EMN 2014.09.30 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 September 30, 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 September 30, 2014
Common Stock, par value $0.01 per share
148,527,396
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PAGE 1 OF 61 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 59

1


TABLE OF CONTENTS
ITEM
 
PAGE

PART I.  FINANCIAL INFORMATION

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

PART II.  OTHER INFORMATION

 
 
 
 
 
 
 
 
 

SIGNATURES

 

EXHIBIT INDEX

 

2



  

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
 
Third Quarter
 
First Nine Months
(Dollars in millions, except per share amounts)
2014
 
2013
 
2014
 
2013
Sales
$
2,413

 
$
2,338

 
$
7,178

 
$
7,085

Cost of sales
1,777

 
1,649

 
5,290

 
5,103

Gross profit
636

 
689

 
1,888

 
1,982

Selling, general and administrative expenses
171

 
159

 
511

 
510

Research and development expenses
56

 
48

 
165

 
148

Asset impairments and restructuring charges (gains), net
71

 
3

 
77

 
24

Operating earnings
338

 
479

 
1,135

 
1,300

Net interest expense
45

 
44

 
132

 
137

Other charges (income), net
(5
)
 
1

 
(16
)
 
2

Earnings from continuing operations before income taxes
298

 
434

 
1,019

 
1,161

Provision for income taxes from continuing operations
86

 
125

 
281

 
338

Earnings from continuing operations
212

 
309

 
738

 
823

Earnings from discontinued operations, net of tax
—

 
—

 
2

 
—

Net earnings
$
212

 
$
309

 
$
740

 
$
823

Less: Net earnings attributable to noncontrolling interest
2

 
1

 
5

 
4

Net earnings attributable to Eastman
$
210

 
$
308

 
$
735

 
$
819

Amounts attributable to Eastman stockholders
 
 
 
 
 
 
 
Earnings from continuing operations, net of tax
$
210

 
$
308

 
$
733

 
$
819

Earnings from discontinued operations, net of tax
—

 
—

 
2

 
—

Net earnings attributable to Eastman stockholders
$
210

 
$
308

 
$
735

 
$
819

Basic earnings per share attributable to Eastman
 
 
 
 
 
 
 
Earnings from continuing operations
$
1.41

 
$
2.00

 
$
4.89

 
$
5.31

Earnings from discontinued operations
—

 
—

 
0.01

 
—

Basic earnings per share attributable to Eastman
$
1.41

 
$
2.00

 
$
4.90

 
$
5.31

Diluted earnings per share attributable to Eastman
 

 
 

 
 

 
 

Earnings from continuing operations
$
1.39

 
$
1.97

 
$
4.83

 
$
5.23

Earnings from discontinued operations
—

 
—

 
0.02

 
—

Diluted earnings per share attributable to Eastman
$
1.39

 
$
1.97

 
$
4.85

 
$
5.23



3



UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS (continued)
 
Third Quarter
 
First Nine Months
(Dollars in millions, except per share amounts)
2014
 
2013
 
2014
 
2013
Comprehensive Income
 

 
 

 
 

 
 

Net earnings including noncontrolling interest
$
212

 
$
309

 
$
740

 
$
823

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 

Change in cumulative translation adjustment
(127
)
 
45

 
(114
)
 
10

Defined benefit pension and other postretirement benefit plans:
 

 
 

 
 

 
 

Prior service credit arising during the period
—

 
29

 
—

 
29

Amortization of unrecognized prior service credits included in net periodic costs
(4
)
 
(4
)
 
(12
)
 
(11
)
Derivatives and hedging:
 

 
 

 
 

 
 

Unrealized (loss) gain during period
36

 
(13
)
 
42

 
(4
)
Reclassification adjustment for (losses) gains included in net income
—

 
—

 
(9
)
 
—

Total other comprehensive income (loss), net of tax
(95
)
 
57

 
(93
)
 
24

Comprehensive income including noncontrolling interest
117

 
366

 
647

 
847

Comprehensive income attributable to noncontrolling interest
2

 
1

 
5

 
4

Comprehensive income attributable to Eastman
$
115

 
$
365

 
$
642

 
$
843

Retained Earnings
 

 
 

 
 

 
 

Retained earnings at beginning of period
$
4,431

 
$
3,456

 
$
4,012

 
$
3,038

Net earnings attributable to Eastman
210

 
308

 
735

 
819

Cash dividends declared
(53
)
 
(46
)
 
(159
)
 
(139
)
Retained earnings at end of period
$
4,588

 
$
3,718

 
$
4,588

 
$
3,718


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

4


UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
September 30,
 
December 31,
(Dollars in millions, except per share amounts)
2014
 
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
212

 
$
237

Trade receivables, net
985

 
880

Miscellaneous receivables
141

 
208

Inventories
1,358

 
1,264

Other current assets
194

 
251

Total current assets
2,890

 
2,840

Properties
 

 
 

Properties and equipment at cost
10,230

 
9,958

Less:  Accumulated depreciation
5,878

 
5,668

Net properties
4,352

 
4,290

Goodwill
2,716

 
2,637

Intangible assets, net of accumulated amortization
1,808

 
1,761

Other noncurrent assets
369

 
317

Total assets
$
12,135

 
$
11,845

Liabilities and Stockholders' Equity
 

 
 

Current liabilities
 

 
 

Payables and other current liabilities
$
1,398

 
$
1,470

Total current liabilities
1,398

 
1,470

Long-term borrowings
4,563

 
4,254

Deferred income tax liabilities
573

 
496

Post-employment obligations
1,242

 
1,297

Other long-term liabilities
380

 
453

Total liabilities
8,156

 
7,970

Stockholders' equity
 

 
 

Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 216,136,911 and 215,131,237 for 2014 and 2013, respectively)
2

 
2

Additional paid-in capital
1,810

 
1,778

Retained earnings
4,588

 
4,012

Accumulated other comprehensive income
78

 
171

 
6,478

 
5,963

Less: Treasury stock at cost (67,660,313 shares for 2014 and 62,714,861 shares for 2013)
2,577

 
2,167

Total Eastman stockholders' equity
3,901

 
3,796

Noncontrolling interest
78

 
79

Total equity
$
3,979

 
$
3,875

Total liabilities and stockholders' equity
$
12,135

 
$
11,845


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

5


UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
First Nine Months
(Dollars in millions)
2014
 
2013
Cash flows from operating activities
 
 
 
Net earnings
$
740

 
$
823

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
328

 
326

Asset impairment charges
50

 
6

Gain on sale of assets
(5
)
 
—

Provision for deferred income taxes
58

 
118

Mark-to-market gain on pension and other postretirement benefit plans
—

 
(86
)
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
 

 
 

(Increase) decrease in trade receivables
(118
)
 
(119
)
(Increase) decrease in inventories
(76
)
 
(14
)
Increase (decrease) in trade payables
(12
)
 
(67
)
Pension and other postretirement contributions (in excess of) less than expenses
(76
)
 
(120
)
Variable compensation (in excess of) less than expenses
(8
)
 
30

Other items, net
68

 
(103
)
Net cash provided by operating activities
949

 
794

Cash flows from investing activities
 

 
 

Additions to properties and equipment
(406
)
 
(312
)
Proceeds from sale of assets
13

 
6

Acquisitions, net of cash acquired
(325
)
 
—

Additions to capitalized software
(2
)
 
(2
)
Other items, net
2

 
—

Net cash used in investing activities
(718
)
 
(308
)
Cash flows from financing activities
 

 
 

Net (decrease) increase in commercial paper borrowings
(185
)
 
300

Proceeds from borrowings
615

 
150

Repayment of borrowings
(125
)
 
(805
)
Dividends paid to stockholders
(159
)
 
(94
)
Treasury stock purchases
(410
)
 
(113
)
Dividends paid to noncontrolling interest
(9
)
 
(10
)
Proceeds from stock option exercises and other items, net
22

 
55

Net cash used in financing activities
(251
)
 
(517
)
Effect of exchange rate changes on cash and cash equivalents
(5
)
 
4

Net change in cash and cash equivalents
(25
)
 
(27
)
Cash and cash equivalents at beginning of period
237

 
249

Cash and cash equivalents at end of period
$
212

 
$
222


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

6

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

ITEM
 
Page
 
 
 

7

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.

In first nine months 2014, the Company recognized $2 million, net of tax, in earnings from discontinued operations from final settlement of commercial litigation related to the previously discontinued polyethylene terephthalate ("PET") business.

2.
ACQUISITIONS

Knowlton Technologies, LLC
On August 6, 2014, the Company acquired Knowlton Technologies, LLC. ("Knowlton"), a leader in the design, accelerated prototyping, and manufacture of wet-laid nonwovens in filtration, friction, and custom designed composite webs, for a total cash purchase price of $42 million, prior to post-closing adjustments. The acquisition was accounted for as a business combination. The acquired Knowlton business is a developing business of the EastmanTM microfiber technology platform, the financial results of which are not identifiable to an operating segment and are shown as "other" operating earnings (loss). Current assets consist primarily of $14 million in accounts receivable and inventory acquired. Management valued properties and equipment, totaling $18 million, using the cost approach supported where available by observable market data which includes consideration of obsolescence. Goodwill of $8 million, which represents the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed, is expected to be deductible for tax purposes. Acquired intangible assets of $6 million consist primarily of developed technologies with an amortization period of 15 years. Management valued intangible assets using the relief from royalty method, a form of the income approach supported by observable market data from peer chemical companies. Current liabilities of $4 million consist primarily of accounts payable. Values assigned are preliminary.

BP plc's Global Aviation Turbine Engine Oil Business
On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business ("aviation turbine oil business") for a total cash purchase price of $283 million, prior to post-closing adjustments. The acquisition was accounted for as a business combination and is reported in the Specialty Fluids & Intermediates ("SFI") segment. In combination with Eastman's Skydrol® aviation hydraulic fluids business, the acquired aviation turbine oil business enables Eastman to better supply the global aviation industry.


8

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The purchase price allocation for the aviation turbine oil business acquisition is preliminary as of September 30, 2014. The purchase price allocation remains open primarily for post-closing adjustments which may impact current assets and noncurrent assets. The Company expects to finalize the purchase price allocation in fourth quarter 2014. Adjustments to the June 30, 2014 preliminary purchase price allocation of the aviation turbine oil business acquisition during third quarter 2014 are reflected in the Company's Consolidated Statements of Financial Position as of September 30, 2014 and are summarized in the table below. These adjustments are not material to the Company's financial position or results of operations for third quarter 2014. The following table summarizes the purchase price allocation for the aviation turbine oil business acquisition as of June 2, 2014, as previously reported at June 30, 2014, the net impact of adjustments during third quarter of 2014, and the resulting preliminary purchase price allocation for the aviation turbine oil business acquisition as of June 2, 2014 as reported at September 30, 2014:
(Dollars in millions)
As of June 2, 2014 Previously Reported
 
Increase (Decrease)
 
As of June 2, 2014 As Adjusted
Current assets
$
42

 
$
—

 
$
42

Machinery and equipment
11

 
(1
)
 
10

Goodwill
68

 
24

 
92

Intangible assets
162

 
(23
)
 
139

Total purchase price
$
283

 
$
—

 
$
283


Current assets consist primarily of inventory acquired. Machinery and equipment acquired included manufacturing operations in Linden, New Jersey and technology resources in Naperville, Illinois. Management valued machinery and equipment using the cost approach supported by published industry sources.

In connection with the purchase transaction, 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.  All goodwill is expected to be deductible for tax purposes.

Intangible assets acquired included brands that are business-to-business in nature. Also acquired were customer relationships in the aviation industry. Management valued intangible assets using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data for peer chemical companies.

Intangible Assets acquired on June 2, 2014
 
 
 
(Dollars in millions)
Fair Value
 
Weighted-Average Amortization Period (Years)
Amortizable intangible assets
 
 
 
  Brands
$
74

 
30
  Customer relationships
65

 
16
Total
$
139

 
 

In first nine months 2014, the Company recognized $3 million and $2 million in transaction and integration costs, respectively, related to the acquisition. Transaction and integration costs 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. As required by purchase accounting, the acquired inventories were marked to fair value. Approximately 75 percent of these inventories were sold in third quarter 2014 resulting in a $6 million increase in cost of sales with all of these inventories sold in first nine months resulting in an $8 million increase in cost of sales in first nine months 2014.

Beginning in June 2014, the Company's consolidated results of operations included the results of the acquired aviation turbine oil business. Based on applicable accounting and reporting guidance, the acquisition is not material to the Company's consolidated financial statements; therefore, pro forma financial information has not been presented.


9

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3.
INVENTORIES
 
September 30,
 
December 31,
(Dollars in millions)
2014
 
2013
At FIFO or average cost (approximates current cost)
 
 
 
Finished goods
$
1,070

 
$
976

Work in process
282

 
300

Raw materials and supplies
507

 
494

Total inventories
1,859

 
1,770

LIFO Reserve
(501
)
 
(506
)
Total inventories
$
1,358

 
$
1,264


Inventories valued on the LIFO method were approximately 60 percent of total inventories as of both September 30, 2014 and December 31, 2013.

4.
PAYABLES AND OTHER CURRENT LIABILITIES
 
September 30,
 
December 31,
(Dollars in millions)
2014
 
2013
Trade creditors
$
735

 
$
762

Accrued payrolls, vacation, and variable-incentive compensation
155

 
205

Accrued taxes
131

 
80

Post-employment obligations
58

 
59

Interest payable
44

 
46

Environmental contingent liabilities, current portion
40

 
40

Other
235

 
278

Total payables and other current liabilities
$
1,398

 
$
1,470


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

5.
PROVISION FOR INCOME TAXES
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Provision for income taxes from continuing operations
$
86

 
$
125

 
$
281

 
$
338

Effective tax rate
29
%
 
29
%
 
28
%
 
29
%
 
The third quarter and first nine months 2014 effective tax rates reflect benefit from the integration of Eastman and Solutia business operations and legal entity structures. The third quarter and first nine months 2013 effective tax rates were impacted by a $14 million benefit primarily from adjustments to the tax provision to reflect the finalization of the 2012 consolidated U.S. Federal income tax return. The first nine months 2013 effective tax rate also benefited from enactment of the American Taxpayer Relief Act of 2012 in January 2013, which resulted in a $10 million benefit primarily from a research and development ("R&D") tax credit. The tax credits expired at the end of 2013.


10

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6.
BORROWINGS
 
September 30,
 
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
170

 
171

5.5% notes due 2019
250

 
250

4.5% notes due 2021
250

 
250

3.6% notes due 2022
893

 
894

7 1/4% debentures due 2024
244

 
243

7 5/8% debentures due 2024
54

 
54

7.60% debentures due 2027
222

 
222

4.8% notes due 2042
497

 
497

4.65% notes due 2044
495

 
—

Credit facilities and commercial paper borrowings
240

 
425

Total borrowings
4,563

 
4,254

Borrowings due within one year
—

 
—

Long-term borrowings
$
4,563

 
$
4,254


On May 15, 2014, the Company issued 4.65% notes due 2044 in the principal amount of $500 million. Proceeds from the sale of the notes, net of approximately $10 million in transaction costs, were $490 million.

Credit Facility and Commercial Paper Borrowings

As of September 30, 2014, the Company has access to borrowings under a $1 billion revolving credit agreement (the "Credit Facility") expiring October 2018.  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 September 30, 2014 and December 31, 2013, 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. At September 30, 2014 the Company's commercial paper borrowings were $240 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.

In August 2014, the Company amended a $250 million line of credit under its accounts receivable securitization agreement (the "A/R Facility"), extending the maturity to April 2017. The amended A/R Facility has terms substantially similar to the $250 million accounts receivable securitization agreement previously 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 September 30, 2014 and December 31, 2013 the Company had no outstanding borrowings under the A/R Facility. During first quarter 2014, $125 million of the available amount under the A/R Facility was borrowed and then repaid during second quarter 2014.

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 $1.01 billion and $825 million as of September 30, 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.


11

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In connection with its entry into an Agreement and Plan of Merger to acquire Taminco Corporation ("Taminco"), in September 2014, the Company entered into an agreement with Citigroup Global Markets, Inc. which contains commitments for a $2.75 billion senior unsecured bridge term loan facility and sets out the principal terms of an uncommitted $1.0 billion senior unsecured term loan facility. This financing is intended to provide a portion of the funding necessary to complete the acquisition, including refinancing a portion of Taminco's outstanding debt. Depending on market conditions, the Company may seek to finance a portion of the funds to be used to complete the acquisition through the public offering of debt securities. Any commitments under the term loan facility, or proceeds from the sale of debt securities, will reduce the commitments under the bridge term loan facility on a dollar-for-dollar basis. The loan agreements were entered into on October 9, 2014 and were unfunded as of the date of filing of this Quarterly Report on Form 10-Q.

Fair Value of Borrowings

The Company has classified its long-term borrowings at September 30, 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 September 30, 2014
(Dollars in millions)
 
Recorded Amount September 30, 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
 
$
4,563

 
$
4,802

 
$
4,562

 
$
240

 
$
—

 
 
 
 
 
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

 
$
—


7.
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.  

Beginning in third quarter 2014, the maximum period for which the Company hedges commodity prices using derivative financial instruments was increased from three to five years.

For further information on hedging programs, 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.


12

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.  In 2014, the Company entered into interest rate swaps to hedge the interest rate risk on the 3.6% notes due 2022. As of September 30, 2014, the total notional amount of the Company's interest rate swaps was $500 million. As of 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.
Total notional amounts (in millions, unless noted):
September 30, 2014
 
December 31, 2013
 
 
 
 
 
Foreign Exchange Forward and Option Contracts
 
 
 
 
EUR/USD (in EUR)
€903
 
€954
 
EUR/USD (in approximate USD equivalent)
$1,160
 
$1,320
 
JPY/USD (in JPY)
¥5,700
 
¥8,300
 
JPY/USD (in approximate USD equivalent)
$50
 
$80
Commodity Forward and Collar Contracts
 
 
 
 
Contract ethylene sales (in thousand metric tons)
17
 
—

 
Feedstock (in million barrels)
25
 
8
 
Energy (in million british thermal units)
17
 
—

Interest rate swaps for the future issuance of debt
$100
 
—


Total notional for commodity hedging contracts increased significantly in 2014 as a result of the increase in tenor of the contracts and management's decision to increase the level of hedge coverage.

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 September 30, 2014
Description
 
September 30, 2014
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Derivative Assets
 
$
102

 
$
—

 
$
101

 
$
1

Derivative Liabilities
 
(38
)
 
—

 
(38
)
 
—

 
 
$
64

 
$
—

 
$
63

 
$
1

 

13

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 September 30, 2014:
Fair Value Measurements Using Level 3 Inputs
 
 
 
 
 
 
 
 
Commodity Contracts
 
Third Quarter
 
First Nine Months
(Dollars in millions)
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
 
$
—

 
$
(7
)
 
$
—

 
$
(5
)
Realized gain (loss) in sales revenue
 
—

 
(3
)
 
—

 
(10
)
Change in unrealized gain (loss)
 
1

 
4

 
1

 
2

Settlements
 
—

 
3

 
—

 
10

Transfers (out) in of Level 3
 
—

 
—

 
—

 
—

Balance at end of period
 
$
1

 
$
(3
)
 
$
1

 
$
(3
)

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 less than $1 million of nonqualifying derivatives or derivatives that are not designated as hedges recorded as of September 30, 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 the Company chosen to present the derivatives contracts on a net basis, the Company would have a derivative in a net asset position of $87 million and a derivative in a net liability position of $23 million as of September 30, 2014. The Company does not have any cash collateral due under such agreements.


14

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

September 30, 2014

December 31, 2013
Cash Flow Hedges

 

 

 
Commodity contracts

Other current assets

$
9


$
20

Commodity contracts

Other noncurrent assets

1


7

Foreign exchange contracts

Other current assets

43


17

Foreign exchange contracts

Other noncurrent assets

49


14

 

 

$
102


$
58

 
(Dollars in millions)
 
 
 
Fair Value Measurements Significant Other Observable Inputs
Derivative Liabilities
 
Statement of Financial Position Location
 
September 30, 2014
 
December 31, 2013
Fair Value Hedges
 
 
 
 
 
 
Interest rate swaps
 
Other long-term liabilities
 
$
3

 
$
—

Cash Flow Hedges
 
 
 
 
 
 
Commodity contracts
 
Payables and other current liabilities
 
10

 
—

Commodity contracts
 
Other long-term liabilities
 
15

 
—

Foreign exchange contracts
 
Payables and other current liabilities
 
9

 
21

Foreign exchange contracts
 
Other long-term liabilities
 
1

 
25

 
 
 
 
$
38

 
$
46


Derivatives' Hedging Relationships


Third Quarter
(Dollars in millions)

Location of Gain/(Loss) Recognized in Income on Derivatives

Amount of Gain/ (Loss) Recognized Income on Derivatives
Derivatives in Fair Value Hedging Relationships


September 30, 2014

September 30, 2013
Interest rate contracts

Net interest expense

$
2


$
—





$
2


$
—


 
 
First Nine Months
(Dollars in millions)
 
Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/ (Loss) Recognized Income on Derivatives
Derivatives in Fair Value Hedging Relationships
 
 
September 30, 2014
 
September 30, 2013
Interest rate contracts
 
Net interest expense
 
$
3

 
$
—

 
 
 
 
$
3

 
$
—


15

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
Third 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
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Commodity contracts
 
$
(22
)
 
$
8

 
Sales
 
$
—

 
$
(3
)
 
 
 
 
 
 
Cost of Sales
 
(1
)
 
4

Foreign exchange contracts
 
57

 
(22
)
 
Sales
 
4

 
2

Forward starting interest rate swap contracts
 
1

 
1

 
Net interest expense
 
(2
)
 
(2
)
 
 
$
36

 
$
(13
)
 
 
 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
First Nine Months
(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
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Commodity contracts
 
$
(27
)
 
$
4

 
Sales
 
$
—

 
$
(10
)
 
 
 
 
 
 
Cost of sales
 
18

 
1

Foreign exchange contracts
 
59

 
(11
)
 
Sales
 
3

 
8

Forward starting interest rate swap contracts
 
1

 
3

 
Net interest expense
 
(6
)
 
(6
)
 
 
$
33

 
$
(4
)
 
 
 
$
15

 
$
(7
)

"Change in amount after tax of gain/(loss) recognized in Other Comprehensive Income on derivatives (effective portion)" declined for commodity contracts as a result of decreased propane prices and improved for foreign exchange contracts as a result of the lower EUR foreign exchange rate.

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 $8 million at September 30, 2014 and $80 million at September 30, 2013 with the decrease primarily a result of lower propane prices and EUR exchange rate.  If realized, $23 million net gains in third 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 third quarter and first nine months 2014 or third quarter and first nine months 2013.

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 $1 million net gains during third quarter 2014 and $3 million net losses during third quarter 2013 on nonqualifying derivatives.  The Company recognized approximately $4 million net gains and $4 million net losses on nonqualifying derivatives during first nine months 2014 and 2013, respectively.


16

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8.
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:
 
Third 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
$
11

 
$
4

 
$
11

 
$
3

 
$
2

 
$
2

Interest cost
24

 
7

 
22

 
7

 
11

 
11

Expected return on assets
(36
)
 
(9
)
 
(32
)
 
(9
)
 
(2
)
 
(1
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
(1
)
 
—

 
(1
)
 
—

 
(6
)
 
(6
)
Mark-to-market pension and other postretirement benefits gain (1)
—

 
—

 
—

 
—

 
—

 
(86
)
Net periodic benefit cost
$
(2
)
 
$
2

 
$
—

 
$
1

 
$
5

 
$
(80
)
 
 
 
 
 
 
 
 
 
 
 
 
 
First Nine Months
 
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
$
31

 
$
11

 
$
32

 
$
10

 
$
6

 
$
8

Interest cost
74

 
23

 
66

 
21

 
33

 
33

Expected return on assets
(107
)
 
(28
)
 
(96
)
 
(26
)
 
(5
)
 
(5
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
(3
)
 
—

 
(3
)
 
—

 
(18
)
 
(16
)
Mark-to-market pension and other postretirement benefits gain (1)
—

 
—

 
—

 
—

 
—

 
(86
)
Net periodic benefit cost
$
(5
)
 
$
6

 
$
(1
)
 
$
5

 
$
16

 
$
(66
)

(1) 
Mark-to-market gain in third quarter and first nine months 2013 due to the interim remeasurement of the Eastman other postretirement benefit plan obligation, triggered by a plan change in life insurance benefits in third quarter.


17

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In third quarter 2013, the Company changed life insurance benefits provided to future retirees by the Eastman other postretirement benefit plan which triggered an interim remeasurement of this other postretirement benefit plan obligation. The remeasurement resulted in a reduction in the accumulated postretirement benefit obligation of approximately $47 million which will be amortized as a prior service credit from Accumulated Other Comprehensive Income over 8 years. The remeasurement of the plan also resulted in a mark-to-market ("MTM") actuarial gain of $86 million in third quarter 2013. The actuarial gain was primarily due to a higher assumed discount rate of 4.72 percent in third quarter 2013 compared to 4.01 percent at December 31, 2012. The higher assumed discount rate is reflective of changes in global market conditions and interest rates on high-grade corporate bonds. For additional information concerning the Company's accounting methodology for pension and other postretirement actuarial gains and losses, see Note 1, "Significant Accounting Policies" in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.

The Company contributed $47 million and $99 million to its U.S. defined benefit pension plans in first nine months 2014 and 2013, respectively.

9.
COMMITMENTS

Purchase Obligations and Lease Commitments
 
The Company had various purchase obligations at September 30, 2014 totaling $2.0 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 $254 million over a period of approximately 45 years.  Of the total lease commitments, approximately 55 percent relate to real property, including office space, storage facilities, and land; approximately 35 percent relate to railcars; and approximately 10 percent relate to machinery and equipment, including computer and communications equipment and production equipment.

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 September 30, 2014 totaled $121 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 20 years with maximum potential future payments of $32 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity.  Management's current expectation is that future payment or performance related to non-performance under other guarantees is remote.


18

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10.
ENVIRONMENTAL MATTERS

Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies.  In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs.  In addition, the Company will be required to incur costs for environmental remediation and closure and postclosure under the federal Resource Conservation and Recovery Act.  Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K. The Company's total reserve for environmental contingencies was $350 million and $368 million at September 30, 2014 and December 31, 2013, respectively.  At September 30, 2014 and December 31, 2013, this reserve included $10 million and $9 million, respectively, 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 $329 million to the maximum of $568 million and from the minimum or best estimate of $341 million to the maximum of $581 million at September 30, 2014 and December 31, 2013, respectively.  The maximum estimated future costs are considered to be reasonably possible and include the amounts accrued at both September 30, 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 $21 million and $27 million at September 30, 2014 and December 31, 2013, respectively. 

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
7

Cash reductions
(19
)
Balance at September 30, 2014
$
329


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)
September 30, 2014
 
December 31, 2013
Environmental contingent liabilities, current
$
40

 
$
40

Environmental contingent liabilities, long-term
310

 
328

Total
$
350

 
$
368



19

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11.
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.

12.
STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders' equity for first nine 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
—

 
—

 
735

 
—

 
—

 
735

 
5

 
740

Cash Dividends Declared (1)
($1.05 per share)
—

 
—

 
(159
)
 
—

 
—

 
(159
)
 
—

 
(159
)
Other Comprehensive Income
—

 
—

 
—

 
(93
)
 
—

 
(93
)
 
—

 
(93
)
Share-Based Compensation Expense (2)
—

 
23

 
—

 
—

 
—

 
23

 
—

 
23

Stock Option Exercises
—

 
12

 
—

 
—

 
—

 
12

 
—

 
12

Other (3)
—

 
(3
)
 
—

 
—

 
—

 
(3
)
 
(2
)
 
(5
)
Share Repurchase
—

 
—

 
—

 
—

 
(410
)
 
(410
)
 
—

 
(410
)
Distributions to Noncontrolling Interest
—

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
(4
)
Balance at September 30, 2014
2

 
1,810

 
4,588

 
78

 
(2,577
)
 
3,901

 
78

 
3,979


(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
(114
)
 
(12
)
 
33

 
—

 
(93
)
Balance at September 30, 2014
$
19

 
$
66

 
$
(6
)
 
$
(1
)
 
$
78



20

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 indefinitely invested, unremitted earnings of these foreign subsidiaries.

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:
 
Third 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
$
(127
)
 
$
(127
)
 
$
43

 
$
45

Defined benefit pension and other postretirement benefit plans:
 
 
 
 
 
 
 

Prior service credit arising during the period
—

 
—

 
47

 
29

Amortization of unrecognized prior service credits included in net periodic costs (1)
(7
)
 
(4
)
 
(7
)
 
(4
)
Change in defined benefit pension and other postretirement benefit plans
(7
)
 
(4
)
 
40

 
25

Derivatives and hedging: (2)
 
 
 
 
 
 
 

Unrealized (loss) gain
58

 
36

 
(19
)
 
(13
)
Reclassification adjustment for (gain) loss included in net income
—

 
—

 
(2
)
 
—

Change in derivatives and hedging
58

 
36

 
(21
)
 
(13
)
Total other comprehensive income (loss)
$
(76
)
 
$
(95
)
 
$
62

 
$
57

 
 
 
 
 
 
 
 
 
First Nine Months
 
2014
 
2013
(Dollars in millions)
Before Tax
 
Net of Tax
 
Before Tax
 
Net of Tax
Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in cumulative translation adjustment
$
(115
)
 
$
(114
)
 
$
8

 
$
10

Defined benefit pension and other postretirement benefit plans:
 
 
 
 
 
 
 

Prior service credit arising during the period

—

 
—

 
47

 
29

Amortization of unrecognized prior service credits included in net periodic costs (1)
(21
)
 
(12
)
 
(19
)
 
(11
)
Change in defined benefit pension and other postretirement benefit plans

(21
)
 
(12
)
 
28

 
18

Derivatives and hedging:(2)
 
 
 
 
 
 
 

Unrealized gain (loss) during period
67

 
42

 
(13
)
 
(4
)
Reclassification adjustment for (gain) loss included in net income
(14
)
 
(9
)
 
6

 
—

Change in derivatives and hedging
53

 
33

 
(7
)
 
(4
)
Total other comprehensive income (loss)
$
(83
)
 
$
(93
)
 
$
29

 
$
24


(1) 
Included in the calculation of net periodic benefit costs for pension and other postretirement benefit plans. See Note 8, "Retirement Plans".
(2) 
For additional information regarding the impact of reclassifications into earnings, refer to Note 7, "Derivatives".


21

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13.
EARNINGS AND DIVIDENDS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share ("EPS") from continuing operations:
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
(In millions, except per share amounts)
 
 
 
 

 

Numerator
 
 
 
 
 
 
 
Earnings attributable to Eastman stockholders:
 
 
 
 
 
 
 
Earnings from continuing operations, net of tax
$
210

 
$
308

 
$
733

 
$
819

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average shares used for basic EPS
148.7

 
154.0

 
149.8

 
154.3

Dilutive effect of stock options and other awards
1.6

 
2.4

 
1.7

 
2.4

Weighted average shares used for diluted EPS
150.3

 
156.4

 
151.5

 
156.7

 
 
 
 
 
 
 
 
EPS from continuing operations (1)
 
 
 
 
 
 
 
Basic
$
1.41

 
$
2.00

 
$
4.89

 
$
5.31

Diluted
$
1.39

 
$
1.97

 
$
4.83

 
$
5.23


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

In both third quarter and first nine months 2014, common shares underlying options to purchase 210,143 shares 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. Third quarter and first nine months 2014 reflect the impact of share repurchases of 618,896 and 4,945,452 shares, respectively.

In third quarter 2013, common shares underlying options to purchase 125,019 shares 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. In first nine months 2013, there were no outstanding options to purchase shares of common stock excluded from the computation of diluted earnings per share. Third quarter and first nine months 2013 reflect the impact of share repurchases of 463,418 and 1,579,118 shares, respectively.

The Company declared cash dividends of $0.35 and $0.30 per share in third quarter 2014 and 2013, respectively, and $1.05 and $0.90 per share in first nine months 2014 and 2013, respectively.

14.
ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES (GAINS), NET

In third quarter and first nine months 2014, there were net asset impairments and restructuring charges of $71 million and $77 million, respectively.

In third quarter and first nine months 2014, asset impairments of $18 million and restructuring charges, including severance, of $24 million were recognized in the Additives & Functional Products ("AFP") segment for costs of the planned closure of a Crystex® R&D facility in France. This closure is subject to certain local legal and regulatory requirements.

As a result of the annual impairment testing of indefinite-lived intangible assets, in third quarter and first nine months 2014 the Company recognized an intangible asset impairment of $22 million in the AFP segment to adjust the carrying value of the Crystex® tradename to the estimated fair value. This impairment resulted from a decrease in projected revenue since the tradename was acquired from Solutia in 2012. The estimated fair value was determined using an income approach, specifically the relief from royalty method.

22

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


In addition, during third quarter and first nine months 2014, a change in estimate of certain costs for the fourth quarter 2012 termination of the operating agreement for the Sao Jose dos Campos, Brazil site resulted in a restructuring charge of $5 million to previously recognized asset impairments and restructuring charges.

During first nine months 2014, the Company recognized gains from the sales of previously impaired assets at the former Photovoltaics production facility in Germany and a former polymers production facility in China of $5 million and $2 million, respectively.

In first nine months 2014, charges included $8 million of asset impairments, including intangible assets, and $2 million of restructuring charges in the Advanced Materials ("AM") segment primarily due to the closure of a production facility in Taiwan for the Flexvue® product line. First nine months 2014 also included $5 million of restructuring charges for severance associated with the continued integration of the acquired Solutia businesses.

In third quarter and first nine months 2013, there were $3 million and $24 million, respectively, of net asset impairments and restructuring charges including $3 million and $9 million, respectively, of restructuring charges primarily for severance associated with the continued integration of the acquired Solutia businesses.

During first nine months 2013, management decided to shut-down the Photovoltaics product line, including the primary production facility in Germany. This resulted in the Company recognizing asset impairments of $7 million and restructuring charges of $5 million including charges for severance. During first nine months 2013, the Company also recognized severance charges of $6 million primarily for a voluntary separation plan for certain employees. In addition, during first nine months 2013, a change in estimate of certain costs for the fourth quarter 2012 termination of the operating agreement for the Sao Jose dos Campos, Brazil site resulted in a reduction of $4 million to previously recognized asset impairments and restructuring charges.

Changes in Reserves for Asset Impairments, Restructuring Charges (Gains), 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 first nine months 2014 and full year 2013:

(Dollars in millions)
Balance at January 1, 2014
 
Provision/ Adjustments
 
Non-cash Reductions
 
Cash Reductions
 
Balance at September 30, 2014
Non-cash charges
$
—

 
$
50

 
$
(50
)
 
$
—

 
$
—

Severance costs
22

 
13

 
—

 
(19
)
 
16

Site closure and restructuring costs
14

 
14

 
(3
)
 
(5
)
 
20

Total
$
36

 
$
77

 
$
(53
)
 
$
(24
)
 
$
36



(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


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


23

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

15.
SHARE-BASED COMPENSATION AWARDS

The Company utilizes share-based awards under employee and non-employee director compensation programs.  These share-based awards may include restricted and unrestricted stock, restricted stock units, stock options, and performance shares.  In third quarter 2014 and 2013, $6 million and $8 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. The impact on third quarter 2014 and 2013 net earnings of $4 million and $5 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.

In first nine months 2014 and 2013, $23 million and $27 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. The impact on first nine months 2014 and 2013 net earnings of $14 million and $17 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.

For additional information regarding share-based compensation plans and awards, see Note 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.
 
 
 
16.
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 Nine Months
 
2014
 
2013
Other current assets
$
23

 
$
(1
)
Other noncurrent assets
25

 
20