and maintenance.

Stock Repurchases and Dividends

In February 2018, the Company's Board of Directors authorized the repurchase of up to $2 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company. As of June 30, 2019, a total of 5,720,541 shares have been repurchased under this authorization for a total amount of $498 million.

The Board of Directors declared a cash dividend of $0.62 per share during the third quarter of 2019, payable on October 4, 2019 to stockholders of record on September 16, 2019.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Other

Eastman did not have any material relationships with unconsolidated entities or financial partnerships, including special purpose entities, for the purpose of facilitating off balance sheet arrangements with contractually narrow or limited purposes. Thus, the Company is not materially exposed to any financing, liquidity, market, or credit risk related to any such relationships.

RECENTLY ISSUED ACCOUNTING STANDARDS

For information regarding the impact of recently issued accounting standards, see Note 1, "Significant Accounting Policies", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

OUTLOOK

In 2019, management expects adjusted EPS to be between $7.50 and $8.00 and free cash flow up to $1.1 billion. These expectations assume:


•	earnings to benefit from a robust portfolio of specialty businesses in attractive niche end-markets, strong growth in high margin, innovative products, relatively unchanged manufacturing costs due to aggressive cost management, and $40 million of cost savings resulting from business improvement and cost reduction initiatives;


•	earnings to be negatively impacted by slow global economic growth, the U.S. - China trade dispute, a stronger U.S. dollar, and higher pension costs due to lower expected return on assets and higher interest costs;


•	interest expense of approximately $225 million;


•	the full-year effective tax rate on reported earnings before income tax to be approximately 17 percent;


•	depreciation and amortization of approximately $620 million;


•	capital expenditures between $450 million and $475 million;


•	reduction in debt to be lower than 2018; and


•	share repurchases similar to 2018.

The Company's 2019 financial results forecasts do not include non-core, unusual, or non-recurring items. Accordingly, management is unable to reconcile projected full-year 2019 earnings excluding non-core, unusual, or non-recurring items to projected reported GAAP earnings without unreasonable efforts.

See "Risk Factors" below.

RISK FACTORS

In addition to factors described elsewhere in this Quarterly Report, the following are the most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements made in this Quarterly Report and elsewhere from time to time. See "Forward-Looking Statements".

Continued uncertain conditions in the global economy and the financial markets could negatively impact the Company.

The Company's business and operating results were affected by the impact of the last global recession, and its related impacts, such as the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that affected the global economy. Continued uncertainty in the global economy and global capital markets may adversely affect Eastman's results of operations, financial condition, and cash flows. In addition, the Company's ability to access the credit and capital markets under attractive rates and terms could be constrained, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Volatility in costs for strategic raw material and energy commodities or disruption in the supply of these commodities could adversely affect the Company's financial results.

Eastman is reliant on certain strategic raw material and energy commodities for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in raw material and energy costs. These risk mitigation measures do not eliminate all exposure to market fluctuations and may limit the Company from fully benefiting from lower raw material costs and, conversely, offset the impact of higher raw material costs. In addition, natural disasters, plant interruptions, changes in laws or regulations, war or other outbreak of hostilities or terrorism, and breakdown or degradation of transportation infrastructure used for delivery of strategic raw material and energy commodities, could adversely impact both the cost and availability of these commodities.

Loss or financial weakness of any of the Company's largest customers could adversely affect the Company's financial results.

Although Eastman has an extensive customer base, loss of, or material financial weakness of, certain of the Company's largest customers could adversely affect the Company's financial condition and results of operations until such business is replaced. No assurances can be made that the Company would be able to regain or replace any lost customers.

The Company's business is subject to operating risks common to chemical manufacturing businesses, including cyber security risks, any of which could disrupt manufacturing operations or related infrastructure and adversely affect results of operations.

As a global specialty chemicals manufacturing company, Eastman's business is subject to operating risks common to chemical manufacturing, storage, handling, and transportation, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases. Significant limitation on the Company's ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse effect on the Company's sales revenue, costs, results of operations, credit ratings, and financial condition. Disruptions could occur due to internal factors such as computer or equipment malfunction (accidental or intentional), operator error, or process failures; or external factors such as computer or equipment malfunction at third-party service providers, natural disasters, pandemic illness, changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber attacks, or breakdown or degradation of transportation infrastructure used for delivery of supplies to the Company or for delivery of products to customers. The Company has in the past experienced cyber attacks and breaches of its computer information systems, although none of these have had a material adverse effect on the Company's operations. While the Company remains committed to managing cyber related risk, no assurances can be provided that any future disruptions due to these, or other, circumstances will not have a material effect on operations. Unplanned disruptions of manufacturing operations or related infrastructure could be significant in scale and could negatively impact operations, neighbors, and the environment, and could have a negative impact on the Company's results of operations. As previously reported, manufacturing operations and earnings have been negatively impacted by the fourth quarter 2017 operational incident in the Kingsport manufacturing facility coal gasification operations area and the second quarter 2018 third-party supplier operational disruptions at the Texas City and Longview, Texas manufacturing facilities.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Growth initiatives may not achieve desired business or financial objectives and may require significant resources in addition to or different from those available or in excess of those estimated or budgeted for such initiatives.

Eastman continues to identify and pursue growth opportunities through both organic and inorganic initiatives. These growth opportunities include development and commercialization or licensing of innovative new products and technologies and related employee leadership, expertise, skill development and retention, expansion into new markets and geographic regions, alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses and capabilities. Such initiatives are necessarily constrained by available and development of additional resources, including development, attraction, and retention of employee leadership, application development, and sales and marketing talent and capabilities. There can be no assurance that such innovation, development and commercialization or licensing efforts, investments, or acquisitions and alliances (including integration of acquired businesses) will result in financially successful commercialization of products, or acceptance by existing or new customers, or successful entry into new markets or otherwise achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations. There also can be no assurance that capital projects for growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers. Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively affect the returns from any proposed or current investments and projects.

The Company's substantial global operations subject it to risks of doing business in other countries, including U.S. and non-U.S. trade relations, which could adversely affect its business, financial condition, and results of operations.

More than half of Eastman's sales for 2018 were to customers outside of North America. The Company expects sales from international markets to continue to represent a significant portion of its sales. Also, a significant portion of the Company's manufacturing capacity is located outside of the United States. Accordingly, the Company's business is subject to risks related to the differing legal, political, cultural, social and regulatory requirements, and economic conditions of many jurisdictions. Fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided in foreign countries. In addition, the U.S. or foreign countries have imposed and may impose additional taxes or otherwise tax Eastman's foreign income, or adopt or increase restrictions on foreign trade or investment, including currency exchange controls, tariffs or other taxes, or limitations on imports or exports (including recent and proposed changes in U.S. trade policy and resulting retaliatory actions by other countries, including China, which have recently reduced and which may increasingly reduce demand for and increase costs of impacted products or result in U.S.-based trade counterparties limiting trade with U.S.-based companies or non-U.S. customers limiting their purchases from U.S.-based companies). Certain legal and political risks are also inherent in the operation of a company with Eastman's global scope. For example, it may be more difficult for Eastman to enforce its agreements or collect receivables through foreign legal systems, and the laws of some countries may not protect the Company's intellectual property rights to the same extent as the laws of the U.S. Failure of foreign countries to have laws to protect Eastman's intellectual property rights or an inability to effectively enforce such rights in foreign countries could result in loss of valuable proprietary information. There is also risk that foreign governments may nationalize private enterprises in certain countries where Eastman operates. Social and cultural norms in certain countries may not support compliance with Eastman's corporate policies including those that require compliance with substantive laws and regulations. Also, changes in general economic and political conditions in countries where Eastman operates are a risk to the Company's financial performance. As Eastman continues to operate its business globally, its success will depend, in part, on its ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to its multinational operations will not have an adverse effect on Eastman's business, financial condition, or results of operations.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Legislative, regulatory, or voluntary actions could increase the Company's future health, safety, and environmental compliance costs.

Eastman and its facilities and businesses are subject to complex health, safety, and environmental laws, regulations and related voluntary actions, both in the U.S. and internationally, which require and will continue to require significant expenditures to remain in compliance with such laws, regulations, and voluntary actions. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. For example, any amount accrued for environmental matters reflects the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number of and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations and actions, and testing requirements could result in higher costs. Specifically, future changes in legislation and regulation and related voluntary actions associated with physical impacts of climate change may increase the likelihood that the Company's manufacturing facilities will in the future be impacted by carbon requirements, regulation of greenhouse gas emissions, and energy policy, and may result in capital expenditures, increases in costs for raw materials and energy, limitations on raw material and energy source and supply choices, and other direct compliance costs.

Significant acquisitions expose the Company to risks and uncertainties, the occurrence of any of which could materially adversely affect the Company's business, financial condition, and results of operations.

While acquisitions have been and continue to be a part of Eastman's growth strategy, acquisitions of large companies (such as the previous acquisitions of Taminco Corporation and Solutia, Inc.) subject the Company to a number of risks and uncertainties, the occurrence of any of which could have a material adverse effect on Eastman. These include, but are not limited to, the possibilities that the financial performance of the acquired business may be significantly worse than expected; that significant additional indebtedness may constrain the Company's ability to access the credit and capital markets at attractive interest rates and favorable terms, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives; that the Company may not be able to achieve the cost, revenue, tax, or other "synergies" expected from any acquisition, or that there may be delays in achieving any such synergies; that management's time and effort may be dedicated to the new business resulting in a loss of focus on the successful operation of the Company's existing businesses; and that the Company may be required to expend significant additional resources in order to integrate any acquired business into Eastman or that the integration efforts will not achieve the expected benefits.

In addition to the foregoing most significant known risk factors to the Company, there may be other factors, not currently known to the Company, which could, in the future, materially adversely affect the Company, its business, financial condition, or results of operations. The foregoing discussion of the most significant risk factors to the Company does not necessarily present them in order of importance. This disclosure, including that under "Outlook" and other forward-looking statements and related disclosures made by the Company in this Quarterly Report and elsewhere from time to time, represents management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public Company disclosures (such as in filings with the Securities and Exchange Commission or in Company press releases) on related subjects.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Eastman has exposure to various market risks principally due to changes in foreign currency exchange rates, the pricing of various commodities, and interest rates. In an effort to manage these risks, the Company employs various strategies, including pricing, inventory management, and hedging. The Company enters into derivative contracts which are governed by policies, procedures, and internal processes set forth by its Board of Directors.

The Company determines its exposures to market risk by utilizing sensitivity analyses, which measure the potential losses in fair value resulting from one or more selected hypothetical changes in foreign currency exchange rates, commodity prices, or interest rates. For more information regarding exposures, refer to Part II, Item 7A of the Company's 2018 Annual Report on Form 10-K.



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At June 30, 2019 and December 31, 2018, the market risk associated with certain cash flows related to certain foreign currency denominated sales and purchase transactions, assuming a 10 percent adverse move in the U.S. dollar relative to these foreign currencies, was $47 million and $28 million, respectively, with an additional $5 million and $3 million, respectively, exposure for each additional one percentage point adverse change in those foreign currency rates. The increase in market risk in June 2019, compared to December 2018, was due to a larger foreign currency derivative portfolio at June 30. 2019.

At June 30, 2019 and December 31, 2018, the market risk associated with commodity derivative transactions, assuming an instantaneous parallel shift in the underlying commodity price of 10 percent and no corresponding change in the selling price of finished goods, was $16 million and $25 million, respectively, with an additional $2 million and $3 million, respectively, of exposure for each one percentage point move in closing price thereafter. The decrease in market risk in June 2019, compared to December 2018, was due to a lower commodity derivative portfolio at June 30, 2019.

Other than the foreign currency risk related to sales and purchase transactions and commodity risk discussed above, there have been no material changes to the Company's market risks from those disclosed in Part II, Item 7A of the Company's 2018 Annual Report on Form 10-K.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Eastman maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that as of June 30, 2019, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed was accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company's internal control over financial reporting that occurred during the second quarter of 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


PART II.	OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

General



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Solutia Legacy Torts Claims Litigation

Pursuant to an Amended and Restated Settlement Agreement effective February 28, 2008 between Solutia, Inc. ("Solutia") and Monsanto Company ("Monsanto") in connection with Solutia's emergence from Chapter 11 bankruptcy proceedings (the "Monsanto Settlement Agreement"), Monsanto is responsible for the defense and indemnification of Solutia against any Legacy Tort Claims (as defined in the Monsanto Settlement Agreement) and Solutia has agreed to retain responsibility for certain tort claims, if any, that may arise from Solutia's conduct after its spinoff from Pharmacia Corporation (f/k/a Monsanto), which occurred on September 1, 1997. Solutia, which became a wholly-owned subsidiary of Eastman upon Eastman's acquisition of Solutia in July 2012, has been named as a defendant in several such proceedings, and has submitted the matters to Monsanto, which was acquired by Bayer AG in June 2018, as Legacy Tort Claims. To the extent these matters are not within the meaning of Legacy Tort Claims, Solutia could potentially be liable thereunder. In connection with the completion of its acquisition of Solutia, Eastman guaranteed the obligations of Solutia and Eastman was added as an indemnified party under the Monsanto Settlement Agreement.


ITEM 1A.	RISK FACTORS

For identification and discussion of the most significant risks applicable to the Company and its business, see "Risk Factors" in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Quarterly Report on Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In February 2018, the Company's Board of Directors authorized the repurchase of up to an additional $2 billion of Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company. As of June 30, 2019, a total of 5,720,541 shares have been repurchased under this authorization for a total amount of $498 million. During first six months 2019, the Company repurchased 3,249,786 shares of common stock for a cost of $250 million. For additional information, see Note 11, "Stockholders' Equity", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.



Period	Total Number of Shares Purchased	Average Price Paid Per Share ⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Approximate Dollar Value that May Yet Be Purchased Under the Plan or Program
April 1 - 30, 2019	305,021	$	81.96	305,021	$	1.602	billion
May 1 - 31, 2019	673,239	$	74.27	673,239	$	1.552	billion
June 1 - 30, 2019	689,450	$	72.52	689,450	$	1.502	billion
Total	1,667,710	$	74.95	1,667,710


⁽¹⁾	Average price paid per share reflects the weighted average purchase price paid for shares.



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ITEM 6.	EXHIBITS

Exhibits filed as part of this report are listed in the Exhibit Index.



		EXHIBIT INDEX
Exhibit Number		Description

3.01		Amended and Restated Certificate of Incorporation of Eastman Chemical Company (incorporated herein by reference to Exhibit 3.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012)

3.02		Amended and Restated Bylaws of Eastman Chemical Company (incorporated herein by reference to Exhibit 3.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017)

4.01		Form of Eastman Chemical Company common stock certificate as amended February 1, 2001 (incorporated herein by reference to Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)

4.02		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 the Company's Current Report on Form 8-K dated January 10, 1994)

4.03		Indenture, dated as of June 5, 2012, between Eastman Chemical Company and Wells Fargo Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 5, 2012)

4.04		Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the Company's Current Report on Form 8-K dated January 10, 1994)

4.05		Officers' Certificate pursuant to Sections 201 and 301 of the Indenture related to 7 5/8% Debentures due 2024 (incorporated herein by reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated June 8, 1994)

4.06		Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the Company's Current Report on Form 8-K dated June 8, 1994)

4.07		Form of 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.08 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)

4.08		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 Company's Annual Report on Form 10-K for the year ended December 31, 1996)

4.09		Form of 4.5% Note due 2021 (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated December 10, 2010)

4.10		Form of 3.6% Note due 2022 (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated June 5, 2012)

4.11		Form of 4.8% Note due 2042 (incorporated herein by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K dated June 5, 2012)

4.12		Form of 4.65% Note due 2044 (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated May 15, 2014)

4.13		Form of 2.70% Note due 2020 (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated November 20, 2014)



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		EXHIBIT INDEX
Exhibit Number		Description
4.14		Form of 3.80% Note due 2025 (incorporated herein by reference to Exhibit 4.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 2014)

4.15		Form of 1.50% Note due 2023 (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated May 26, 2016 and Exhibit 1.1 to the Company's Current Report on Form 8-K dated November 21, 2016)

4.16		Form of 1.875% Note due 2026 (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated November 21, 2016)

4.17		Form of 3.5% Note due 2021 (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated November 6, 2018)

4.18		Form of 4.5% Note due 2028 (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated November 6, 2018)

10.01 *		Omnibus Agreement and Reassignment Agreement dated June 27, 2019 to the Amended and Restated $250,000,000 Accounts Receivable Securitization Agreement dated July 9, 2008 (amended August 31, 2016 and April 2, 2018) between the Company and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as agent (incorporated herein by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, and Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018)

10.02 *		Executive Retirement Agreement **

31.01 *		Rule 13a – 14(a) Certification by Mark J. Costa, Chief Executive Officer, for the quarter ended June 30, 2019

31.02 *		Rule 13a – 14(a) Certification by Curtis E. Espeland, Executive Vice President and Chief Financial Officer, for the quarter ended June 30, 2019

32.01 *		Section 1350 Certification by Mark J. Costa, Chief Executive Officer, for the quarter ended June 30, 2019

32.02 *		Section 1350 Certification by Curtis E. Espeland, Executive Vice President and Chief Financial Officer, for the quarter ended June 30, 2019

101.INS *		XBRL Instance Document

101.SCH *		XBRL Taxonomy Extension Schema Document

101.CAL *		XBRL Taxonomy Calculation Linkbase Document

101.DEF *		XBRL Definition Linkbase Document

101.LAB *		XBRL Taxonomy Label Linkbase Document

101.PRE *		XBRL Presentation Linkbase Document

* Denotes exhibit filed or furnished herewith.

** Management contract or compensatory plan or arrangement filed pursuant to Item 601(b) (10) (iii) of Regulation S-K.



Table of Contents

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:	August 6, 2019	By:	/s/ Curtis E. Espeland
			Curtis E. Espeland
			Executive Vice President and Chief Financial Officer