Edgar Filing: EASTMAN CHEMICAL CO

form10qsecondqtr_2012.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, 2012
	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 [X] 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, 2012
Common Stock, par value $0.01 per share		138,232,385

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

PAGE 1 OF 60 TOTAL SEQUENTIALLY NUMBERED PAGES

EXHIBIT INDEX ON PAGE 59

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	31

3.	Quantitative and Qualitative Disclosures About Market Risk	54

4.	Controls and Procedures	54

PART II. OTHER INFORMATION

1.	Legal Proceedings	55

1A.	Risk Factors	57

6.	Exhibits	57

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)	2012			2011			2012			2011

Sales	$	1,853		$	1,885		$	3,674		$	3,643
Cost of sales		1,372			1,411			2,762			2,711
Gross profit		481			474			912			932

Selling, general and administrative expenses		121			118			247			226
Research and development expenses		43			38			84			74
Asset impairments and restructuring charges (gains), net		--			(15	)		--			(15	)
Operating earnings		317			333			581			647

Net interest expense		28			18			47			37
Other charges (income), net		21			(5	)		22			(11	)
Earnings from continuing operations before income taxes		268			320			512			621
Provision for income taxes from continuing operations		91			101			176			201
Earnings from continuing operations		177			219			336			420

Earnings from discontinued operations, net of tax		--			--			--			9
Gain from disposal of discontinued operations, net of tax		2			1			1			31
Net earnings	$	179		$	220		$	337		$	460

Basic earnings per share
Earnings from continuing operations	$	1.28		$	1.55		$	2.43		$	2.97
Earnings from discontinued operations		0.02			--			0.01			0.28
Basic earnings per share	$	1.30		$	1.55		$	2.44		$	3.25

Diluted earnings per share
Earnings from continuing operations	$	1.26		$	1.51		$	2.38		$	2.89
Earnings from discontinued operations		0.01			--			0.01			0.28
Diluted earnings per share	$	1.27		$	1.51		$	2.39		$	3.17

Comprehensive Income
Net earnings	$	179		$	220		$	337		$	460
Other comprehensive income (loss), net of tax
Change in cumulative translation adjustment		(24	)		11			(9	)		36
Defined benefit pension and other postretirement benefit plans:
Amortization of unrecognized prior service credits included in net periodic costs		(3	)		(5	)		(8	)		(13	)
Derivatives and hedging:
Unrealized gain (loss) during period		(40	)		(19	)		(30	)		(32	)
Reclassification adjustment for gains included in net income		4			--			(1	)		(1	)
Total other comprehensive income (loss), net of tax		(63	)		(13	)		(48	)		(10	)
Comprehensive income	$	116		$	207		$	289		$	450

Retained Earnings
Retained earnings at beginning of period	$	2,882		$	2,459		$	2,760		$	2,253
Net earnings		179			220			337			460
Cash dividends declared		(37	)		(33	)		(73	)		(67	)
Retained earnings at end of period	$	3,024		$	2,646		$	3,024		$	2,646

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)	2012		2011
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	3,000	$	577
Short-term time deposits		--		200
Trade receivables, net		732		632
Miscellaneous receivables		70		72
Inventories		775		779
Other current assets		53		42
Total current assets		4,630		2,302

Properties
Properties and equipment at cost		8,509		8,383
Less: Accumulated depreciation		5,374		5,276
Net properties		3,135		3,107

Goodwill		404		406
Other noncurrent assets		397		369
Total assets	$	8,566	$	6,184

Liabilities and Stockholders' Equity
Current liabilities
Payables and other current liabilities	$	894	$	961
Borrowings due within one year		5		153
Total current liabilities		899		1,114

Long-term borrowings		3,830		1,445
Deferred income tax liabilities		229		210
Post-employment obligations		1,382		1,411
Other long-term liabilities		103		134
Total liabilities		6,443		4,314

Stockholders' equity
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 197,683,562 and 196,455,131 for 2012 and 2011, respectively)		2		2
Additional paid-in capital		936		900
Retained earnings		3,024		2,760
Accumulated other comprehensive income		90		138
		4,052		3,800
Less: Treasury stock at cost (59,511,662 shares for 2012 and 59,539,633 shares for 2011)		1,929		1,930

Total stockholders' equity		2,123		1,870

Total liabilities and stockholders' equity	$	8,566	$	6,184

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

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	First Six Months
(Dollars in millions)	2012			2011

Cash flows from operating activities
Net earnings	$	337		$	460

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		140			135
Gain on sale of assets		--			(70	)
Provision (benefit) for deferred income taxes		23			(14	)
Pension and other postretirement contributions (in excess of) less than expenses		(45	)		(112	)
Variable compensation (in excess of) less than expenses		(36	)		(45	)
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
(Increase) decrease in trade receivables		(103	)		(212	)
(Increase) decrease in inventories		(2	)		(121	)
Increase (decrease) in trade payables		(31	)		70
Other items, net		52			(30	)

Net cash provided by operating activities		335			61

Cash flows from investing activities
Additions to properties and equipment		(177	)		(206	)
Proceeds from redemption of short-term time deposits		200			--
Proceeds from sale of assets and investments		6			644
Acquisitions and investments in joint ventures		(10	)		--
Additions to short-term time deposits		--			(200	)
Additions to capitalized software		(3	)		(5	)
Other items, net		(35	)		(6	)

Net cash (used in) provided by investing activities		(19	)		227

Cash flows from financing activities
Net increase in commercial paper, credit facility, and other borrowings		(1	)		1
Proceeds from borrowings		2,311			--
Repayment of borrowings		(146	)		(2	)
Dividends paid to stockholders		(71	)		(67	)
Treasury stock purchases		--			(177	)
Proceeds from stock option exercises and other items, net		14			75

Net cash provided by (used in) financing activities		2,107			(170	)

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

Net change in cash and cash equivalents		2,423			118

Cash and cash equivalents at beginning of period		577			516

Cash and cash equivalents at end of period	$	3,000		$	634

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

ITEM	Page

Note 1. Basis of Presentation	7
Note 2. Accounting Methodology Change for Pension and Other Postretirement Benefit Plans	8
Note 3. Acquisitions and Investments in Joint Ventures	14
Note 4. Discontinued Operations	15
Note 5. Inventories	15
Note 6. Payables and Other Current Liabilities	15
Note 7. Provision for Income Taxes	16
Note 8. Borrowings	16
Note 9. Derivatives	17
Note 10. Retirement Plans	21
Note 11. Commitments	22
Note 12. Environmental Matters	23
Note 13. Legal Matters	23
Note 14. Stockholders' Equity	24
Note 15. Earnings and Dividends Per Share	25
Note 16. Asset Impairments and Restructuring Charges (Gains), Net	25
Note 17. Share-Based Compensation Awards	26
Note 18. Supplemental Cash Flow Information	26
Note 19. Segment Information	26
Note 20. Recently Issued Accounting Standards	29
Note 21. Subsequent Event	29

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	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 described in the Company's Current Report on Form 8-K dated May 16, 2012 (the "Form 8-K"), which adjusted certain items contained in the Company's 2011 Annual Report on Form 10-K to reflect the change in accounting for pension and other postretirement benefit ("OPEB") plans actuarial gains and losses described in Note 2, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans", and certain enhanced disclosures. The accompanying unaudited consolidated financial statements reflect the change in accounting for pension and OPEB plans, and should be read in conjunction with the consolidated financial statements in Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-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, 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. Certain prior period data has been reclassified in the Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.

Other comprehensive income

Beginning January 1, 2012, the Company adopted amended accounting guidance related to the presentation of other comprehensive income which became effective for reporting periods beginning after December 15, 2011. This change has been retrospectively applied to all periods presented.

Stock split

On August 5, 2011, the Company's Board of Directors declared a two-for-one split of the Company's common stock in the form of a 100 percent stock dividend. Stockholders of record as of September 15, 2011 were issued one additional share of common stock on October 3, 2011 for each share held. Treasury shares were treated as shares outstanding in the stock split. All shares and per share amounts in this Quarterly Report on Form 10-Q have been adjusted for all periods presented for the stock split.

Solutia acquisition

Information related to the Solutia Inc. ("Solutia") acquisition completed July 2, 2012 is in Note 21, "Subsequent Event". For all periods presented, Solutia financial information is not included in Eastman results.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2.	ACCOUNTING METHODOLOGY CHANGE FOR PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

As previously reported on March 7, 2012, Eastman elected to change its method of accounting for actuarial gains and losses for its pension and OPEB plans to a more preferable method permitted under GAAP. The new method recognizes actuarial gains and losses in the Company's operating results in the year in which the gains and losses occur rather than amortizing them over future periods. Eastman management believes that this change in accounting improves transparency of reporting of its operating results by recognizing the effects of economic and interest rate trends on pension and OPEB plan investments and assumptions in the year these actuarial gains and losses are incurred. Historically, Eastman has recognized pension and OPEB actuarial gains and losses annually in its Consolidated Statements of Financial Position as Accumulated Other Comprehensive Income and Loss as a component of Stockholders' Equity, and then amortized these gains and losses each period in its Consolidated Statements of Earnings. The expected return on assets component of Eastman's pension expense has historically been calculated using a five-year smoothing of asset gains and losses, and the gain or loss component of pension and OPEB expense has historically been based on amortization of actuarial gains and losses that exceed 10 percent of the greater of plan assets or projected benefit obligations over the average future service period of active employees. Under the new method of accounting, these gains and losses are measured annually at the plan's December 31 measurement date and recorded as a mark-to-market ("MTM") adjustment during the fourth quarter of each year, and any quarters in which an interim remeasurement is triggered. This methodology is preferable under GAAP since it aligns more closely with fair value principles and does not delay the recognition of gains and losses into future periods. The new method has been retrospectively applied to the financial results of all periods presented.

Under the new method of accounting, Eastman's pension and OPEB costs consist of two elements: 1) ongoing costs recognized quarterly, which are comprised of service and interest costs, expected returns on plan assets, and amortization of prior service credits; and 2) MTM gains and losses recognized annually, in the fourth quarter of each year, resulting from changes in actuarial assumptions and the differences between actual and expected returns on plan assets and discount rates. Any interim remeasurement triggered by a curtailment, settlement, or significant plan change is recognized as an MTM adjustment in the quarter in which such remeasurement event occurs.

Eastman's operating segment results follow internal management reporting, which is used for making operating decisions and assessing performance. Historically, total pension and OPEB costs have been allocated to each segment. In conjunction with the change in accounting principle, the service cost, which represents the benefits earned by active employees during the period, and amortization of prior service credits continue to be allocated to each segment. Interest costs, expected return on assets, and the MTM adjustment (including any interim remeasurement) for actuarial gains and losses are under the changed accounting method included in corporate expense and not allocated to segments. Management believes this change in expense allocation better reflects the operating results of each business.

Management also elected to change its method of accounting for certain costs included in inventory. Effective in first quarter 2012, the portion of pension and OPEB costs attributable to former employees (inactives) is not a component of inventoriable costs and instead is charged directly to the cost of sales line item as a period cost. Applying this change in inventory retrospectively did not have a material impact on previously reported inventory, cost of sales, or financial results in any prior period and prior period results have not been retrospectively adjusted for this change in accounting for certain related costs included in inventory.

The cumulative effect of the change in accounting for pension and OPEB plans was a decrease in Retained Earnings as of December 31, 2011 (the most recent measurement date prior to the change) of $676 million, and an equivalent increase in Accumulated Other Comprehensive Income, leaving total stockholders' equity unchanged. See Note 10, "Retirement Plans".

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Following are the changes to financial statement line items as a result of the accounting methodology change for the periods presented in the accompanying unaudited consolidated financial statements:

Unaudited Condensed Consolidated Statement of Earnings
	Three Months Ended June 30, 2012
(Dollars in millions, except per share amounts, unaudited)	Previous Accounting Method			Effect of Accounting Change			As Reported

Cost of sales	$	1,387		$	(15	)	$	1,372
Gross profit		466			15			481
Selling, general and administrative expenses		124			(3	)		121
Research and development expenses		44			(1	)		43
Operating earnings		298			19			317
Other charges (income), net		20			1			21
Earnings from continuing operations before income taxes		250			18			268
Provision for income taxes from continuing operations		84			7			91
Earnings from continuing operations		166			11			177
Net earnings		168			11			179

Basic earnings per share
Earnings from continuing operations	$	1.20		$	0.08		$	1.28
Earnings from discontinued operations		0.01			0.01			0.02
Basic earnings per share		1.21			0.09			1.30

Diluted earnings per share
Earnings from continuing operations	$	1.18		$	0.08		$	1.26
Diluted earnings per share		1.19			0.08			1.27

Comprehensive Income
Net earnings	$	168		$	11		$	179
Amortization of unrecognized prior service credits included in net periodic costs (1)		10			(13	)		(3	)
Total other comprehensive income (loss), net of tax		(50	)		(13	)		(63	)
Comprehensive income		118			(2	)		116

Retained Earnings
Retained earnings at beginning of period	$	3,546		$	(664	)	$	2,882
Net earnings		168			11			179
Retained earnings at end of period		3,677			(653	)		3,024

(1)	Updated to reflect first quarter 2012 presentation of other comprehensive income.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Condensed Consolidated Statement of Earnings
	Three Months Ended June 30, 2011
(Dollars in millions, except per share amounts, unaudited)	As Previously Reported (Before Accounting Change)			Effect of Accounting Change			As Adjusted (After Accounting Change)

Cost of sales	$	1,422		$	(11	)	$	1,411
Gross profit		463			11			474
Selling, general and administrative expenses		121			(3	)		118
Research and development expenses		39			(1	)		38
Operating earnings		318			15			333
Other charges (income), net		(6	)		1			(5	)
Earnings from continuing operations before income taxes		306			14			320
Provision for income taxes from continuing operations		96			5			101
Earnings from continuing operations		210			9			219
Net earnings		211			9			220

Basic earnings per share
Earnings from continuing operations	$	1.49		$	0.06		$	1.55

Diluted earnings per share
Earnings from continuing operations	$	1.45		$	0.06		$	1.51

Comprehensive Income
Net earnings	$	211		$	9		$	220
Amortization of unrecognized prior service credits included in net periodic costs (1)		2			(7	)		(5	)
Total other comprehensive income (loss), net of tax		(6	)		(7	)		(13	)
Comprehensive income		205			2			207

Retained Earnings
Retained earnings at beginning of period	$	3,065		$	(606	)	$	2,459
Net earnings		211			9			220
Retained earnings at end of period		3,243			(597	)		2,646

(1)	Updated to reflect first quarter 2012 presentation of other comprehensive income.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Condensed Consolidated Statement of Earnings
		Six Months Ended June 30, 2012
(Dollars in millions, except per share amounts, unaudited)		Previous Accounting Method		Effect of Accounting Change		As Reported

Cost of sales	$	2,792	$	(30)	$	2,762
Gross profit		882		30		912
Selling, general and administrative expenses		254		(7)		247
Research and development expenses		85		(1)		84
Operating earnings		543		38		581
Other charges (income), net		21		1		22
Earnings from continuing operations before income taxes		475		37		512
Provision for income taxes from continuing operations		162		14		176
Earnings from continuing operations		313		23		336
Net earnings		314		23		337

Basic earnings per share
Earnings from continuing operations	$	2.27	$	0.16	$	2.43
Basic earnings per share		2.28		0.16		2.44

Diluted earnings per share
Earnings from continuing operations	$	2.22	$	0.16	$	2.38
Diluted earnings per share		2.23		0.16		2.39

Comprehensive Income
Net earnings	$	314	$	23	$	337
Amortization of unrecognized prior service credits included in net periodic costs (1)		18		(26)		(8)
Total other comprehensive income (loss), net of tax		(22)		(26)		(48)
Comprehensive income		292		(3)		289

Retained Earnings
Retained earnings at beginning of period	$	3,436	$	(676)	$	2,760
Net earnings		314		23		337
Retained earnings at end of period		3,677		(653)		3,024

(1)	Updated to reflect first quarter 2012 presentation of other comprehensive income.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Condensed Consolidated Statement of Earnings
	Six Months Ended June 30, 2011
(Dollars in millions, except per share amounts, unaudited)	As Previously Reported (Before Accounting Change)			Effect of Accounting Change			As Adjusted (After Accounting Change)

Cost of sales	$	2,747		$	(36	)	$	2,711
Gross profit		896			36			932
Selling, general and administrative expenses		234			(8	)		226
Research and development expenses		75			(1	)		74
Operating earnings		602			45			647
Other charges (income), net		(12	)		1			(11	)
Earnings from continuing operations before income taxes		577			44			621
Provision for income taxes from continuing operations		185			16			201
Earnings from continuing operations		392			28			420
Earnings from discontinued operations, net of tax		8			1			9
Net earnings		431			29			460

Basic earnings per share
Earnings from continuing operations	$	2.77		$	0.20		$	2.97
Earnings from discontinued operations		0.28			--			0.28
Basic earnings per share		3.05			0.20			3.25

Diluted earnings per share
Earnings from continuing operations	$	2.70		$	0.19		$	2.89
Earnings from discontinued operations		0.27			0.01			0.28
Diluted earnings per share		2.97			0.20			3.17

Comprehensive Income
Net earnings	$	431		$	29		$	460
Amortization of unrecognized prior service credits included in net periodic costs (1)		6			(19	)		(13	)
Total other comprehensive income (loss), net of tax		9			(19	)		(10	)
Comprehensive income		440			10			450

Retained Earnings
Retained earnings at beginning of period	$	2,879		$	(626	)	$	2,253
Net earnings		431			29			460
Retained earnings at end of period		3,243			(597	)		2,646

(1)	Updated to reflect first quarter 2012 presentation of other comprehensive income.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Statements of Financial Position
	June 30, 2012
(Dollars in millions, unaudited)	Previous Accounting Method			Effect of Accounting Change			As Reported

Other noncurrent assets	$	395		$	2		$	397
Post-employment obligations		1,377			5			1,382
Retained earnings		3,677			(653	)		3,024
Accumulated other comprehensive income (loss)		(560	)		650			90

	December 31, 2011
(Dollars in millions)	As Previously Reported (Before Accounting Change)			Effect of Accounting Change			As Adjusted (After Accounting Change)

Retained earnings	$	3,436		$	(676	)	$	2,760
Accumulated other comprehensive income (loss)		(538	)		676			138

Unaudited Condensed Consolidated Statements of Cash Flows
	Six Months Ended June 30, 2012
(Dollars in millions)	Previous Accounting Method			Effect of Accounting Change			As Reported

Net earnings	$	314		$	23		$	337
Provision (benefit) for deferred income taxes		9			14			23
Pension and other postretirement contributions (in excess of) less than expenses		(24	)		(21	)		(45	)
Other items, net		68			(16	)		52

	Six Months Ended June 30, 2011
(Dollars in millions)	As Previously Reported (Before Accounting Change)			Effect of Accounting Change			As Adjusted (After Accounting Change)

Net earnings	$	431		$	29		$	460
Provision (benefit) for deferred income taxes		(32	)		18			(14	)
Pension and other postretirement contributions (in excess of) less than expenses (1)		(77	)		(35	)		(112	)
Other items, net (1)		(18	)		(12	)		(30	)

(1)	Updated to reflect first quarter 2012 presentation of cash flows from operating activities.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3.	ACQUISITIONS AND INVESTMENTS IN JOINT VENTURES

Sterling Chemicals, Inc. and Scandiflex do Brasil S.A. Indústrias Químicas

During third quarter 2011, the Company completed two acquisitions in the Performance Chemicals and Intermediates ("PCI") segment. On August 9, 2011, Eastman acquired Sterling Chemicals, Inc. ("Sterling"), a single site North American petrochemical producer, to produce non-phthalate plasticizers, including Eastman 168™ non-phthalate plasticizers, and acetic acid. On September 1, 2011, Eastman acquired Scandiflex do Brasil S.A. Indústrias Químicas ("Scandiflex"), a manufacturer of plasticizers located in São Paulo, Brazil. The acquisition of Scandiflex provided the Company additional access to Brazilian plasticizer markets. The total purchase price for both acquisitions was $133 million, including a post-closing payment of $10 million to the previous shareholders of Scandiflex. Transaction costs of $4 million associated with these acquisitions were expensed as incurred and are included in the "Selling, general and administrative expenses" line item in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. The table below shows the final fair value purchase price allocation for these acquisitions:

	Dollars in millions

Current assets	$	33
Properties and equipment		129
Intangible assets		11
Other noncurrent assets		20
Goodwill		33
Current liabilities		(23	)
Long-term liabilities		(70	)
Total purchase price	$	133

In connection with the purchase transactions, the Company recorded goodwill, which represents the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed. Acquired intangible assets primarily relate to perpetual air emission credits to which management has assigned indefinite lives. Long-term liabilities primarily include Sterling pension and other postretirement welfare plan obligations, as well as Scandiflex contingent liabilities for environmental and other contingencies. In connection with the Sterling acquisition, Sterling's debt was repaid at closing and therefore not included in the above purchase price allocation.

Other 2011 Acquisitions and Investments in Joint Ventures

On July 1, 2011, the Company acquired Dynaloy, LLC ("Dynaloy"), a producer of formulated solvents. The acquisition was accounted for as a business combination and is reported in the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment. Dynaloy adds materials science capabilities that are expected to complement growth of the CASPI segment's electronic materials product line. On November 2, 2011, the Company acquired TetraVitae Bioscience, Inc., a developer of renewable chemicals, including bio-based butanol and acetone. Also in 2011, the Company entered into a joint venture for a 30,000 metric ton acetate tow manufacturing facility in China that is expected to be operational in mid-2013, with investment primarily during 2011 and 2012.

Pro forma financial information for these acquisitions is not presented due to the immaterial financial impact to the Company.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4.	DISCONTINUED OPERATIONS

On January 31, 2011, the Company completed the sale of the polyethylene terephthalate ("PET") business, related assets at the Columbia, South Carolina site, and technology of its Performance Polymers segment for $615 million and recognized a gain of approximately $30 million, net of tax. The Company contracted with the buyer for transition services to supply certain raw materials and services for a period of less than one year. Transition supply agreement revenues of approximately $220 million, relating to raw materials, were more than offset by costs and reported net in cost of sales. The PET business, assets, and technology sold were substantially all of the Performance Polymers segment and therefore the segment operating results are presented as discontinued operations for all periods presented and are not included in results from continuing operations.

Operating results of the discontinued operations which were formerly included in the Performance Polymers segment are summarized below:

	Second Quarter				First Six Months
(Dollars in millions)	2012		2011		2012		2011

Sales	$	--	$	--	$	--	$	105
Earnings before income taxes		--		--		--		18
Earnings from discontinued operations, net of tax		--		--		--		9
Gain from disposal of discontinued operations, net of tax		2		1		1		31

Second quarter 2012 net gains are primarily related to PET business litigation settled during the quarter.

5.	INVENTORIES

	June 30,			December 31,
(Dollars in millions)	2012			2011

At FIFO or average cost (approximates current cost)
Finished goods	$	732		$	777
Work in process		225			239
Raw materials and supplies		387			353
Total inventories		1,344			1,369
LIFO Reserve		(569	)		(590	)
Total inventories	$	775		$	779

Inventories valued on the LIFO method were approximately 70 percent of total inventories as of both June 30, 2012 and December 31, 2011.

6.	PAYABLES AND OTHER CURRENT LIABILITIES

	June 30,		December 31,
(Dollars in millions)	2012		2011

Trade creditors	$	497	$	529
Accrued payrolls, vacation, and variable-incentive compensation		93		146
Accrued taxes		83		40
Post-employment obligations		56		58
Interest payable		31		26
Other		134		162
Total payables and other current liabilities	$	894	$	961

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)	2012			2011			2012			2011

Provision for income taxes	$	91		$	101		$	176		$	201
Effective tax rate		34	%		32	%		34	%		32	%

The second quarter and first six months 2012 effective tax rates were increased due to more earnings being generated in the U.S. as compared to internationally and the non-deductibility of certain Solutia acquisition transaction costs. The second quarter and first six months 2011 effective tax rates included a $6 million tax benefit recognized due to an increased level of capital investment which qualified for additional state tax credits.

8.	BORROWINGS

	June 30,			December 31,
(Dollars in millions)	2012			2011

Borrowings consisted of:
7% notes due 2012	$	--		$	147
3% debentures due 2015		250			250
2.4% notes due 2017		997			--
6.30% notes due 2018		175			176
5.5% notes due 2019		250			250
4.5% debentures due 2021		250			250
3.6% notes due 2022		893			--
7 1/4% debentures due 2024		243			243
7 5/8% debentures due 2024		54			54
7.60% debentures due 2027		222			222
4.8% notes due 2042		496			--
Credit facility borrowings		--			--
Other		5			6
Total borrowings		3,835			1,598
Borrowings due within one year		(5	)		(153	)
Long-term borrowings	$	3,830		$	1,445

The Company has a $750 million revolving credit agreement (the "Credit Facility") expiring December 2016. 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. At June 30, 2012 and December 31, 2011, 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 capacity for borrowings available under the Credit Facility. Given the expiration date 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.

In April 2012, the Company increased the line of credit under its accounts receivable securitization agreement ("A/R Facility") to $250 million from $200 million and extended the maturity date to April 2015. 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. At June 30, 2012 and December 31, 2011, the Company had no outstanding borrowings under the A/R Facility.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Credit Facility and the A/R Facility contain 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. In addition, the entire amount of these facilities was available without violating applicable covenants as of June 30, 2012 and December 31, 2011.

On June 5, 2012, the Company issued 2.4% notes due 2017 in the principal amount of $1.0 billion, 3.6% notes due 2022 in the principal amount of $900 million, and 4.8% notes due 2042 in the principal amount of $500 million. Proceeds from the sale of the notes, net of original issue discounts, issuance costs, and the monetization of interest rate swaps, were $2.3 billion. Proceeds from these notes were used to pay, in part, the cash portion of the Solutia acquisition, repayment of Solutia debt, and acquisition costs.

During second quarter, the Company repaid the $146 million of 7% notes that matured in April 2012.

On February 29, 2012, Eastman entered into a $1.2 billion five-year Term Loan Agreement (the "Term Loan"). No amounts were outstanding under the Term Loan as of June 30, 2012. The Term Loan contains certain customary representations, warranties and covenants, including maintenance of certain financial ratios. The Company has been in compliance with all such covenants since February 29, 2012.

As previously disclosed, Eastman entered into a $2.3 billion Bridge Loan Agreement (the "Bridge Loan") on February 29, 2012. As a result of the issuance of $2.4 billion principal amount of notes during second quarter 2012 no amounts were borrowed under the Bridge Loan and the Bridge Loan was terminated on June 5, 2012.

Fair Value of Borrowings

The Company has determined that its long-term borrowings at June 30, 2012 and December 31, 2011 were classified within level 1 in the fair value hierarchy as defined in the accounting policies in Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-K. The fair value for fixed-rate borrowings is based on current market quotes. The Company's floating-rate borrowings approximate fair value.

	June 30, 2012				December 31, 2011
(Dollars in millions)	Recorded Amount		Fair Value		Recorded Amount		Fair Value

Long-term borrowings	$	3,830	$	4,096	$	1,445	$	1,656

9.	DERIVATIVES

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 when appropriate 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 13, "Derivatives", to the consolidated financial statements in Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-K.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Hedges

Fair value hedges are defined as 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, 2012 and December 31, 2011, the Company had no fair value hedges.

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.

As of June 30, 2012, the total notional amounts of the Company's foreign exchange forward and option contracts were €303 million (approximately $385 million equivalent) and ¥11.6 billion (approximately $150 million equivalent), and the total notional volume hedged for raw materials was approximately 1 million barrels of ethane and 25 thousand tons of paraxylene. The Company had no hedges for energy or interest rate swaps for the future issuance of debt ("forward starting interest rate swaps") at June 30, 2012.

As of December 31, 2011, the total notional amounts of the Company's foreign exchange forward and option contracts were €270 million (approximately $350 million equivalent) and ¥13.7 billion (approximately $185 million equivalent), respectively, the total notional volume hedged for energy was approximately 1 million mmbtu (million british thermal units), and the total notional volume hedged for raw materials was approximately 2 million barrels. Additionally, the total notional value of forward starting interest rate swaps was $200 million.

Fair Value Measurements

For additional information on fair value measurement, see Note 1, "Significant Accounting Policies" to the consolidated financial statements in Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-K.

The following chart shows the financial assets and liabilities valued on a recurring basis.

(Dollars in millions)			Fair Value Measurements at June 30, 2012
Description		June 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivative Assets	$	37	$	--	$	37	$	--
Derivative Liabilities		(20)		--		(12)		(8)
	$	17	$	--	$	25	$	(8)

(Dollars in millions)			Fair Value Measurements at December 31, 2011
Description		December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivative Assets	$	34	$	--	$	34	$	--
Derivative Liabilities		(23)		--		(23)		--
	$	11	$	--	$	11	$	--

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The majority of the Company's derivative assets are classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which 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 the transaction's counterparty to validate the accuracy of its standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry only a minimal risk of nonperformance.

The Company holds Level 3 assets for commodity hedges. The fair values of Level 3 instruments are determined using pricing data similar to that used in Level 2 financial instruments described above, and reflect adjustments for less liquid markets or longer contractual terms. All Level 3 hedges will mature in the current year. The Company determines the fair value of paraxylene derivative forward contracts based on related inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets, and which influence the actual forward price of the commodity. Due to the fact that the forward price of the commodity itself is considered unobservable, the Company has categorized these forward contracts as Level 3.

The table below presents a rollforward of activity for these assets for the period ended June 30, 2012:

	Level 3 Assets
(Dollars in millions)	Total			Commodity Contracts

Beginning balance at March 31, 2012	$	--		$	--
Realized gain (loss)		--			--
Change in unrealized gain (loss)		(9	)		(9	)
Purchases, sales and settlements		1			1
Transfers (out) in of Level 3		--			--
Ending balance at June 30, 2012	$	(8	)	$	(8	)

The following chart shows the financial assets and liabilities valued on a recurring basis and their location in the Statement of Financial Position. The Company had no nonqualifying derivatives or derivatives that are not designated as hedges as of June 30, 2012 and December 31, 2011.

Fair Value of Derivatives Designated as Hedging Instruments

(Dollars in millions)		Fair Value Measurements Significant Other Observable Inputs
Derivative Assets	Statement of Financial Position Location	June 30, 2012		December 31, 2011
Cash Flow Hedges
Commodity contracts	Other current assets	$	--	$	1
Commodity contracts	Other noncurrent assets		--		1
Foreign exchange contracts	Other current assets		22		20
Foreign exchange contracts	Other noncurrent assets		15		12
		$	37	$	34

(Dollars in millions)		Fair Value Measurements Significant Other Observable Inputs
Derivative Liabilities	Statement of Financial Position Location	June 30, 2012		December 31, 2011
Cash Flow Hedges
Commodity contracts	Payables and other current liabilities	$	13	$	8
Commodity contracts	Other long-term liabilities		2		--
Foreign exchange contracts	Payables and other current liabilities		4		7
Foreign exchange contracts	Other long-term liabilities		1		7
Forward starting interest rate swap contracts	Payables and other current liabilities		--		1
		$	20	$	23

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Derivatives' Hedging Relationships

Second Quarter

(Dollars in millions)		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)
Derivatives' Cash Flow Hedging Relationships		June 30, 2012		June 30, 2011			June 30, 2012		June 30, 2011
Commodity contracts	$	3	$	(3)	Cost of sales	$	(18)	$	5
Foreign exchange contracts		4		(9)	Sales		9		(4)
Forward starting interest rate swap contracts		(43)		(7)	Interest Expense		(1)		--
	$	(36)	$	(19)		$	(10)	$	1

First Six Months

(Dollars in millions)		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)
Derivatives' Cash Flow Hedging Relationships		June 30, 2012		June 30, 2011			June 30, 2012		June 30, 2011
Commodity contracts	$	(4)	$	(1)	Cost of sales	$	(18)	$	5
Foreign exchange contracts		3		(25)	Sales		17		(3)
Forward starting interest rate swap contracts		(30)		(7)	Interest Expense		(1)		--
	$	(31)	$	(33)		$	(2)	$	2

In second quarter 2012, forward starting interest rate swaps related to the issuance of debt for the Solutia acquisition were settled, resulting in an additional loss, net of tax of $44 million recorded in Other Comprehensive Income.

Hedging Summary

At June 30, 2012 and 2011, monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in accumulated other comprehensive income before taxes totaled approximately $54 million and $25 million in losses, respectively. If realized, approximately $11 million in gains in second quarter 2012 will be reclassified into earnings during the next 12 months, including foreign exchange contracts monetized and prospectively de-designated in fourth quarter 2011. Ineffective portions of hedges are immediately recognized in cost of sales or other charges (income), net. For second quarter and six months ended June 30, 2012, the ineffective portion of the Company's qualifying hedges was $2 million. For six months ended June 30, 2011, there was no material ineffectiveness.

The gains or losses on 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, and, in all periods presented, represent foreign exchange derivatives denominated in multiple currencies and are transacted and settled in the same quarter. The Company recognized approximately $2 million net gains and $1 million net losses on nonqualifying derivatives during second quarter 2012 and 2011, respectively. The Company recognized approximately $1 million net gains and $5 million net losses on nonqualifying derivatives during first six months 2012 and 2011, respectively.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10.	RETIREMENT PLANS

As discussed in Note 2, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans", effective January 1, 2012, Eastman elected to change its method of accounting for actuarial gains and losses for its pension and OPEB plans. This accounting change has been applied retrospectively to all periods presented.

As described in more detail below, Eastman offers various postretirement benefits to its employees.

DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT WELFARE PLANS

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.

In August 2011, in connection with its acquisition of Sterling, the Company assumed Sterling's U.S. defined benefit pension plan. Prior to the acquisition, the plan had been closed to new participants and was no longer accruing additional benefits. For more information, see Note 3, "Acquisitions and Investments in Joint Ventures".

Postretirement Welfare Plans:

Eastman provides a subsidy toward life insurance, health care, and dental benefits for eligible retirees hired prior to January 1, 2007, and a subsidy toward health care and dental benefits for retirees' eligible survivors. In general, Eastman provides those benefits to retirees eligible under the Company's U.S. plans.

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.

In August 2011, in connection with its acquisition of Sterling, the Company assumed Sterling's postretirement welfare plan. For more information, see Note 3, "Acquisitions and Investments in Joint Ventures".

Costs recognized for benefits for eligible retirees hired prior to January 1, 2007 are recognized using estimated amounts, which may change as actual costs for the year are determined. Components of net periodic benefit cost were as follows:

	Second Quarter												First Six Months
	Pension Plans						Postretirement Welfare Plans						Pension Plans						Postretirement Welfare Plans
(Dollars in millions)	2012			2011			2012			2011			2012			2011			2012			2011

Service cost	$	11		$	11		$	3		$	2		$	23		$	23		$	5		$	4
Interest cost		22			21			10			11			43			42			21			22
Expected return on assets		(25	)		(24	)		(1	)		(1	)		(50	)		(49	)		(1	)		(2	)
Curtailment gain (1)		--			--			--			--			--			--			--			(7	)
Amortization of:
Prior service credit		(1	)		(4	)		(5	)		(5	)		(2	)		(7	)		(10	)		(10	)
Mark-to-market gain (2)		--			--			--			--			--			--			--			(15	)
Net periodic benefit cost	$	7		$	4		$	7		$	7		$	14		$	9		$	15		$	(8	)

(1)	Gain for the Performance Polymers segment that was sold January 31, 2011 and is included in discontinued operations. For more information, see Note 4, "Discontinued Operations".

(2)	Mark-to-market gain due to the interim remeasurement of the OPEB plan obligation, triggered by the exit of employees associated with the sale of the PET business.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Second quarter and first six months 2012 reflect the impact on the U.S. defined benefit pension plan and the other postretirement welfare plan of the Sterling acquisition described in Note 3, "Acquisitions and Investments in Joint Ventures".

The Company contributed $45 million and $100 million to its U.S. defined benefit pension plans in first six months 2012 and 2011, respectively.

11.	COMMITMENTS

Purchase Obligations and Lease Commitments

The Company had various purchase obligations at June 30, 2012 totaling approximately $2.2 billion over a period of approximately 15 years for materials, supplies and energy incident to the ordinary conduct of business. In second quarter 2012, the Company entered into an agreement with a third party to purchase propylene from a planned propane dehydrogenation plant beginning in 2015. The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling $140 million over a period of several years. Of the total lease commitments, approximately 5 percent relate to machinery and equipment, including computer and communications equipment and production equipment; approximately 45 percent relate to real property, including office space, storage facilities, and land; and approximately 50 percent relate to railcars.

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 as well as other guarantees. Disclosures about each group of similar guarantees are provided below.

Residual Value 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, 2012 totaled $110 million and consisted primarily of leases for railcars and company aircraft and will expire beginning in 2016. Management believes, based on current facts and circumstances, that the likelihood of material residual guarantee payments is remote.

Other Guarantees

Guarantees and claims also arise during the ordinary course of business from relationships with joint venture partners, suppliers, customers, 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 primarily 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 of between 1 and 15 years with maximum potential future payments of approximately $80 million in the aggregate, with none of these guarantees individually significant to the Company’s operating results, financial position, or liquidity. The Company's current expectation is that future payment or performance related to non-performance under other guarantees is considered remote.

Variable Interest Entities

The Company has evaluated its material contractual relationships under accounting guidance for consolidation of Variable Interest Entities ("VIEs") and has 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.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12.	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 Exhibit 99.03 – "Item 8, Form 10-K – Financial Statements and Supplementary Data" of the Form 8-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 $39 million at both June 30, 2012 and December 31, 2011. At June 30, 2012 and December 31, 2011, this reserve included $8 million and $6 million, respectively, related to previously closed and impaired sites, as well as sites that have been divested but for which the Company retains the environmental liability related to these sites.

Estimated future environmental expenditures for remediation costs ranged from the minimum or best estimate of $12 million to the maximum of $28 million and from the minimum or best estimate of $11 million to the maximum of $29 million at June 30, 2012 and December 31, 2011, respectively. The best estimate accrued to date over the facilities' estimated useful lives for asset retirement obligation costs were $27 million and $28 million at June 30, 2012 and December 31, 2011, respectively. These estimates do not include the acquired Solutia facilities.

During third quarter 2011, as described in Note 3, "Acquisitions and Investments in Joint Ventures" the Company completed the acquisitions of Sterling and Scandiflex, resulting in a $4 million increase to the reserve for environmental contingencies consisting of an additional $1 million in asset retirement obligation costs and a minimum or best estimate of $3 million to a maximum of $4 million of estimated future environmental expenditures for remediation.

The Company completed the sale of the PET business on January 31, 2011. As a result, $3 million in asset retirement obligation costs were divested.

13.	LEGAL MATTERS

General

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.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14.	STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders' equity for first six months 2012 is provided below:

(Dollars in millions)	Common Stock at Par Value $	Paid-in Capital $	Retained Earnings $	Accumulated Other Comprehensive Income $	Treasury Stock at Cost $	Total Stockholders' Equity $
Balance at December 31, 2011 (1) (2)	2	900	2,760	138	(1,930)	1,870

Net Earnings	--	--	337	--	--	337
Cash Dividends Declared (3)	--	--	(73)	--	--	(73)
Other Comprehensive Income	--	--	--	(48)	--	(48)
Share-Based Compensation Expense (4)	--	16	--	--	--	16
Stock Option Exercises	--	14	--	--	--	14
Other (5)	--	6	--	--	1	7
Stock Repurchases	--	--	--	--	--	--
Balance at June 30, 2012	2	936	3,024	90	(1,929)	2,123

(1)	Common Stock at Par Value and Retained Earnings have been adjusted for the two-for-one stock split on October 3, 2011. For additional information, see Note 1, "Basis of Presentation" and Note 15, "Earnings and Dividends Per Share".

(2)	Retained Earnings and Accumulated Other Comprehensive Income have been adjusted for the change in accounting methodology for pension and OPEB plans. For additional information, see Note 2, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans".

(3)	Includes cash dividends declared, but unpaid.

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

(5)	Primarily includes tax benefits relating to the difference between the amounts deductible for federal income taxes over the amounts charged to income for book value purposes credited to paid-in capital and other items.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

(Dollars in millions)	Cumulative Translation Adjustment $	Unrecognized Prior Service Credits for Benefit Plans (1) $	Unrealized Gains (Losses) on Derivative Instruments $	Unrealized Losses on Investments $	Accumulated Other Comprehensive Income (Loss) $
Balance at December 31, 2010 (1)	79	99	17	(1)	194
Period change	(15)	(21)	(20)	--	(56)
Balance at December 31, 2011 (1)	64	78	(3)	(1)	138
Period change	(9)	(8)	(31)	--	(48)
Balance at June 30, 2012	55	70	(34)	(1)	90

(1)	Unrecognized Prior Service Credits for Benefit Plans have been adjusted for the change in accounting methodology for pension and OPEB plans. For additional information, see Note 2, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans".

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.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

15.	EARNINGS AND DIVIDENDS PER SHARE

	Second Quarter		First Six Months
	2012	2011	2012	2011

Shares used for earnings per share calculation (in millions):
Basic	138.1	141.4	137.7	141.4
Diluted	141.2	145.0	140.9	145.1

On August 5, 2011, the Company's Board of Directors declared a two-for-one split of the Company's common stock. The stock split was in the form of a 100 percent stock dividend and was distributed on October 3, 2011 to stockholders of record as of September 15, 2011. Stockholders were issued one additional share for each share owned. Treasury shares were treated as shares outstanding in the stock split. All shares and per share amounts in this Quarterly Report on Form 10-Q have been adjusted for all periods presented for the stock split.

In second quarter and first six months 2012, there were no outstanding options to purchase shares of common stock excluded from the computation of diluted earnings per share. There were no share repurchases in second quarter or first six months 2012.

In second quarter and first six months 2011, there were no outstanding options to purchase shares of common stock excluded from the computation of diluted earnings per share. Second quarter and first six months 2011 reflect the impact of share repurchases of 3.7 million shares.

The Company declared cash dividends of $0.26 and $0.235 per share in second quarter 2012 and 2011, respectively and $0.52 and $0.47 per share in first six months 2012 and 2011, respectively.

16.	ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES (GAINS), NET

In second quarter and first six months 2011, there was a $15 million gain from the sale of the previously impaired methanol and ammonia assets related to the terminated Beaumont, Texas industrial gasification project.

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

The following table summarizes the changes in other asset impairments and restructuring charges and gains, the non-cash reductions attributable to asset impairments, and the cash reductions in shutdown reserves for severance costs and site closure costs paid for full year 2011 and first six months 2012:

(Dollars in millions)

Balance at

January 1, 2011

Provision/ Adjustments