Edgar Filing: EASTMAN CHEMICAL CO

EMN 2014.03.31 10Q

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 March 31, 2014
	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	[ ]	(Do not check if a smaller reporting company)	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 March 31, 2014
Common Stock, par value $0.01 per share	150,242,083

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PAGE 1 OF 47 TOTAL SEQUENTIALLY NUMBERED PAGES

EXHIBIT INDEX ON PAGE 46

TABLE OF CONTENTS



ITEM		PAGE

PART I. FINANCIAL INFORMATION



1.	Financial Statements

	Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings	3
	Unaudited 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	23

3.	Quantitative and Qualitative Disclosures About Market Risk	42

4.	Controls and Procedures	42

PART II. OTHER INFORMATION



1.	Legal Proceedings	43

1A.	Risk Factors	43

2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

6.	Exhibits	44

SIGNATURES



	Signatures	45

EXHIBIT INDEX



	Exhibit Index	46

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,

COMPREHENSIVE INCOME AND RETAINED EARNINGS



	First Quarter
(Dollars in millions, except per share amounts)	2014			2013
Sales	$	2,305		$	2,307
Cost of sales	1,710			1,691
Gross profit	595			616
Selling, general and administrative expenses	168			171
Research and development expenses	53			49
Asset impairments and restructuring charges, net	13			3
Operating earnings	361			393
Net interest expense	42			47
Other charges (income), net	(3		)	1
Earnings before income taxes	322			345
Provision for income taxes	88			97
Net earnings	$	234		$	248
Less: Net earnings attributable to noncontrolling interest	1			1
Net earnings attributable to Eastman	$	233		$	247

Basic earnings per share attributable to Eastman	$	1.54		$	1.60
Diluted earnings per share attributable to Eastman	$	1.52		$	1.57



Comprehensive Income
Net earnings including noncontrolling interest	$	234		$	248
Other comprehensive income (loss), net of tax
Change in cumulative translation adjustment	4			(50		)
Defined benefit pension and other postretirement benefit plans:
Amortization of unrecognized prior service credits included in net periodic costs	(4		)	(4		)
Derivatives and hedging:
Unrealized (loss) gain during period	—			14
Reclassification adjustment for (losses) gains included in net income	(3		)	2
Total other comprehensive income (loss), net of tax	(3		)	(38		)
Comprehensive income including noncontrolling interest	231			210
Comprehensive income attributable to noncontrolling interest	1			1
Comprehensive income attributable to Eastman	$	230		$	209
Retained Earnings
Retained earnings at beginning of period	$	4,012		$	3,038
Net earnings attributable to Eastman	233			247
Cash dividends declared	(54		)	(46		)
Retained earnings at end of period	$	4,191		$	3,239

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

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



	March 31,		December 31,
(Dollars in millions, except per share amounts)	2014		2013
Assets
Current assets
Cash and cash equivalents	$	185	$	237
Trade receivables, net	998		880
Miscellaneous receivables	169		208
Inventories	1,377		1,264
Other current assets	220		251
Total current assets	2,949		2,840
Properties
Properties and equipment at cost	10,070		9,958
Less: Accumulated depreciation	5,769		5,668
Net properties	4,301		4,290
Goodwill	2,636		2,637
Intangible assets, net of accumulated amortization	1,738		1,761
Other noncurrent assets	323		317
Total assets	$	11,947	$	11,845
Liabilities and Stockholders' Equity
Current liabilities
Payables and other current liabilities	$	1,259	$	1,470
Total current liabilities	1,259		1,470
Long-term borrowings	4,635		4,254
Deferred income tax liabilities	546		496
Post-employment obligations	1,301		1,297
Other long-term liabilities	398		453
Total liabilities	8,139		7,970
Stockholders' equity
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 216,078,918 and 215,131,237 for 2014 and 2013, respectively)	2		2
Additional paid-in capital	1,795		1,778
Retained earnings	4,191		4,012
Accumulated other comprehensive income	168		171
	6,156		5,963
Less: Treasury stock at cost (65,887,633 shares for 2014 and 62,714,861 shares for 2013)	2,427		2,167
Total Eastman stockholders' equity	3,729		3,796
Noncontrolling interest	79		79
Total equity	$	3,808	$	3,875
Total liabilities and stockholders' equity	$	11,947	$	11,845

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

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS



	First Three Months
(Dollars in millions)	2014			2013
Cash flows from operating activities
Net earnings including noncontrolling interest	$	234		$	248
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	107			110
Asset impairment charges	8			—
Provision for deferred income taxes	32			26
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
(Increase) decrease in trade receivables	(118		)	(155		)
(Increase) decrease in inventories	(116		)	(53		)
Increase (decrease) in trade payables	(21		)	(27		)
Pension and other postretirement contributions (in excess of) less than expenses	(12		)	(25		)
Variable compensation (in excess of) less than expenses	(93		)	(57		)
Other items, net	(51		)	(62		)
Net cash (used in) provided by operating activities	(30		)	5
Cash flows from investing activities
Additions to properties and equipment	(122		)	(87		)
Proceeds from sale of assets	4			5
Additions to capitalized software	(1		)	(1		)
Net cash used in investing activities	(119		)	(83		)
Cash flows from financing activities
Net increase in commercial paper borrowings	257			200
Proceeds from borrowings	125			—
Repayment of borrowings	—			(200		)
Dividends paid to stockholders	(53		)	(1		)
Treasury stock purchases	(260		)	(32		)
Dividends paid to noncontrolling interest	(3		)	(3		)
Proceeds from stock option exercises and other items, net	32			46
Net cash provided by financing activities	98			10
Effect of exchange rate changes on cash and cash equivalents	(1		)	(3		)
Net change in cash and cash equivalents	(52		)	(71		)
Cash and cash equivalents at beginning of period	237			249
Cash and cash equivalents at end of period	$	185		$	178

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

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



ITEM		Page

Note 1.	Basis of Presentation	7
Note 2.	Inventories	7
Note 3.	Payables and Other Current Liabilities	7
Note 4.	Provision for Income Taxes	8
Note 5.	Borrowings	8
Note 6.	Derivatives	10
Note 7.	Retirement Plans	13
Note 8.	Commitments	13
Note 9.	Environmental Matters	14
Note 10.	Legal Matters	15
Note 11.	Stockholders' Equity	16
Note 12.	Earnings and Dividends Per Share	17
Note 13.	Asset Impairments and Restructuring Charges, Net	18
Note 14.	Share-Based Compensation Awards	18
Note 15.	Supplemental Cash Flow Information	20
Note 16.	Segment Information	20
Note 17.	Recently Issued Accounting Standards	22

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 2013 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 2013 Annual Report on Form 10-K. The December 31, 2013 financial position data included herein was derived from the audited consolidated financial statements included in the 2013 Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP"). The unaudited consolidated financial statements are prepared in conformity with 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.


2.	INVENTORIES



	March 31,			December 31,
(Dollars in millions)	2014			2013
At FIFO or average cost (approximates current cost)
Finished goods	$	1,055		$	976
Work in process	308			300
Raw materials and supplies	520			494
Total inventories	1,883			1,770
LIFO Reserve	(506		)	(506		)
Total inventories	$	1,377		$	1,264

Inventories valued on the LIFO method were approximately 60 percent of total inventories as of both March 31, 2014 and December 31, 2013.


3.	PAYABLES AND OTHER CURRENT LIABILITIES



	March 31,		December 31,
(Dollars in millions)	2014		2013
Trade creditors	$	729	$	762
Accrued payrolls, vacation, and variable-incentive compensation	83		205
Accrued taxes	65		80
Post-employment obligations	56		59
Interest payable	36		46
Environmental contingent liabilities, current portion	40		40
Other	250		278
Total payables and other current liabilities	$	1,259	$	1,470

Included in "Other" above are certain accruals for dividends payable, payroll deductions and employee benefits, the current portion of hedging liabilities, divestitures, and other payables and accruals.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


4.	PROVISION FOR INCOME TAXES



	First Quarter
(Dollars in millions)	2014			2013
Provision for income taxes	$	88		$	97
Effective tax rate	27		%	28		%

Excluding discrete items, the first quarter 2014 effective tax rate, and the expected full year tax rate on reported earnings before income tax of approximately 28 percent, reflects further benefit from the continued integration of Eastman and Solutia business operations and legal entity structures. The first quarter 2013 effective tax rate was impacted by enactment of the American Taxpayer Relief Act of 2012 in January 2013, which resulted in a $10 million benefit primarily related to a research and development ("R&D") tax credit.


5.	BORROWINGS



	March 31,		December 31,
(Dollars in millions)	2014		2013
Borrowings consisted of:
3% notes due 2015	$	250	$	250
2.4% notes due 2017	998		998
6.30% notes due 2018	171		171
5.5% notes due 2019	250		250
4.5% notes due 2021	250		250
3.6% notes due 2022	894		894
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		497
Credit facilities and commercial paper borrowings	807		425
Total borrowings	4,635		4,254
Borrowings due within one year	—		—
Long-term borrowings	$	4,635	$	4,254

Credit Facility and Commercial Paper Borrowings

In October 2013, the Company entered into a $1 billion revolving credit agreement (the "Credit Facility") expiring October 2018. The Credit Facility amends and extends, and has terms substantially similar to, the $750 million revolving credit agreement entered into in December 2011. 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 March 31, 2014 and December 31, 2013, the Company had no outstanding borrowings under the Credit Facility.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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. At March 31, 2014 the Company's commercial paper borrowings were $682 million with a weighted average interest rate of 0.31 percent. At December 31, 2013 the Company's commercial paper borrowings were $425 million with a weighted average interest rate of 0.35 percent.

The Company also has a $250 million line of credit under its accounts receivable securitization agreement (the "A/R Facility"), expiring April 2016. 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 March 31, 2014, the Company's borrowings under the A/R Facility were $125 million secured by trade receivables with an interest rate of 0.90 percent. At December 31, 2013, the Company had no outstanding borrowings under the A/R Facility.

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. Total available borrowings under the Credit Facility and A/R Facility were $443 million and $825 million as of March 31, 2014 and December 31, 2013, respectively. The Company would not violate applicable covenants for these periods if the total available amounts of the facilities had been borrowed.

Fair Value of Borrowings

The Company has classified its long-term borrowings at March 31, 2014 and December 31, 2013 under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K. The fair value for fixed-rate borrowings is based on current market prices and is classified as Level 1. The fair value for the Company's floating-rate borrowings, which relate to the A/R Facility and commercial paper, equals the carrying value and is classified as Level 2.



			Fair Value Measurements at March 31, 2014
(Dollars in millions)	Recorded Amount March 31, 2014		Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Long-term borrowings	$	4,635	$	4,846	$	4,039	$	807	$	—



			Fair Value Measurements at December 31, 2013
(Dollars in millions)	Recorded Amount December 31, 2013		Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Long-term borrowings	$	4,254	$	4,366	$	3,941	$	425	$	—

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


6.	DERIVATIVES

Hedging Programs

The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, 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 10, "Derivatives", to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.

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 March 31, 2014 and December 31, 2013, 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 March 31, 2014, the total notional amounts of the Company's foreign exchange forward and option contracts were €945 million (approximately $1,310 million equivalent) and ¥7.5 billion (approximately $75 million equivalent), respectively and the total notional volume hedged for feedstock was approximately 9 million barrels. The Company had no outstanding hedges for energy or interest rate swaps for the future issuance of debt ("forward starting interest rate swaps") at March 31, 2014.

As of December 31, 2013, the total notional amounts of the Company's foreign exchange forward and option contracts were €954 million (approximately $1,320 million equivalent) and ¥8.3 billion (approximately $80 million equivalent), respectively. The total notional volume hedged for feedstock was approximately 8 million barrels. The Company had no outstanding hedges for energy or forward starting interest rate swaps.

Fair Value Measurements

For additional information on fair value measurement, see Note 1, "Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.

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



(Dollars in millions)				Fair Value Measurements at March 31, 2014
Description	March 31, 2014			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative Assets	$	41		$	—	$	41		$	—
Derivative Liabilities	(44		)	—		(44		)	—
	$	(3	)	$	—	$	(3	)	$	—

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



(Dollars in millions)				Fair Value Measurements at December 31, 2013
Description	December 31, 2013			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative Assets	$	58		$	—	$	58		$	—
Derivative Liabilities	(46		)	—		(46		)	—
	$	12		$	—	$	12		$	—

The Company's derivative assets are currently 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.

From time to time, 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. Level 3 hedges typically will mature within one year or less. The Company determines the fair value of Level 3 commodity 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 (liabilities) for the period ended March 31, 2014:



Fair Value Measurements Using Level 3 Inputs
Commodity Contracts	First Quarter
(Dollars in millions)	2014		2013
Balance at beginning of period	$	—	$	(5	)
Realized gain (loss) in sales revenue	—		(4		)
Change in unrealized gain (loss)	—		(7		)
Settlements	—		4
Transfers (out) in of Level 3	—		—
Balance at end of period	$	—	$	(12	)

The following chart shows the financial assets and liabilities valued on a recurring basis and their location in the Unaudited Consolidated Statements of Financial Position. The Company had no nonqualifying derivatives or derivatives that are not designated as hedges as of March 31, 2014 and December 31, 2013. All of the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option to settle contracts on a net basis when they settle on the same day and the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company has elected to present the derivative contracts on a gross basis in the Unaudited Consolidated Statements of Financial Position. Had it chosen to present the derivatives contracts on a net basis, it would have a derivative in a net asset position of $21 million and a derivative in a net liability position of $24 million as of March 31, 2014. The Company does not have any cash collateral due under such agreements.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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	March 31, 2014		December 31, 2013
Cash Flow Hedges
Commodity contracts	Other current assets	$	13	$	20
Commodity contracts	Other noncurrent assets	3		7
Foreign exchange contracts	Other current assets	15		17
Foreign exchange contracts	Other noncurrent assets	10		14
		$	41	$	58



(Dollars in millions)		Fair Value Measurements Significant Other Observable Inputs
Derivative Liabilities	Statement of Financial Position Location	March 31, 2014		December 31, 2013
Cash Flow Hedges
Commodity contracts	Other long-term liabilities	$	1	$	—
Foreign exchange contracts	Payables and other current liabilities	20		21
Foreign exchange contracts	Other long-term liabilities	23		25
		$	44	$	46

Derivatives' Hedging Relationships



	First Quarter
(Dollars in millions)	Change in 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	March 31, 2014			March 31, 2013				March 31, 2014			March 31, 2013
Commodity contracts	$	(2	)	$	(2	)	Sales	$	—		$	(4	)
							Cost of Sales	8			—
Foreign exchange contracts	(2		)	17			Sales	(1		)	2
Forward starting interest rate swap contracts	1			1			Net interest expense	(2		)	(2		)
	$	(3	)	$	16			$	5		$	(4	)

Hedging Summary

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 losses of approximately $66 million at March 31, 2014 and $49 million at March 31, 2013. If realized, less than $1 million net gains in first quarter 2014 will be reclassified into earnings during the next 12 months. Ineffective portions of hedges are immediately recognized in cost of sales or other charges (income), net. There were no material gains or losses related to the ineffective portion of hedges recognized in first quarter 2014 or first quarter 2013.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 Unaudited Consolidated 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 no net gains or losses during first quarter 2014 and approximately $1 million net losses during first quarter 2013 on nonqualifying derivatives.


7.	RETIREMENT PLANS

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

Defined Benefit Pension Plans and Other Postretirement Benefit Plans

Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. In addition, Eastman provides a subsidy for life insurance, health care, and dental benefits to eligible retirees hired prior to January 1, 2007, and a subsidy for health care and dental benefits to retirees' eligible survivors. Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined.

For additional information regarding retirement plans, see Note 11, "Retirement Plans", to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.

Components of net periodic benefit cost were as follows:



	First Quarter
	Pension Plans												Other Postretirement Benefit Plans
	2014						2013						2014			2013
(Dollars in millions)	U.S.			Non-U.S.			U.S.			Non-U.S.
Components of net periodic benefit cost:
Service cost	$	10		$	4		$	10		$	4		$	2		$	3
Interest cost	25			8			22			7			11			11
Expected return on assets	(36		)	(10		)	(32		)	(9		)	(2		)	(2		)
Amortization of:
Prior service cost (credit)	(1		)	—			(1		)	—			(6		)	(5		)
Net periodic benefit cost	$	(2	)	$	2		$	(1	)	$	2		$	5		$	7

The Company contributed $11 million to its U.S. defined benefit pension plans in first three months 2013. The Company did not make any contributions to its U.S. defined benefit pension plans in first three months 2014.


8.	COMMITMENTS

Purchase Obligations and Lease Commitments

The Company had various purchase obligations at March 31, 2014 totaling $2.3 billion over a period of approximately 30 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 approximately $261 million over a similar number of years. Of the total lease commitments, approximately 60 percent relate to real property, including office space, storage facilities, and land; approximately 30 percent relate to railcars; and approximately 10 percent relate to machinery and equipment, including computer and communications equipment and production equipment.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 March 31, 2014 totaled $119 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 between 1 and 15 years with maximum potential future payments of approximately $49 million in the aggregate, with none of these guarantees being 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.


9.	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 2013 Annual Report on Form 10-K. The Company's total reserve for environmental contingencies was $355 million and $368 million at March 31, 2014 and December 31, 2013, respectively. At both March 31, 2014 and December 31, 2013, this reserve included $9 million related to sites previously closed and impaired by Eastman and sites that have been divested by Eastman 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 $334 million to the maximum of $575 million and from the minimum or best estimate of $341 million to the maximum of $581 million at March 31, 2014 and December 31, 2013, respectively. The maximum estimated future costs are considered to be reasonably possible and include the amounts accrued at both March 31, 2014 and December 31, 2013. Although the resolution of uncertainties related to these environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and if applicable, the expected sharing of costs, 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 or cash flows.

For facilities that have environmental asset retirement obligations, the best estimate accrued to date over the facilities' estimated useful lives for these environmental asset retirement obligation costs was $20 million and $27 million at March 31, 2014 and December 31, 2013, respectively.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Reserves for environmental remediation that management believes to be probable and estimable are recorded as current and long-term liabilities in the Unaudited Consolidated Statements of Financial Position. These reserves include liabilities expected to be paid out within 30 years. The amounts charged to pre-tax earnings for environmental remediation and related charges are included in cost of sales and other charges (income), net, and are summarized below:



(Dollars in millions)	Environmental Remediation Liabilities
Balance at December 31, 2013	$	341
Changes in estimates recorded to earnings and other	—
Cash reductions	(7		)
Balance at March 31, 2014	$	334

The Company's total environmental reserve for environmental contingencies, including remediation costs and asset retirement obligations, is recorded in the Unaudited Consolidated Statements of Financial Position as follows:



(Dollars in millions)	March 31, 2014		December 31, 2013
Environmental contingent liabilities, current	$	40	$	40
Environmental contingent liabilities, long-term	315		328
Total	$	355	$	368


10.	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


11.	STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders' equity for first three months 2014 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 Attributed to Eastman $		Noncontrolling Interest $		Total Stockholders' Equity $
Balance at December 31, 2013	2	1,778		4,012		171		(2,167	)	3,796		79		3,875
Net Earnings	—	—		233		—		—		233		1		234
Cash Dividends Declared ⁽¹⁾	—	—		(54	)	—		—		(54	)	—		(54	)
Other Comprehensive Income	—	—		—		(3	)	—		(3	)	—		(3	)
Share-Based Compensation Expense⁽²⁾	—	9		—		—		—		9		—		9
Stock Option Exercises	—	11		—		—		—		11		—		11
Other⁽³⁾	—	(3	)	—		—		—		(3	)	(1	)	(4	)
Share Repurchase	—	—		—		—		(260	)	(260	)			(260	)
Balance at March 31, 2014	2	1,795		4,191		168		(2,427	)	3,729		79		3,808


⁽¹⁾	Includes cash dividends paid and dividends declared, but unpaid.


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


⁽³⁾	Paid in capital includes tax benefits/charges relating to the difference between the amounts deductible for federal income taxes over the amounts charged to income for book value purposes have been adjusted to paid-in capital and other items. Equity attributable to noncontrolling interest includes adjustments for currency revaluation.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX



(Dollars in millions)	Cumulative Translation Adjustment		Benefit Plans Unrecognized Prior Service Credits			Unrealized Gains (Losses) on Derivative Instruments			Unrealized Losses on Investments			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2012	$	105	$	65		$	(46	)	$	(1	)	$	123
Period change	28		13			7			—			48
Balance at December 31, 2013	133		78			(39		)	(1		)	171
Period change	4		(4		)	(3		)	—			(3		)
Balance at March 31, 2014	$	137	$	74		$	(42	)	$	(1	)	$	168

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

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



	First Quarter
	2014						2013
(Dollars in millions)	Before Tax			Net of Tax			Before Tax			Net of Tax
Other comprehensive income (loss)
Change in cumulative translation adjustment	$	3		$	4		$	(50	)	$	(50	)
Defined benefit pension and other postretirement benefit plans:
Amortization of unrecognized prior service credits included in net periodic costs ⁽¹⁾	(7		)	(4		)	(6		)	(4		)
Derivatives and hedging: ⁽²⁾
Unrealized (loss) gain	—			—			23			14
Reclassification adjustment for gains included in net income	(5		)	(3		)	3			2
Change in derivatives and hedging	(5		)	(3		)	26			16
Total other comprehensive income (loss)	$	(9	)	$	(3	)	$	(30	)	$	(38	)


⁽¹⁾	Included in the calculation of net periodic benefit costs for pension and other postretirement benefit plans. See Note 7, "Retirement Plans".


⁽²⁾	For additional information regarding the impact of reclassifications into earnings, refer to Note 6, "Derivatives".


12.	EARNINGS AND DIVIDENDS PER SHARE

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



	First Quarter
	2014		2013
(In millions, except per share amounts)
Numerator
Net earnings attributable to Eastman	$	233	$	247

Denominator
Weighted average shares used for basic EPS	151.4		154.4
Dilutive effect of stock options and other award plans	1.6		2.3
Weighted average shares used for diluted EPS	153.0		156.7

Earnings Per Share⁽¹⁾
Basic	$	1.54	$	1.60
Diluted	$	1.52	$	1.57


⁽¹⁾	Earnings per share are calculated using whole dollars and shares.

In first quarter 2014 and 2013, common shares underlying options to purchase 210,143 and 125,019 shares, respectively, of common stock were excluded from the shares treated as outstanding for computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total cash proceeds that would be received for these exercises. First quarter 2014 and 2013 reflect the impact of share repurchases of 3,172,772 and 445,500 shares, respectively.

The Company declared cash dividends of $0.35 and $0.30 per share in first quarter 2014 and 2013, respectively.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


13.	ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET

In first quarter 2014, there were $13 million of net asset impairments and restructuring charges. Net asset impairments and restructuring charges consisted of $8 million of asset impairments, including intangible assets, and $2 million of restructuring charges in the Advanced Materials segment primarily due to the closure of a production facility in Taiwan for the Flexvue^® performance films product line and $3 million of restructuring charges for severance associated with the continued integration of Solutia.

In first quarter 2013, there were $3 million of restructuring charges for severance associated with the continued integration of Solutia.

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

The following table summarizes the changes in other asset impairments and restructuring charges, 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 2013 and first three months 2014:



(Dollars in millions)	Balance at January 1, 2013		Provision/ Adjustments		Non-cash Reductions			Cash Reductions			Balance at December 31, 2013
Non-cash charges	$	—	$	28	$	(28	)	$	—		$	—
Severance costs	4		27		2			(11		)	22
Site closure and restructuring costs	21		21		(16		)	(12		)	14
Total	$	25	$	76	$	(42	)	$	(23	)	$	36



(Dollars in millions)	Balance at January 1, 2014		Provision/ Adjustments		Non-cash Reductions			Cash Reductions			Balance at March 31, 2014
Non-cash charges	$	—	$	8	$	(8	)	$	—		$	—
Severance costs	22		3		—			(8		)	17
Site closure and restructuring costs	14		2		—			(4		)	12
Total	$	36	$	13	$	(8	)	$	(12	)	$	29

During 2013, the Company accrued for employee separations associated with the acquisition and integration of Solutia. Substantially all separation payments for the 2013 accruals will be completed by December 31, 2014.


14.	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 first quarter 2014 and 2013, approximately $9 million and $11 million, respectively, of compensation expense before tax were recognized in selling, general and administrative expense in the Unaudited Consolidated Statements of Earnings for all share-based awards of which $2 million and $4 million, respectively, related to stock options. The compensation expense is recognized over the substantive vesting period, which may be a shorter time period than the stated vesting period for qualifying termination eligible employees as defined in the forms of award notice. For first quarter 2014 and 2013, approximately $1 million and $3 million, respectively, of stock option compensation expense was recognized due to qualifying termination eligibility preceding the requisite vesting period. The impact on first quarter 2014 and 2013 net earnings of approximately $5 million and $7 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Stock Option Grants

In first quarter 2014 and 2013, the number of stock options granted under the 2012 Omnibus Stock Compensation Plan were 210 thousand and 318 thousand, respectively. Options have an exercise price equal to the closing price of the Company's stock on the date of grant. The term of options is ten years with vesting periods that vary up to three years. Vesting usually occurs ratably over the vesting period or at the end of the vesting period. The Company utilizes the Black Scholes Merton option valuation model which relies on certain assumptions to estimate an option's fair value.

The assumptions used in the determination of fair value for stock options granted in first quarter 2014 and 2013 are provided in the table below:



	First Quarter
Assumptions	2014	2013

Expected volatility rate	26.30%	34.90%
Expected dividend yield	1.70%	1.97%
Average risk-free interest rate	1.39%	0.77%
Expected forfeiture rate	0.75%	0.75%
Expected term years	4.7	5.0

The grant date exercise price and fair value of options granted during first quarter 2014 were $87.43 and $17.67, respectively, and during first quarter 2013 were $69.73 and $17.92, respectively.

For options unvested at March 31, 2014, approximately $4 million in compensation expense will be recognized over the next three years.

Other Share-Based Compensation Awards

In addition to stock option awards, the Company has awarded long-term performance share awards, restricted stock awards, and stock appreciation rights. The long-term performance awards are based upon actual return on capital compared to a target return on capital and total stockholder return compared to a peer group ranking by total stockholder return over a three year performance period. The awards are valued using a Monte Carlo Simulation based model and vest pro-ratably over the three year performance period. The number of long-term performance award target shares granted during first quarter 2014 and 2013 for the 2014-2016 and 2013-2015 periods were 285 thousand and 270 thousand, respectively. The target shares granted are assumed to be 100 percent. At the end of the three-year performance period, the actual number of shares awarded can range from zero percent to 250 percent of the target shares granted based on the award notice. The number of restricted stock awards granted during first quarter 2014 and 2013 were 103 thousand and 119 thousand, respectively. The fair value of a restricted stock award is equal to the closing stock price of the Company's stock on the date of grant and normally vests over a period of three years. In both first quarter 2014 and 2013, $7 million was recognized as compensation expense before tax for these other share-based awards and was included in the total compensation expense noted above for all share-based awards. The unrecognized compensation expense before tax for these same type awards at March 31, 2014 was approximately $55 million and will be recognized primarily over a period of three years.

For additional information regarding share-based compensation plans and awards, see Note 18, "Share-Based Compensation Plans and Awards", to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


15.	SUPPLEMENTAL CASH FLOW INFORMATION

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



(Dollars in millions)	First Three Months
	2014			2013
Other current assets	$	13		$	15
Other noncurrent assets	6			(23		)
Payables and other current liabilities	(41		)	(3		)
Long-term liabilities and equity	(29		)	(51		)
Total	$	(51	)	$	(62	)

These changes included monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, accrued taxes, interest accruals, and environmental accruals.


16.	SEGMENT INFORMATION

The Company's products and operations are currently managed and reported in five operating segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids &

Intermediates ("SFI"). For additional information concerning the Company's segments' businesses and products, see Note 21, "Segment Information" to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.

Included in first quarter 2013 "other" sales revenue and operating earnings were the Perennial Wood™ growth initiative and the Photovoltaics product line acquired from Solutia. Neither are included in first quarter 2014 as a result of decisions made by management in 2013 not to continue its Perennial Wood^TM growth initiative and to shut-down the Photovoltaics product line, including the primary production facility in Germany.

Included in first quarter 2014 "other" operating loss were Solutia acquisition integration costs of $9 million, and restructuring charges of $3 million, primarily for severance associated with the continued integration of Solutia. Included in first quarter 2013 "other" operating loss were Solutia integration costs of $7 million and restructuring charges of $3 million for the severance associated with the continued integration of Solutia.



	First Quarter
(Dollars in millions)	2014		2013
Sales
Additives & Functional Products	$	423	$	419
Adhesives & Plasticizers	345		345
Advanced Materials	581		584
Fibers	354		346
Specialty Fluids & Intermediates	601		607
Total Sales by Segment	2,304		2,301
Other	1		6
Total Sales	$	2,305	$	2,307

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



	First Quarter
(Dollars in millions)	2014			2013
Operating Earnings (Loss)
Additives & Functional Products	$	94		$	98
Adhesives & Plasticizers	47			49
Advanced Materials ⁽¹⁾	61			65
Fibers	117			114
Specialty Fluids & Intermediates	64			95
Total Operating Earnings by Segment	383			421
Other ⁽²⁾
Growth initiatives and businesses not allocated to segments ⁽³⁾	(13		)	(21		)
Pension and other postretirement benefit costs not allocated to operating segments	3			3
Integration and restructuring costs related to the acquisition of Solutia ⁽⁴⁾	(12		)	(10		)
Total Operating Earnings	$	361		$	393


⁽¹⁾	Included in first three months 2014 earnings are asset impairments and restructuring charges of $10 million primarily for the closure of a production facility in Taiwan for the Flexvue^® performance films product line.


⁽²⁾	Research and development, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown as "other" operating earnings (loss).


⁽³⁾	Businesses not allocated to segments in 2013 included the Perennial Wood™ growth initiative and Photovoltaics product line, both of which ceased production in the second half of 2013. Included in 2014 are corporate growth initiatives, including Eastman™ microfiber technology.


⁽⁴⁾	Restructuring charges of $3 million in both first quarter 2014 and 2013 for severance associated with the continued integration of Solutia.



	March 31,		December 31,
(Dollars in millions)	2014		2013
Assets by Segment ⁽¹⁾
Additives & Functional Products	$	3,004	$	2,940
Adhesives & Plasticizers	1,041		996
Advanced Materials	3,814		3,807
Fibers	999		974
Specialty Fluids & Intermediates	2,141		2,054
Total Assets by Segment	10,999		10,771
Corporate Assets	948		1,074
Total Assets	$	11,947	$	11,845


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

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


17.	RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2014, the Financial Accounting Standards Board issued amended accounting guidance for discontinued operations. The amendments improve the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represents strategic shifts that have (or will have) a major effect on any entity's operations and financial results. Examples of a strategic shift that has (or will have) a major effect on an entity's operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. The amendments require an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the assets and liability sections, respectively, of the statement of financial position. In addition to enhanced disclosures for discontinued operations, disclosures are required for disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. This guidance is effective prospectively for reporting periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued or available for issuance. The Company has concluded that this new guidance will not have a material impact on the Company's financial position or results of operations.


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



ITEM	Page

Critical Accounting Estimates	23

Non-GAAP Financial Measures	24

Overview	25

Results of Operations	26

Summary by Operating Segment	28

Summary by Customer Location	33

Liquidity, Capital Resources, and Other Financial Information	34

Recently Issued Accounting Standards	38

2014 Outlook	38

Forward-Looking Statements and Risk Factors	38

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements for Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States, and should be read in conjunction with the Company's 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 2013 Annual Report on Form 10-K, and the Company's unaudited consolidated financial statements, including related notes, included elsewhere in this Quarterly Report on Form 10-Q. All references to earnings per share ("EPS") contained in this report are diluted earnings per share unless otherwise noted.

CRITICAL ACCOUNTING ESTIMATES

In preparing the consolidated financial statements in conformity with 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, pension and other postretirement benefits, litigation and contingent liabilities, income taxes, and purchase accounting. 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 2013 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

NON-GAAP FINANCIAL MEASURES

In addition to evaluating the Company's financial condition, results of operations, liquidity and cash flows as reported in accordance with GAAP, Eastman management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly arise from Eastman's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature. These transactions, costs, and losses or gains relate to, among other things, cost reduction, growth and profitability improvement initiatives, and other events outside of core business operations (such as mark-to-market losses or gains for pension and other postretirement benefit plans, typically in the fourth quarter of each year and any quarters in which an interim remeasurement is triggered). Because non-core or non-recurring transactions, costs, and losses or gains may materially affect the Company's, or any particular operating segment's, financial condition or results in a specific period in which they are recognized, Eastman believes it is appropriate to evaluate both the financial measures prepared and calculated in accordance with GAAP and the related non-GAAP financial measures excluding the effect on our results of these non-core or non-recurring items. In addition to using such measures to evaluate results in a specific period, management evaluates such non-GAAP measures, and believes that investors may also evaluate such measures, because such measures may provide more complete and consistent comparisons of the Company's, and its segments', operational performance on a period-over-period historical basis and, as a result, provide a better indication of expected future trends. Management discloses these non-GAAP measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's, and its operating segments', performance, make resource allocation decisions and evaluate organizational and individual performance in determining certain performance-based compensation. Non-GAAP measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP measure, but to consider such measures with the most directly comparable GAAP measure.

The non-core or non-recurring items excluded by management in its evaluation of certain results in this Quarterly Report are:


•	Solutia integration costs which resulted from non-core transactions not expected to impact Eastman's results consistently; and


•	Asset impairments and restructuring charges, net, which, other than severance costs, are not cash transactions impacting profitability,

in each case for the periods and in the amounts in the table below.

Non - GAAP Financial Measures -- Excluded Non-Core or Non-Recurring Items



	First Quarter
(Dollars in millions)	2014		2013
Integration costs related to the acquisition of Solutia	$	9	$	7
Asset impairments and restructuring charges, net	13		3

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


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


•	Operating earnings,


•	Net earnings attributable to Eastman, and


•	Diluted earnings per share.

These non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented in "Overview", "Results of Operations", and "Summary by Operating Segment" in this MD&A.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

Similarly, from time to time, Eastman discloses to investors and securities analysts a non-GAAP measure of free cash flow, which management defines as cash provided by operating activities, as adjusted, described above, less the amounts of capital expenditures and dividends, as management believes such items are generally funded from available cash and, as such, should be considered in determining free cash flow. Eastman management believes this is the appropriate metric to use to evaluate the Company's overall ability to generate cash to fund future operations, inorganic growth opportunities, and to meet the Company's debt repayment obligations. Management believes this metric is useful to investors and securities analysts in order to provide them with information similar to that used by management in evaluating potential future cash available for various initiatives and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies.

OVERVIEW

Eastman's portfolio of specialty businesses holds leading market positions and manufactures products that enhance performance in a variety of end markets such as transportation, building and construction, and consumables. Management believes that despite ongoing economic uncertainty, the Company's key end markets generally benefited from modest global economic growth. Eastman management believes that the Company's global market and manufacturing presence, combined with global trends such as energy efficiency, a rising middle class in emerging economies, and increased health and wellness will continue to support the Company's achievement of its growth objectives in the long term.

The Company generated sales revenue of $2.3 billion in both first quarter 2014 and 2013.

Operating earnings were $361 million in first quarter 2014 compared with $393 million in first quarter 2013. Excluding the non-core or non-recurring items referenced in "Non-GAAP Financial Measures", operating earnings in first quarter 2014 and 2013 were $383 million and $403 million, respectively. The decrease was primarily in the Specialty Fluids & Intermediates ("SFI") segment. Operating earnings included lower "Other" losses primarily due to decisions made by management in 2013 not to continue its Perennial Wood^TM growth initiative and to shut-down the Photovoltaics product line.

Net earnings attributable to Eastman were $233 million in first quarter 2014 compared to $247 million in first quarter 2013. Earnings attributable to Eastman were $1.52 per diluted share first quarter 2014 compared to $1.57 per diluted share in first quarter 2013. Excluding the non-core or non-recurring items referenced in "Non-GAAP Financial Measures", net earnings attributable to Eastman in first quarter 2014 and 2013 were $247 million and $253 million, respectively. Excluding these non-core or non-recurring items, earnings attributable to Eastman for first quarter 2014 and 2013 were $1.61 per diluted share and $1.62 per diluted share, respectively.

The Company used $30 million in cash from operating activities in first three months 2014 compared with cash provided by operating activities of $5 million in first three months 2013. The usage was primarily due to an increase of $116 million in inventory in first three months 2014 compared with an increase of $53 million in first three months 2013. The greater inventory increase in first three months 2014 was primarily due to preparation for upcoming planned manufacturing maintenance.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

In 2014, the Company made progress on both organic (internal growth) and inorganic (external growth through joint venture and acquisition) growth initiatives including:


•	in the Advanced Materials ("AM") segment:


◦	continuing the expansion of Eastman Tritan^TM copolyester capacity at the Kingsport, Tennessee manufacturing facility which is expected to be operational in the second half of 2014 to meet demand for Eastman Tritan^TM copolyester; and


◦	entering into a definitive agreement to acquire Commonwealth Laminating & Coating, Inc., a specialty films business. The acquisition is expected to be completed in the second half of 2014.


•	in the SFI segment:


◦	continuing a Therminol^® heat transfer fluid capacity expansion in Newport, Wales, which is expected to be operational in the second half of 2014 to support expected demand in the industrial chemicals and processing market; and


◦	entering into a definitive agreement to acquire the assets of BP plc's global aviation turbine engine oil business. The acquisition is expected to be completed in second quarter 2014.

RESULTS OF OPERATIONS



	First Quarter
(Dollars in millions)	2014		2013		Change
Sales	$	2,305	$	2,307	—	%
Volume effect					(1	)%
Price effect					1	%
Exchange rate effect					—	%

Sales revenue was relatively unchanged in first quarter 2014 compared to first quarter 2013.



	First Quarter
(Dollars in millions)	2014		2013		Change
Gross Profit	$	595	$	616	(3	)%

Gross profit decreased $21 million in first quarter 2014 compared with first quarter 2013. Gross profit decreased primarily in the SFI segment due to higher raw material and energy costs, particularly for propane, exceeding higher selling prices by $19 million.



	First Quarter
(Dollars in millions)	2014			2013			Change
Selling, General and Administrative Expenses	$	168		$	171		(2	)%
Integration costs related to the acquisition of Solutia	(9		)	(7		)
Selling, General, and Administrative Expenses excluding non-core or non-recurring items	$	159		$	164		(3	)%

SG&A expenses in first quarter 2014 were slightly lower compared to first quarter 2013.



	First Quarter
(Dollars in millions)	2014		2013		Change
Research and Development Expenses	$	53	$	49	8	%

Research and development ("R&D") expenses were higher in first quarter 2014 compared to first quarter 2013 primarily due to increased investments in R&D growth initiatives for the AM and Additives & Functional Products ("AFP") segments.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Asset Impairments and Restructuring Charges, Net

In first quarter 2014, there were $13 million of net asset impairments and restructuring charges. Net asset impairments and restructuring charges consisted of $8 million of asset impairments, including intangible assets, and $2 million of restructuring charges in the AM segment primarily due to the closure of a production facility in Taiwan for the Flexvue^® performance films product line. There were $3 million of restructuring charges for severance associated with the continued integration of Solutia.

In first quarter 2013, there were $3 million of restructuring charges for severance associated with the continued integration of Solutia.

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

Operating Earnings



	First Quarter
(Dollars in millions)	2014		2013		Change
Operating earnings	$	361	$	393	(8	)%
Integration costs related to the acquisition of Solutia	9		7
Asset impairments and restructuring charges, net	13		3
Operating earnings excluding non-core or non-recurring items	$	383	$	403	(5	)%

Net Interest Expense



	First Quarter
(Dollars in millions)	2014		2013		Change
Gross interest costs	$	47	$	49
Less: Capitalized interest	2		1
Interest expense	45		48		(6	)%
Interest income	3		1
Net interest expense	$	42	$	47	(11	)%

Net interest expense decreased $5 million in first quarter 2014 compared to first quarter 2013. The decrease was primarily due to repayment in 2013 of the five-year term loan (the "Term Loan") used to finance part of the Solutia acquisition.

Other Charges (Income), Net



	First Quarter
(Dollars in millions)	2014			2013
Foreign exchange transaction losses, net	$	—		$	5
(Income) loss from equity investments and other investment (gains) losses, net	(3		)	(2		)
Other, net	—			(2		)
Other charges (income), net	$	(3	)	$	1

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Provision for Income Taxes



	First Quarter
(Dollars in millions)	2014				2013
Provision for income taxes	$	88			$	97
Effective tax rate	27		%	—	28		%

The Company's expected full year tax rate on 2014 reported earnings before income tax is approximately 28 percent.

Net Earnings and Diluted Earnings per Share Attributable to Eastman



	First Quarter
	2014				2013
(Dollars in millions, except diluted EPS)	$		EPS		$		EPS
Net earnings attributable to Eastman	$	233	$	1.52	$	247	$	1.57
Solutia integration costs, net of tax	5		0.03		4		0.03
Asset impairments and restructuring charges, net of tax	9		0.06		2		0.02
Net earnings attributable to Eastman excluding non-core or non-recurring items, net of tax	$	247	$	1.61	$	253	$	1.62

First quarter 2014 diluted shares outstanding were less than first quarter 2013 primarily due to an increased number of shares repurchased in first quarter of 2014.

SUMMARY BY OPERATING SEGMENT

Eastman has five reporting segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids & Intermediates ("SFI"). For additional information concerning the Company's segments' businesses and products, see Note 21, "Segment Information" to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Additives & Functional Products Segment



	First Quarter
					Change
(Dollars in millions)	2014		2013		$			%

Sales	$	423	$	419	$	4		1	%
Volume effect					2			1	%
Price effect					1			—	%
Exchange rate effect					1			—	%

Operating earnings	94		98		(4		)	(4	)%

Sales revenue in first quarter 2014 increased slightly compared to first quarter 2013 primarily due to slightly higher sales volume for coatings product lines more than offsetting slightly lower sales volume for rubber additives product lines. The higher sales volume for coatings was primarily attributed to strengthened demand in the building and construction and transportation markets. The lower sales volume for rubber additives was primarily attributed to customer inventory destocking in Asia Pacific.

Operating earnings in first quarter 2014 decreased compared to first quarter 2013 primarily due to higher raw material and energy costs, particularly for propane, offsetting slightly higher selling prices for polymer product lines by $5 million.

The Company continues to make progress in the refinement and enhancement of its technology for the manufacture of Crystex^® insoluble sulfur in order to improve its cost position and introduce a higher performance product into the tires industry. In mid-2014, management plans to complete evaluation of the timing of incorporating this technology into a capacity expansion at the Kuantan, Malaysia manufacturing facility to capitalize on expected high industrial growth rates in the Asia Pacific region.

Adhesives & Plasticizers Segment



	First Quarter
					Change
(Dollars in millions)	2014		2013		$			%

Sales	$	345	$	345	$	—		—	%
Volume effect					9			3	%
Price effect					(12		)	(3	)%
Exchange rate effect					3			—	%

Operating earnings	47		49		(2		)	(4	)%

Sales revenue in first quarter 2014 was unchanged compared to first quarter 2013 primarily due to higher sales volume of adhesives resins product lines offsetting lower selling prices for both adhesives resins and plasticizers products. Higher sales volume for adhesives resins product lines was primarily attributed to stronger end market demand, particularly for hygiene and packaging products, and customer inventory destocking that negatively impacted first quarter 2013. Lower selling prices for adhesives resins product lines were primarily due to continued competitive pressure resulting from greater industry supply attributed to increased availability of key raw materials and additional competitor capacity. Lower selling prices for plasticizers product lines were primarily attributed to continued competitive pressures resulting from continued weakened demand in Asia Pacific and Europe.

Operating earnings declined primarily due to $13 million of lower selling prices and slightly higher raw material and energy costs, particularly for propane. This was partially offset by lower operating costs of $6 million, including the benefit of higher capacity utilization, and higher sales volume of $4 million.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

In October 2013, the Company announced it is expanding capacity of its Eastman 168™ non-phthalate plasticizers at its manufacturing facility in Texas City, Texas. The expansion is expected to be operational by second quarter 2014.

In 2012, the Company announced a joint venture to build a hydrogenated hydrocarbon resin plant in Nanjing, China. The venture will be equally owned by Eastman and Sinopec Yangzi Petrochemical Company Limited and is expected to be operational in late 2015. The facility is expected to produce 50,000 metric tons of the A&P segment's Regalite™ hydrogenated hydrocarbon resins upon completion, increasing Eastman's total capacity for hydrogenated resins by 50 percent, making Eastman the largest global supplier of hydrogenated hydrocarbon resins, and supporting expected demand growth for its products in hygiene and packaging applications.

Advanced Materials Segment



	First Quarter
					Change
(Dollars in millions)	2014		2013		$			%

Sales	$	581	$	584	$	(3	)	(1	)%
Volume effect					2			—	%
Price effect					(6		)	(1	)%
Exchange rate effect					1			—	%

Operating earnings	61		65		(4		)	(6	)%
Asset impairments and restructuring charges, net	10		—		10
Operating earnings excluding non-core or non-recurring items	71		65		6			9	%

Sales revenue in first quarter 2014 was relatively unchanged compared to first quarter 2013 as higher sales volume for Eastman Tritan™ copolyester and premium acoustic interlayers was offset by lower performance films sales volume due to changes in customer incentive terms in Asia Pacific.

First quarter 2014 operating earnings decreased slightly compared to first quarter 2013. Operating earnings in first quarter 2014 included asset impairments and restructuring charges of $10 million primarily for the closure of a production facility in Taiwan for the Flexvue^® performance films product line. Excluding non-core or non-recurring items, operating earnings increased to $71 million in first quarter 2014 compared to $65 million in first quarter 2013 primarily due to lower unit costs for specialty plastics. The lower unit costs were due to higher capacity utilization resulting from previous inventory management decisions and to meet demand for Eastman Tritan™ copolyester.

In 2013, the Company began the expansion of Eastman Tritan^TM copolyester capacity at its Kingsport, Tennessee manufacturing facility. This expansion is expected to be operational in the second half of 2014.

The Company is also progressing on enhancements and innovations to improve its cost position in its polyvinyl butyral ("PVB") resin technology supporting growth in the transportation and building and construction markets in the Asia Pacific region. In mid-2014, management plans to complete evaluation of the timing of a capacity expansion at the Kuantan, Malaysia PVB manufacturing facility.

In March 2014, the Company entered into a definitive agreement to acquire Commonwealth Laminating & Coating, Inc., a specialty films business. The acquisition is expected to be completed in the second half of 2014, and the acquired business will be reported in the AM segment.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Fibers Segment



	First Quarter
					Change
(Dollars in millions)	2014		2013		$		%

Sales	$	354	$	346	$	8	2	%