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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period endedMarch 31, 2021
 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)
Delaware62-1539359
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification no.)
  
200 South Wilcox Drive 
KingsportTennessee37662
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (423) 229-2000

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per share EMNNew York Stock Exchange
1.50% Notes Due 2023EMN23New York Stock Exchange
1.875% Notes Due 2026EMN26New York Stock Exchange

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   No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   No  

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
ClassNumber of Shares Outstanding at March 31, 2021
Common Stock, par value $0.01 per share136,323,522
--------------------------------------------------------------------------------------------------------------------------------
1

TABLE OF CONTENTS
ITEM PAGE


PART I.  FINANCIAL INFORMATION

 
   
 
 
 
 
   
   
   

PART II.  OTHER INFORMATION

   

SIGNATURES

 

2

FORWARD-LOOKING STATEMENTS

Certain statements made or incorporated by reference 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 ("Eastman" or the "Company") 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", "forecasts", "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 and opportunities (including potential risks associated with physical impacts of climate change and related voluntary and regulatory carbon requirements); exposure to and effects of hedging raw material and energy prices and costs; foreign currencies and interest rates; disruption or interruption of operations and of raw material or energy supply; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin and sales; pending and future legal proceedings; earnings, cash flow, dividends, stock repurchases and other expected financial results, events, decisions, and conditions; expectations, strategies, and plans for individual assets and products, businesses, and operating segments, as well as for the whole of Eastman; cash sources and 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, benefits from the integration of, and expected business and financial performance of acquired businesses as well as the subsequent impairment assessments of acquired long-lived assets; strategic, technology, and product innovation 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 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 known material factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements are identified and discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part I, Item 2 of this Quarterly Report. Other factors, risks or uncertainties of which management is not aware, or presently deems immaterial, could also cause actual results to differ materially from those in the forward-looking statements.

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. Investors are advised, however, to consult any further public Company disclosures (such as filings with the Securities and Exchange Commission, Company press releases, or pre-noticed public investor presentations) on related subjects.

3

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
 First Quarter
(Dollars in millions, except per share amounts)20212020
Sales$2,409 $2,241 
Cost of sales1,811 1,664 
Gross profit598 577 
Selling, general and administrative expenses184 160 
Research and development expenses58 61 
Asset impairments and restructuring charges, net7 14 
Other components of post-employment (benefit) cost, net(36)(30)
Other (income) charges, net(4)4 
Earnings before interest and taxes389 368 
Net interest expense50 52 
Earnings before income taxes339 316 
Provision for income taxes62 56 
Net earnings277 260 
Less: Net earnings attributable to noncontrolling interest3 2 
Net earnings attributable to Eastman$274 $258 
Basic earnings per share attributable to Eastman$2.01 $1.90 
Diluted earnings per share attributable to Eastman$1.99 $1.89 

Comprehensive Income
Net earnings including noncontrolling interest$277 $260 
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment2 19 
Defined benefit pension and other postretirement benefit plans:
Amortization of unrecognized prior service credits(7)(7)
Derivatives and hedging:
Unrealized gain (loss) during period25 7 
Reclassification adjustment for (gains) losses included in net income, net5 (2)
Total other comprehensive income (loss), net of tax25 17 
Comprehensive income including noncontrolling interest302 277 
Less: Comprehensive income attributable to noncontrolling interest3 2 
Comprehensive income attributable to Eastman$299 $275 
Retained Earnings  
Retained earnings at beginning of period$8,080 $7,965 
Net earnings attributable to Eastman274 258 
Cash dividends declared(94)(90)
Retained earnings at end of period$8,260 $8,133 

The accompanying notes are an integral part of these consolidated financial statements.
4

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31,December 31,
(Dollars in millions, except per share amounts)20212020
Assets
Current assets
Cash and cash equivalents$540 $564 
Trade receivables, net of allowance for doubtful accounts1,229 1,033 
Miscellaneous receivables440 482 
Inventories1,505 1,379 
Other current assets83 83 
Total current assets3,797 3,541 
Properties
Properties and equipment at cost13,527 13,531 
Less: Accumulated depreciation8,061 7,982 
Net properties5,466 5,549 
Goodwill4,446 4,465 
Intangible assets, net of accumulated amortization1,741 1,792 
Other noncurrent assets745 736 
Total assets$16,195 $16,083 
Liabilities and Stockholders' Equity
Current liabilities
Payables and other current liabilities$1,692 $1,689 
Borrowings due within one year324 349 
Total current liabilities2,016 2,038 
Long-term borrowings5,200 5,269 
Deferred income tax liabilities855 848 
Post-employment obligations1,116 1,143 
Other long-term liabilities689 677 
Total liabilities9,876 9,975 
Stockholders' equity
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 221,457,969 and 220,641,506 for 2021 and 2020, respectively)2 2 
Additional paid-in capital2,219 2,174 
Retained earnings8,260 8,080 
Accumulated other comprehensive income (loss)(248)(273)
10,233 9,983 
Less: Treasury stock at cost (85,185,245 shares for 2021 and 84,830,450 shares for 2020)4,000 3,960 
Total Eastman stockholders' equity6,233 6,023 
Noncontrolling interest86 85 
Total equity6,319 6,108 
Total liabilities and stockholders' equity$16,195 $16,083 

The accompanying notes are an integral part of these consolidated financial statements.
5

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Three Months
(Dollars in millions)20212020
Operating activities
Net earnings$277 $260 
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization149 139 
Asset impairment charges 9 
Provision for (benefit from) deferred income taxes2 12 
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
(Increase) decrease in trade receivables(211)(72)
(Increase) decrease in inventories(144)(18)
Increase (decrease) in trade payables197 (104)
Pension and other postretirement contributions (in excess of) less than expenses(53)(52)
Variable compensation (in excess of) less than expenses(78)(74)
Other items, net77 71 
Net cash provided by operating activities216 171 
Investing activities
Additions to properties and equipment(91)(99)
Additions to capitalized software(6)(2)
Other items, net(2) 
Net cash used in investing activities(99)(101)
Financing activities
Net increase (decrease) in commercial paper and other borrowings(25)539 
Dividends paid to stockholders(94)(90)
Treasury stock purchases (40)(30)
Other items, net22 (11)
Net cash (used in) provided by financing activities(137)408 
Effect of exchange rate changes on cash and cash equivalents(4)(2)
Net change in cash and cash equivalents(24)476 
Cash and cash equivalents at beginning of period564 204 
Cash and cash equivalents at end of period$540 $680 

The accompanying notes are an integral part of these consolidated financial statements.
6


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Page

7


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company ("Eastman" or the "Company") in accordance and consistent with the accounting policies stated in the Company's 2020 Annual Report on Form 10-K, and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of that report, with the exception of recently adopted accounting standards noted below. The December 31, 2020 financial position data included herein was derived from the consolidated financial statements included in the 2020 Annual Report on Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP").

In the opinion of management, the unaudited consolidated financial statements include all normal recurring adjustments necessary for fair statement of the interim financial information in conformity with GAAP. These statements contain 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 unaudited consolidated financial statements and accompanying footnotes to conform to current period presentation.

Recently Adopted Accounting Standards

Accounting Standards Update ("ASU") ASU 2019-12 Income Taxes - Simplifying the Accounting for Income Taxes: On January 1, 2021, Eastman adopted this update which is a part of the Financial Accounting Standards Board's ("FASB") initiative to reduce complexity in accounting standards. Adoption methods varied based on the specific tax items impacted. The adoption of this standard did not result in a material impact to the Company's financial statements and related disclosures.

ASU 2020-01 Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815: On January 1, 2021, Eastman prospectively adopted this update which provides clarification that an entity should consider observable transactions that require the application or discontinuance of the equity method of accounting for the purposes of applying the measurement alternative and clarification that certain forward contracts and purchased options to purchase securities that, upon settlement, would be accounted for under the equity method of accounting. The adoption of this standard did not result in a material impact to the Company's financial statements and related disclosures.

ASU 2021-01 Reference Rate Reform (Topic 848): In January 2021, the FASB issued this update to clarify that certain optional expedients and exceptions under this topic for contract modifications and hedge accounting apply to derivatives instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform (the global financial markets transition in contracts, hedging relationships, and other transactions away from referencing the London Interbank Offered Rate (LIBOR) and other interbank offered rates and toward new reference rates). This update was effective immediately upon release. As the Company has not experienced any reference rate reform modification to date, this update will be adopted on a prospective basis in the event of such modifications.

Accounting Standards Issued But Not Adopted as of March 31, 2021

None applicable to Eastman.

8


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Working Capital Management and Off Balance Sheet Arrangements

The Company has an off balance sheet, uncommitted accounts receivable factoring program under which entire invoices may be sold, without recourse, to third-party financial institutions. Under these agreements, the Company sells the invoices at face value, less a transaction fee, which substantially equals the carrying value and fair value with no gain or loss recognized, and no credit loss exposure is retained. Available capacity under these agreements, which the Company uses as a routine source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. In addition, certain agreements also require that the Company continue to service, administer, and collect the sold accounts receivable at market rates. The total amounts sold in first quarter 2021 and 2020 were $289 million and $457 million, respectively.

2.INVENTORIES
 March 31,December 31,
(Dollars in millions)20212020
Finished goods$944 $891 
Work in process214 203 
Raw materials and supplies586 511 
Total inventories at FIFO or average cost1,744 1,605 
Less: LIFO reserve239 226 
Total inventories$1,505 $1,379 

Inventories valued on the last-in, first-out ("LIFO") method were approximately 45 percent and 50 percent of total inventories at March 31, 2021 and December 31, 2020, respectively. In 2020, a $13 million LIFO decrement was recognized due to inventory reduction actions, resulting in an increase to "Cost of sales" in the Audited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and a decrease to "Inventories" in the Audited Consolidated Statements of Financial Position.

3.PAYABLES AND OTHER CURRENT LIABILITIES
 March 31,December 31,
(Dollars in millions)20212020
Trade creditors$976 $799 
Accrued payroll and variable compensation143 228 
Accrued taxes143 178 
Post-employment obligations106 138 
Other324 346 
Total payables and other current liabilities$1,692 $1,689 

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

4.INCOME TAXES
 First Quarter
(Dollars in millions)20212020
$%$%
Provision for income taxes and tax rate$62 18 %$56 18 %

First quarter 2021 and 2020 effective tax rates included adjustments to the tax provision to reflect adjustments of prior years' income tax returns.

9


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2021 and December 31, 2020, Eastman had $256 million and $257 million, respectively, in unrecognized tax benefits. At March 31, 2021, it is reasonably possible that, as a result of the resolution of federal, state, and foreign examinations and appeals, and the expiration of various statutes of limitation, the total amounts of unrecognized tax benefits could decrease within the next 12 months by up to $70 million.

Income tax incentives, in the form of tax holidays, have been granted to the Company in certain jurisdictions to attract investment and encourage industrial development. The expiration of these tax holidays varies by country. The tax holidays are conditional on the Company meeting certain requirements, including employment and investment thresholds; determination of compliance with these conditions may be subject to challenge by tax authorities in those jurisdictions. No individual tax holiday had a material impact to the Company's earnings in first quarter 2021 or 2020.

5.BORROWINGS
 March 31,December 31,
(Dollars in millions)20212020
Borrowings consisted of:
3.5% notes due December 2021$299 $299 
3.6% notes due August 2022745 744 
1.50% notes due May 2023 (1)
878 919 
7 1/4% debentures due January 2024198 198 
7 5/8% debentures due June 202443 43 
3.8% notes due March 2025699 701 
1.875% notes due November 2026 (1)
582 609 
7.60% debentures due February 2027195 195 
4.5% notes due December 2028493 493 
4.8% notes due September 2042493 493 
4.65% notes due October 2044874 874 
Commercial paper and short-term borrowings25 50 
Total borrowings5,524 5,618 
Borrowings due within one year324 349 
Long-term borrowings$5,200 $5,269 
(1)The carrying value of the euro-denominated 1.50% notes due May 2023 and 1.875% notes due November 2026 will fluctuate with changes in the euro exchange rate. The carrying value of these euro-denominated borrowings have been designated as non-derivative net investment hedges of a portion of the Company's net investments in euro functional-currency denominated subsidiaries to offset foreign currency fluctuations.

Credit Facility and Commercial Paper Borrowings

The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring October 2023. 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 available liquidity for general corporate purposes and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. At March 31, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility. At March 31, 2021, the Company's commercial paper borrowings were $25 million with a weighted average interest rate of 0.25 percent. At December 31, 2020, the Company's commercial paper borrowings were $50 million with a weighted average interest rate of 0.25 percent.

The Credit Facility contains customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. In second quarter 2020, the Company amended the Credit Facility maximum debt covenants to reflect the higher cash balance to enhance liquidity due to, and the expected negative impact on operating results of, the COVID-19 coronavirus global pandemic ("COVID-19") and added a new restrictive covenant prohibiting stock repurchases until June 30, 2021 in the event certain financial ratios are exceeded. The Company was in compliance with all applicable covenants at both March 31, 2021 and December 31, 2020.

10


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Borrowings

Eastman has classified its total borrowings at March 31, 2021 and December 31, 2020 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 2020 Annual Report on Form 10-K. The fair value for fixed-rate debt securities is based on quoted market prices for the same or similar debt instruments and is classified as Level 2. The fair value for the Company's other borrowings, primarily under commercial paper, equals the carrying value and is classified as Level 2. At March 31, 2021 and December 31, 2020, the fair value of total borrowings was $6.153 billion and $6.449 billion, respectively. The Company had no borrowings classified as Level 3 as of March 31, 2021 and December 31, 2020.

6.DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS

Overview of Hedging Programs

Eastman 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 financial 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 9, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2020 Annual Report on Form 10-K.

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. The derivative instruments that are designated and qualify as a cash flow hedge are reported 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 change in the hedge instrument is reported as a component of Accumulated other comprehensive income (loss) ("AOCI") located in the Unaudited Consolidated Statements of Financial Position and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from cash flow hedges are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows.

In first, second, and third quarters 2020, Eastman entered into forward-starting interest rate swaps with a notional amount of $25 million in each period to mitigate the risk of variability in interest rates for an expected long-term debt issuance by August 2022. These swaps were designated as cash flow hedges and will be settled upon debt issuance. The total outstanding forward starting swaps as of March 31, 2021 was $75 million.

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. The derivative instruments that are designated and qualify as fair value hedges are recognized 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 fair value of the underlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for qualifying fair value hedges is recognized in earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from fair value hedges are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows.

11


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 investments in certain foreign operations. The net of the change in the hedge instrument and item being hedged for qualifying net investment hedges is reported as a component of the "Cumulative Translation Adjustment" ("CTA") within AOCI in the Unaudited Consolidated Statements of Financial Position. Cash flows from the CTA component are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows. Recognition in earnings of amounts previously recognized in CTA is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. In the event of a complete or substantially complete liquidation of the net investment, cash flows from net investment hedges are classified as investing activities in the Unaudited Consolidated Statements of Cash Flows.

For derivative cross-currency interest rate swap net investment hedges, gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in CTA within AOCI and recognized in earnings through the periodic swap interest accruals. The cross-currency interest rate swaps designated as net investment hedges are included as part of "Other long-term liabilities", "Other noncurrent assets", "Payables and other current liabilities", or "Other current assets" within the Unaudited Consolidated Statements of Financial Position. Cash flows from excluded components are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows.

In September 2020, the Company entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €152 million ($180 million) maturing December 2028.

Summary of Financial Position and Financial Performance of Hedging Instruments

The following table presents the notional amounts outstanding at March 31, 2021 and December 31, 2020 associated with Eastman's hedging programs.
Notional OutstandingMarch 31, 2021December 31, 2020
Derivatives designated as cash flow hedges:
Foreign Exchange Forward and Option Contracts (in millions)
EUR/USD (in EUR)483521
Commodity Forward and Collar Contracts
Energy (in million british thermal units)9 17 
Interest rate swaps for the future issuance of debt (in millions)$75$75
Derivatives designated as fair value hedges:
Fixed-for-floating interest rate swaps (in millions)$75$75
Derivatives designated as net investment hedges:
Cross-currency interest rate swaps (in millions)
EUR/USD (in EUR)853853
Non-derivatives designated as net investment hedges:
Foreign Currency Net Investment Hedges (in millions)
EUR/USD (in EUR)1,2451,245

12


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements

All 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 that 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 transaction counterparties to validate the accuracy of its standard pricing models. The Company had no derivatives classified as Level 3 as of March 31, 2021 and December 31, 2020. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance, and the Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an ongoing basis. The Company did not recognize a credit loss during first quarter 2021 or 2020.

All 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. The Company does not have any cash collateral due under such agreements.

13


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has elected to present derivative contracts on a gross basis within the Unaudited Consolidated Statements of Financial Position. The following table presents the financial assets and liabilities valued on a recurring and gross basis and includes where the financial assets and liabilities are within the Unaudited Consolidated Statements of Financial Position as of March 31, 2021 and December 31, 2020.

The Financial Position and Fair Value Measurements of Hedging Instruments on a Gross Basis
(Dollars in millions) 
Derivative TypeStatements of Financial
Position Classification
March 31, 2021
Level 2
December 31, 2020
Level 2
Derivatives designated as cash flow hedges:   
Commodity contractsOther current assets$1 $1 
Foreign exchange contractsOther current assets3  
Foreign exchange contractsOther noncurrent assets2  
Forward starting interest rate swap contractsOther noncurrent assets8 1 
Derivatives designated as fair value hedges:
Fixed-for-floating interest rate swapOther current assets 1 
Fixed-for-floating interest rate swapOther noncurrent assets2 4 
Derivatives designated as net investment hedges:
Cross-currency interest rate swapsOther noncurrent assets43 40 
Total Derivative Assets$59 $47 
Derivatives designated as cash flow hedges:
Commodity contractsPayables and other current liabilities$ $6 
Foreign exchange contractsPayables and other current liabilities6 21 
Foreign exchange contractsOther long-term liabilities3 14 
Derivatives designated as net investment hedges:
Cross-currency interest rate swapsOther long-term liabilities23 51 
Total Derivative Liabilities$32 $92 
Total Net Derivative Assets (Liabilities) $27 $(45)

In addition to the fair value associated with derivative instruments designated as cash flow hedges, fair value hedges, and net investment hedges noted in the table above, the Company had non-derivative instruments designated as foreign currency net investment hedges with a carrying value of $1.5 billion at both March 31, 2021 and December 31, 2020, respectively. The designated foreign currency-denominated borrowings are included as part of "Long-term borrowings" within the Unaudited Consolidated Statements of Financial Position.

For additional fair value measurement information, see Note 1, "Significant Accounting Policies", and Note 9, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2020 Annual Report on Form 10-K.

14


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2021 and December 31, 2020, the following amounts were included in the Unaudited Consolidated Statements of Financial Position related to cumulative basis adjustments for fair value hedges.
(Dollars in millions)Carrying amount of the hedged liabilitiesCumulative amount of fair value hedging loss adjustment included in the carrying amount of the hedged liability
Line item in the Unaudited Consolidated Statements of Financial Position in which the hedged item is includedMarch 31, 2021December 31, 2020March 31, 2021December 31, 2020
Long-term borrowings (1)
$771 $772 $(2)$(1)
(1)At March 31, 2021 and December 31, 2020, the cumulative amount of fair value hedging loss adjustment remaining for hedged liabilities for which hedge accounting has been discontinued was $4 million and $5 million, respectively.

The following table presents the effect of the Company's hedging instruments on "Other comprehensive income (loss), net of tax" ("OCI") and financial performance for first quarter 2021 and 2020.
Change in amount of after tax gain (loss) recognized in OCI on derivativesPre-tax amount of gain (loss) reclassified from OCI into earnings
(Dollars in millions)First QuarterFirst Quarter
Hedging Relationships2021202020212020
Derivatives in cash flow hedging relationships:
Commodity contracts$1 $(9)$ $(1)
Foreign exchange contracts23 13 (5)6 
Forward starting interest rate and treasury lock swap contracts7 1 (2)(2)
Non-derivatives in net investment hedging relationships (pre-tax):
Net investment hedges 69 33 — — 
Derivatives in net investment hedging relationships (pre-tax):
Cross-currency interest rate swaps42 18 — — 
Cross-currency interest rate swaps excluded component (11)41 — — 

15


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the effect of fair value and cash flow hedge accounting on the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for first quarter 2021 and 2020.
Location and Amount of Gain or (Loss) Recognized in Earnings from Fair Value and Cash Flow Hedging Relationships
First Quarter
20212020
(Dollars in millions)SalesCost of SalesNet Interest ExpenseSalesCost of SalesNet Interest Expense
Total amounts of income and expense line items presented in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in which the effects of fair value or cash flow hedges are recognized$2,409 $1,811 $50 $2,241 $1,664 $52 
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships:
Interest contracts (fixed-for-floating interest rate swaps):
Hedged items  
Derivatives designated as hedging instruments  
Gain or (loss) on cash flow hedging relationships:
Interest contracts (forward starting interest rate and treasury lock swap contracts):
Amount reclassified from AOCI into earnings(2)(2)
Commodity Contracts:
Amount reclassified from AOCI into earnings (1)
Foreign Exchange Contracts:
Amount reclassified from AOCI into earnings(5)6 

The Company enters into foreign exchange derivatives denominated in multiple currencies which are transacted and settled in the same quarter. These derivatives are not designated as hedges due to the short-term nature and the gains or losses on these derivatives are marked-to-market in line item "Other (income) charges, net" of the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. As a result of these derivatives, the Company recognized a net gain of $5 million and $7 million during first quarter 2021 and 2020, respectively.

Pre-tax monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in AOCI included net losses of $129 million and $270 million at March 31, 2021 and December 31, 2020, respectively. Losses in AOCI decreased between March 31, 2021 and December 31, 2020 primarily as a result of a decrease in foreign currency exchange rates associated with the euro. If recognized, approximately $17 million in pre-tax losses, as of March 31, 2021, would be reclassified into earnings during the next 12 months.

7.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 life insurance for eligible retirees hired prior to January 1, 2007. The Company provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for eligible Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. Costs recognized for these benefits are estimated amounts, which may change as actual costs for the year are determined.

For additional information regarding retirement plans, see Note 10, "Retirement Plans", to the consolidated financial statements in Part II, Item 8 of the Company's 2020 Annual Report on Form 10-K.
16


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Components of net periodic benefit (credit) cost were as follows:
First Quarter
 Pension PlansOther Postretirement Benefit Plans
2021202020212020
(Dollars in millions)U.S.Non-U.S.U.S.Non-U.S.
Service cost$7 $4 $7 $4 $ $ 
Interest cost9 3 14 4 3 5 
Expected return on assets(32)(9)(34)(8)(1)(1)
Amortization of:
Prior service credit, net    (9)(10)
Net periodic benefit (credit) cost$(16)$(2)$(13)$ $(7)$(6)

8.LEASES AND OTHER COMMITMENTS

Leases

There are two types of leases: finance and operating. Both types of leases have associated right-to-use assets and lease liabilities that are valued at the present value of the lease payments and recognized on the Unaudited Consolidated Statements of Financial Position. The discount rate used in the measurement of a right-to-use asset and lease liability is the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, the collateralized incremental borrowing rate is used. The Company elected the accounting policy not to apply the recognition and measurement requirements to short-term leases with a term of 12 months or less and do not include a bargain purchase option.

The Company has operating leases, as a lessee, with customary terms that do not include: significant variable lease payments; significant reasonably certain extensions or options required to be included in the lease term; restrictions; or other covenants for real property, rolling stock, and machinery and equipment. Real property leases primarily consist of office space and rolling stock leases primarily for railcars and fleet vehicles. At March 31, 2021 and December 31, 2020, operating right-to-use assets of $177 million and $185 million, respectively, are included as a part of "Other noncurrent assets" in the Unaudited Consolidated Statements of Financial Position and includes $9 million at both periods of assets previously classified as lease intangibles and $8 million and $9 million of prepaid lease assets, respectively. Operating lease liabilities are included as a part of "Payables and other current liabilities" and "Other long-term liabilities" in the Unaudited Consolidated Statements of Financial Position.

17


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2021, reconciliation of lease payments and operating lease liabilities is provided below:
(Dollars in millions)Operating lease liabilities
Remainder of 2021$46 
202247 
202333 
202419 
202512 
2026 and beyond28 
Total lease payments185 
Less: amounts of lease payments representing interest16 
Present value of future lease payments169 
Less: current obligations under leases55 
Long-term lease obligations$114 

The Company has operating leases, primarily leases for railcars, with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease that will expire beginning second quarter 2021. Residual guarantee payments that become probable and estimable are recognized as 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.

Lease costs during the period and other information is provided below:
First Quarter
(Dollars in millions)20212020
Lease costs:
Operating lease costs$18 $19
Short-term lease costs8 9
Sublease income(1)(1)
Total$25 $27
Other operating lease information:
Cash paid for amounts included in the measurement of lease liabilities$17 $18
Right-to-use assets obtained in exchange for new lease liabilities$8 $16
Weighted-average remaining lease term, in years55
Weighted-average discount rate3.5 %3.9 %

Other Commitments

Supplier Purchase Obligations

The Company had various purchase obligations at March 31, 2021, totaling approximately $3.1 billion over a period of
approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 guarantees relate 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 guarantees have terms up to 30 years with maximum potential future payments of approximately $25 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 guarantees is remote.

9.ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS

Certain Eastman manufacturing facilities 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 certain cleanup costs. In addition, the Company will 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 2020 Annual Report on Form 10-K. The resolution of uncertainties related to environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized. However, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and the extended period of time that the obligations are expected to be satisfied, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will have a material adverse effect on the Company's future liquidity or financial position. The Company's net reserve for environmental contingencies was $282 million and $285 million at March 31, 2021 and December 31, 2020, respectively.

Environmental Remediation and Environmental Asset Retirement Obligations

The Company's net environmental reserve for environmental contingencies, including remediation costs and asset retirement obligations, is included as part of "Other noncurrent assets", "Payables and other current liabilities", and "Other long-term liabilities" in the Consolidated Statements of Financial Position as follows:
(Dollars in millions)March 31, 2021December 31, 2020
Environmental contingencies, current$15 $15 
Environmental contingencies, long-term267 270 
Total$282 $285 

Environmental Remediation

Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $255 million to the maximum of $497 million and from the best estimate or minimum of $257 million to the maximum of $501 million at March 31, 2021 and December 31, 2020, respectively. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts recognized at both March 31, 2021 and December 31, 2020.

19


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 three months 2021 and full year 2020 are summarized below:
(Dollars in millions)Environmental Remediation Liabilities
Balance at December 31, 2019$260 
Changes in estimates recognized in earnings and other7 
Cash reductions(10)
Balance at December 31, 2020257 
Changes in estimates recognized in earnings and other1 
Cash reductions(3)
Balance at March 31, 2021$255 

Environmental Asset Retirement Obligations

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. Environmental asset retirement obligations consist of primarily closure and post-closure costs. For sites that have environmental asset retirement obligations, the best estimate recognized to date for these environmental asset retirement obligation costs was $27 million and $28 million at March 31, 2021 and December 31, 2020, respectively. 

Non-Environmental Asset Retirement Obligations

The Company 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 recognized non-environmental asset retirement obligations were $51 million at both March 31, 2021 and December 31, 2020, and is included as part of "Other long-term liabilities" in the Unaudited Consolidated Statements of Financial Position.

10.LEGAL MATTERS

From time to time, Eastman 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 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 position, results of operations, or cash flows.

20


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11.STOCKHOLDERS' EQUITY

Reconciliations of the changes in stockholders' equity for first quarter 2021 and 2020 are provided below:
(Dollars in millions, except per share amount)Common Stock at Par ValueAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury Stock at CostTotal Eastman Stockholders' EquityNoncontrolling InterestTotal Equity
Balance at December 31, 2020$2 $2,174 $8,080 $(273)$(3,960)$6,023 $85 $6,108 
Net Earnings  274   274 3 277 
Cash Dividends Declared (1)
($0.69 per share)
  (94)  (94) (94)
Other Comprehensive Income (Loss)   25  25  25 
Share Based Compensation Expense (2)
 22    22  22 
Stock Option Exercises 38    38  38 
Other (3)
 (15)   (15)(1)(16)
Share Repurchase