Document
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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, 2016
 
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, 2016
Common Stock, par value $0.01 per share
146,750,874
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TABLE OF CONTENTS
ITEM
 
PAGE
 

PART I.  FINANCIAL INFORMATION

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

PART II.  OTHER INFORMATION

 
 
 
 
 
 
 
 
 

SIGNATURES

 

EXHIBIT INDEX

 

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FORWARD-LOOKING STATEMENTS

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

Forward-looking statements are based upon certain underlying assumptions as of the date such statements were made. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. Forward-looking statements and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. The most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements are identified and discussed under "Risk Factors" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 of this Quarterly Report.

The Company cautions you not to place undue reliance on forward-looking statements, which speak only as of the date such statements are made. Except as may be required by law, the Company undertakes no obligation to update or alter these forward-looking statements, whether as a result of new information, future events, or otherwise.


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UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
 
Third Quarter
 
First Nine Months
(Dollars in millions, except per share amounts)
2016
 
2015
 
2016
 
2015
Sales
$
2,287

 
$
2,447

 
$
6,820

 
$
7,423

Cost of sales
1,666

 
1,752

 
4,960

 
5,352

Gross profit
621

 
695

 
1,860

 
2,071

Selling, general and administrative expenses
181

 
183

 
538

 
561

Research and development expenses
54

 
59

 
163

 
168

Asset impairments and restructuring charges, net
30

 
21

 
28

 
130

Operating earnings
356

 
432

 
1,131

 
1,212

Net interest expense
64

 
66

 
191

 
198

Early debt extinguishment costs

 

 
9

 

Other charges (income), net
3

 
13

 
(5
)
 
2

Earnings before income taxes
289

 
353

 
936

 
1,012

Provision for income taxes
56

 
95

 
195

 
283

Net earnings
233

 
258

 
741

 
729

Less: Net earnings attributable to noncontrolling interest
1

 
2

 
3

 
5

Net earnings attributable to Eastman
$
232

 
$
256

 
$
738

 
$
724

 
 
 
 
 
 
 
 
Basic earnings per share attributable to Eastman
$
1.57

 
$
1.73

 
$
5.00

 
$
4.87

Diluted earnings per share attributable to Eastman
$
1.56

 
$
1.71

 
$
4.96

 
$
4.83

Comprehensive Income
 

 
 

 
 

 
 

Net earnings including noncontrolling interest
$
233

 
$
258

 
$
741

 
$
729

Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Change in cumulative translation adjustment
(42
)
 
(47
)
 
(6
)
 
(183
)
Defined benefit pension and other postretirement benefit plans:
 

 
 

 
 

 
 

Amortization of unrecognized prior service credits included in net periodic costs
(7
)
 
(4
)
 
(21
)
 
(15
)
Derivatives and hedging:
 

 
 

 
 

 
 

Unrealized (loss) gain during period
(7
)
 
(66
)
 
13

 
(27
)
Reclassification adjustment for losses included in net income, net
19

 
34

 
56

 
56

Total other comprehensive income (loss), net of tax
(37
)
 
(83
)
 
42

 
(169
)
Comprehensive income including noncontrolling interest
196

 
175

 
783

 
560

Less: Comprehensive income attributable to noncontrolling interest
1

 
2

 
3

 
5

Comprehensive income attributable to Eastman
$
195

 
$
173

 
$
780

 
$
555

Retained Earnings
 

 
 

 
 

 
 

Retained earnings at beginning of period
$
5,517

 
$
4,893

 
$
5,146

 
$
4,545

Net earnings attributable to Eastman
232

 
256

 
738

 
724

Cash dividends declared
(69
)
 
(59
)
 
(204
)
 
(179
)
Retained earnings at end of period
$
5,680

 
$
5,090

 
$
5,680

 
$
5,090


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

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UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
September 30,
 
December 31,
(Dollars in millions, except per share amounts)
2016
 
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
207

 
$
293

Trade receivables, net of allowance for doubtful accounts
905

 
792

Miscellaneous receivables
258

 
246

Inventories
1,471

 
1,479

Other current assets
59

 
68

Total current assets
2,900

 
2,878

Properties
 

 
 

Properties and equipment at cost
11,564

 
11,234

Less:  Accumulated depreciation
6,367

 
6,104

Net properties
5,197

 
5,130

Goodwill
4,474

 
4,518

Intangible assets, net of accumulated amortization
2,543

 
2,650

Other noncurrent assets
375

 
404

Total assets
$
15,489

 
$
15,580

Liabilities and Stockholders' Equity
 

 
 

Current liabilities
 

 
 

Payables and other current liabilities
$
1,531

 
$
1,625

Borrowings due within one year
675

 
431

Total current liabilities
2,206

 
2,056

Long-term borrowings
5,933

 
6,577

Deferred income tax liabilities
1,022

 
928

Post-employment obligations
1,239

 
1,297

Other long-term liabilities
573

 
701

Total liabilities
10,973

 
11,559

Stockholders' equity
 

 
 

Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 217,598,989 and 216,899,964 for 2016 and 2015, respectively)
2

 
2

Additional paid-in capital
1,907

 
1,863

Retained earnings
5,680

 
5,146

Accumulated other comprehensive loss
(348
)
 
(390
)
 
7,241

 
6,621

Less: Treasury stock at cost (70,898,913 shares for 2016 and 69,137,973 shares for 2015)
2,800

 
2,680

Total Eastman stockholders' equity
4,441

 
3,941

Noncontrolling interest
75

 
80

Total equity
4,516

 
4,021

Total liabilities and stockholders' equity
$
15,489

 
$
15,580


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

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
First Nine Months
(Dollars in millions)
2016
 
2015
Operating activities
 
 
 
Net earnings
$
741

 
$
729

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization
436

 
429

Mark-to-market loss on pension and other postretirement benefit plans
30

 
2

Asset impairment charges

 
107

Early debt extinguishment costs
9

 

Gain on sale of equity investment
(17
)
 

Provision for deferred income taxes
89

 
29

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

 
 

Increase in trade receivables
(105
)
 
(54
)
Decrease (increase) in inventories
12

 
(23
)
Decrease in trade payables
(66
)
 
(139
)
Pension and other postretirement contributions in excess of expenses
(121
)
 
(149
)
Variable compensation (in excess of) less than expenses
(19
)
 
20

Other items, net
2

 
99

Net cash provided by operating activities
991

 
1,050

Investing activities
 

 
 

Additions to properties and equipment
(375
)
 
(426
)
Proceeds from sale of assets and equity investment
41

 
4

Acquisitions, net of cash acquired
(26
)
 
(45
)
Other items, net
1

 

Net cash used in investing activities
(359
)
 
(467
)
Financing activities
 

 
 

Net (decrease) increase in commercial paper borrowings
(255
)
 
157

Proceeds from borrowings
807

 
250

Repayment of borrowings
(957
)
 
(675
)
Dividends paid to stockholders
(204
)
 
(179
)
Treasury stock purchases
(120
)
 
(48
)
Dividends paid to noncontrolling interest
(8
)
 
(6
)
Proceeds from stock option exercises and other items, net
20

 
20

Net cash used in financing activities
(717
)
 
(481
)
Effect of exchange rate changes on cash and cash equivalents
(1
)
 
(7
)
Net change in cash and cash equivalents
(86
)
 
95

Cash and cash equivalents at beginning of period
293

 
214

Cash and cash equivalents at end of period
$
207

 
$
309


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

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

ITEM
 
Page
 
 
 
Derivative and Non-Derivative Financial Instruments
Environmental Matters and Asset Retirement Obligations

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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 2015 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 2015 Annual Report on Form 10-K. The December 31, 2015 financial position data included herein was derived from the audited consolidated financial statements included in the 2015 Annual Report on 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. Third quarter 2016 includes a $47 million correction of prior periods' cumulative foreign currency translation adjustment related to the Solutia, Inc. ("Solutia") and Taminco Corporation ("Taminco") acquisitions. See Note 3, "Goodwill" and Note 13, "Stockholders' Equity".

In April 2015, the Financial Accounting Standards Board ("FASB") issued new guidance for debt issuance costs as a part of the simplification initiative. Under this guidance, debt issuance costs will be presented as a direct reduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The amortization of debt issuance costs will be reported as interest expense. The recognition and measurement guidance for debt issuance costs is not affected by the amendment. As of March 31, 2016, the new guidance was applied on a retrospective basis which resulted in a reclassification of $31 million from "Other noncurrent assets" to "Long-term borrowings" in the Unaudited Consolidated Statement of Financial Position at December 31, 2015. See Note 7, "Borrowings".

In January 2016, Eastman changed its organizational and management structure following completion of the integration of recently acquired businesses to better align similar strategies and business models. As a result, beginning first quarter 2016, the Company's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. For further information, see Note 3, "Goodwill" and Note 18, "Segment Information".

Off Balance Sheet Financing Arrangements

The Company has rights and obligations under non-recourse factoring facilities that have a combined limit of €158 million ($177 million) as of September 30, 2016 and are committed until December 2017. These arrangements include receivables in the United States, Belgium, Germany, and Finland, and are subject to various eligibility requirements. The Company sells the receivables at face value but receives funding (approximately 85 percent) net of a deposit amount until collections are received from customers for the receivables sold. The total amounts of cumulative receivables sold in third quarter and first nine months 2016 were approximately $220 million and $680 million, respectively. The total amounts of cumulative receivables sold in third quarter and first nine months 2015 were approximately $245 million and $780 million, respectively. As part of the program, the Company continues to service the sold receivables at market rates with no servicing assets or liabilities recognized. The amounts of sold receivables outstanding under the non-recourse factoring facilities were $105 million and $106 million at September 30, 2016 and December 31, 2015, respectively. The fair value of the receivables sold equals the carrying value at the time of the sale, and no gain or loss is recognized. The Company is exposed to a credit loss of up to 10 percent on sold receivables.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2.
INVENTORIES
 
September 30,
 
December 31,
(Dollars in millions)
2016
 
2015
At FIFO or average cost (approximates current cost)
 
 
 
Finished goods
$
1,057

 
$
1,063

Work in process
197

 
212

Raw materials and supplies
476

 
500

Total inventories
1,730

 
1,775

Less: LIFO reserve
259

 
296

Total inventories
$
1,471

 
$
1,479


Inventories valued on the last-in, first-out ("LIFO") method were approximately 60 percent at both September 30, 2016 and December 31, 2015.

3.
GOODWILL

In January 2016, as a result of the changes in Eastman's organizational and management structure, goodwill was reassigned to segments using a relative fair value allocation. In conjunction with the organizational changes and in accordance with GAAP, during first quarter 2016 Eastman performed an impairment assessment and concluded that no indication of an impairment existed. For further information on the organizational changes, see Note 1, "Basis of Presentation" and Note 18, "Segment Information".

Changes to the carrying value of goodwill follow:
(Dollars in millions)
Additives & Functional Products
 
Adhesives & Plasticizers
 
Advanced Materials
 
Chemical Intermediates
 
Other Segments
 
Total
Balance at December 31, 2015
$
1,865

 
$
111

 
$
1,293

 
$
1,239

 
$
10

 
$
4,518

Adjustments to net goodwill resulting from reorganization
583

 
(111
)
 

 
(472
)
 

 

Currency translation adjustments (1)
(26
)
 

 
(14
)
 
(4
)
 

 
(44
)
Balance at September 30, 2016
$
2,422

 
$

 
$
1,279

 
$
763

 
$
10

 
$
4,474


(1) 
See Note 1, "Basis of Presentation" regarding correction of prior period foreign currency translation.

As of September 30, 2016, the reported balance of goodwill included accumulated impairment losses of $23 million, $12 million, and $14 million in the AFP segment, CI segment, and other segments, respectively. As of December 31, 2015, the reported balance of goodwill included accumulated impairment losses of $35 million and $14 million in the Adhesives & Plasticizers segment and other segments, respectively.

4.
EQUITY INVESTMENTS

In June 2016, Eastman sold its 50 percent interest in Primester, a joint venture which manufactures cellulose acetate at the Company's Kingsport site, to an affiliate of the joint venture partner for $35 million. This investment was accounted for under the equity method. Eastman's net investment in the joint venture at the date of sale was $18 million. Such amounts were included in "Other noncurrent assets" in the Unaudited Consolidated Statements of Financial Position and the gain of $17 million was recorded in "Other charges (income), net" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5.
PAYABLES AND OTHER CURRENT LIABILITIES
 
September 30,
 
December 31,
(Dollars in millions)
2016
 
2015
Trade creditors
$
629

 
$
699

Accrued payrolls, vacation, and variable-incentive compensation
197

 
227

Derivative hedging liability
185

 
218

Post-employment obligations
116

 
120

Accrued taxes
99

 
80

Other
305

 
281

Total payables and other current liabilities
$
1,531

 
$
1,625


"Other" consists primarily of accruals for interest payable, dividends payable, the current portion of environmental liabilities, and miscellaneous accruals.

6.
PROVISION FOR INCOME TAXES
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2016
 
2015
 
2016
 
2015
Provision for income taxes
$
56

 
$
95

 
$
195

 
$
283

Effective tax rate
20
%
 
27
%
 
21
%
 
28
%

The third quarter and first nine months 2016 effective tax rates reflect a benefit from the extension of favorable U.S. federal tax provisions, primarily research and development ("R&D") tax credits and deferral of certain earnings of foreign subsidiaries from U.S. income taxes in fourth quarter of 2015. The favorable tax provisions will benefit all quarters in 2016, compared to only fourth quarter in 2015. The third quarter and first nine months 2016 effective tax rates include a tax benefit of $16 million related to foreign tax credits as a result of the amendment of prior year income tax returns. The first nine months 2016 effective tax rate includes a $16 million one-time benefit for the restoration of tax basis for which depreciation deductions were previously limited and a $9 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of 2014 foreign income tax returns. The first nine months 2015 effective tax rate included a $6 million benefit from the settlement of non-U.S. income tax audits offset by an unfavorable foreign rate variance due to increased earnings in higher-tax jurisdictions.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7.
BORROWINGS
 
September 30,
 
December 31,
(Dollars in millions)
2016
 
2015
Borrowings consisted of:
 
 
 
2.4% notes due June 2017
$
499

 
$
998

6.30% notes due November 2018
166

 
166

5.5% notes due November 2019
249

 
249

2.7% notes due January 2020
795

 
794

4.5% notes due January 2021
249

 
249

3.6% notes due August 2022
890

 
896

1.50% notes due May 2023
607

 

7 1/4% debentures due January 2024
244

 
244

7 5/8% debentures due June 2024
54

 
54

3.8% notes due March 2025
792

 
791

7.60% debentures due February 2027
222

 
222

4.8% notes due September 2042
492

 
492

4.65% notes due October 2044
870

 
869

Credit facilities borrowings
300

 
550

Commercial paper borrowings
175

 
430

Capital leases
4

 
4

Total borrowings
6,608

 
7,008

Borrowings due within one year
675

 
431

Long-term borrowings
$
5,933

 
$
6,577


On May 26, 2016, the Company sold euro-denominated 1.50% notes due 2023 in the principal amount of €550 million ($614 million). Proceeds from the sale of the notes, net of transaction costs, were €544 million ($607 million) and were used for the early repayment of $500 million of 2.4% notes due June 2017 and repayment of other borrowings. Total consideration for the partial redemption of 2.4% notes due June 2017 was $507 million ($500 million for the principal amount and $7 million for the early redemption premium) and are reported as financing activities on the Unaudited Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $9 million for early debt extinguishment costs primarily attributable to the early redemption premium and related unamortized costs. The book value of the redeemed debt was $498 million. In conjunction with the euro-denominated public debt offering, the Company contemporaneously designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiaries. For further information, see Note 8, "Derivative and Non-Derivative Financial Instruments".

Credit Facility and Commercial Paper Borrowings

In connection with the 2014 acquisition of Taminco Corporation ("Taminco"), Eastman borrowed $1.0 billion under a five-year Term Loan. As of September 30, 2016, the Term Loan balance outstanding was $250 million with an interest rate of 1.77 percent. In second quarter 2016, $100 million of the Company's borrowings under the Term Loan were repaid using available cash. As of December 31, 2015, the Term Loan balance outstanding was $350 million with an interest rate of 1.67 percent. Borrowings under the Term Loan are subject to interest at varying spreads above quoted market rates.

The Company has access to a $1.25 billion revolving credit agreement (the "Credit Facility") that expires October 2021. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Commercial paper borrowings are classified as short-term. At September 30, 2016 and December 31, 2015, the Company had no outstanding borrowings under the Credit Facility. At September 30, 2016, the Company's commercial paper borrowings were $175 million with a weighted average interest rate of 0.76 percent. At December 31, 2015, the Company's commercial paper borrowings were $430 million with a weighted average interest rate of 0.80 percent.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company has access to a $250 million accounts receivable securitization agreement (the "A/R Facility") that expires April 2019. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. At September 30, 2016, the Company's borrowings under the A/R Facility were $50 million supported by trade receivables with an interest rate of 1.58 percent. In third quarter 2016, $150 million of the available amount under the A/R Facility was repaid. In first nine months 2016, $350 million of the available amount under the A/R Facility was repaid and $200 million borrowed. At December 31, 2015, the Company's borrowings under the A/R Facility were $200 million supported by trade receivables with an interest rate of 1.11 percent.

The Credit and A/R Facilities and the Term Loan 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 and A/R Facilities were $1,275 million and $842 million as of September 30, 2016 and December 31, 2015, respectively. Changes in available borrowings were due primarily to a decrease in commercial paper borrowings and borrowings under the A/R Facility. The Company would not have violated 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 September 30, 2016 and December 31, 2015, 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 2015 Annual Report on Form 10-K. The fair value for fixed-rate debt securities is based on current market prices and is classified as Level 1. The fair value for the Company's other borrowings, which relate to the Term Loan, the A/R Facility, and capital leases, equals the carrying value and is classified as Level 2.


 
 
 
Fair Value Measurements at September 30, 2016
(Dollars in millions)
 
Recorded Amount
September 30, 2016
 
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
 
$
5,933

 
$
6,410

 
$
6,107

 
$
303

 
$

 
 
 
 
 
Fair Value Measurements at December 31, 2015
(Dollars in millions)
 
Recorded Amount
December 31, 2015
 
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
 
$
6,577

 
$
6,647

 
$
6,094

 
$
553

 
$



12

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8.
DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS

Hedging Programs

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

For further information on hedging programs, see Note 10, "Derivatives", to the consolidated financial statements in Part II, Item 8 of the Company's 2015 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. All derivative instruments that are designated and qualify as fair value hedges are recorded on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The 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 second quarter 2016, the Company entered into a fixed-to-floating interest rate swap on a portion of the 3.8% notes due March 2025 in order to manage the Company's interest rate mix of fixed and variable rate debt. As of September 30, 2016, the total notional amount of the Company's interest rate swap was $75 million. As of December 31, 2015, there were no outstanding interest rate swap hedges that were designated as fair value hedges. There was no hedge ineffectiveness associated with the fair value hedges during third quarter and first nine months 2016 and 2015.

Fair Value Measurement of Derivatives Designated as Fair Value Hedging Instruments
(Dollars in millions)
 
Statement of Financial Position Location
 
Fair Value Measurement
Derivative Assets
 
 
September 30, 2016
 
December 31, 2015
Interest rate swap
 
Other noncurrent assets
 
$
1

 
$


Derivatives' Fair Value Hedging Relationships
 
 
Third Quarter
(Dollars in millions)
 
Consolidated Statement of Earnings Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/(Loss) Recognized in Income on Derivatives
Derivatives' Fair Value Hedging Relationships
 
 
2016
 
2015
Interest rate swaps
 
Net interest expense
 
$
2

 
$
3

 
 
First Nine Months
(Dollars in millions)
 
Consolidated Statement of Earnings Location of Gain/(Loss) Recognized in Income on Derivatives
 
Amount of Gain/(Loss) Recognized in Income on Derivatives
Derivatives' Fair Value Hedging Relationships
 
 
2016
 
2015
Interest rate swaps
 
Net interest expense
 
$
9

 
$
10



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 are attributable to a particular risk. All derivative instruments that are designated and qualify as a cash flow hedge are recorded on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The effective portion of the gain or loss on the derivative is reported as a component of "Other comprehensive income (loss), net of tax" ("OCI") located in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and reclassified into earnings as part of "Cost of sales" 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
 
 
September 30, 2016
 
December 31, 2015
Foreign Exchange Forward and Option Contracts (in millions):
 
 
 
 
 
EUR/USD (in EUR)
 
€438
 
€618
 
EUR/USD (in approximate USD equivalent)
 
$492
 
$689
 
JPY/USD (in JPY)
 
¥2,100
 
¥2,400
 
JPY/USD (in approximate USD equivalent)
 
$21
 
$20
Commodity Forward and Collar Contracts:
 
 
 
 
 
Feedstock (in million barrels)
 
14
 
22
 
Energy (in million million British thermal units)
 
26
 
32
Interest rate swaps for the future issuance of debt (in millions)
 
$500
 
$500

Fair Value Measurement of Derivatives Designated as Cash Flow Hedging Instruments
(Dollars in millions)
 
 

Fair Value Measurements Significant Other Observable Inputs
Derivative Assets
 
Statement of Financial Position Location

September 30, 2016

December 31, 2015
Commodity contracts
 
Other current assets

$
1


$

Commodity contracts
 
Other noncurrent assets

1



Foreign exchange contracts
 
Other current assets

41


65

Foreign exchange contracts
 
Other noncurrent assets

42


79

 
 
 

$
85


$
144

(Dollars in millions)
 
 
 
Fair Value Measurements Significant Other Observable Inputs
Derivative Liabilities
 
Statement of Financial Position Location
 
September 30, 2016
 
December 31, 2015
Commodity contracts
 
Payables and other current liabilities
 
$
100

 
$
194

Commodity contracts
 
Other long-term liabilities
 
119

 
242

Forward starting interest rate swap contracts
 
Payables and other current liabilities
 
76

 

Forward starting interest rate swap contracts
 
Other long-term liabilities
 

 
30

 
 
 
 
$
295

 
$
466



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Derivatives' Cash Flow Hedging Relationships
 
 
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
 
2016
 
2015
 
2016
 
2015
Commodity contracts
 
$
23

 
$
(6
)
 
Sales
 
$

 
$
1

 
 
 
 
 
 
Cost of Sales
 
(46
)
 
(74
)
Foreign exchange contracts
 
(13
)
 
(11
)
 
Sales
 
15

 
20

Forward starting interest rate swap contracts
 
2

 
(15
)
 
Net interest expense
 
(1
)
 
(1
)
 
 
$
12

 
$
(32
)
 
 
 
$
(32
)
 
$
(54
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
2016
 
2015
 
2016
 
2015
Commodity contracts
 
$
132

 
$
21

 
Sales
 
$

 
$
4

 
 
 
 
 
 
Cost of sales
 
(131
)
 
(152
)
Foreign exchange contracts
 
(38
)
 
16

 
Sales
 
45

 
63

Forward starting interest rate swap contracts
 
(25
)
 
(8
)
 
Net interest expense
 
(5
)
 
(5
)
 
 
$
69

 
$
29

 
 
 
$
(91
)
 
$
(90
)

Ineffective portions of raw material and energy hedges are immediately recognized in earnings within "Cost of sales" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. The Company recognized pre-tax losses for ineffectiveness of the commodity hedging portfolio of $1 million during both third quarter 2016 and 2015 and recognized $3 million in pre-tax losses during first nine months 2016. There was no hedge ineffectiveness associated with the interest rate and foreign exchange cash flow hedges during third quarter and first nine months 2016 and 2015.

Net Investment Hedges

Net investment hedges are defined as derivative or non-derivative instruments designated as and used to hedge the foreign currency exposure of the net investment in certain foreign operations. The effective portion of the gain or loss on the net investment hedge is reported as a component of "Change in cumulative translation adjustment" ("CTA") within OCI located in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Gains and losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

Contemporaneously with its sale on May 26, 2016 of euro-denominated 1.50% notes due 2023 in the principal amount of €550 million ($614 million), the Company designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiaries to protect the designated net investment against foreign currency fluctuations. As of September 30, 2016, the total notional value of the non-derivative net investment hedge was €543 million ($607 million). The designated foreign currency-denominated borrowings are included as part of "Long-term borrowings'" within the Unaudited Consolidated Statements of Financial Position.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the change in the unrealized loss on the net investment hedge instruments recognized as part of the CTA within OCI during third quarter and first nine months 2016 and 2015. There were no reclassifications to earnings or hedge ineffectiveness with these instruments during third quarter and first nine months 2016 and 2015.
 
 
Third Quarter
 
First Nine Months
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Change in unrealized loss in other comprehensive income
 
$
(3
)
 
$

 
$

 
$


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 OCI before taxes totaled losses of $267 million at September 30, 2016 and $386 million at September 30, 2015. If realized, $61 million net losses as of September 30, 2016 will be reclassified into earnings during the next 12 months.

The gains or losses on nonqualifying derivatives or derivatives that are not designated as hedges are marked to market and reported in "Other charges (income), net" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained 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 net losses on nonqualifying derivatives of $11 million during third quarter 2015 and net losses of $14 million and $23 million during the first nine months of 2016 and 2015, respectively.

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 2015 Annual Report on Form 10-K.

The following chart shows the gross financial assets and liabilities valued on a recurring basis. During the periods presented, there were no transfers between fair value hierarchy levels.
(Dollars in millions)
 
 
 
Fair Value Measurements at September 30, 2016
Description
 
September 30, 2016
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Derivative Assets
 
$
86

 
$

 
$
86

 
$

Derivative Liabilities
 
(295
)
 

 
(295
)
 

 
 
$
(209
)
 
$

 
$
(209
)
 
$

 
(Dollars in millions)
 
 
 
Fair Value Measurements at December 31, 2015
Description
 
December 31, 2015
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Derivative Assets
 
$
144

 
$

 
$
144

 
$

Derivative Liabilities
 
(466
)
 

 
(466
)
 

 
 
$
(322
)
 
$

 
$
(322
)
 
$



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

All of the Company's derivative assets and liabilities are currently classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs 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 minimal risk of nonperformance.

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 in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. Management 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 $85 million and a derivative in a net liability position of $294 million as of September 30, 2016. The Company does not have any cash collateral due under such agreements.

9.
RETIREMENT PLANS

Defined Benefit Pension Plans and Other Postretirement Benefit Plans

Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. In addition, Eastman provides 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 2015 Annual Report on Form 10-K.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Components of net periodic benefit (credit) cost were as follows:
 
Third Quarter
 
Pension Plans
 
Other Postretirement Benefit Plans
 
2016
 
2015
 
2016
 
2015
(Dollars in millions)
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
 
 
 
 
Components of net periodic benefit (credit) cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
9

 
$
3

 
$
10

 
$
3

 
$
2

 
$
2

Interest cost
18

 
5

 
21

 
7

 
7

 
9

Expected return on assets
(34
)
 
(7
)
 
(38
)
 
(9
)
 
(1
)
 
(1
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service credit, net
(1
)
 

 
(1
)
 

 
(11
)
 
(6
)
Mark-to-market pension and other postretirement benefits loss(1)

 
30

 

 

 

 

Net periodic benefit (credit) cost
$
(8
)
 
$
31

 
$
(8
)
 
$
1

 
$
(3
)
 
$
4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Nine Months
 
Pension Plans
 
Other Postretirement Benefit Plans
 
2016
 
2015
 
2016
 
2015
(Dollars in millions)
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
 
 
 
 
Components of net periodic benefit (credit) cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
29

 
$
9

 
$
29

 
$
11

 
$
5

 
$
6

Interest cost
55

 
17

 
65

 
20

 
21

 
29

Expected return on assets
(102
)
 
(23
)
 
(111
)
 
(28
)
 
(4
)
 
(4
)
Curtailment gain(2)

 

 

 
(7
)
 

 

Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service credit, net
(3
)
 

 
(3
)
 

 
(31
)
 
(18
)
Mark-to-market pension and other postretirement benefits loss(1)

 
30

 

 
2

 

 

Net periodic benefit (credit) cost
$
(21
)
 
$
33

 
$
(20
)
 
$
(2
)
 
$
(9
)
 
$
13


(1) 
In third quarter 2016, a change to a UK pension plan triggered an interim remeasurement of the plan obligation and resulted in a $30 million mark-to-market loss and in 2015 the closure of the Workington, UK acetate tow manufacturing site triggered an interim remeasurement of a UK pension plan obligation both included in Other in Note 18, "Segment Information".
(2) 
Gain in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing site.

The Company contributed $50 million and $90 million to its U.S. defined benefit pension plans in first nine months 2016 and 2015, respectively.

In third quarter 2016, the Company announced a change to a UK defined benefit pension plan which triggered an interim remeasurement of the plan obligation resulting in a mark-to-market ("MTM") loss of $30 million. The MTM loss was primarily due to a lower discount rate at the third quarter 2016 remeasurement date compared to December 31, 2015. The lower discount rate is reflective of changes in global market conditions and interest rates on high-grade corporate bonds.
In first quarter 2016, the Company changed the approach used to calculate service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans. The Company elected to calculate service and interest costs by applying the specific spot rates along the yield curve to the plans' projected cash flows. The change does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the MTM actuarial gain or loss which typically is recognized in the fourth quarter of each year or in any other quarters in which an interim remeasurement is triggered.


18

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10.
COMMITMENTS

Purchase Obligations and Lease Commitments
 
The Company had various purchase obligations at September 30, 2016, totaling $1.5 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 $259 million over a period of approximately 40 years. Of the total lease commitments, approximately 50 percent relate to real property, including office space, storage facilities, and land; approximately 40 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 totaled $125 million at September 30, 2016 and consist primarily of leases for railcars and the company aircraft mostly expiring in 2016 and 2017. Residual guarantee payments that become probable and estimable are accrued to rent expense over the remaining life of the applicable lease. Management's current expectation is that the likelihood of material residual guarantee payments is remote.

Other Guarantees

Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, and other parties when the Company undertakes an obligation to guarantee the performance of others, if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating 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 up to 30 years with maximum potential future payments of approximately $35 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.


19

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11.
ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS

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 post-closure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2015 Annual Report on Form 10-K. The Company's total reserve for environmental contingencies was $325 million and $336 million at September 30, 2016 and December 31, 2015, respectively. At both September 30, 2016 and December 31, 2015, this reserve included $8 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.

The Company's total environmental reserve that management believes to be probable and estimable for environmental contingencies, including remediation costs and asset retirement obligations, is included as part of "Payables and other current liabilities" and "Other long-term liabilities" in the Unaudited Consolidated Statements of Financial Position as follows:
(Dollars in millions)
September 30, 2016
 
December 31, 2015
Environmental contingent liabilities, current
$
30

 
$
35

Environmental contingent liabilities, long-term
295

 
301

Total
$
325

 
$
336


Remediation

Estimated future environmental expenditures for remediation costs ranged from the minimum or best estimate of $300 million to the maximum of $510 million and from the minimum or best estimate of $308 million to the maximum of $516 million at September 30, 2016 and December 31, 2015, respectively. The maximum estimated future costs are considered to be reasonably possible and include the amounts accrued at both September 30, 2016 and December 31, 2015. 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.

Reserves for environmental remediation include liabilities expected to be paid within approximately 30 years. The amounts charged to pre-tax earnings for environmental remediation and related charges are included within "Cost of sales" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Changes in the reserves for environmental remediation liabilities during first nine months 2016 are summarized below:
(Dollars in millions)
Environmental Remediation Liabilities
Balance at December 31, 2015
$
308

Changes in estimates recognized in earnings and other
10

Cash reductions
(18
)
Balance at September 30, 2016
$
300



20

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Closure/Post-Closure

An asset retirement obligation is an obligation for the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying value of the long-lived assets and depreciated over their useful life. Environmental asset retirement obligations consist primarily of closure and post-closure costs. For sites that have environmental asset retirement obligations, the best estimate accrued to date over the sites' estimated useful lives for these environmental asset retirement obligation costs was $25 million and $28 million at September 30, 2016 and December 31, 2015, respectively. 

Other

The Company also has contractual asset retirement obligations not associated with environmental liabilities. Eastman's non-environmental asset retirement obligations are primarily associated with the future closure of leased manufacturing assets at Pace, Florida and Oulu, Finland. These accrued non-environmental asset retirement obligations were $46 million at both September 30, 2016 and December 31, 2015.

12.
LEGAL MATTERS

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


21

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13.
STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders' equity for first nine months 2016 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, 2015
$
2

 
$
1,863

 
$
5,146

 
$
(390
)
 
$
(2,680
)
 
$
3,941

 
$
80

 
$
4,021

Net Earnings

 

 
738

 

 

 
738

 
3

 
741

Cash Dividends Declared (1)
($1.38 per share)

 

 
(204
)
 

 

 
(204
)
 

 
(204
)
Other Comprehensive Income (2)

 

 

 
42

 

 
42

 

 
42

Share-Based Compensation Expense (3)

 
27

 

 

 

 
27

 

 
27

Stock Option Exercises

 
17

 

 

 

 
17

 

 
17

Share Repurchase

 

 

 

 
(120
)
 
(120
)
 

 
(120
)
Distributions to Noncontrolling Interest

 

 

 

 

 

 
(8
)
 
(8
)
Balance at September 30, 2016
$
2

 
$
1,907

 
$
5,680

 
$
(348
)
 
$
(2,800
)
 
$
4,441

 
$
75

 
$
4,516


(1) 
Cash dividends declared includes cash dividends paid and dividends declared, but unpaid.
(2) 
See Note 1, "Basis of Presentation" regarding correction of prior period foreign currency translation.
(3) 
Share-based compensation expense is the fair value of share-based awards.

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, 2014
$
(68
)
 
$
61

 
$
(269
)
 
$
(1
)
 
$
(277
)
Period change
(216
)
 
68

 
35

 

 
(113
)
Balance at December 31, 2015
(284
)
 
129

 
(234
)
 
(1
)
 
(390
)
Period change (1)
(6
)
 
(21
)
 
69

 

 
42

Balance at September 30, 2016
$
(290
)
 
$
108

 
$
(165
)
 
$
(1
)
 
$
(348
)

(1) 
See Note 1, "Basis of Presentation" regarding correction of prior period foreign currency translation.

Amounts of other comprehensive income (loss) are presented net of applicable taxes. The Company recognizes deferred income taxes on the cumulative translation adjustment related to branch operations and income from other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are provided on the cumulative translation adjustment of other 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.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Components of other comprehensive income recognized in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings are presented below, before tax and net of tax effects:
 
Third Quarter
 
2016
 
2015
(Dollars in millions)
Before Tax
 
Net of Tax
 
Before Tax
 
Net of Tax
Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in cumulative translation adjustment (1)
$
(42
)
 
$
(42
)
 
$
(47
)
 
$
(47
)
Defined benefit pension and other postretirement benefit plans:
 
 
 
 
 
 
 

Amortization of unrecognized prior service credits included in net periodic costs (2)
(12
)
 
(7
)
 
(7
)
 
(4
)
Derivatives and hedging: (3)
 
 
 
 
 
 
 

Unrealized loss during period
(11
)
 
(7
)
 
(107
)
 
(66
)
Reclassification adjustment for losses included in net income, net
30

 
19

 
55

 
34

Total other comprehensive income (loss)
$
(35
)
 
$
(37
)
 
$
(106
)
 
$
(83
)
 
 
 
 
 
 
 
 
 
First Nine Months
 
2016
 
2015
(Dollars in millions)
Before Tax
 
Net of Tax
 
Before Tax
 
Net of Tax
Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in cumulative translation adjustment (1)
$
(6
)
 
$
(6
)
 
$
(183
)
 
$
(183
)
Defined benefit pension and other postretirement benefit plans:
 
 
 
 
 
 
 

Amortization of unrecognized prior service credits included in net periodic costs (2)
(34
)
 
(21
)
 
(24
)
 
(15
)
Derivatives and hedging:(3)
 
 
 
 
 
 
 

Unrealized gain (loss) during period
21

 
13

 
(44
)
 
(27
)
Reclassification adjustment for losses included in net income, net
90

 
56

 
90

 
56

Total other comprehensive income (loss)
$
71

 
$
42

 
$
(161
)
 
$
(169
)

(1) 
See Note 1, "Basis of Presentation" regarding correction of prior period foreign currency translation.
(2) 
Included in the calculation of net periodic benefit costs for pension and other postretirement benefit plans. See Note 9, "Retirement Plans".
(3) 
For additional information regarding the impact of reclassifications into earnings, see Note 8, "Derivative and Non-Derivative Financial Instruments".


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14.
EARNINGS AND DIVIDENDS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share ("EPS"):
 
Third Quarter
 
First Nine Months
(In millions, except per share amounts)
2016
 
2015
 
2016
 
2015
Numerator
 
 
 
 
 
 
 
Earnings attributable to Eastman:
 
 
 
 
 
 
 
Earnings, net of tax
$
232

 
$
256

 
$
738

 
$
724

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average shares used for basic EPS
147.2

 
148.6

 
147.6

 
148.6

Dilutive effect of stock options and other awards
1.0

 
1.2

 
1.0

 
1.2

Weighted average shares used for diluted EPS
148.2

 
149.8

 
148.6

 
149.8

 
 
 
 
 
 
 
 
(Calculated using whole dollars and shares)
 
 
 
 
 
 
 
EPS
 
 
 
 
 
 
 
Basic
$
1.57

 
$
1.73

 
$
5.00

 
$
4.87

Diluted
$
1.56

 
$
1.71

 
$
4.96

 
$
4.83


In third quarter and first nine months 2016, options to purchase 1,437,767 and 1,076,143 shares of common stock, respectively, 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 2016 reflect the impact of share repurchases of 1,128,869 and 1,760,940, respectively.

In third quarter and first nine months 2015, options to purchase 773,643 and 264,043 shares of common stock, respectively, 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 2015 reflect the impact of share repurchases of 221,578 and 656,578, respectively.

The Company declared cash dividends of $0.46 and $0.40 per share in third quarter 2016 and 2015, respectively, and $1.38 and $1.20 per share in first nine months 2016 and 2015, respectively.

15.
ASSET IMPAIRMENTS AND RESTRUCTURING
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2016
 
2015
 
2016
 
2015
Severance
$
30

 
$
3

 
$
30

 
$
17

Gain on sale of assets

 

 
(2
)
 

Intangible asset and goodwill impairments

 
18

 

 
22

Fixed asset impairments

 

 

 
85

Site closure and restructuring charges

 

 

 
6

Total
$
30

 
$
21

 
$
28

 
$
130


As part of the Company's previously announced plan to reduce costs primarily in 2017, the Company recognized restructuring charges of $30 million for severance in third quarter 2016.

In first nine months 2016, there was a gain of $2 million in the AFP segment for the sale of previously impaired assets at the Crystex® R&D site in France.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As a result of the annual impairment testing of indefinite-lived intangible assets, in third quarter and first nine months 2015 the Company recognized intangible asset impairments of $18 million in the AM segment primarily to reduce the carrying value of the V-Kool® window films products trade name to the estimated fair value. The estimated fair value was determined using an income approach, specifically, the relief from royalty method. The impairment resulted from a decrease in projected revenues since the tradename was acquired from Solutia in 2012. The decrease in projected revenues was primarily due to the Asian economic downturn impacting car sales growth in those geographic markets.

In first nine months 2015, net asset impairments and restructuring charges included $81 million of fixed asset impairments and $14 million of restructuring charges, including severance, in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing site which was substantially completed in 2015. Additionally, in first nine months 2015, management decided not to continue a growth initiative that was reported in "Other". This resulted in the Company recognizing fixed asset and goodwill impairments of $8 million and restructuring charges of $4 million. Additionally, during first nine months 2015, net asset impairments and restructuring charges included $4 million of restructuring charges primarily for severance associated with the integration of Taminco.

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

The following table summarizes the changes in asset impairments and restructuring charges and gains, the non-cash reductions attributable to asset impairments, and the cash reductions in restructuring reserves for severance costs and site closure costs paid in first nine months 2016 and full year 2015:

(Dollars in millions)
Balance at January 1, 2016
 
Provision/ Adjustments
 
Non-cash Reductions
 
Cash Reductions
 
Balance at September 30, 2016
Non-cash charges
$

 
$

 
$

 
$

 
$

Severance costs
55

 
30

 

 
(32
)
 
53

Site closure and restructuring costs
11

 
(2
)
 
1

 
(2
)
 
8

Total
$
66

 
$
28

 
$
1

 
$
(34
)
 
$
61



(Dollars in millions)
Balance at January 1, 2015
 
Provision/ Adjustments
 
Non-cash Reductions
 
Cash Reductions
 
Balance at December 31, 2015
Non-cash charges
$

 
$
107

 
$
(107
)
 
$

 
$

Severance costs
13

 
67

 
1

 
(26
)
 
55

Site closure and restructuring costs
15

 
9

 
3

 
(16
)
 
11

Total
$
28

 
$
183

 
$
(103
)
 
$
(42
)
 
$
66


Severance payments in first nine months 2016 relate primarily to fourth quarter 2015 actions taken to reduce non-operations workforce. Substantially all severance costs remaining are expected to be applied to the reserves within one year.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

16.
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 2016 and 2015, $7 million and $9 million, respectively, of compensation expense before tax were recognized in "Selling, general and administrative expenses" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for all share-based awards. The impact on both third quarter 2016 and 2015 net earnings of $5 million is net of deferred tax expense related to share-based award compensation for each period.

In first nine months 2016 and 2015, $27 million and $30 million, respectively, of compensation expense before tax were recognized in "Selling, general and administrative expenses" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for all share-based awards. The impact on first nine months 2016 and 2015 net earnings of $17 million and $18 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 2015 Annual Report on Form 10-K.

17.
SUPPLEMENTAL CASH FLOW INFORMATION

Included in the line item "Other items, net" of the "Operating activities" section of the Unaudited Consolidated Statements of Cash Flows are the following changes to Unaudited Consolidated Statement of Financial Position:
(Dollars in millions)
First Nine Months
 
2016
 
2015
Other current assets
$
(25
)