Edgar Filing: EASTMAN CHEMICAL CO

emn2010q2_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2010
	OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______________ to ______________

Commission file number 1-12626

EASTMAN CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware		62-1539359
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

200 South Wilcox Drive
Kingsport, Tennessee		37662
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (423) 229-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES [ ] NO [ ]

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

Large accelerated filer [X] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [ ]

(Do not check if a smaller reporting company)

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

YES [ ] NO [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class	Number of Shares Outstanding at June 30, 2010
Common Stock, par value $0.01 per share		72,242,224

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PAGE 1 OF 45 TOTAL SEQUENTIALLY NUMBERED PAGES

EXHIBIT INDEX ON PAGE 44

TABLE OF CONTENTS

ITEM

PAGE

PART I. FINANCIAL INFORMATION

1.	Financial Statements

	Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings	3
	Consolidated Statements of Financial Position	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to the Unaudited Consolidated Financial Statements	6

2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20

3.	Quantitative and Qualitative Disclosures About Market Risk	40

4.	Controls and Procedures	40

PART II. OTHER INFORMATION

1.	Legal Proceedings	41

1A.	Risk Factors	42

2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

6.	Exhibits	42

SIGNATURES

Signatures

EXHIBIT INDEX

Exhibit Index

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,

COMPREHENSIVE INCOME AND RETAINED EARNINGS

	Second Quarter						First Six Months
(Dollars in millions, except per share amounts)	2010			2009			2010			2009

Sales	$	1,724		$	1,253		$	3,288		$	2,382
Cost of sales		1,320			993			2,563			1,943
Gross profit		404			260			725			439

Selling, general and administrative expenses		108			98			211			192
Research and development expenses		36			34			72			68
Asset impairments and restructuring charges, net		3			(3	)		3			23
Operating earnings		257			131			439			156

Net interest expense		25			20			50			39
Other charges (income), net		8			5			14			9
Earnings before income taxes		224			106			375			108
Provision for income taxes		76			41			126			41
Net earnings	$	148		$	65		$	249		$	67

Earnings per share
Basic	$	2.05		$	0.89		$	3.44		$	0.92
Diluted	$	2.02		$	0.89		$	3.38		$	0.91

Comprehensive Income
Net earnings	$	148		$	65		$	249		$	67
Other comprehensive income (loss), net of tax
Change in cumulative translation adjustment		(9	)		25			(21	)		15
Change in unrecognized losses and prior service credits for benefit plans		6			(2	)		9			(2	)
Change in unrealized gains on derivative instruments		2			(8	)		8			1
Total other comprehensive income (loss), net of tax		(1	)		15			(4	)		14
Comprehensive income	$	147		$	80		$	245		$	81

Retained Earnings
Retained earnings at beginning of period	$	2,640		$	2,533		$	2,571		$	2,563
Net earnings		148			65			249			67
Cash dividends declared		(32	)		(32	)		(64	)		(64	)
Retained earnings at end of period	$	2,756		$	2,566		$	2,756		$	2,566

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

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

	June 30,			December 31,
(Dollars in millions, except per share amounts)	2010			2009
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	435		$	793
Trade receivables, net		721			277
Miscellaneous receivables		88			102
Inventories		635			531
Other current assets		30			32
Total current assets		1,909			1,735

Properties
Properties and equipment at cost		8,631			8,525
Less: Accumulated depreciation		5,476			5,415
Net properties		3,155			3,110

Goodwill		376			315
Other noncurrent assets		359			355
Total assets	$	5,799		$	5,515

Liabilities and Stockholders' Equity
Current liabilities
Payables and other current liabilities	$	880		$	800
Borrowings due within one year		6			--
Total current liabilities		886			800

Long-term borrowings		1,605			1,604
Deferred income tax liabilities		285			258
Post-employment obligations		1,216			1,221
Other long-term liabilities		130			119
Total liabilities		4,122			4,002

Stockholders' equity
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 95,417,504 and 94,775,064 for 2010 and 2009, respectively)		1			1
Additional paid-in capital		697			661
Retained earnings		2,756			2,571
Accumulated other comprehensive loss		(389	)		(385	)
		3,065			2,848
Less: Treasury stock at cost (23,257,954 shares for 2010 and 22,389,696 shares for 2009 )		1,388			1,335

Total stockholders' equity		1,677			1,513

Total liabilities and stockholders' equity	$	5,799		$	5,515

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

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	First Six Months
(Dollars in millions)	2010			2009

Cash flows from operating activities
Net earnings	$	249		$	67

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		139			134
Provision for deferred income taxes		12			140
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
(Increase) decrease in trade receivables		(433	)		(52	)
(Increase) decrease in inventories		(90	)		191
Increase (decrease) in trade payables		90			(55	)
Increase (decrease) in liabilities for employee benefits and incentive pay		(10	)		(22	)
Other items, net		24			(66	)

Net cash provided by (used in) operating activities		(19	)		337

Cash flows from investing activities
Additions to properties and equipment		(76	)		(204	)
Proceeds from sale of assets and investments		11			25
Acquisitions and investments in joint ventures		(189	)		(36	)
Additions to capitalized software		(3	)		(4	)
Other items, net		--			(7	)

Net cash used in investing activities		(257	)		(226	)

Cash flows from financing activities
Net increase in commercial paper, credit facility, and other borrowings		1			9
Repayment of borrowings		--			(2	)
Dividends paid to stockholders		(64	)		(64	)
Treasury stock purchases		(53	)		--
Proceeds from stock option exercises and other items		33			9

Net cash used in financing activities		(83	)		(48	)

Effect of exchange rate changes on cash and cash equivalents		1			--

Net change in cash and cash equivalents		(358	)		63

Cash and cash equivalents at beginning of period		793			387

Cash and cash equivalents at end of period	$	435		$	450

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

ITEM	Page

Note 1. Basis of Presentation	7
Note 2. Acquisitions	7
Note 3. Asset Impairments and Restructuring Charges, Net	8
Note 4. Inventories	9
Note 5. Goodwill and Intangible Assets	9
Note 6. Payables and Other Current Liabilities	9
Note 7. Provision for Income Taxes	10
Note 8. Borrowings	10
Note 9. Retirement Plans	11
Note 10. Environmental Matters	12
Note 11. Commitments	12
Note 12. Fair Value of Financial Instruments	13
Note 13. Stockholders' Equity	16
Note 14. Earnings and Dividends per Share	16
Note 15. Share-Based Compensation Awards	17
Note 16. Supplemental Cash Flow Information	17
Note 17. Segment Information	17
Note 18. Legal Matters	19

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company (the "Company" or "Eastman") in accordance and consistent with the accounting policies stated in the Company's 2009 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K. The unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States ("GAAP") and, of necessity, include some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of all majority-owned subsidiaries and joint ventures. Eastman accounts for other joint ventures and investments where it exercises significant influence, but does not have control, on the equity basis. Intercompany transactions and balances are eliminated in consolidation. Certain prior period data has been reclassified in the Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.

Effective January 1, 2010, the Company adopted amended accounting guidance on transfers of financial assets. The impact of this guidance is prospective with changes in first six months Statements of Consolidated Financial Position and the Statements of Cash Flows. For additional information, refer to Notes 8, "Borrowings," and 11, "Commitments."

2.	ACQUISITIONS

Genovique Specialties Corporation

On April 30, 2010, Eastman completed the stock purchase of Genovique Specialties Corporation ("Genovique"), which has been accounted for as a business combination. Genovique is a global producer of specialty plasticizers, benzoic acid, and sodium benzoate. This acquisition includes Genovique's manufacturing operations in Kohtla-Järve, Estonia, Chestertown, Maryland, and a joint venture in Wuhan, China. Genovique's benzoate ester plasticizers are a strategic addition to Eastman's existing general-purpose and specialty non-phthalate plasticizers. The acquisition adds differentiated, sustainably-advantaged products to Eastman's Performance Chemicals and Intermediates ("PCI") segment and enhances the Company's diversification into emerging geographic regions.

The total purchase price was approximately $160 million, including assumed debt of $5 million. Transaction costs associated with the acquisition were expensed as incurred. The table below shows the preliminary fair value purchase price allocation for the Genovique acquisition:

	Dollars in millions

Current assets	$	48
Properties and equipment		33
Intangible assets		59
Other noncurrent assets		2
Goodwill		64
Current liabilities		(17	)
Long-term liabilities		(29	)
Total purchase price	$	160

Acquired intangible assets consist of $44 million in established customer relationships, $14 million in trade names, and $1 million in developed technology. The customer relationships and developed technology intangible assets have remaining useful lives of 16 and 7 years, respectively. Trade names have been determined to have an indefinite life. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired and liabilities assumed, is attributed to the synergies between the acquired company and Eastman.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Korean Acetate Tow Facility

On March 22, 2010, Eastman Fibers Korea Limited ("EFKL") completed the purchase of the acetate tow facility in Ulsan, Korea from SK Chemicals Co., Ltd. ("SK"), which has been accounted for as a business combination. EFKL is a venture between the Company and SK, in which the Company has controlling ownership and operates the facility. This acquisition established acetate tow manufacturing capacity for the Company in Asia and supports projected long term sales growth for acetate tow in the region.

The fair value of total consideration was $111 million, which was paid in installments beginning first quarter 2009 and completed second quarter 2010. The Company has determined the preliminary fair value of the acquired assets to be as follows: property, plant, and equipment of $101 million, inventory of $5 million, and technology of $5 million.

3.	ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET

In second quarter 2010, there were $3 million in restructuring charges primarily for severance associated with the acquisition and integration of Genovique.

In second quarter 2009, there was a $3 million reduction of the first quarter 2009 restructuring charge resulting in a net $23 million charge in first six months 2009. The charges, primarily for severance, resulted from a reduction in force.

Changes in Reserves for Asset Impairments, Restructuring Charges, and Severance Charges

The following table summarizes the beginning reserves, charges to and changes in estimates to the reserves as described above, and the cash and non-cash reductions to the reserves attributable to asset impairments and the cash payments for severance and site closure costs for full year 2009 and first six months 2010:

(Dollars in millions)	Balance at January 1, 2009		Provision/ Adjustments			Non-cash Reductions			Cash Reductions			Balance at December 31, 2009

Non-cash charges	$	--	$	179		$	(179	)	$	--		$	--
Severance costs		5		23			--			(23	)		5
Site closure and other restructuring costs		25		(2	)		--			(18	)		5
Total	$	30	$	200		$	(179	)	$	(41	)	$	10

	Balance at January 1, 2010		Provision/ Adjustments			Non-cash Reductions			Cash Reductions			Balance at June 30, 2010

Non-cash charges	$	--	$	--		$	--		$	--		$	--
Severance costs		5		3			--			(6	)		2
Site closure and other restructuring costs		5		--			--			--			5
Total	$	10	$	3		$	--		$	(6	)	$	7

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4.	INVENTORIES

	June 30,			December 31,
(Dollars in millions)	2010			2009

At FIFO or average cost (approximates current cost)
Finished goods	$	612		$	547
Work in process		189			168
Raw materials and supplies		297			262
Total inventories		1,098			977
LIFO Reserve		(463	)		(446	)
Total inventories	$	635		$	531

Inventories valued on the LIFO method were approximately 70 percent and 75 percent of total inventories as of June 30, 2010 and December 31, 2009, respectively.

5.	GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows:

(Dollars in millions)	CASPI Segment			PCI Segment		Other Segments		Total

Reported balance at December 31, 2009	$	309		$	1	$	5	$	315
Additions		--			64		--		64
Currency translation adjustments		(3	)		--		--		(3	)
Reported balance at June 30, 2010	$	306		$	65	$	5	$	376

As a result of the purchase of Genovique during second quarter 2010, the Company recorded goodwill of $64 million. The remaining goodwill and indefinite-lived intangibles primarily consist of goodwill in the Coatings, Adhesives, Specialty Polymers and Inks ("CASPI") and PCI segments. Included in the reported balance for goodwill are accumulated impairment losses of $44 million at December 31, 2009 and June 30, 2010.

Intangible assets include developed technology, customer lists, patents and patent licenses, and trademarks with a net book value of $102 million as of June 30, 2010 and $43 million as of December 31, 2009. As a result of the Genovique acquisition, the Company recorded $59 million in customer relationships, technology, and other intangible assets. Intangible assets are included in other noncurrent assets on the balance sheet.

Refer to Note 2, "Acquisitions" for further details regarding the acquisition of Genovique.

6.	PAYABLES AND OTHER CURRENT LIABILITIES

	June 30,		December 31,
(Dollars in millions)	2010		2009

Trade creditors	$	540	$	433
Accrued payrolls, vacation, and variable-incentive compensation		104		125
Accrued taxes		30		33
Post-employment obligations		63		61
Interest payable		31		32
Other		112		116
Total payables and other current liabilities	$	880	$	800

The current portion of post-employment obligations is an estimate of current year payments.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7.	PROVISION FOR INCOME TAXES

	Second Quarter						First Six Months
(Dollars in millions)	2010			2009			2010			2009

Provision for income taxes	$	76		$	41		$	126		$	41
Effective tax rate		34	%		39	%		33	%		38	%

Excluding discrete items, second quarter and first six months 2010 effective tax rates reflect the Company's expected full year tax rate on reported earnings before income taxes of approximately 33 percent. Second quarter and first six months 2009 effective tax rates reflect a $7 million tax charge associated with a change in accounting method for tax purposes to accelerate timing of deductions for manufacturing repairs expense.

The Company or one of its subsidiaries files tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005. It is reasonably possible that within the next 12 months the Company will recognize approximately $2 million of unrecognized tax benefits as a result of the expiration of relevant statutes of limitations.

8.	BORROWINGS

	June 30,			December 31,
(Dollars in millions)	2010			2009

Borrowings consisted of:
7% notes due 2012	$	151		$	152
6.30% notes due 2018		204			205
5.5% notes due 2019		250			250
7 1/4% debentures due 2024		498			497
7 5/8% debentures due 2024		200			200
7.60% debentures due 2027		298			298
Other		10			2
Total borrowings		1,611			1,604
Borrowings due within one year		(6	)		--
Long-term borrowings	$	1,605		$	1,604

At June 30, 2010, the Company had a $700 million revolving credit facility ("Credit Facility") in two tranches, with $125 million expiring in 2012 and $575 million expiring in 2013. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a facility fee is paid on the total commitment. In addition, the Credit Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. At June 30, 2010 and December 31, 2009, the Company had no outstanding borrowings under the Credit Facility.

The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Given the expiration dates of the Credit Facility, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability and intent to refinance such borrowings on a long-term basis.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

At June 30, 2010, the Company also had a $200 million line of credit under its annually renewable accounts receivable securitization agreement ("A/R Facility"). The A/R Facility was renewed in July 2010. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and the Company pays a fee to maintain availability of the A/R Facility. In addition, the A/R Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. At June 30, 2010, the Company had no outstanding borrowings under the A/R Facility. Refer to Note 11, "Commitments" for further details regarding the A/R Facility.

9.	RETIREMENT PLANS

DEFINED BENFIT PENSION PLANS

Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined.

Below is a summary of the components of net periodic benefit cost recognized for Eastman's significant defined benefit pension plans:

Summary of Components of Net Periodic Benefit Costs
	Second Quarter						First Six Months
(Dollars in millions)	2010			2009			2010			2009

Service cost	$	11		$	10		$	22		$	21
Interest cost		21			22			42			43
Expected return on assets		(26	)		(25	)		(53	)		(49	)
Amortization of:
Prior service credit		(4	)		(4	)		(8	)		(8	)
Actuarial loss		11			10			22			17
Net periodic benefit cost	$	13		$	13		$	25		$	24

POSTRETIREMENT WELFARE PLANS

Eastman provides a subsidy toward life insurance and health care and dental benefits for eligible retirees hired prior to January 1, 2007, and a subsidy toward health care benefits for retirees' eligible survivors. In general, Eastman provides those benefits to retirees eligible under the Company's U.S. plans. Similar benefits are also made available to retirees of Holston Defense Corporation, a wholly-owned subsidiary of the Company that, prior to January 1, 1999, operated a government-owned ammunitions plant.

Eligible employees hired on or after January 1, 2007 have access to postretirement health care benefits, but Eastman does not provide a subsidy toward the premium cost of postretirement benefits for those employees.

A few of the Company's non-U.S. operations have supplemental health benefit plans for certain retirees, the cost of which is not significant to the Company.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Costs recognized for benefits for eligible retirees hired prior to January 1, 2007 are recorded using estimated amounts, which may change as actual costs derived for the year are determined. Below is a summary of the components of net periodic benefit cost recognized for the Company's U.S. other post-employment plans:

Summary of Components of Net Periodic Benefit Costs
	Second Quarter						First Six Months
(Dollars in millions)	2010			2009			2010			2009

Service cost	$	2		$	2		$	5		$	4
Interest cost		11			11			22			22
Expected return on assets		--			--			(1	)		(1	)
Amortization of:
Prior service credit		(6	)		(6	)		(12	)		(12	)
Actuarial loss		3			3			6			6
Net periodic benefit cost	$	10		$	10		$	20		$	19

10.	ENVIRONMENTAL MATTERS

Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP"), by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure and postclosure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K. Because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations or cash flows. The Company's total reserve for environmental contingencies was $40 million and $42 million at June 30, 2010 and December 31, 2009, respectively. Estimated future environmental expenditures for remediation costs range from the minimum or best estimate of $10 million to the maximum of $21 million at June 30, 2010, and $10 million to the maximum of $20 million at December 31, 2009. The best estimate accrued to date over the facilities' estimated useful lives for asset retirement obligation costs is $30 million and $32 million at June 30, 2010 and December 31, 2009, respectively.

11.	COMMITMENTS

Purchasing Obligations and Lease Commitments

At June 30, 2010, the Company had various purchase obligations totaling approximately $1 billion over a period of approximately 15 years for materials, supplies, and energy incident to the ordinary conduct of business. The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling $85 million over a period of several years. Of the total lease commitments, approximately 15 percent relates to machinery and equipment, including computer and communications equipment and production equipment; approximately 50 percent relates to real property, including office space, storage facilities and land; and approximately 35 percent relates to railcars.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable Securitization Program

Effective January 1, 2010, the Company adopted amended accounting guidance for transfers of financial assets which impacts the financial statement presentation for activity under the Company's $200 million accounts receivable securitization program. Beginning for periods after December 31, 2009, transfers of receivables interests that were previously treated as sold and removed from the balance sheet will be included in trade receivables, net and reflected as secured borrowings on the balance sheet. The Company's Statement of Financial Position at June 30, 2010 reflects an increase in trade receivables, $200 million of which was transferred at December 31, 2009 under the securitization program and reduced cash flows from operating activities by that amount for first six months 2010. As a result of the adoption of this accounting guidance, any amounts drawn on this accounts receivable securitization program would now be reflected as secured borrowings and disclosed in Note 8, "Borrowings." At December 31, 2009 and June 30, 2009 the accounts receivable securitization program was fully drawn.

Guarantees

The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease. These residual value guarantees at June 30, 2010 totaled $160 million and consisted primarily of leases for railcars and company aircraft. Leases with guarantee amounts totaling $11 million, $139 million, and $10 million will expire in 2011, 2012, and 2014 and beyond, respectively. The Company believes, based on current facts and circumstances, that the likelihood of a material payment pursuant to such guarantees is remote.

Variable Interest Entities

In June 2009, new accounting guidance on the consolidation of Variable Interest Entities ("VIEs") was issued. This guidance is effective for all VIEs or potential VIEs the Company is involved with on or after January 1, 2010. This guidance amends the evaluation criteria to identify which entity has a controlling financial interest of a variable interest entity and requires ongoing reassessments. The Company has evaluated its material contractual relationships under the new guidance and concluded that the entities involved in these relationships are not VIEs or, in the case of Primester, a joint venture that manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the Company has shared control of the VIE. As such, the Company is not required to consolidate these entities.

12.	FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Borrowings

The fair value for fixed-rate borrowings is based on current interest rates for comparable securities.

	June 30, 2010				December 31, 2009
(Dollars in millions)	Recorded Amount		Fair Value		Recorded Amount		Fair Value

Long-term borrowings	$	1,605	$	1,800	$	1,604	$	1,656

The Company's floating-rate borrowings approximate fair value.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

The following chart shows the financial assets and liabilities measured at fair value on a recurring basis.

(Dollars in millions)				Fair Value Measurements at June 30, 2010
Description	June 30, 2010			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative Assets	$	139		$	2		$	137		$	--
Derivative Liabilities		(93	)		(4	)		(89	)		--
	$	46		$	(2	)	$	48		$	--

(Dollars in millions)				Fair Value Measurements at December 31, 2009
Description	December 31, 2009			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative Assets	$	52		$	--	$	52		$	--
Derivative Liabilities		(21	)		--		(21	)		--
	$	31		$	--	$	31		$	--

Hedging Programs

The Company is exposed to market risk, such as changes in currency exchange rates, raw material and energy costs and interest rates. The Company uses various derivative financial instruments pursuant to the Company's hedging policies to mitigate these market risk factors and their effect on the cash flows of the underlying transactions. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. For further information, see Note 9, "Fair Value of Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.

Fair Value Hedges

Fair value hedges are derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

As of June 30, 2010, the total notional amount of the Company's interest rate swaps was $146 million. The fair value of the derivative of $2 million was recorded in other noncurrent assets.

Cash Flow Hedges

Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income, net of income taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

During the second quarter 2010, the Company entered into forward starting interest rate swaps designated as cash flow hedges to manage interest rate exposure related to the probable future issuance of fixed-rate debt. These forward starting interest rate swaps are based on a total notional amount of $300 million.

As of June 30, 2010, the total amount of the Company's foreign exchange forward and option contracts was a $62 million asset. As of June 30, 2010, the total amount of the Company's feedstock/energy forward and option contracts was a $14 million liability. As of June 30, 2010, the total amount of the Company's forward starting interest rate swaps contracts was a $4 million liability.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Derivatives Designated as Cash Flow Hedging Instruments

(Dollars in millions)		Fair Value
Derivative Assets	Balance Sheet Location	June 30, 2010		December 31, 2009
Commodity contracts	Other current assets	$	--	$	7
Foreign exchange contracts	Other current assets		33		14
Foreign exchange contracts	Other noncurrent assets		30		11
		$	63	$	32

(Dollars in millions)		Fair Value
Derivative Liabilities	Balance Sheet Location	June 30, 2010		December 31, 2009
Commodity contracts	Payables and other current liabilities	$	14	$	1
Foreign exchange contracts	Other noncurrent liabilities		1		--
Forward starting interest rate swap contracts	Other noncurrent liabilities		4		--
		$	19	$	1

Derivatives' Cash Flow Hedging Relationships

Second Quarter
(Dollars in millions)
Derivatives' Cash Flow Hedging Relationships	Amount after tax of gain/ (loss) recognized in Other Comprehensive Income on derivatives (effective portion)						Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)	Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
	June 30, 2010			June 30, 2009				June 30, 2010			June 30, 2009
Commodity contract	$	(8	)	$	1		Cost of sales	$	(1	)	$	(3	)
Foreign exchange contracts		13			(9	)	Sales		14			6
Forward starting interest rate swap contracts		(3	)		--
	$	2		$	(8	)		$	13		$	3

First Six Months
(Dollars in millions)
Derivatives' Cash Flow Hedging Relationships	Amount after tax of gain/ (loss) recognized in Other Comprehensive Income on derivatives (effective portion)						Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)	Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
	June 30, 2010			June 30, 2009				June 30, 2010		June 30, 2009
Commodity contract	$	(12	)	$	5		Cost of sales	$	4	$	(9	)
Foreign exchange contracts		23			(4	)	Sales		23		14
Forward starting interest rate swap contracts		(3	)		--
	$	8		$	1			$	27	$	5

For all periods presented, there were no material ineffectiveness with regard to the Company's cash flow hedges.

Nondesignated / Nonqualifying Derivative Instruments

The Company mitigates foreign currency transaction exposure within a quarter from point of recording a sale or purchase transaction to the point of receipt of the currency related to that transaction through its foreign exchange tactical hedging program. The gains or losses on these nonqualifying derivatives or derivatives that are not designated as hedges are marked to market in the line item "Other charges (income), net" of the Statements of Earnings. The Company recognized approximately $12 million net gain on nonqualifying derivatives during the quarter ended June 30, 2010. The Company recognized approximately $15 million net gain on nonqualifying derivatives during the six months ended June 30, 2010.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13.	STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders' equity for first six months 2010 is provided below:

(Dollars in millions)	Common Stock at Par Value $		Paid-in Capital $		Retained Earnings $			Accumulated Other Comprehensive Income (Loss) $			Treasury Stock at Cost $			Total Stockholders' Equity $
Balance at December 31, 2009		1		661		2,571			(385	)		(1,335	)		1,513

Net Earnings		--		--		249			--			--			249
Cash Dividends Declared (1)		--		--		(64	)		--			--			(64	)
Other Comprehensive Income (Loss)		--		--		--			(4	)		--			(4	)
Share-Based Compensation Expense (2)		--		10		--			--			--			10
Stock Option Exercises		--		26		--			--			--			26
Stock Repurchases		--		--		--			--			(53	)		(53	)
Balance at June 30, 2010		1		697		2,756			(389	)		(1,388	)		1,677

(1)	Includes cash dividends declared, but unpaid.

(2)	Includes the fair value of equity share-based awards recognized for share-based compensation.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

(Dollars in millions)	Cumulative Translation Adjustment $			Unrecognized Losses and Prior Service Credits for Benefit Plans $			Unrealized Gains on Derivative Instruments $		Unrealized Losses on Investments $			Accumulated Other Comprehensive Income (Loss) $
Balance at December 31, 2008		60			(414	)		20		(1	)		(335	)
Period change		17			(74	)		7		--			(50	)
Balance at December 31, 2009		77			(488	)		27		(1	)		(385	)
Period change		(21	)		9			8		--			(4	)
Balance at June 30, 2010		56			(479	)		35		(1	)		(389	)

Amounts of other comprehensive income (loss) are presented net of applicable taxes. The Company records deferred income taxes on the cumulative translation adjustment related to branch operations and other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are provided on the cumulative translation adjustment of subsidiaries outside the United States, as such cumulative translation adjustment is considered to be a component of permanently invested, unremitted earnings of these foreign subsidiaries.

14.	EARNINGS AND DIVIDENDS PER SHARE

	Second Quarter		First Six Months
	2010	2009	2010	2009

Shares used for earnings per share calculation (in millions):
Basic	72.3	72.5	72.3	72.5
Diluted	73.5	73.1	73.5	73.0

In second quarter and first six months 2010, common shares underlying options to purchase 594,551 shares of common stock and 709,801 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total proceeds that would be received for these awards. Second quarter and first six months 2010 reflect the impact of share repurchases of 0.9 million shares.

In second quarter and first six months 2009, common shares underlying options to purchase 3,745,729 shares of common stock and 4,031,829 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total proceeds that would be received for these awards. There were no repurchases in first six months 2009.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company declared cash dividends of $0.44 per share in second quarter 2010 and 2009 and $0.88 per share in first six months 2010 and 2009.

15.	SHARE-BASED COMPENSATION AWARDS

The Company utilizes share-based awards under employee and non-employee director compensation programs. These share-based awards may include restricted and unrestricted stock, restricted stock units, stock options, and performance shares. In both second quarter 2010 and 2009, approximately $5 million of compensation expense before tax were recognized in selling, general and administrative expense in the earnings statement for all share-based awards. The impact on second quarter 2010 and 2009 net earnings of approximately $3 million and $2 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.

In first six months 2010 and 2009, $10 million and $9 million, respectively, of compensation expense before tax were recognized in selling, general and administrative expense in the earnings statement for all share-based awards. The impact on first six months 2010 and 2009 net earnings of $6 million and $5 million, respectively, is net of deferred tax expense related to share-based award compensation.

Additional information regarding share-based compensation plans and awards may be found in Note 15, "Share-Based Compensation Plans and Awards", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.

16.	SUPPLEMENTAL CASH FLOW INFORMATION

Included in the line item "Other items, net" of the "Cash flows from operating activities" section of the Consolidated Statements of Cash Flows are specific changes to certain balance sheet accounts as follows:

(Dollars in millions)	First Six Months
	2010			2009

Current assets	$	7		$	(72	)
Other assets		(8	)		37
Current liabilities		11			(34	)
Long-term liabilities and equity		14			3
Total	$	24		$	(66	)

The above changes included transactions such as monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, accrued taxes, value-added taxes, and other miscellaneous accruals.

17.	SEGMENT INFORMATION

The Company's products and operations are managed and reported in five reportable operating segments, consisting of the CASPI segment, the Fibers segment, the PCI segment, the Performance Polymers segment, and the Specialty Plastics segment. For additional information concerning the Company's segments' businesses and products, see Note 22, "Segment Information", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.

Research and development and other expenses not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown in the tables below as "other" operating losses.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In first quarter 2010, the Company transferred certain intermediates product lines from the Performance Polymers segment to the PCI segment to improve optimization of manufacturing assets supporting the three raw material streams that supply the Company's downstream businesses. The revised segment composition reflects how management views and evaluates operations. Accordingly, the amounts for sales, operating earnings, and assets have been adjusted to retrospectively apply these changes to all periods presented.

	Second Quarter
(Dollars in millions)	2010		2009
Sales
CASPI	$	416	$	302
Fibers		274		263
PCI		541		316
Performance Polymers		222		185
Specialty Plastics		271		187

Total Sales	$	1,724	$	1,253

	First Six Months
(Dollars in millions)	2010		2009
Sales
CASPI	$	789	$	552
Fibers		541		522
PCI		1,023		620
Performance Polymers		416		344
Specialty Plastics		519		344

Total Sales	$	3,288		2,382

	Second Quarter
(Dollars in millions)	2010			2009
Operating Earnings (Loss)
CASPI (1)	$	94		$	50
Fibers		83			74
PCI (2)		69			1
Performance Polymers		6			7
Specialty Plastics (1)		21			8
Total Operating Earnings by Segment		273			140
Other		(16	)		(9	)

Total Operating Earnings	$	257		$	131

(1)	Second quarter 2009 includes a positive adjustment to first quarter 2009 restructuring charge of ($2) million and ($1) million in the CASPI and Specialty Plastics segments, respectively.

(2)	Second quarter 2010 includes restructuring charges of $3 million, primarily for severance in the PCI segment. See Note 3, "Asset Impairments and Restructuring Charges, Net" for additional information.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	First Six Months
(Dollars in millions)	2010			2009
Operating Earnings (Loss)
CASPI (1)	$	160		$	64
Fibers (1)		162			143
PCI (1) (2)		106			(9	)
Performance Polymers (1)		(7	)		(11	)
Specialty Plastics (1)		42			(10	)
Total Operating Earnings by Segment		463			177
Other		(24	)		(21	)

Total Operating Earnings	$	439		$	156

(1)	First six months 2009 includes a restructuring charge primarily for a severance program of $5 million, $4 million, $6 million, $4 million, and $4 million in the CASPI, Fibers, PCI, Performance Polymers, and Specialty Plastics segments, respectively.

(2)	First six months 2010 includes restructuring charges of $3 million, primarily for severance in the PCI segment. See Note 3, "Asset Impairments and Restructuring Charges, Net" for additional information.

	June 30,		December 31,
(Dollars in millions)	2010		2009
Assets by Segment (1)
CASPI	$	1,270	$	1,128
Fibers		845		726
PCI		1,177		845
Performance Polymers		614		575
Specialty Plastics		1,001		910
Total Assets by Segment		4,907		4,184
Corporate Assets		892		1,331

Total Assets	$	5,799	$	5,515

(1)	The chief operating decision maker holds segment management accountable for accounts receivable, inventory, fixed assets, goodwill, and intangibles.

18.	LEGAL MATTERS

From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could negatively impact earnings or cash flows in a particular future period.

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

ITEM	Page

Critical Accounting Estimates	21

Presentation of Non-GAAP Financial Measures	21

Overview	22

Results of Operations	23

Summary by Operating Segment	26

Summary by Customer Location	31

Liquidity, Capital Resources, and Other Financial Information	32

Outlook	35

Forward-Looking Statements and Risk Factors	37

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Eastman Chemical Company's (the "Company" or "Eastman") audited consolidated financial statements, including related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2009 Annual Report on Form 10-K, and the Company's unaudited consolidated financial statements, including related notes, included elsewhere in this report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING ESTIMATES

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"), the Company's 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, the Company evaluates its estimates, including those related to allowances for doubtful accounts, impairment of long-lived assets, environmental costs, U.S. pension and other post-employment 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. The Company's management believes the critical accounting estimates described in Part II, Item 7 of the Company's 2009 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.

PRESENTATION OF NON-GAAP FINANCIAL MEASURES

This Management's Discussion and Analysis includes the following non-GAAP financial measures and accompanying reconciliations to the most directly comparable GAAP financial measures. The non-GAAP financial measures used by the Company may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance or liquidity prepared in accordance with GAAP.

·	Company and segment operating earnings, net earnings, and diluted earnings per share excluding asset impairments and restructuring charges, net; and

·	Cash flows from operating activities excluding the impact of adoption of amended accounting guidance for transfers of financial assets.

In second quarter 2010, there were $3 million in restructuring charges, primarily for severance associated with the acquisition and integration of Genovique Specialties Corporation ("Genovique").

In second quarter 2009, the Company recognized a $3 million reduction of the first quarter 2009 restructuring charge resulting in a net $23 million charge in first six months 2009. The charges, primarily for severance, resulted from a reduction in force.

In first quarter 2010, the Company adopted amended accounting guidance for transfers of financial assets which impacts the financial statement presentation for activity under the Company's $200 million accounts receivable securitization program. For periods beginning after December 31, 2009, transfers of receivables interests that were previously treated as sold and removed from the balance sheet will be included in trade receivables, net and reflected as secured borrowings on the balance sheet. The Company's Statement of Financial Position at June 30, 2010 reflects an increase in trade receivables, $200 million of which was transferred at December 31, 2009 under the securitization program and reduced cash flows from operating activities by that amount for first quarter 2010. At June 30, 2010, there were no transfers of receivables interests under the accounts receivable securitization program.

For evaluation and analysis of ongoing business results and of the impact on the Company and segments of strategic decisions and actions to reduce costs and to improve the profitability of the Company, Eastman's management believes that Company and segment earnings should be considered both with and without asset impairments and restructuring charges. Management believes that investors can better evaluate and analyze historical and future business trends if they also consider the reported Company and segment results, respectively, without the asset impairments and restructuring charges, net. In addition, management believes that cash provided by (used in) operating earnings should be considered both with and without the impact of adoption of amended accounting guidance for transfers of financial assets. Management utilizes these measures to evaluate business performance and its cash position and in determining certain performance-based compensation. These measures, excluding the identified items, are not recognized in accordance with GAAP and should not be viewed as alternatives to the GAAP measures of performance.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company generated sales revenue of $1.7 billion and $1.3 billion in second quarter 2010 and 2009, respectively and $3.3 billion and $2.4 billion in first six months 2010 and 2009, respectively. Sales revenue increases for both second quarter and first six months 2010 compared to comparable 2009 periods were due to higher sales volume primarily attributed to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives, and increased selling prices in response to higher raw material and energy costs.

Operating earnings were $257 million in second quarter 2010 compared with $131 million in second quarter 2009 and $439 million in first six months 2010 compared with $156 million in first six months 2009. Operating earnings were negatively impacted by restructuring charges of $3 million in both second quarter and first six months 2010 and $23 million in first six months 2009. Operating earnings in second quarter 2009 were positively impacted by a $3 million reduction of a first quarter 2009 restructuring charge. The increase in both comparable periods was due to higher sales volume and higher capacity utilization which led to lower unit costs. In addition, higher selling prices more than offset higher raw material and energy costs. Operating earnings in second quarter 2010 were negatively impacted by costs recognized during the quarter related to the previously announced power outage at the Company's Longview, Texas manufacturing facility, which were mostly offset by a partial settlement of a related insurance claim and were primarily reflected in the Performance Chemicals and Intermediates ("PCI") and Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segments. In first six months 2010, operating earnings included the cumulative negative impact of approximately $25 million related to the outage, net of these insurance proceeds from partial settlement. The Company expects additional insurance proceeds in the second half of the year. First six months 2010 operating earnings also included $12 million from acetyl license revenue. Second quarter and first six months 2009 operating earnings included approximately $20 million in costs related to the reconfiguration of the Longview, Texas facility.

The Company used $19 million in cash from operating activities during first six months 2010 compared to $337 million provided by operating activities in first six months 2009. Excluding the $200 million impact of the adoption of amended accounting guidance discussed above in "Presentation of Non-GAAP Financial Measures", Eastman generated $181 million in cash from operating activities primarily due to higher net earnings partially offset by an increase in working capital. Excluding the impact of the adoption of this amended accounting guidance, the Company expects to generate free cash flow of approximately $300 million for full year 2010, assuming capital expenditures of approximately $250 million and U.S. defined benefit pension plan funding in an amount of approximately $25 million. Free cash flow is defined as cash from operating activities less capital expenditures and dividends.

The Company is progressing on its growth initiatives in 2010.

·	In the Fibers segment, the Korean acetate tow facility was acquired and commenced production in first quarter, and began customer qualifications during second quarter.

·	In the Specialty Plastics segment, the monomer manufacturing facility and the first Eastman TritanTM copolyester polymer manufacturing facility in Kingsport, Tennessee commenced production in first quarter.

·	In the PCI segment, Genovique, a global producer of specialty non-phthalate plasticizers for water-based adhesives and other applications, was acquired in second quarter.

·	In the Specialty Plastics segment, the expansion of capacity by approximately 25 percent for cyclohexane dimethanol ("CHDM") modified polymers, a monomer used in the manufacture of copolyester, has commenced and is expected to be online in two phases in late 2011 and in 2012.

·	In the Specialty Plastics segment, the second thirty thousand metric ton expansion of the resin capacity for TritanTM copolyesters has commenced and is expected to be online by the end of 2011.

In the CASPI segment, the third expansion of the Company’s hydrogenated hydrocarbon resins capacity in Middelburg, the Netherlands will increase this capacity by an additional 20 percent and is expected to be online in early 2011. A Longview, Texas hydrogenated hydrocarbon resins expansion will commence in the second half of the year and will also be online in early 2011.

In addition, the Company announced on April 23, 2010 that it will review strategic options, including a possible divestiture, for its polyethylene terephthalate ("PET") business in the Performance Polymers segment and anticipates completing this effort by year end.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

	Second Quarter
(Dollars in millions)	2010		2009		Change			Volume Effect			Price Effect			Product Mix Effect			Exchange Rate Effect

Sales	$	1,724	$	1,253		38	%		21	%		13	%		4	%		--	%

	First Six Months
(Dollars in millions)	2010		2009		Change			Volume Effect			Price Effect			Product Mix Effect			Exchange Rate Effect

Sales	$	3,288	$	2,382		38	%		21	%		11	%		5	%		1	%

Sales revenue in second quarter 2010 compared to second quarter 2009 increased $471 million primarily due to higher sales volume in all segments and increased selling prices primarily in the PCI, CASPI, and Performance Polymers segments. The higher sales volume was attributed primarily to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives. The increased selling prices were in response to higher raw material and energy costs.

Sales revenue in first six months 2010 compared to first six months 2009 increased $906 million primarily due to higher sales volume in all segments and increased selling prices primarily in the PCI, Performance Polymers, and CASPI segments. The higher sales volume was attributed primarily to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives. The increased selling prices were in response to higher raw material and energy costs.

	Second Quarter									First Six Months
(Dollars in millions)	2010			2009			Change			2010			2009			Change

Gross Profit	$	404		$	260			55	%	$	725		$	439			65	%
As a percentage of sales		23	%		21	%					22	%		18	%

Gross profit and gross profit as a percentage of sales in second quarter and first six months 2010 increased compared to second quarter and first six months 2009 in all segments except Performance Polymers. The increase in both comparable periods was due to higher sales volume and higher capacity utilization which led to lower unit costs. In addition, higher selling prices more than offset higher raw material and energy costs. Gross profit in second quarter 2010 included costs recognized during the quarter related to the previously announced power outage, which were mostly offset by a partial settlement of a related insurance claim and were primarily reflected in the PCI and CASPI segments. In first six months 2010, gross profit included the cumulative negative impact of approximately $25 million related to the outage, net of these insurance proceeds from partial settlement. First six months 2010 gross profit also included $12 million from acetyl license revenue. Second quarter and first six months 2009 included approximately $20 million in costs related to the reconfiguration of the Longview, Texas facility. The reconfiguration costs impacted the PCI and CASPI segments.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

	Second Quarter									First Six Months
(Dollars in millions)	2010			2009			Change			2010			2009			Change

Selling, General and Administrative Expenses	$	108		$	98			10	%	$	211		$	192			10	%
Research and Development Expenses		36			34			6	%		72			68			6	%
	$	144		$	132			9	%	$	283		$	260			9	%
As a percentage of sales		8	%		11	%					9	%		11	%

Selling, general and administrative ("SG&A") expenses in second quarter 2010 were higher compared to second quarter 2009 primarily due to higher expenses for growth initiatives. SG&A expenses in first six months 2010 were higher compared to first six months 2009 primarily due to increased performance-based compensation expense and higher expenses for growth initiatives.

Research and development ("R&D") expenses were higher in second quarter and first six months 2010 compared to second quarter and first six months 2009 primarily due to higher R&D expenses for growth initiatives.

Asset Impairments and Restructuring Charges, Net

In second quarter 2010, there were $3 million in restructuring charges primarily for severance associated with the acquisition and integration of Genovique.

For more information regarding asset impairments and restructuring charges, net see the segment discussions and Note 3, "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.

Operating Earnings

	Second Quarter								First Six Months
(Dollars in millions)	2010		2009			Change			2010		2009		Change

Operating earnings	$	257	$	131			96	%	$	439	$	156	>100 %
Asset impairments and restructuring charges, net		3		(3	)					3		23
Operating earnings excluding asset impairments and restructuring charges, net	$	260	$	128		>100		%	$	442	$	179	>100 %

Net Interest Expense

	Second Quarter							First Six Months
(Dollars in millions)	2010		2009		Change			2010		2009		Change

Gross interest costs	$	27	$	26				$	54	$	50
Less: Capitalized interest		--		4					1		7
Interest expense		27		22		23	%		53		43		23	%
Interest income		2		2					3		4
Net interest expense	$	25	$	20		25	%	$	50	$	39		28	%

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net interest expense increased $5 million and $11 million in second quarter and first six months 2010, respectively, compared to comparable 2009 periods primarily due to lower capitalized interest resulting from lower capital spending and higher average borrowings.

For 2010, the Company expects net interest expense to increase compared with 2009 primarily due to lower capitalized interest and higher average borrowings.

Other Charges (Income), Net

	Second Quarter				First Six Months
(Dollars in millions)	2010		2009		2010		2009

Foreign exchange transaction losses	$	6	$	2	$	9	$	2
Investment losses, net		--		2		1		5
Other, net		2		1		4		2
Other charges (income), net	$	8	$	5	$	14	$	9

Provision for Income Taxes

	Second Quarter			First Six Months
(Dollars in millions)	2010	2009		2010	2009
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