Company Quick10K Filing
Eastman Chemical
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 140 $10,762
10-Q 2019-11-01 Quarter: 2019-09-30
10-Q 2019-08-06 Quarter: 2019-06-30
10-Q 2019-05-03 Quarter: 2019-03-31
10-K 2019-02-27 Annual: 2018-12-31
10-Q 2018-10-29 Quarter: 2018-09-30
10-Q 2018-08-03 Quarter: 2018-06-30
10-Q 2018-05-07 Quarter: 2018-03-31
10-K 2018-03-01 Annual: 2017-12-31
10-Q 2017-11-02 Quarter: 2017-09-30
10-Q 2017-08-04 Quarter: 2017-06-30
10-Q 2017-05-05 Quarter: 2017-03-31
10-K 2017-02-27 Annual: 2016-12-31
10-Q 2016-11-04 Quarter: 2016-09-30
10-Q 2016-08-03 Quarter: 2016-06-30
10-Q 2016-05-05 Quarter: 2016-03-31
10-K 2016-02-25 Annual: 2015-12-31
10-Q 2015-11-03 Quarter: 2015-09-30
10-Q 2015-07-30 Quarter: 2015-06-30
10-Q 2015-05-05 Quarter: 2015-03-31
10-K 2015-02-27 Annual: 2014-12-31
10-Q 2014-11-04 Quarter: 2014-09-30
10-Q 2014-07-30 Quarter: 2014-06-30
10-Q 2014-04-29 Quarter: 2014-03-31
10-K 2014-02-28 Annual: 2013-12-31
10-Q 2013-10-28 Quarter: 2013-09-30
10-Q 2013-08-05 Quarter: 2013-06-30
10-Q 2013-04-30 Quarter: 2013-03-31
10-K 2013-02-28 Annual: 2012-12-31
10-Q 2012-10-31 Quarter: 2012-09-30
10-Q 2012-08-02 Quarter: 2012-06-30
10-Q 2012-05-10 Quarter: 2012-03-31
10-K 2012-02-22 Annual: 2011-12-31
10-Q 2011-11-01 Quarter: 2011-09-30
10-Q 2011-08-02 Quarter: 2011-06-30
10-Q 2011-05-03 Quarter: 2011-03-31
10-K 2011-02-23 Annual: 2010-12-31
10-Q 2010-11-01 Quarter: 2010-09-30
10-Q 2010-08-03 Quarter: 2010-06-30
10-Q 2010-04-26 Quarter: 2010-03-31
10-K 2010-02-24 Annual: 2009-12-31
8-K 2019-12-04 Officers, Officers, Exhibits
8-K 2019-11-16 Officers, Exhibits
8-K 2019-10-24 Earnings, Exhibits
8-K 2019-07-25 Officers, Exhibits
8-K 2019-07-25 Earnings, Exhibits
8-K 2019-05-02 Shareholder Vote
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-01-31 Earnings, Exhibits
8-K 2018-12-05 Officers
8-K 2018-11-06 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-11-05 Other Events, Exhibits
8-K 2018-10-30 Other Events, Exhibits
8-K 2018-10-30 Other Events, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-07-01 Officers
8-K 2018-05-03 Shareholder Vote
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-02-15 Officers
8-K 2018-02-01 Earnings, Exhibits
EMN 2019-09-30
Part I. Financial Information
Part II. Other Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.01 emn20190930ex3101.htm
EX-31.02 emn20190930ex3102.htm
EX-32.01 emn20190930ex3201.htm
EX-32.02 emn20190930ex3202.htm

Eastman Chemical Earnings 2019-09-30

EMN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
IFF 16,398 13,348 7,023 4,716 1,956 361 891 20,456 41% 23.0 3%
CE 13,378 9,506 6,252 6,739 1,812 1,049 1,718 16,536 27% 9.6 11%
FMC 10,857 9,824 7,061 4,653 2,083 503 787 13,305 45% 16.9 5%
EMN 10,762 16,256 10,310 9,666 2,357 915 1,724 16,200 24% 9.4 6%
WLK 8,701 12,216 5,957 8,419 1,532 660 1,640 10,985 18% 6.7 5%
ALB 7,392 8,094 4,294 3,417 1,210 600 914 8,883 35% 9.7 7%
HXL 6,722 3,195 1,753 2,320 629 219 473 7,792 27% 16.5 7%
SEE 6,537 5,216 5,558 4,720 1,508 370 718 9,606 32% 13.4 7%
VSM 5,704 1,459 1,255 1,341 569 86 309 6,416 42% 20.8 6%
GRA 5,061 3,726 3,339 1,998 796 186 430 6,861 40% 16.0 5%

Document
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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 ended
September 30, 2019
 
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

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
 
EMN
 
New York Stock Exchange
1.50% Notes Due 2023
 
EMN23
 
New York Stock Exchange
1.875% Notes Due 2026
 
EMN26
 
New 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 filer
 
Accelerated filer
Non-accelerated filer
 
Smaller 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.
Class
Number of Shares Outstanding at September 30, 2019
Common Stock, par value $0.01 per share
135,979,215
--------------------------------------------------------------------------------------------------------------------------------

1

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TABLE OF CONTENTS
ITEM
 
PAGE
 

PART I.  FINANCIAL INFORMATION

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

PART II.  OTHER INFORMATION

 
 
 
 
 
 
 
 
 

SIGNATURES

 


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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", "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 of, 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 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 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 "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

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
 
Third Quarter
 
First Nine Months
(Dollars in millions, except per share amounts)
2019
 
2018
 
2019
 
2018
Sales
$
2,325

 
$
2,547

 
$
7,068

 
$
7,775

Cost of sales
1,751

 
1,819

 
5,331

 
5,762

Gross profit
574

 
728

 
1,737

 
2,013

Selling, general and administrative expenses
163

 
175

 
515

 
554

Research and development expenses
59

 
60

 
174

 
176

Asset impairments and restructuring charges, net
2

 

 
52

 
6

Other components of post-employment (benefit) cost, net
(20
)
 
(30
)
 
(62
)
 
(90
)
Other (income) charges, net
3

 
6

 

 
(50
)
Earnings before interest and taxes
367

 
517

 
1,058

 
1,417

Net interest expense
54

 
58

 
165

 
178

Earnings before income taxes
313

 
459

 
893

 
1,239

Provision for income taxes
46

 
46

 
158

 
190

Net earnings
267

 
413

 
735

 
1,049

Less: Net earnings attributable to noncontrolling interest
1

 
1

 
2

 
3

Net earnings attributable to Eastman
$
266

 
$
412

 
$
733

 
$
1,046

 
 
 
 
 
 
 
 
Basic earnings per share attributable to Eastman
$
1.95

 
$
2.93

 
$
5.31

 
$
7.38

Diluted earnings per share attributable to Eastman
$
1.93

 
$
2.89

 
$
5.27

 
$
7.28

Comprehensive Income
 
 
 
 
 

 
 

Net earnings including noncontrolling interest
$
267

 
$
413

 
$
735

 
$
1,049

Other comprehensive income (loss), net of tax:


 


 
 

 
 

Change in cumulative translation adjustment
23

 
(21
)
 
40

 
(28
)
Defined benefit pension and other postretirement benefit plans:
 
 
 
 
 

 
 

Amortization of unrecognized prior service credits
(7
)
 
(7
)
 
(22
)
 
(22
)
Derivatives and hedging:
 
 
 
 
 

 
 

Unrealized gain (loss) during period
10

 
37

 
(2
)
 
78

Reclassification adjustment for (gains) losses included in net income, net
6

 
(10
)
 
6

 
(13
)
Total other comprehensive income (loss), net of tax
32

 
(1
)
 
22

 
15

Comprehensive income including noncontrolling interest
299

 
412

 
757

 
1,064

Less: Comprehensive income attributable to noncontrolling interest
1

 
1

 
2

 
3

Comprehensive income attributable to Eastman
$
298

 
$
411

 
$
755

 
$
1,061

Retained Earnings
 

 
 

 
 

 
 

Retained earnings at beginning of period
$
7,848

 
$
7,292

 
$
7,573

 
$
6,802

Cumulative effect adjustment resulting from adoption of new accounting standards

 

 
(20
)
 
16

Net earnings attributable to Eastman
266

 
412

 
733

 
1,046

Cash dividends declared
(85
)
 
(78
)
 
(257
)
 
(238
)
Retained earnings at end of period
$
8,029

 
$
7,626

 
$
8,029

 
$
7,626


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

4

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UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
September 30,
 
December 31,
(Dollars in millions, except per share amounts)
2019
 
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
207

 
$
226

Trade receivables, net of allowance for doubtful accounts
1,191

 
1,154

Miscellaneous receivables
279

 
329

Inventories
1,695

 
1,583

Other current assets
68

 
73

Total current assets
3,440

 
3,365

Properties
 
 
 
Properties and equipment at cost
12,898

 
12,731

Less: Accumulated depreciation
7,364

 
7,131

Net properties
5,534

 
5,600

Goodwill
4,464

 
4,467

Intangible assets, net of accumulated amortization
2,034

 
2,185

Other noncurrent assets
665

 
378

Total assets
$
16,137

 
$
15,995

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Payables and other current liabilities
$
1,438

 
$
1,608

Borrowings due within one year
642

 
243

Total current liabilities
2,080

 
1,851

Long-term borrowings
5,567

 
5,925

Deferred income tax liabilities
887

 
884

Post-employment obligations
867

 
925

Other long-term liabilities
639

 
532

Total liabilities
10,040

 
10,117

Stockholders' equity
 
 
 
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 219,624,815 and 219,140,523 for 2019 and 2018, respectively)
2

 
2

Additional paid-in capital
2,092

 
2,048

Retained earnings
8,029

 
7,573

Accumulated other comprehensive income (loss)
(203
)
 
(245
)
 
9,920

 
9,378

Less: Treasury stock at cost (83,696,398 shares for 2019 and 79,413,989 shares for 2018)
3,900

 
3,575

Total Eastman stockholders' equity
6,020

 
5,803

Noncontrolling interest
77

 
75

Total equity
6,097

 
5,878

Total liabilities and stockholders' equity
$
16,137

 
$
15,995


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

5

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
First Nine Months
(Dollars in millions)
2019
 
2018
Operating activities
 
 
 
Net earnings
$
735

 
$
1,049

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


 


Depreciation and amortization
462

 
451

Gain from property insurance

 
(65
)
Provision for deferred income taxes
13

 
15

Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
 
 
 
(Increase) decrease in trade receivables
(50
)
 
(229
)
(Increase) decrease in inventories
(122
)
 
(261
)
Increase (decrease) in trade payables
(183
)
 
7

Pension and other postretirement contributions (in excess of) less than expenses
(97
)
 
(112
)
Variable compensation (in excess of) less than expenses
(15
)
 
23

Other items, net
90

 
(75
)
Net cash provided by operating activities
833

 
803

Investing activities
 
 
 
Additions to properties and equipment
(308
)
 
(381
)
Proceeds from property insurance

 
65

Acquisitions, net of cash acquired
(48
)
 

Other items, net
(4
)
 
1

Net cash used in investing activities
(360
)
 
(315
)
Financing activities
 
 
 
Net increase (decrease) in commercial paper and other borrowings
149

 
339

Proceeds from borrowings
335

 
490

Repayment of borrowings
(385
)
 
(693
)
Dividends paid to stockholders
(258
)
 
(240
)
Treasury stock purchases
(325
)
 
(375
)
Other items, net
(3
)
 
(3
)
Net cash used in financing activities
(487
)
 
(482
)
Effect of exchange rate changes on cash and cash equivalents
(5
)
 
(4
)
Net change in cash and cash equivalents
(19
)
 
2

Cash and cash equivalents at beginning of period
226

 
191

Cash and cash equivalents at end of period
$
207

 
$
193


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

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


 
 
Page
 
 
 

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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 2018 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 the items noted below. The December 31, 2018 financial position data included herein was derived from the audited consolidated financial statements included in the 2018 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.

Recently Adopted Accounting Standards

Accounting Standards Update ("ASU") 2016-02 Leases: On January 1, 2019, Eastman adopted this standard, and related releases, under the modified retrospective optional transition method such that prior period financial statements have not been adjusted to reflect the impact of the new standard and adoption did not result in an impact to retained earnings. Upon adoption, operating right-to-use assets and lease liabilities were $208 million. The new standard establishes two types of leases: finance and operating. Both finance and operating leases have associated right-to-use assets and lease liabilities that have been valued at the present value of the lease payments and recognized on the Unaudited Consolidated Statement of Financial Position. For further information, see Note 8, "Leases and Off Balance Sheet Items".

ASU 2018-02 Income Statement - Reporting Comprehensive Income: On January 1, 2019, Eastman adopted this standard in the current period resulting in the reclassification of $20 million of stranded tax expense from accumulated other comprehensive income (loss) ("AOCI") to retained earnings as a result of the 2017 Tax Cuts and Jobs Act ("Tax Reform Act"). The amount of the reclassification is the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances related to items remaining in AOCI.

ASU 2018-15 Internal-Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract: On January 1, 2019, Eastman adopted this standard prospectively which did not result in a material impact on the Company's financial statements and related disclosures.

ASU 2018-16 Derivatives and Hedging - Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes: On January 1, 2019, Eastman adopted this standard prospectively for qualifying new or redesignated hedging relationships. Management does not expect the adoption of this standard will materially impact the Company's financial statements and related disclosures.

Accounting Standards Issued But Not Adopted as of September 30, 2019

ASU 2016-13 Financial Instruments - Credit Losses: In June 2016, the Financial Accounting Standards Board ("FASB") issued this standard relating to credit losses and subsequent related releases. The amendments require a financial asset (including trade receivables) to be presented at the net amount expected to be collected through the use of allowances for credit losses valuation account. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period and early adoption is permitted, including adoption in an interim period, beginning after December 15, 2018. The new standard application is mixed among the various elements that include modified retrospective and prospective transition methods. Management does not expect that changes in its accounting required by the new standard will materially impact the Company's financial statements and related disclosures.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


ASU 2018-13 Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued this update as a part of its disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The primary changes applicable to Eastman in this update are the disclosures of fair value levels, assessment thereof, and transfers between those levels. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption was permitted upon issuance of this update and an entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until the effective date. Certain disclosure amendments are to be applied prospectively for only the most recent interim or annual period presented, while other amendments are to be applied retrospectively to all periods presented. Management does not expect that changes required by the new standard will materially impact the Company's related disclosures.

ASU 2018-14 Retirement Benefits - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans: In August 2018, the FASB issued this update as a part of its disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The primary change impacting Eastman is the addition of disclosures related to significant gains and losses related to changes in the benefit obligation for the period and weighted-average interest crediting rates for cash balance plans. This standard is effective for fiscal years ending after December 15, 2020 and early adoption is permitted. Upon adoption, this update is to be applied on a retrospective basis to all periods presented. Management does not expect that changes required by the new standard will materially impact the Company's related disclosures.

ASU 2018-18 Collaborative Arrangements - Clarifying the Interaction between Topic 808 (Collaborative Arrangements) and Topic 606 (Revenue from Contracts with Customers): In November 2018, the FASB issued clarification in regards to which contracts are accounted for under Topic 808 and Topic 606 as well as alignment of guidance between the two pronouncements. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. Upon adoption, this update is to be applied retrospectively to the date of initial application of Topic 606. Management is currently evaluating the impact on the Company's financial statements and related disclosures.

ASU 2019-01 Leases - Codification Improvements: In March 2019, the FASB issued this update in response to stakeholder inquiries regarding the new leasing standard. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. Upon adoption, this update is to be applied as of the adoption date and under the same transition methodology of ASU 2016-02 Leases. Management is currently evaluating the impact on the Company's financial statements and related disclosures.

2.
INVENTORIES
 
September 30,
 
December 31,
(Dollars in millions)
2019
 
2018
Finished goods
$
1,161

 
$
1,143

Work in process
239

 
262

Raw materials and supplies
571

 
515

Total inventories at FIFO or average cost
1,971

 
1,920

Less: LIFO reserve
276

 
337

Total inventories
$
1,695

 
$
1,583



Inventories valued on the last-in, first-out ("LIFO") method were approximately 50 percent and 55 percent of total inventories at September 30, 2019 and December 31, 2018, respectively.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3.
PAYABLES AND OTHER CURRENT LIABILITIES
 
September 30,
 
December 31,
(Dollars in millions)
2019
 
2018
Trade creditors
$
716

 
$
914

Accrued payroll and variable compensation
163

 
197

Accrued taxes
94

 
94

Other
465

 
403

Total payables and other current liabilities
$
1,438

 
$
1,608



"Other" consists primarily of accruals for post-employment obligations, dividends payable, interest payable, the current portion of operating lease liabilities, the current portion of derivative hedging liabilities, the current portion of environmental liabilities, and miscellaneous accruals.

4.
INCOME TAXES
 
Third Quarter
 
First Nine Months
(Dollars in millions)
2019
 
2018
 
2019
 
2018
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Provision for income taxes and tax rate
$
46

 
15
%
 
$
46

 
10
%
 
$
158

 
18
%
 
$
190

 
15
%


Third quarter and first nine months 2019 includes adjustments to the tax provision to reflect amendments to and finalization of prior year's income tax returns. The third quarter and first nine months 2018 effective tax rates include the impact of the U.S. corporate tax rate reduction resulting from the Tax Reform Act. In third quarter and first nine months 2018, the Company also recognized a decrease of $14 million and $4 million, respectively, to the provision for income taxes resulting from adjustments to the provisional net tax benefit recognized in fourth quarter 2017 resulting from the Tax Reform Act and tax impact of outside-U.S. entity reorganizations as part of the transition to an international treasury services center. Third quarter and first nine months 2018 adjustments resulting from the Tax Reform Act were due to a decrease to the provision for income taxes related to foreign income inclusion and associated foreign tax credits partially offset by an increase to the provision for income taxes for a remeasurement of the deferred tax assets as a result of additional Internal Revenue Service ("IRS") guidance released in the third quarter 2018. Third quarter and first nine months 2018 effective tax rates also include a $14 million decrease to the provision for income taxes related to prior year income tax returns and a $17 million decrease to the provision for income taxes related to current year estimates of business tax credits. In addition, first nine months 2018 included a $10 million increase to the one-time transition tax on deferred foreign income resulting from the Tax Reform Act.

The U.S. Department of Treasury and IRS have issued a number of proposed regulations related to implementation of the provisions of the Tax Reform Act and certain states may issue clarifying guidance regarding state income tax conformity to the current federal tax code. Finalization of these regulations in 2019 or future periods may result in changes in the period of enactment to the amounts currently reported in the Unaudited Consolidated Statements of Financial Position.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5.
BORROWINGS
 
September 30,
 
December 31,
(Dollars in millions)
2019
 
2018
Borrowings consisted of:
 
 
 
2.7% notes due January 2020
$
250

 
$
250

4.5% notes due January 2021
185

 
185

3.5% notes due December 2021
298

 
297

3.6% notes due August 2022
740

 
739

1.50% notes due May 2023 (1)
815

 
855

7 1/4% debentures due January 2024
198

 
197

7 5/8% debentures due June 2024
43

 
43

3.8% notes due March 2025
696

 
691

1.875% notes due November 2026 (1)
539

 
566

7.60% debentures due February 2027
195

 
195

4.5% notes due December 2028
492

 
492

4.8% notes due September 2042
493

 
493

4.65% notes due October 2044
873

 
872

Commercial paper and short-term borrowings
392

 
243

Credit facilities borrowings

 
50

Total borrowings
6,209

 
6,168

Borrowings due within one year
642

 
243

Long-term borrowings
$
5,567

 
$
5,925


(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 Facilities 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 September 30, 2019 and December 31, 2018, the Company had no outstanding borrowings under the Credit Facility. At September 30, 2019, the Company's commercial paper borrowings were $297 million with a weighted average interest rate of 2.29 percent. At December 31, 2018, the Company's commercial paper borrowings were $130 million with a weighted average interest rate of 2.91 percent.

The Company has access to up to $250 million under an accounts receivable securitization agreement (the "A/R Facility") that expires April 2020. 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. Borrowings under the A/R Facility are classified as long-term because the Company has the ability and intent to refinance such borrowings on a long-term basis. In first quarter 2019, $125 million available under the A/R Facility was borrowed and $175 million repaid using available cash. In second quarter 2019, $100 million available under the A/R Facility was borrowed and $100 million repaid using available cash. In third quarter 2019, $110 million available under the A/R Facility was borrowed and $110 million repaid using available cash. At September 30, 2019, the Company had no borrowings outstanding under the A/R Facility. At December 31, 2018, the Company's borrowings under the A/R Facility were $50 million with an interest rate of 3.39 percent.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company has access to borrowings of up to 150 million ($163 million) under a receivables facility based on the discounted value of selected customer accounts receivable. This facility expires December 2020 and renews for another one year period if not terminated with 90 days notice by either party. These arrangements include receivables in the United States, Belgium, and Finland, and are subject to various eligibility requirements. Borrowings under this facility are subject to interest at an agreed spread above LIBOR and EURIBOR plus administration and insurance fees and are classified as short-term. At September 30, 2019, the Company's outstanding borrowings under this facility were $95 million with a weighted average interest rate of 1.51 percent. At December 31, 2018, the Company's amount of outstanding borrowings under this facility were $112 million with a weighted average interest rate of 1.70 percent.

The Credit Facility and A/R Facility contain customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all covenants at both September 30, 2019 and December 31, 2018.

Fair Value of Borrowings

Eastman has classified its total borrowings at September 30, 2019 and December 31, 2018 under the fair value hierarchy as described in the accounting policies in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 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 the commercial paper and receivables facility equals the carrying value and is classified as Level 2. At September 30, 2019 and December 31, 2018, the fair value of total borrowings was $6.726 billion and $6.216 billion, respectively. The Company had no borrowings classified as Level 3 as of September 30, 2019 and December 31, 2018.

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 2018 Annual Report on Form 10-K.

Cash Flow Hedges

Cash flow hedges are derivative instruments designated 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 AOCI located in the Unaudited Consolidated Statements of Financial Position and reclassified in 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 Statement of Cash Flows.

Fair Value Hedges

Fair value hedges are defined as derivative or non-derivative instruments designated 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 Statement of Cash Flows.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Net Investment Hedges

Net investment hedges are defined as derivative or non-derivative instruments designated 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 located in the Unaudited Consolidated Statements of Financial Position. Cash flows from the CTA component are classified as operating activities in the Unaudited Consolidated Statement 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 Statement 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" or "Other noncurrent assets" within the Unaudited Consolidated Statements of Financial Position. Cash flows from excluded components are classified as operating activities in the Unaudited Consolidated Statement of Cash Flows.

In January 2018, Eastman 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 150 million ($180 million) maturing January 2021 and 266 million ($320 million) maturing August 2022.

In October 2018, Eastman 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 165 million ($190 million) maturing January 2024, 104 million ($120 million) maturing March 2025, and 165 million ($190 million) maturing February 2027.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Financial Position and Financial Performance of Hedging Instruments

The following table presents the notional amounts outstanding at September 30, 2019 and December 31, 2018 associated with Eastman's hedging programs.
Notional Outstanding
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
Foreign Exchange Forward and Option Contracts (in millions)
 
 
 
 
 
EUR/USD (in EUR)
 
603
 
263
Commodity Forward and Collar Contracts
 
 
 
 
 
Feedstock (in million barrels)
 
2

 
5

 
Energy (in million british thermal units)
 
33

 
40

 
 
 
 
 
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)
 
851
 
851
 
 
 
 
 
Non-derivatives designated as net investment hedges:
 
 
 
 
Foreign Currency Net Investment Hedges (in millions)
 
 
 
 
 
EUR/USD (in EUR)
 
1,242
 
1,241


Fair Value Measurements

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 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. 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 third quarter and first nine months 2019 and 2018.

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.

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 located within the Unaudited Consolidated Statements of Financial Position as of September 30, 2019 and December 31, 2018.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Financial Position and Fair Value Measurements of Hedging Instruments on a Gross Basis
(Dollars in millions)
 
 
 
 
 
 
Derivative Type
 
Statements of Financial
Position Classification
 
September 30, 2019
Level 2
 
December 31, 2018
Level 2
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Commodity contracts
 
Other current assets
 
$
1

 
$
4

Foreign exchange contracts
 
Other current assets
 
23

 
15

Foreign exchange contracts
 
Other noncurrent assets
 
9

 
4

 
 
 
 
 
 
 
Derivatives designated as fair value hedges:
 
 
 
 
 
 
Fixed-for-floating interest rate swap
 
Other current assets
 

 
1

 
 
 
 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
 
 
 
Cross-currency interest rate swaps
 
Other noncurrent assets
 
94

 
26

Total Derivative Assets
 
 
 
$
127

 
$
50

 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Commodity contracts
 
Payables and other current liabilities
 
$
26

 
$
24

Commodity contracts
 
Other long-term liabilities
 
5

 
5

 
 
 
 
 
 
 
Derivatives designated as fair value hedges:
 
 
 
 
 
 
Fixed-for-floating interest rate swap
 
Long-term borrowings
 

 
4

Total Derivative Liabilities
 
 
 
$
31

 
$
33

Total Net Derivative Assets (Liabilities)
 
 
 
$
96

 
$
17



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 $1.4 billion at both September 30, 2019 and December 31, 2018. 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 2018 Annual Report on Form 10-K.

As of September 30, 2019 and December 31, 2018, the following amounts were included on the Unaudited Consolidated Statements of Financial Position related to cumulative basis adjustments for fair value hedges.
(Dollars in millions)
 
Carrying amount of the hedged liabilities
 
Cumulative 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 included
 
September 30,
2019
 
December 31, 2018
 
September 30,
2019
 
December 31, 2018
Long-term borrowings (1)
 
$
763

 
$
759

 
$
(7
)
 
$
(12
)

(1) 
At both September 30, 2019 and December 31, 2018, the cumulative amount of fair value hedging loss adjustment remaining for hedged liabilities for which hedge accounting has been discontinued was $7 million.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 third quarter and first nine months 2019 and 2018.
 
 
Change in amount of after tax gain (loss) recognized in OCI on derivatives
 
Pre-tax amount of gain (loss) reclassified from OCI into earnings
(Dollars in millions)
 
Third Quarter
 
First Nine Months
 
Third Quarter
 
First Nine Months
Hedging Relationships
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(1
)
 
$
28

 
$
(7
)
 
$
57

 
$
(14
)
 
$
8

 
$
(25
)
 
$
3

Foreign exchange contracts
 
16

 
(2
)
 
10

 
5

 
7

 
7

 
20

 
18

Forward starting interest rate and treasury lock swap contracts
 
1

 
1