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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
FORM 10-Q
(Mark
One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X]  NO  [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X]  NO  [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
 
Accelerated filer
[  ]
Non-accelerated filer
[   ]
(Do not check if a smaller reporting company)
Smaller reporting company
[  ]
 
 
 
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.
YES [  ]  NO  [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [  ]  NO  [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Number of Shares Outstanding at March 31, 2019
Common Stock, par value $0.01 per share
138,578,592
--------------------------------------------------------------------------------------------------------------------------------

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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; 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, 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, and benefits from, the integration of, and expected business and financial performance of, acquired businesses; strategic and 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 or in Company press releases) on related subjects.


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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)
2019
 
2018
Sales
$
2,380

 
$
2,607

Cost of sales
1,806

 
2,026

Gross profit
574

 
581

Selling, general and administrative expenses
187

 
190

Research and development expenses
58

 
56

Asset impairments and restructuring charges, net
32

 
2

Other components of post-employment (benefit) cost, net
(21
)
 
(30
)
Other (income) charges, net
(2
)
 
(46
)
Earnings before interest and taxes
320

 
409

Net interest expense
56

 
59

Earnings before income taxes
264

 
350

Provision for income taxes
55

 
60

Net earnings
209

 
290

Less: Net earnings attributable to noncontrolling interest

 

Net earnings attributable to Eastman
$
209

 
$
290

 
 
 
 
Basic earnings per share attributable to Eastman
$
1.50

 
$
2.03

Diluted earnings per share attributable to Eastman
$
1.49

 
$
2.00

Comprehensive Income
 
 
 
Net earnings including noncontrolling interest
$
209

 
$
290

Other comprehensive income (loss), net of tax:


 


Change in cumulative translation adjustment
30

 
27

Defined benefit pension and other postretirement benefit plans:
 
 
 
Amortization of unrecognized prior service credits
(7
)
 
(7
)
Derivatives and hedging:
 
 
 
Unrealized gain (loss) during period
10

 
(23
)
Reclassification adjustment for (gains) losses included in net income, net
(2
)
 

Total other comprehensive income (loss), net of tax
31

 
(3
)
Comprehensive income including noncontrolling interest
240

 
287

Less: Comprehensive income attributable to noncontrolling interest

 

Comprehensive income attributable to Eastman
$
240

 
$
287

Retained Earnings
 

 
 

Retained earnings at beginning of period
$
7,573

 
$
6,802

Cumulative effect adjustment resulting from adoption of new accounting standards
(20
)
 
16

Net earnings attributable to Eastman
209

 
290

Cash dividends declared
(87
)
 
(82
)
Retained earnings at end of period
$
7,675

 
$
7,026


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

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UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
March 31,
 
December 31,
(Dollars in millions, except per share amounts)
2019
 
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
195

 
$
226

Trade receivables, net of allowance for doubtful accounts
1,297

 
1,154

Miscellaneous receivables
285

 
329

Inventories
1,704

 
1,583

Other current assets
70

 
73

Total current assets
3,551

 
3,365

Properties
 
 
 
Properties and equipment at cost
12,796

 
12,731

Less: Accumulated depreciation
7,220

 
7,131

Net properties
5,576

 
5,600

Goodwill
4,477

 
4,467

Intangible assets, net of accumulated amortization
2,130

 
2,185

Other noncurrent assets
627

 
378

Total assets
$
16,361

 
$
15,995

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Payables and other current liabilities
$
1,490

 
$
1,608

Borrowings due within one year
862

 
243

Total current liabilities
2,352

 
1,851

Long-term borrowings
5,602

 
5,925

Deferred income tax liabilities
892

 
884

Post-employment obligations
915

 
925

Other long-term liabilities
681

 
532

Total liabilities
10,442

 
10,117

Stockholders' equity
 
 
 
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 219,523,859 and 219,140,523 for 2019 and 2018, respectively)
2

 
2

Additional paid-in capital
2,060

 
2,048

Retained earnings
7,675

 
7,573

Accumulated other comprehensive income (loss)
(194
)
 
(245
)
 
9,543

 
9,378

Less: Treasury stock at cost (80,996,065 shares for 2019 and 79,413,989 shares for 2018)
3,700

 
3,575

Total Eastman stockholders' equity
5,843

 
5,803

Noncontrolling interest
76

 
75

Total equity
5,919

 
5,878

Total liabilities and stockholders' equity
$
16,361

 
$
15,995


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

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
First Three Months
(Dollars in millions)
2019
 
2018
Operating activities
 
 
 
Net earnings
$
209

 
$
290

Adjustments to reconcile net earnings to net cash used in operating activities:


 


Depreciation and amortization
155

 
152

Gain from property insurance

 
(50
)
Provision for deferred income taxes
4

 
11

Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
 
 
 
(Increase) decrease in trade receivables
(149
)
 
(223
)
(Increase) decrease in inventories
(122
)
 
(80
)
Increase (decrease) in trade payables
(42
)
 
8

Pension and other postretirement contributions (in excess of) less than expenses
(36
)
 
(36
)
Variable compensation (in excess of) less than expenses
(77
)
 
(77
)
Other items, net
53

 
(30
)
Net cash used in operating activities
(5
)
 
(35
)
Investing activities
 
 
 
Additions to properties and equipment
(106
)
 
(128
)
Proceeds from property insurance

 
50

Acquisitions, net of cash acquired
(19
)
 

Net cash used in investing activities
(125
)
 
(78
)
Financing activities
 
 
 
Net increase (decrease) in commercial paper and other borrowings
370

 
199

Proceeds from borrowings
125

 
275

Repayment of borrowings
(175
)
 
(175
)
Dividends paid to stockholders
(87
)
 
(80
)
Treasury stock purchases
(125
)
 
(100
)
Other items, net
(6
)
 
(3
)
Net cash provided by financing activities
102

 
116

Effect of exchange rate changes on cash and cash equivalents
(3
)
 

Net change in cash and cash equivalents
(31
)
 
3

Cash and cash equivalents at beginning of period
226

 
191

Cash and cash equivalents at end of period
$
195

 
$
194


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

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.
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 will 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.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accounting Standards Issued But Not Adopted as of March 31, 2019

ASU 2016-13 Financial Instruments - Credit Losses: In June 2016, the Financial Accounting Standards Board ("FASB") issued this standard relating to credit losses. 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. In November 2018, the FASB issued amendment 2018-19 to clarify that receivables arising from operating leases are not within the scope of this sub-topic but instead, impairment of such operating lease receivables should be accounted for in accordance with ASU 2016-02 Leases above. 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.

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. 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 is currently evaluating implementation options and impact on 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. 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 is currently evaluating the impact on the Company's related disclosures.

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 transition to 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 using the same transition methodology of ASU 2016-02 Leases. Management is currently evaluating the impact on the Company's financial statements and related disclosures.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2.
INVENTORIES
 
March 31,
 
December 31,
(Dollars in millions)
2019
 
2018
Finished goods
$
1,201

 
$
1,143

Work in process
260

 
262

Raw materials and supplies
572

 
515

Total inventories at FIFO or average cost
2,033

 
1,920

Less: LIFO reserve
329

 
337

Total inventories
$
1,704

 
$
1,583



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

3.
PAYABLES AND OTHER CURRENT LIABILITIES
 
March 31,
 
December 31,
(Dollars in millions)
2019
 
2018
Trade creditors
$
857

 
$
914

Accrued payroll and variable compensation
115

 
197

Accrued taxes
67

 
94

Other
451

 
403

Total payables and other current liabilities
$
1,490

 
$
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 environmental liabilities, and miscellaneous accruals.

4.
INCOME TAXES
 
First Quarter
(Dollars in millions)
2019
 
2018
 
$
 
%
 
$
 
%
Provision for income taxes and tax rate
$
55

 
21
%
 
$
60

 
17
%


The first quarter 2019 effective tax rate includes adjustments to the tax provision to reflect planned amendments to and expected finalization of a prior year's income tax return in a foreign jurisdiction. The first quarter 2018 effective tax rate included the impact of the U.S. corporate tax rate reduction resulting from the Tax Reform Act.

The U.S. Department of Treasury has 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
 
March 31,
 
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
739

 
739

1.50% notes due May 2023 (1)
840

 
855

7 1/4% debentures due January 2024
197

 
197

7 5/8% debentures due June 2024
43

 
43

3.8% notes due March 2025
692

 
691

1.875% notes due November 2026 (1)
556

 
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
872

 
872

Commercial paper and short-term borrowings
612

 
243

Credit facilities borrowings

 
50

Total borrowings
6,464

 
6,168

Borrowings due within one year
862

 
243

Long-term borrowings
$
5,602

 
$
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 March 31, 2019 and December 31, 2018, the Company had no outstanding borrowings under the Credit Facility. At March 31, 2019, the Company's commercial paper borrowings were $502 million with a weighted average interest rate of 2.76 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. In first quarter 2019, $125 million available under the A/R Facility was borrowed and $175 million repaid using available cash. At March 31, 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 ($169 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 March 31, 2019, the Company's outstanding borrowings under this facility were $110 million with a weighted average interest rate of 1.48 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 and A/R Facilities and other borrowing agreements contain customary covenants and events of default, some of which require the Company to maintain certain financial ratios that determine the amounts available and terms of borrowings. The Company was in compliance with all covenants at both March 31, 2019 and December 31, 2018.

Fair Value of Borrowings

Eastman has classified its total borrowings at March 31, 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 March 31, 2019 and December 31, 2018, the fair value of total borrowings was $6.720 billion and $6.216 billion, respectively. The Company had no borrowings classified as Level 3 as of March 31, 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.

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.


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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. 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.

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.

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.

Summary of Financial Position and Financial Performance of Hedging Instruments

The following table presents the notional amounts outstanding at March 31, 2019 and December 31, 2018 associated with Eastman's hedging programs.
Notional Outstanding
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
Foreign Exchange Forward and Option Contracts (in millions)
 
 
 
 
 
EUR/USD (in EUR)
 
203
 
263
Commodity Forward and Collar Contracts
 
 
 
 
 
Feedstock (in million barrels)
 
4

 
5

 
Energy (in million british thermal units)
 
31

 
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


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 first quarter 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 March 31, 2019 and December 31, 2018.
The Financial Position and Fair Value Measurements of Hedging Instruments on a Gross Basis
(Dollars in millions)
 
 
 
 
 
 
Derivative Type
 
Statements of Financial
Position Classification
 
March 31, 2019
Level 2
 
December 31, 2018
Level 2
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Commodity contracts
 
Other current assets
 
$
3

 
$
4

Commodity contracts
 
Other noncurrent assets
 
1

 

Foreign exchange contracts
 
Other current assets
 
16

 
15

Foreign exchange contracts
 
Other noncurrent assets
 
5

 
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
 
52

 
26

Total Derivative Assets
 
 
 
$
77

 
$
50

 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Commodity contracts
 
Payables and other current liabilities
 
$
11

 
$
24

Commodity contracts
 
Other long-term liabilities
 
4

 
5

 
 
 
 
 
 
 
Derivatives designated as fair value hedges:
 
 
 
 
 
 
Fixed-for-floating interest rate swap
 
Long-term borrowings
 
3

 
4

Total Derivative Liabilities
 
 
 
$
18

 
$
33

Total Net Derivative Assets (Liabilities)
 
 
 
$
59

 
$
17




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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 a carrying value of $1.4 billion associated with non-derivative instruments designated as foreign currency net investment hedges at both March 31, 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 March 31, 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
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Long-term borrowings (1)
 
$
759

 
$
759

 
$
(10
)
 
$
(12
)


(1) 
At both March 31, 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.

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 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)
 
First Quarter
 
First Quarter
Hedging Relationships
 
2019
 
2018
 
2019
 
2018
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
7

 
$
(11
)
 
$
(3
)
 
$
(2
)
Foreign exchange contracts
 
1

 
(13
)
 
6

 
3

Forward starting interest rate and treasury lock swap contracts
 
1

 
1

 
(1
)
 
(1
)
Non-derivatives in net investment hedging relationships (pre-tax):
 
 
 
 
 
 
 
 
Net investment hedges
 
26

 
(42
)
 

 

Derivatives in net investment hedging relationships (pre-tax):
 
 
 
 
 
 
 
 
Cross-currency interest rate swaps
 
19

 
(11
)
 

 

Cross-currency interest rate swaps excluded component
 
6

 
(11
)
 

 



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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 2019 and 2018.
Location and Amount of Gain or (Loss) Recognized in Earnings on Fair Value and Cash Flow Hedging Relationships
 
 
First quarter
 
 
2019
 
2018
(Dollars in millions)
 
Sales
 
Cost of Sales
 
Net Interest Expense
 
Sales
 
Cost of Sales
 
Net 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
 
$
2,380

 
$
1,806

 
$
56

 
$
2,607

 
$
2,026

 
$
59

 
 
 
 
 
 
 
 
 
 
 
 
 
The effects of fair value and cash flow hedging:
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
(1
)
 
 
 
 
 
(1
)
Commodity Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Amount reclassified from AOCI into earnings
 
 
 
(3
)
 
 
 
 
 
(2
)
 
 
Foreign Exchange Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Amount reclassified from AOCI into earnings
 
6

 
 
 
 
 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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. The Company recognized a net loss of $3 million and $8 million during first quarter 2019 and 2018, respectively, for these derivatives.

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 $49 million and $112 million at March 31, 2019 and December 31, 2018, respectively. Losses in AOCI decreased March 31, 2019 compared to December 31, 2018 primarily as a result of a decrease in foreign currency exchange rates associated with the euro. If realized, approximately $3 million in pre-tax losses, as of March 31, 2019, would be reclassified into earnings during the next 12 months.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 2018 Annual Report on Form 10-K.

Components of net periodic benefit (credit) cost were as follows:
 
First Quarter
 
Pension Plans
 
Other Postretirement Benefit Plans
 
2019
 
2018
 
2019
 
2018
(Dollars in millions)
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
 
 
 
 
Service cost
$
7

 
$
3

 
$
9

 
$
4

 
$

 
$

Interest cost
19

 
5

 
17

 
5

 
6

 
6

Expected return on assets
(32
)
 
(8
)
 
(37
)
 
(9
)
 
(1
)
 
(2
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service credit, net

 

 

 

 
(10
)
 
(10
)
Net periodic benefit (credit) cost
$
(6
)
 
$

 
$
(11
)
 
$

 
$
(5
)
 
$
(6
)


8.
LEASES AND OFF BALANCE SHEET ITEMS

Leases

On January 1, 2019, Eastman adopted ASU 2016-02 Leases 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. The new standard establishes two types of leases: finance and operating. Both types of 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 which did not result in an impact to retained earnings.

Upon adoption, the Company elected the practical expedient package wherein: expired or existing contracts were not reassessed as to whether these contracts are or contained a lease; expired or existing contracts were not reassessed for operating or financing classification; and initial direct costs for existing leases were not reassessed. The Company also elected the practical expedient not to assess whether existing or expired land easements that were not previously accounted for under the prior standard are or contain a lease. Lastly, 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.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2019, operating right-to-use assets of $219 million are included as a part of "Other noncurrent assets" in the Unaudited Consolidated Statement of Financial Position and includes $9 million of assets previously classified as lease intangibles. Operating lease liabilities are included as a part of "Payables and other current liabilities" and "Other long-term liabilities" in the Unaudited Consolidated Statement of Financial Position. There have been no material changes to the future minimum lease payments as of December 31, 2018 as accounted for under the previous lease standard, for these obligations, see Note 11, "Commitments and Off Balance Sheet Arrangements", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K. As of March 31, 2019, reconciliation of minimum lease payments and operating lease liabilities is provided below:
(Dollars in millions)
 
Operating lease liabilities
Remainder of 2019
 
$
50

2020
 
55

2021
 
43

2022
 
32

2023
 
21

2024 and beyond
 
35

Total minimum lease payments
 
236

Less: amounts of lease payments representing interest
 
26

Present value of future minimum lease payments
 
210

Less: current obligations under leases
 
57

Long-term lease obligations
 
$
153



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 in second quarter 2019. 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.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Lease costs during the period and other information is provided below:
(Dollars in millions)
First Quarter 2019
Lease costs:
 
 
Operating lease costs
$
15

 
Short-term lease costs
11

 
Total
$
26

 
 
 
Other operating lease information:
 
 
Cash paid for amounts included in the measurement of lease liabilities
$
17

 
Right-to-use assets obtained in exchange for new lease liabilities
$
11

 
Weighted-average remaining lease term, in years
5

 
Weighted-average discount rate
4.2
%


Off Balance Sheet Items

Supplier Purchase Obligations
 
The Company had various purchase obligations at March 31, 2019, totaling approximately $2.8 billion over a period of approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business.

Guarantees

Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, and other parties when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating to intellectual property, environmental matters, and other indemnifications and have arisen through the normal course of business. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims, if they were to occur. These other guarantees have terms up to 30 years with maximum potential future payments of approximately $30 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. Management's current expectation is that future payment or performance related to non-performance under other guarantees is remote.

Accounts Receivable Purchase Agreements

The Company has uncommitted accounts receivable purchase agreements under which entire invoices may be sold, without recourse, to third-party financial institutions. Under these programs, 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 programs, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold into these programs and the financial institutions' willingness to purchase such receivables. In addition, certain of these agreements also require that the Company continue to service, administer and collect the sold accounts receivable at market rates. The total amount of receivables sold in first quarter 2019 and 2018 were $101 million and $39 million, respectively.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 2018 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 condition. The Company's total reserve for environmental loss contingencies was $294 million and $296 million at March 31, 2019 and December 31, 2018, respectively.

Environmental Remediation and Environmental Asset Retirement Obligations

The Company's total environmental reserve that management believes to be probable and reasonably estimable for environmental contingencies, including remediation costs and asset retirement obligations, is included as part of "Payables and other current liabilities" and "Other long-term liabilities" in the Unaudited Consolidated Statements of Financial Position as follows:
(Dollars in millions)
March 31, 2019
 
December 31, 2018
Environmental contingent liabilities, current
$
25

 
$
25

Environmental contingent liabilities, long-term
269

 
271

Total
$
294

 
$
296


Environmental Remediation

Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $269 million to the maximum of $507 million at March 31, 2019 and from the best estimate or minimum of $271 million to the maximum of $508 million at December 31, 2018. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts accrued at both March 31, 2019 and December 31, 2018.

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 2019 are summarized below:
(Dollars in millions)
Environmental Remediation Liabilities
Balance at December 31, 2018
$
271

Changes in estimates recognized in earnings and other
1

Cash reductions
(3
)
Balance at March 31, 2019
$
269




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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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. The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying value of the long-lived assets and depreciated over their useful life. Environmental asset retirement obligations consist primarily of closure and post-closure costs. For sites that have environmental asset retirement obligations, the best estimate recognized to date for these environmental asset retirement obligation costs was $25 million at both March 31, 2019 and December 31, 2018

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 $46 million at both March 31, 2019 and December 31, 2018, 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 condition, results of operations, or cash flows.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11.
STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders' equity for first three months 2019 and 2018 is provided below:
(Dollars in millions)
Common Stock at Par Value
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock at Cost
 
Total Eastman Stockholders' Equity
 
Noncontrolling Interest
 
Total Equity
Balance at December 31, 2018
$
2

 
$
2,048

 
$
7,573

 
$
(245
)
 
$
(3,575
)
 
$
5,803

 
$
75

 
$
5,878

Cumulative Effect of Adoption of New Accounting Standards (1)

 

 
(20
)
 
20

 

 

 

 

Net Earnings

 

 
209

 

 

 
209

 

 
209

Cash Dividends Declared (2)
($0.62 per share)

 

 
(87
)
 

 

 
(87
)
 

 
(87
)
Other Comprehensive Income

 

 

 
31

 

 
31

 

 
31

Share-Based Compensation Expense (3)

 
18

 

 

 

 
18

 

 
18

Stock Option Exercises

 
4

 

 

 

 
4

 

 
4

Other (4)

 
(10
)
 

 

 

 
(10
)
 
1

 
(9
)
Share Repurchases

 

 

 

 
(125
)
 
(125
)
 

 
(125
)
Balance at March 31, 2019
$
2

 
$
2,060

 
$
7,675

 
$
(194
)
 
$
(3,700
)
 
$
5,843

 
$
76

 
$
5,919

(Dollars in millions)
Common Stock at Par Value
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock at Cost
 
Total Eastman Stockholders' Equity
 
Noncontrolling Interest
 
Total Equity
Balance at December 31, 2017
$
2

 
$
1,983

 
$
6,802

 
$
(209
)
 
$
(3,175
)
 
$
5,403

 
$
77

 
$
5,480

Cumulative Effect of Adoption of New Accounting Standards (5)

 

 
16

 

 

 
16

 

 
16

Net Earnings

 

 
290

 

 

 
290

 

 
290

Cash Dividends Declared (2)
($0.56 per share)

 

 
(82
)
 

 

 
(82
)
 

 
(82
)
Other Comprehensive Loss

 

 

 
(3
)
 

 
(3
)
 

 
(3
)
Share-Based Compensation Expense (3)

 
24

 

 

 

 
24

 

 
24

Stock Option Exercises

 
13

 

 

 

 
13

 

 
13

Other (4)

 
(16
)
 

 

 

 
(16
)
 

 
(16
)
Share Repurchases

 

 

 

 
(100
)
 
(100
)
 

 
(100
)
Distributions to Noncontrolling Interest

 

 

 

 

 

 
(2
)
 
(2
)
Balance at March 31, 2018
$
2

 
$
2,004

 
$
7,026

 
$
(212
)
 
$
(3,275
)
 
$
5,545

 
$
75

 
$
5,620

(1) 
On January 1, 2019, the Company adopted a new accounting standard for reporting comprehensive income, which resulted in a reclassification of stranded tax effects from the Tax Reform Act from AOCI to retained earnings. See Note 1, "Significant Accounting Policies", for additional information.
(2) 
Cash dividends declared includes cash dividends paid and dividends declared but unpaid.
(3) 
Share-based compensation expense is the fair value of share-based awards.
(4) 
Additional paid-in capital includes value of shares withheld for employees' taxes on vesting of share-based compensation awards.
(5) 
On January 1, 2018, the Company adopted new accounting standards for revenue recognition, income taxes, and derivatives and hedging, which resulted in adjustments to beginning retained earnings. See 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 for specific amounts related to each standard.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accumulated Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
(Dollars in millions)
Cumulative Translation Adjustment
 
Benefit Plans Unrecognized Prior Service Credits
 
Unrealized Gains (Losses) on Derivative Instruments
 
Unrealized Losses on Investments
 
Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2017
$
(296
)
 
$
136

 
$
(48
)
 
$
(1
)
 
$
(209
)
Period change
(13
)
 
(30
)
 
7

 

 
(36
)
Balance at December 31, 2018
(309
)
 
106

 
(41
)
 
(1
)
 
(245
)
Period change (1)
30

 
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