10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2010
	OR
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______________ to ______________

Commission file number 1-12626

EASTMAN CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware	62-1539359
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification no.)
200 South Wilcox Drive
Kingsport, Tennessee	37662
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (423) 229-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]  NO  [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES [X]  NO  [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 Large accelerated filer [X]                             Accelerated filer [  ]

 Non-accelerated filer [  ]                                Smaller reporting company [  ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [  ]  NO  [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class	Number of Shares Outstanding at September 30, 2010
Common Stock, par value $0.01 per share		72,127,905

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PAGE 1 OF 46 TOTAL SEQUENTIALLY NUMBERED PAGES

EXHIBIT INDEX ON PAGE 45

1

 

TABLE OF CONTENTS

ITEM PAGE

PART I.  FINANCIAL INFORMATION

1.	Financial Statements
	Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings	3
	Consolidated Statements of Financial Position	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to the Unaudited Consolidated Financial Statements	6
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
3.	Quantitative and Qualitative Disclosures About Market Risk	41
4.	Controls and Procedures	41

PART II.  OTHER INFORMATION

1.	Legal Proceedings	42
1A.	Risk Factors	43
2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
6.	Exhibits	43

SIGNATURES

Signatures 44

EXHIBIT INDEX

Exhibit Index 45

2

 

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,

COMPREHENSIVE INCOME AND RETAINED EARNINGS

		Third Quarter				First Nine Months
(Dollars in millions, except per share amounts)		2010		2009		2010		2009
Sales	$	1,729	$	1,337	$	5,017	$	3,719
Cost of sales		1,284		1,009		3,847		2,952
Gross profit		445		328		1,170		767
Selling, general and administrative expenses		122		104		333		296
Research and development expenses		43		33		115		101
Asset impairments and restructuring charges, net		--		--		3		23
Operating earnings		280		191		719		347
Net interest expense		25		19		75		58
Other charges (income), net		(3)		2		11		11
Earnings before income taxes		258		170		633		278
Provision for income taxes		88		69		214		110
Net earnings	$	170	$	101	$	419	$	168
Earnings per share
Basic	$	2.37	$	1.40	$	5.81	$	2.31
Diluted	$	2.33	$	1.38	$	5.70	$	2.29
Comprehensive Income
Net earnings	$	170	$	101	$	419	$	168
Other comprehensive income (loss), net of tax
Change in cumulative translation adjustment		28		2		7		17
Change in unrecognized losses and prior service credits for benefit plans		2		--		11		(2)
Change in unrealized gains (losses) on derivative instruments		(33)		(7)		(25)		(6)
Total other comprehensive income (loss), net of tax		( 3)		(5)		(7)		9
Comprehensive income	$	167	$	96	$	412	$	177
Retained Earnings
Retained earnings at beginning of period	$	2,756	$	2,566	$	2,571	$	2,563
Net earnings		170		101		419		168
Cash dividends declared		(32)		(32)		(96)		(96)
Retained earnings at end of period	$	2,894	$	2,635	$	2,894	$	2,635

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

3

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

		September 30,		December 31,
(Dollars in millions, except per share amounts)		2010		2009
		(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	642	$	793
Trade receivables, net		701		277
Miscellaneous receivables		66		102
Inventories		652		531
Other current assets		40		32
Total current assets		2,101		1,735
Properties
Properties and equipment at cost		8,712		8,525
Less:  Accumulated depreciation		5,546		5,415
Net properties		3,166		3,110
Goodwill		377		315
Other noncurrent assets		345		355
Total assets	$	5,989	$	5,515
Liabilities and Stockholders' Equity
Current liabilities
Payables and other current liabilities	$	936	$	800
Borrowings due within one year		4		--
Total current liabilities		940		800
Long-term borrowings		1,602		1,604
Deferred income tax liabilities		297		258
Post-employment obligations		1,198		1,221
Other long-term liabilities		142		119
Total liabilities		4,179		4,002
Stockholders' equity
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 95,576,347 and 94,775,064 for 2010 and 2009, respectively)		1		1
Additional paid-in capital		710		661
Retained earnings		2,894		2,571
Accumulated other comprehensive loss		(392)		(385)
		3,213		2,848
Less: Treasury stock at cost (23,531,116 shares for 2010 and 22,389,696 shares for 2009 )		1,403		1,335
Total stockholders' equity		1,810		1,513
Total liabilities and stockholders' equity	$	5,989	$	5,515

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

4

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

		First Nine Months
(Dollars in millions)		2010		2009
Cash flows from operating activities
Net earnings	$	419	$	168
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		212		203
Provision for deferred income taxes		52		165
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
(Increase) decrease in trade receivables		(397)		(35)
(Increase) decrease in inventories		(100)		141
Increase (decrease) in trade payables		56		(8)
Increase (decrease) in liabilities for employee benefits and incentive pay		9		(14)
Other items, net		46		48
Net cash provided by operating activities		297		668
Cash flows from investing activities
Additions to properties and equipment		(133)		(268)
Proceeds from sale of assets and investments		11		25
Acquisitions and investments in joint ventures		(189)		(52)
Additions to capitalized software		(5)		(6)
Other items, net		(7)		(12)
Net cash used in investing activities		(323)		(313)
Cash flows from financing activities
Net increase in commercial paper, credit facility, and other borrowings		1		23
Repayment of borrowings		(4)		(16)
Dividends paid to stockholders		(96)		(96)
Treasury stock purchases		(68)		--
Proceeds from stock option exercises and other items		41		15
Net cash used in financing activities		(126)		(74)
Effect of exchange rate changes on cash and cash equivalents		1		--
Net change in cash and cash equivalents		(151)		281
Cash and cash equivalents at beginning of period		793		387
Cash and cash equivalents at end of period	$	642	$	668

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

5

 

ITEM	Page
Note 1.    Basis of Presentation	7
Note 2.    Acquisitions	7
Note 3.    Asset Impairments and Restructuring Charges, Net	8
Note 4.    Inventories	9
Note 5.    Goodwill and Intangible Assets	9
Note 6.    Payables and Other Current Liabilities	9
Note 7.    Provision for Income Taxes	10
Note 8.    Borrowings	10
Note 9.    Retirement Plans	11
Note 10.  Environmental Matters	12
Note 11.  Commitments	12
Note 12.  Fair Value of Financial Instruments	13
Note 13.  Stockholders' Equity	16
Note 14.  Earnings and Dividends per Share	17
Note 15.  Share-Based Compensation Awards	17
Note 16.  Supplemental Cash Flow Information	17
Note 17.  Segment Information	18
Note 18.  Legal Matters	19
Note 19.  Subsequent Events	19

6

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company (the "Company" or "Eastman") in accordance and consistent with the accounting policies stated in the Company's 2009 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.  The unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States ("GAAP") and, of necessity, include some amounts that are based upon management estimates and judgments.  Future actual results could differ from such current estimates.  The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of all ma jority-owned subsidiaries and joint ventures.  Eastman accounts for other joint ventures and investments where it exercises significant influence, but does not have control, on the equity basis.  Intercompany transactions and balances are eliminated in consolidation.  Certain prior period data has been reclassified in the Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.

Effective January 1, 2010, the Company adopted amended accounting guidance on transfers of financial assets.  The impact of this guidance was prospective with changes in first nine months Statements of Consolidated Financial Position and the Statements of Cash Flows.  For additional information, refer to Notes 8, "Borrowings", and 11, "Commitments".

2. ACQUISITIONS

Genovique Specialties Corporation

On April 30, 2010, Eastman completed the stock purchase of Genovique Specialties Corporation ("Genovique"), which has been accounted for as a business combination.  Genovique was a global producer of specialty plasticizers, benzoic acid, and sodium benzoate.  This acquisition included Genovique's manufacturing operations in Kohtla-Järve, Estonia, Chestertown, Maryland, and a joint venture in Wuhan, China.  Genovique's benzoate ester plasticizers were a strategic addition to Eastman's existing general-purpose and specialty non-phthalate plasticizers.  The acquisition added differentiated, sustainably-advantaged products to Eastman's Performance Chemicals and Intermediates ("PCI") segment and enhances the Company's diversification into emerging geographic regions.

The total purchase price was approximately $160 million, including assumed debt of $5 million.  Transaction costs associated with the acquisition were expensed as incurred.  The table below shows the preliminary fair value purchase price allocation for the Genovique acquisition:

		Dollars in millions
Current assets	$	48
Properties and equipment		33
Intangible assets		59
Other noncurrent assets		2
Goodwill		63
Current liabilities		(17)
Long-term liabilities		(28)
Total purchase price	$	160

Acquired intangible assets consist of $44 million in established customer relationships, $14 million in trade names, and $1 million in developed technology.  The customer relationships and developed technology intangible assets have remaining useful lives of 16 and 7 years, respectively.  Trade names have been determined to have an indefinite life.  Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired and liabilities assumed, was attributed to the synergies between the acquired company and Eastman.

7

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Korean Acetate Tow Facility

On March 22, 2010, Eastman Fibers Korea Limited ("EFKL") completed the purchase of the acetate tow facility in Ulsan, Korea from SK Chemicals Co., Ltd. ("SK"), which has been accounted for as a business combination.  EFKL is a venture between the Company and SK, in which the Company has controlling ownership and operates the facility.  This acquisition established acetate tow manufacturing capacity for the Company in Asia and supports projected long term sales growth for acetate tow in the region.

The fair value of total consideration was $111 million, which was paid in installments beginning first quarter 2009 and completed second quarter 2010.  The Company has determined the preliminary fair value of the acquired assets to be as follows: property, plant, and equipment of $101 million, inventory of $5 million, and technology of $5 million.

3.   ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET

In first nine months 2010, there were $3 million in restructuring charges primarily for severance associated with the acquisition and integration of Genovique.  In first nine months 2009, restructuring charges were $23 million, net.  The 2009 charges, primarily for severance, resulted from a reduction in force.

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

The following table summarizes the beginning reserves, charges to and changes in estimates to the reserves as described above, and the cash and non-cash reductions to the reserves attributable to asset impairments and the cash payments for severance and site closure costs for full year 2009 and first nine months 2010:

(Dollars in millions)		Balance at January 1, 2009		Provision/ Adjustments		Non-cash Reductions		Cash Reductions		Balance at December 31, 2009
Non-cash charges	$	--	$	179	$	(179)	$	--	$	--
Severance costs		5		23		--		(23)		5
Site closure and other restructuring costs		25		(2)		--		(18)		5
Total	$	30	$	200	$	(179)	$	(41)	$	10
		Balance at January 1, 2010		Provision/ Adjustments		Non-cash Reductions		Cash Reductions		Balance at September 30, 2010
Non-cash charges	$	--	$	--	$	--	$	--	$	--
Severance costs		5		3		--		(6)		2
Site closure and other restructuring costs		5		--		--		--		5
Total	$	10	$	3	$	--	$	(6)	$	7

8

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4.   INVENTORIES

		September 30,		December 31,
(Dollars in millions)		2010		2009
At FIFO or average cost (approximates current cost)
Finished goods	$	623	$	547
Work in process		193		168
Raw materials and supplies		299		262
Total inventories		1,115		977
LIFO reserve		(463)		(446)
Total inventories	$	652	$	531

Inventories valued on the LIFO method were approximately 70 percent and 75 percent of total inventories as of September 30, 2010 and December 31, 2009, respectively.

5.    GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows:

(Dollars in millions)		CASPI Segment		PCI Segment		Other Segments		Total
Reported balance at December 31, 2009	$	309	$	1	$	5	$	315
Additions		--		63		--		63
Currency translation adjustments		(1)		--		--		(1)
Reported balance at September 30, 2010	$	308	$	64	$	5	$	377

As a result of the purchase of Genovique during second quarter 2010, the Company recorded goodwill of $63 million.  The remaining goodwill primarily consists of goodwill in the Coatings, Adhesives, Specialty Polymers and Inks ("CASPI") segment.  Included in the reported balance for goodwill are accumulated impairment losses of $44 million at December 31, 2009 and September 30, 2010.

Intangible assets include developed technology, customer lists, patents and patent licenses, and trademarks with a net book value of $101 million as of September 30, 2010 and $43 million as of December 31, 2009.  As a result of the Genovique acquisition, the Company recorded $59 million in customer relationships, technology, and other intangible assets.  Intangible assets are included in other noncurrent assets on the balance sheet.

Refer to Note 2, "Acquisitions", for further details regarding the acquisition of Genovique.

6.   PAYABLES AND OTHER CURRENT LIABILITIES

		September 30,		December 31,
(Dollars in millions)		2010		2009
Trade creditors	$	511	$	433
Accrued payrolls, vacation, and variable-incentive compensation		146		125
Accrued taxes		35		33
Post-employment obligations		63		61
Interest payable		29		32
Other		152		116
Total payables and other current liabilities	$	936	$	800

The current portion of post-employment obligations is an estimate of current year payments.

  9

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7.  PROVISION FOR INCOME TAXES

		Third Quarter				First Nine Months
(Dollars in millions)		2010		2009		2010		2009
Provision for income taxes	$	88	$	69	$	214	$	110
Effective tax rate		34 %		40 %		34 %		39 %

Third quarter 2010 effective tax rate reflects the Company's expected full year tax rate on reported earnings before income taxes of approximately 34 percent.  Third quarter 2009 effective tax rate reflects an $11 million tax charge associated with the recapture of gasification investment tax credits.

Excluding discrete items, first nine months 2010 effective tax rate reflects the Company's expected full year tax rate on reported earnings before income taxes of approximately 34 percent.  First nine months 2009 effective tax rate reflects an $11 million tax charge associated with the recapture of gasification investment tax credits and a $7 million tax charge associated with a change in accounting method for tax purposes to accelerate timing of deductions for manufacturing repairs expense.

The Company or one of its subsidiaries files tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005.

8.   BORROWINGS

		September 30,		December 31,
(Dollars in millions)		2010		2009
Borrowings consisted of:
7% notes due 2012	$	152	$	152
6.30% notes due 2018		203		205
5.5% notes due 2019		250		250
7 1/4% debentures due 2024		497		497
7 5/8% debentures due 2024		200		200
7.60% debentures due 2027		298		298
Other		6		2
Total borrowings		1,606		1,604
Borrowings due within one year		(4)		--
Long-term borrowings	$	1,602	$	1,604

At September 30, 2010, the Company had a $700 million revolving credit facility ("Credit Facility") in two tranches, with $125 million expiring in 2012 and $575 million expiring in 2013.  Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a facility fee is paid on the total commitment.  In addition, the Credit Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios.  The Company was in compliance with all such covenants for all periods presented.  At September 30, 2010 and December 31, 2009, the Company had no outstanding borrowings under the Credit Facility.

The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes.  Accordingly, any outstanding commercial paper borrowings reduce borrowings available under the Credit Facility.  Given the expiration dates of the Credit Facility, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability and intent to refinance such borrowings on a long-term basis.

10

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

At September 30, 2010, the Company also had a $200 million line of credit under its annually renewable accounts receivable securitization agreement ("A/R Facility").  The A/R Facility was renewed in July 2010.  Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and the Company pays a fee to maintain availability of the A/R Facility.  In addition, the A/R Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios.  The Company was in compliance with all such covenants for all periods presented.  At September 30, 2010, the Company had no outstanding borrowings under the A/R Facility.  Refer to Note 11, "Commitments", for fu rther details regarding the A/R Facility.

9.   RETIREMENT PLANS

DEFINED BENFIT PENSION PLANS

Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits.  Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined.

Below is a summary of the components of net periodic benefit cost recognized for Eastman's significant defined benefit pension plans:

Summary of Components of Net Periodic Benefit Costs
		Third Quarter				First Nine Months
(Dollars in millions)		2010		2009		2010		2009
Service cost	$	11	$	10	$	33	$	31
Interest cost		21		22		63		65
Expected return on assets		(24)		(25)		(77)		(74)
Amortization of:
Prior service credit		(4)		(4)		(12)		(12)
Actuarial loss		10		8		32		25
Net periodic benefit cost	$	14	$	11	$	39	$	35

The Company contributed $35 million and $30 million to its U.S. defined benefit pension plan in third quarter 2010 and 2009, respectively.

POSTRETIREMENT WELFARE PLANS

Eastman provides a subsidy toward life insurance and health care and dental benefits for eligible retirees hired prior to January 1, 2007, and a subsidy toward health care and dental benefits for retirees' eligible survivors.  In general, Eastman provides those benefits to retirees eligible under the Company's U.S. plans.  Similar benefits are also made available to retirees of Holston Defense Corporation, a wholly-owned subsidiary of the Company that, prior to January 1, 1999, operated a government-owned ammunitions plant.

Eligible employees hired on or after January 1, 2007 have access to postretirement life insurance and health care and dental benefits, but Eastman does not provide a subsidy toward the premium cost of postretirement benefits for those employees.

A few of the Company's non-U.S. operations have supplemental health benefit plans for certain retirees, the cost of which is not significant to the Company.

11

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Costs recognized for benefits for eligible retirees hired prior to January 1, 2007 are recorded using estimated amounts, which may change as actual costs derived for the year are determined.  Below is a summary of the components of net periodic benefit cost recognized for the Company's U.S. other post-employment plans:

Summary of Components of Net Periodic Benefit Costs
		Third Quarter				First Nine Months
(Dollars in millions)		2010		2009		2010		2009
Service cost	$	2	$	2	$	7	$	6
Interest cost		11		12		33		34
Expected return on assets		(1)		(1)		(2)		(2)
Amortization of:
Prior service credit		(6)		(5)		(18)		(17)
Actuarial loss		4		4		10		10
Net periodic benefit cost	$	10	$	12	$	30	$	31

10.   ENVIRONMENTAL MATTERS

Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes; the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies.  In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP"), by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs.  In addition, the Company will be required to incur costs for environmental remediation and closure and postclosure under the federal Resource Conservation and Recovery Act.  Reserves for environmental contingencies have been established in accord ance 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 2009 Annual Report on Form 10-K.  Because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations or cash flows.  The Company's total reserve for environmental contingencies was $40 million and $42 million at September 30, 2010 and December 31, 2009, respectively.  Estimated future environmental expenditures for remediation costs range from the minimum or best estimate of $10 million to the maximum of $21 million at September 30, 2010, and $10 million to the maximum of $20 million at December 31, 2009.  The best estima te accrued to date over the facilities' estimated useful lives for asset retirement obligation costs is $30 million and $32 million at September 30, 2010 and December 31, 2009, respectively.

11.   COMMITMENTS

Purchasing Obligations and Lease Commitments

At September 30, 2010, the Company had various purchase obligations totaling approximately $1 billion over a period of approximately 15 years for materials, supplies, and energy incident to the ordinary conduct of business.  The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling $88 million over a period of several years.  Of the total lease commitments, approximately 15 percent relates to machinery and equipment, including computer and communications equipment and production equipment; approximately 50 percent relates to real property, including office space, storage facilities, and land; and approximately 35 percent relates to railcars.

12

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable Securitization Program

Effective January 1, 2010, the Company adopted amended accounting guidance for transfers of financial assets which impacts the financial statement presentation for activity under the Company's $200 million accounts receivable securitization program.  Beginning for periods after December 31, 2009, transfers of receivables interests that were previously treated as sold and removed from the balance sheet will be included in trade receivables, net and reflected as secured borrowings on the balance sheet.  The Company's Statement of Financial Position at September 30, 2010 reflects an increase in trade receivables, $200 million of which was transferred at December 31, 2009 under the securitization program and reduced cash flows from operating activities by that amount for first nine months 2010.  As a result of th e adoption of this accounting guidance, any amounts drawn on this accounts receivable securitization program would now be reflected as secured borrowings and disclosed in Note 8, "Borrowings".  At December 31, 2009 and September 30, 2009 the accounts receivable securitization program was fully drawn.

Guarantees

The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease.  These residual value guarantees at September 30, 2010totaled $160 million and consisted primarily of leases for railcars and company aircraft.  Leases with guarantee amounts totaling $11 million, $139 million, and $10 million will expire in 2011, 2012, and 2014 and beyond, respectively.  The Company believes, based on current facts and circumstances, that the likelihood of material payments pursuant to such guarantees is remote.

Variable Interest Entities

The accounting guidance on the consolidation of Variable Interest Entities ("VIEs") is effective for all VIEs or potential VIEs the Company is involved with on or after January 1, 2010.  This guidance amends the evaluation criteria to identify which entity has a controlling financial interest of a variable interest entity and requires ongoing reassessments.  The Company has evaluated its material contractual relationships under the new guidance and concluded that the entities involved in these relationships are not VIEs or, in the case of Primester, a joint venture that manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the Company has shared control of the VIE.  As such, the Company is not required to consolidate these entities.

12.   FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Borrowings

The fair value for fixed-rate borrowings is based on current interest rates for comparable securities.

		September 30, 2010				December 31, 2009
(Dollars in millions)		Recorded Amount		Fair Value		Recorded Amount		Fair Value
Long-term borrowings	$	1,602	$	1,800	$	1,604	$	1,656

The Company's floating-rate borrowings approximate fair value.

13

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

The following chart shows the financial assets and liabilities measured at fair value on a recurring basis.

(Dollars in millions)			Fair Value Measurements at September 30, 2010
Description		September 30,2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivative Assets	$	93	$	--	$	93	$	--
Derivative Liabilities		(93)		--		(93)		--
	$	--	$	--	$	--	$	--

(Dollars in millions)			Fair Value Measurements at December 31, 2009
Description		December 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivative Assets	$	52	$	--	$	52	$	--
Derivative Liabilities		(21)		--		(21)		--
	$	31	$	--	$	31	$	--

Hedging Programs

The Company is exposed to market risk, such as changes in currency exchange rates, raw material and energy costs and interest rates.  The Company uses various derivative financial instruments pursuant to the Company's hedging policies to mitigate these market risk factors and their effect on the cash flows of the underlying transactions.  Designation is performed on a specific exposure basis to support hedge accounting.  The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged.  The Company does not hold or issue derivative financial instruments for trading purposes.  For further information, see Note 9, "Fair Value of Financial Instruments", to the consolidated financial statem ents in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.

Fair Value Hedges

Fair value hedges are derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk.  For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

As of September 30, 2010, the total notional amount of the Company's interest rate swaps was $146 million.  The fair value of the derivative of $3 million was recorded in other noncurrent assets.

Cash Flow Hedges

Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk.  For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income, net of income taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

During the second quarter 2010, the Company entered into forward starting interest rate swaps designated as cash flow hedges to manage interest rate exposure related to the probable future issuance of fixed-rate debt.  These forward starting interest rate swaps are based on a total notional amount of $300 million.

As of September 30, 2010, the total amount of the Company's foreign exchange forward and option contracts was a $19 million asset.  As of September 30, 2010, the total amount of the Company's feedstock/energy forward and option contracts was a $4 million liability.  As of September 30, 2010, the total amount of the Company's forward starting interest rate swaps contracts was an $18 million liability.

14

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Derivatives Designated as Cash Flow Hedging Instruments

(Dollars in millions)			Fair Value
Derivative Assets	Statement of Financial Position Location		September 30, 2010		December 31, 2009
Commodity contracts	Other current assets	$	--	$	7
Foreign exchange contracts	Other current assets		14		14
Foreign exchange contracts	Other noncurrent assets		11		11
		$	25	$	32

(Dollars in millions)			Fair Value
Derivative Liabilities	Statement of Financial Position Location		September 30, 2010		December 31, 2009
Commodity  contracts	Payables and other current liabilities	$	4	$	1
Foreign exchange contracts	Payables and other current liabilities		3		--
Foreign exchange contracts	Other noncurrent liabilities		3		--
Forward starting interest rate swap contracts	Other noncurrent liabilities		18		--
		$	28	$	1

Derivatives' Cash Flow Hedging Relationships

Third Quarter
(Dollars in millions)
Derivatives' Cash Flow Hedging Relationships		Amount after tax of gain/ (loss) recognized in Other Comprehensive Income on derivatives (effective portion)			Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)		Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
		September 30, 2010		September 30, 2009			September 30, 2010		September 30, 2009
Commodity  contracts	$	6	$	1	Cost of sales	$	(2)	$	--
Foreign exchange contracts		(30)		(8)	Sales		11		5
Forward starting interest rate swap contracts		(9)		--			--		--
	$	(33)	$	(7)		$	9	$	5

First Nine Months
(Dollars in millions)
Derivatives' Cash Flow Hedging Relationships		Amount after tax of gain/ (loss) recognized in Other Comprehensive Income on derivatives (effective portion)			Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)		Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion)
		September 30, 2010		September 30, 2009			September 30, 2010		September 30, 2009
Commodity  contracts	$	(6)	$	6	Cost of sales	$	2	$	(9)
Foreign exchange contracts		(7)		(12)	Sales		34		19
Forward starting interest rate swap contracts		(12)		--			--		--
	$	(25)	$	(6)		$	36	$	10

For all periods presented, there were no material ineffectiveness with regard to the Company's cash flow hedges.

15

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Nondesignated / Nonqualifying Derivative Instruments

The Company mitigates foreign currency transaction exposure within a quarter from the point of recording a sale or purchase transaction to the point of receipt of the currency related to that transaction through its foreign exchange tactical hedging program.  The gains or losses on these nonqualifying derivatives or derivatives that are not designated as hedges are marked to market in the line item "Other charges (income), net" of the Unaudited Consolidated Statements of Earnings.  The Company recognized an approximately $11 million net loss on nonqualifying derivatives during the quarter ended September 30, 2010.  The Company recognized an approximately $4 million net gain on nonqualifying derivatives during the nine months ended September 30, 2010.

13.   STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders' equity for first nine months 2010 is provided below:

(Dollars in millions)	Common Stock at Par Value $	Paid-in Capital $	Retained Earnings $	Accumulated Other Comprehensive Income (Loss) $	Treasury Stock at Cost $	Total Stockholders' Equity $
Balance at December 31, 2009	1	661	2,571	(385)	(1,335)	1,513
Net Earnings	--	--	419	--	--	419
Cash Dividends Declared (1)	--	--	(96)	--	--	(96)
Other Comprehensive Income (Loss)	--	--	--	(7)	--	(7)
Share-Based Compensation Expense (2)	--	15	--	--	--	15
Stock Option Exercises	--	35	--	--	--	35
Other (3)	--	(1)	--	--	--	(1)
Stock Repurchases	--	--	--	--	(68)	(68)
Balance at September 30, 2010	1	710	2,894	(392)	(1,403)	1,810

(1)   Includes cash dividends declared, but unpaid.

(2)   Includes the fair value of equity share-based awards recognized for share-based compensation.

(3)   Includes tax benefits relating to the difference between the amounts deductible for federal income taxes over the amounts charged to income for book value purposes credited to paid-in capital and other items.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

(Dollars in millions)	Cumulative Translation Adjustment $	Unrecognized Losses and Prior Service Credits for Benefit Plans $	Unrealized Gains (Losses) on Derivative Instruments $	Unrealized Losses on Investments $	Accumulated Other Comprehensive Income (Loss) $
Balance at December 31, 2008	60	(414)	20	(1)	(335)
Period change	17	(74)	7	--	(50)
Balance at December 31, 2009	77	(488)	27	(1)	(385)
Period change	7	11	(25)	--	(7)
Balance at September 30, 2010	84	(477)	2	(1)	(392)

Amounts of other comprehensive income (loss) are presented net of applicable taxes.  The Company records deferred income taxes on the cumulative translation adjustment related to branch operations and other entities included in the Company's consolidated U.S. tax return.  No deferred income taxes are provided on the cumulative translation adjustment of subsidiaries outside the United States, as such cumulative translation adjustment is considered to be a component of permanently invested, unremitted earnings of these foreign subsidiaries.

16

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14.   EARNINGS AND DIVIDENDS PER SHARE

	Third Quarter		First Nine Months
	2010	2009	2010	2009
Shares used for earnings per share calculation (in millions):
Basic	71.9	72.6	72.1	72.5
Diluted	73.3	73.5	73.6	73.3

In third quarter and first nine months 2010, common shares underlying options to purchase 589,585 shares of common stock and 696,185 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total proceeds that would be received for these awards.  Third quarter and first nine months 2010 reflect the impact of share repurchases of 1.1million shares.

In third quarter and first nine months 2009, common shares underlying options to purchase 3,037,007 shares of common stock and 3,720,448 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total proceeds that would be received for these awards.  There were no share repurchases in first nine months 2009.

The Company declared cash dividends of $0.44 per share in third quarter 2010 and 2009 and $1.32 per share in first nine months 2010 and 2009.

15.   SHARE-BASED COMPENSATION AWARDS

The Company utilizes share-based awards under employee and non-employee director compensation programs.  These share-based awards may include restricted and unrestricted stock, restricted stock units, stock options, and performance shares.  In third quarter 2010 and 2009, approximately $6 million and $4 million, respectively, of compensation expense before tax were recognized in selling, general and administrative expense in the earnings statement for all share-based awards.  The impact on third quarter 2010 and 2009 net earnings of approximately $4 million and $3 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.

In first nine months 2010 and 2009, $16 million and $13 million, respectively, of compensation expense before tax were recognized in selling, general and administrative expense in the earnings statement for all share-based awards.  The impact on first nine months 2010 and 2009 net earnings of $10 million and $8 million, respectively, is net of deferred tax expense related to share-based award compensation.

Additional information regarding share-based compensation plans and awards may be found in Note 15, "Share-Based Compensation Plans and Awards", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.

16.   SUPPLEMENTAL CASH FLOW INFORMATION

Included in the line item "Other items, net" of the "Cash flows from operating activities" section of the unaudited Consolidated Statements of Cash Flows are specific changes to certain balance sheet accounts as follows:

(Dollars in millions)		First Nine Months
		2010		2009
Current assets	$	--	$	7
Other assets		6		35
Current liabilities		34		5
Long-term liabilities and equity		6		1
Total	$	46	$	48

17

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The above changes included transactions such as monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, accrued taxes, value-added taxes, and other miscellaneous accruals.

17.    SEGMENT INFORMATION

The Company's products and operations are managed and reported in five reportable operating segments, consisting of the CASPI segment, the Fibers segment, the PCI segment, the Performance Polymers segment, and the Specialty Plastics segment.  For additional information concerning the Company's segments' businesses and products, see Note 22, "Segment Information", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.

Research and development and other expenses not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown in the tables below as "other" operating losses.

In first quarter 2010, the Company transferred certain intermediates product lines from the Performance Polymers segment to the PCI segment to improve optimization of manufacturing assets supporting the three raw material streams that supply the Company's downstream businesses.  The revised segment composition reflects how management views and evaluates operations.  Accordingly, the amounts for sales, operating earnings, and assets have been adjusted to retrospectively apply these changes to all periods presented.

		Third Quarter
(Dollars in millions)		2010		2009
Sales
CASPI	$	406	$	338
Fibers		301		257
PCI		534		377
Performance Polymers		222		165
Specialty Plastics		266		200
Total Sales	$	1,729	$	1,337

		First Nine Months
(Dollars in millions)		2010		2009
Sales
CASPI	$	1,195	$	890
Fibers		842		779
PCI		1,557		997
Performance Polymers		638		509
Specialty Plastics		785		544
Total Sales	$	5,017	$	3,719

		Third Quarter
(Dollars in millions)		2010		2009
Operating Earnings (Loss)
CASPI	$	91	$	84
Fibers		90		79
PCI		77		31
Performance Polymers		6		(8)
Specialty Plastics		31		13
Total Operating Earnings by Segment		295		199
Other		(15)		(8)
Total Operating Earnings	$	280	$	191

18

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

		First Nine Months
(Dollars in millions)		2010		2009
Operating Earnings (Loss)
CASPI (1)	$	251	$	148
Fibers (1)		252		222
PCI (1) (2)		183		22
Performance Polymers (1)		(1)		(19)
Specialty Plastics (1)		73		3
Total Operating Earnings by Segment		758		376
Other		(39)		(29)
Total Operating Earnings	$	719	$	347

(1)	First nine months 2009 includes a restructuring charge primarily for a severance program of $5 million, $4 million, $6 million, $4 million, and $4 million in the CASPI, Fibers, PCI, Performance Polymers and Specialty Plastics segments, respectively.
(2)	First nine months 2010 includes restructuring charges of $3 million, primarily for severance in the PCI segment.  See Note 3, "Asset Impairments and Restructuring Charges, Net", for additional information.

		September 30,		December 31,
(Dollars in millions)		2010		2009
Assets by Segment (1)
CASPI	$	1,278	$	1,128
Fibers		863		726
PCI		1,201		845
Performance Polymers		591		575
Specialty Plastics		990		910
Total Assets by Segment		4,923		4,184
Corporate Assets		1,066		1,331
Total Assets	$	5,989	$	5,515

 (1) The chief operating decision maker holds segment management accountable for accounts receivable, inventory, fixed assets, goodwill, and intangibles.

18.   LEGAL MATTERS

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

19.   SUBSEQUENT EVENTS

On October 23, 2010, the Company entered into a definitive agreement with DAK Americas, LLC, to sell the polyethylene terephthalate ("PET") business, related assets at the Columbia, South Carolina site, and technology of its Performance Polymers segment.  The transaction is expected to close during fourth quarter 2010.  The sale is subject to regulatory approvals and satisfaction of other customary closing conditions.  The total cash proceeds of the transaction are expected to be $600 million before transaction fees and working capital adjustments at closing.

19

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Performance Polymers segment assets are presented as held and used for the periods presented, and will be presented as discontinued operations and not included in the results from continuing operations for all periods presented in future financial statements.  The carrying amount of the Performance Polymers PET assets and liabilities as of September 30, 2010 are as follows: net property, plant and equipment at the Columbia, South Carolina site -- $374 million; non-current assets, including technology-- $22 million; and net working capital -- $151 million.

In conjunction with the sale of the Performance Polymers PET business, the Company has approved a restructuring plan to reduce costs and will recognize severance restructuring charges in fourth quarter 2010 estimated to be between $20 and $25 million.

20

 

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM	Page
Critical Accounting Estimates	22
Presentation of Non-GAAP Financial Measures	22
Overview	23
Results of Operations	24
Summary by Operating Segment	27
Summary by Customer Location	32
Liquidity, Capital Resources, and Other Financial Information	33
Outlook	37
Forward-Looking Statements and Risk Factors	38

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Eastman Chemical Company's (the "Company" or "Eastman") audited consolidated financial statements, including related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2009 Annual Report on Form 10-K, and the Company's unaudited consolidated financial statements, including related notes, included elsewhere in this report.  All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.

21

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING ESTIMATES

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"), the Company's management must make decisions which impact the reported amounts and the related disclosures.  Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, sales revenue and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, impairment of long-lived assets, environmental costs, U.S. pension and other post-employment benefits, litigation and contingent liabilities, and income taxes.  ; The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  The Company's management believes the critical accounting estimates described in Part II, Item 7 of the Company's 2009 Annual Report on Form 10-K are the most important to the fair presentation of the Company's financial condition and results.  These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.

PRESENTATION OF NON-GAAP FINANCIAL MEASURES

This Management's Discussion and Analysis includes the following non-GAAP financial measures and accompanying reconciliations to the most directly comparable GAAP financial measures.  The non-GAAP financial measures used by the Company may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance or liquidity prepared in accordance with GAAP.

·   Company and segment operating earnings, net earnings, and diluted earnings per share ("EPS") excluding asset impairments and restructuring charges, net; and

·   Cash flows from operating activities excluding the impact of adoption of amended accounting guidance for transfers of financial assets.

In first nine months 2010, the Company recognized $3 million in restructuring charges primarily for severance associated with the acquisition and integration of Genovique Specialties Corporation ("Genovique").

In first nine months 2009, the Company recognized $23 million in restructuring charges, primarily for severance, resulting from a reduction in force.

In first quarter 2010, the Company adopted amended accounting guidance for transfers of financial assets which impacts the financial statement presentation for activity under the Company's $200 million accounts receivable securitization program.  For periods beginning after December 31, 2009, transfers of receivables interests that were previously treated as sold and removed from the balance sheet will be included in trade receivables, net and reflected as secured borrowings on the balance sheet.  The Company's Statement of Financial Position at September 30, 2010 reflects an increase in trade receivables, $200 million of which was transferred at December 31, 2009 under the securitization program and reduced cash flows from operating activities by that amount for first quarter 2010.

For evaluation and analysis of ongoing business results and of the impact on the Company and segments of strategic decisions and actions to reduce costs and to improve the profitability of the Company, Eastman's management believes that Company and segment earnings should be considered both with and without asset impairments and restructuring charges.  Management believes that investors can better evaluate and analyze historical and future business trends if they also consider the reported Company and segment results, respectively, without the asset impairments and restructuring charges, net.  In addition, management believes that cash provided by (used in) operating activities should be considered both with and without the impact of adoption of amended accounting guidance for transfers of financial assets.   Management utilizes these measures to evaluate business performance and its cash position and in determining certain performance-based compensation.  These measures, excluding the identified items, are not recognized in accordance with GAAP and should not be viewed as alternatives to the GAAP measures of performance.

22

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company generated sales revenue of $1.7 billion and $1.3 billion in third quarter 2010 and 2009, respectively and $5.0 billion and $3.7 billion in first nine months 2010 and 2009, respectively.  Sales revenue increases for both third quarter and first nine months 2010 compared to comparable 2009 periods were due primarily to higher sales volume attributed to improved end-use demand in packaging, durable goods, and other markets in third quarter 2010 and the upturn in the global economy in first nine months 2010 as well as the positive impact of growth initiatives in both periods.  Sales revenue increases were also due to higher selling prices in response to higher raw material and energy costs.

Operating earnings were $280 million in third quarter 2010 compared with $191 million in third quarter 2009, and $719 million in first nine months 2010 compared with $347 million in first nine months 2009.  Operating earnings were negatively impacted by restructuring charges of $3 million in first nine months 2010 and $23 million in first nine months 2009.  The increases in both comparable periods were due to higher sales volume and higher capacity utilization which led to lower unit costs.  In addition, higher selling prices more than offset higher raw material and energy costs.  Operating earnings in third quarter 2010 were also positively impacted by a partial settlement of an insurance claim of $22 million related to the first quarter 2010 power outage at the Company's Longview, Texas manufactur ing facility, which was primarily reflected in the Performance Chemicals and Intermediates ("PCI") and Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segments.  In first nine months 2010, the Company received $32 million in insurance proceeds from partial settlement related to the outage.  The Company expects any remaining insurance proceeds in fourth quarter 2010.  First nine months 2010 operating earnings also included $12 million from acetyl license revenue.  First nine months 2009 operating earnings included approximately $20 million in costs related to the reconfiguration of the Longview, Texas facility.

The Company generated $297 million in cash from operating activities during first nine months 2010 compared to $668 million generated in first nine months 2009.  Excluding the $200 million impact of the adoption of amended accounting guidance described above in "Presentation of Non-GAAP Financial Measures", Eastman generated $497 million in cash from operating activities in first nine months 2010 primarily due to higher net earnings partially offset by an increase in working capital.  Excluding the impact of the adoption of this amended accounting guidance, the Company expects to generate free cash flow of greater than $300 million for full year 2010, assuming capital expenditures of approximately $225 million and U.S. defined benefit pension plan funding in an amount of $135 million, of which $100 million is expected to be contributed in fourth quarter 2010.  Free cash flow is defined as cash from operating activities less capital expenditures and dividends.

The Company is progressing on its growth initiatives in 2010.

·   In the Fibers segment, the Korean acetate tow facility was acquired and commenced production in first quarter.  Commercial operations have commenced and customer qualifications are continuing.

·   In the PCI segment, Genovique, a global producer of specialty non-phthalate plasticizers for water-based adhesives and other applications, was acquired in second quarter.

·   In the Specialty Plastics segment, the monomer manufacturing facility and the first Eastman TritanTM copolyester polymer manufacturing facility in Kingsport, Tennessee commenced production in first quarter. The Company is adding another 30 thousand metric tons of resin capacity for TritanTM, which is expected to be online by the end of 2011.

·   In the Specialty Plastics segment, the Company is expanding its capacity for cyclohexane dimethanol ("CHDM") modified polymers, a monomer used in the manufacture of copolyester, by approximately 25 percent and expects the capacity to be online in two phases in late 2011 and in 2012.

·   In the Specialty Plastics segment, the Company is expanding its cellulose triacetatecapacity by approximately 70 percent, with the new capacity expected to be online in first quarter 2012.

·   In the CASPI segment, the Company has commenced the third expansion of the Company’s hydrogenated hydrocarbon resins capacity in Middelburg, the Netherlands which will increase this capacity by an additional 20 percent and is expected to be online in second half 2011.  The Company is also expanding its Longview, Texas hydrogenated hydrocarbon resins capacity which is expected to be online in early 2011.

23

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The Company announced on October 23, 2010 that it has entered into a definitive agreement with DAK Americas, LLC, to sell the polyethylene terephthalate ("PET") business, related assets at the Columbia, South Carolina site, and technology of its Performance Polymers segment.  The transaction is expected to close during fourth quarter of 2010.  The sale, which is subject to regulatory approvals and satisfaction of other customary closing conditions, is not expected to impact product lines in the Specialty Plastics segment.  The total cash proceeds of the transaction are expected to be $600 million before transaction fees and working capital adjustments at closing.  In conjunction with the sale of the Performance Polymers PET busi ness, the Company on October 23, 2010 approved a restructuring plan to reduce costs and will recognize severance restructuring charges in fourth quarter 2010 estimated to be between $20 and $25 million.

RESULTS OF OPERATIONS

		Third Quarter				Volume Effect	Price Effect	Product Mix Effect	Exchange Rate Effect
(Dollars in millions)		2010		2009	Change
Sales	$	1,729	$	1,337	29 %	18 %	9 %	3 %	(1) %

		First Nine Months				Volume Effect	Price Effect	Product Mix Effect	Exchange Rate Effect
(Dollars in millions)		2010		2009	Change
Sales	$	5,017	$	3,719	35 %	20 %	11 %	4 %	-- %

Sales revenue in third quarter and first nine months 2010 compared to third quarter and first nine months 2009 increased $392 million and $1.3 billion, respectively, due primarily to higher sales volume in all segments and increased selling prices primarily in the PCI and CASPI segments.  The higher sales volume was primarily attributed to improved end-use demand in packaging, durable goods, and other markets in third quarter 2010 and the upturn in the global economy in first nine months 2010 as well as the positive impact of growth initiatives in both periods.  Sales revenue increases were also due to higher selling prices in response to higher raw material and energy costs.

		Third Quarter					First Nine Months
(Dollars in millions)		2010		2009	Change		2010		2009	Change
Gross Profit	$	445	$	328	36 %	$	1,170	$	767	53 %
As a percentage of sales		26 %		25 %			23 %		21 %

Gross profit in third quarter and first nine months 2010 increased compared to third quarter and first nine months 2009 in all segments.  The increase in both comparable periods was due to higher sales volume and higher selling prices, as well as higher capacity utilization which led to lower unit costs in first nine months 2010.  Gross profit in third quarter 2010 was positively impacted by $22 million from the partial settlement of the Longview, Texas insurance claim which was primarily reflected in the PCI and CASPI segments.  In first nine months 2010, the Company received $32 million in insurance proceeds from partial settlement related to the outage.  First nine months 2010 gross profit also included $12 million from acetyl license revenue.  First nine months 2009 gross profit includ ed approximately $20 million in costs related to the reconfiguration of the Longview, Texas facility.  The reconfiguration costs impacted the PCI and CASPI segments.

24

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

		Third Quarter					First Nine Months
(Dollars in millions)		2010		2009	Change		2010		2009	Change
Selling, General and Administrative Expenses	$	122	$	104	17 %	$	333	$	296	13 %
Research and Development Expenses		43		33	30 %		115		101	14 %
	$	165	$	137	20 %	$	448	$	397	13 %
As a percentage of sales		10 %		10 %			9 %		11 %

Selling, general and administrative expenses in third quarter and first nine months 2010 were higher compared to third quarter and first nine months 2009 primarily due to increased performance-based compensation expense and higher expenses for growth initiatives.

Research and development ("R&D") expenses were higher in third quarter and first nine months 2010 compared to third quarter and first nine months 2009 primarily due to higher R&D expenses for growth initiatives.

Asset Impairments and Restructuring Charges, Net

In first nine months 2010, there were $3 million in restructuring charges primarily for severance associated with the acquisition and integration of Genovique.  In first nine months 2009, restructuring charges were $23 million, net.  The 2009 charges, primarily for severance, resulted from a reduction in force.

For more information regarding asset impairments and restructuring charges, net see the segment discussions and Note 3, "Asset Impairments and Restructuring Charges, Net", to the Company's unaudited consolidated financial statementsin Part I, Item 1 of this Quarterly Report on Form 10-Q.

Operating Earnings

		Third Quarter					First Nine Months
(Dollars in millions)		2010		2009	Change		2010		2009	Change
Operating earnings	$	280	$	191	47 %	$	719	$	347	>100 %
Asset impairments and restructuring charges, net		--		--			3		23
Operating earnings excluding asset impairments and restructuring charges, net	$	280	$	191	47 %	$	722	$	370	95 %

Net Interest Expense

		Third Quarter					First Nine Months
(Dollars in millions)		2010		2009	Change		2010		2009	Change
Gross interest costs	$	27	$	23		$	81	$	73
Less:  Capitalized interest		1		3			2		10
Interest expense		26		20	30 %		79		63	25 %
Interest income		1		1			4		5
Net interest expense	$	25	$	19	32 %	$	75	$	58	29 %

Net interest expense increased $6 million and $17 million in third quarter and first nine months 2010 compared to third quarter and first nine months 2009, respectively, primarily due to lower capitalized interest resulting from lower capital spending and higher average borrowings.

25

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

For 2010, the Company expects net interest expense to increase compared with 2009 primarily due to lower capitalized interest and higher average borrowings.

Other Charges (Income), Net

		Third Quarter				First Nine Months
(Dollars in millions)		2010		2009		2010		2009
Foreign exchange transaction (gains) losses, net	$	(2)	$	--	$	7	$	2
Investment (gains) losses, net		(3)		(1)		(2)		4
Other, net		2		3		6		5
Other charges (income), net	$	(3)	$	2	$	11	$	11

Provision for Income Taxes

		Third Quarter				First Nine Months
(Dollars in millions)		2010		2009		2010		2009
Provision for income taxes	$	88	$	69	$	214	$	110
Effective tax rate		34 %		40 %		34 %		39 %

Third quarter 2010 effective tax rate reflects the Company's expected full year tax rate on reported earnings before income taxes of approximately 34 percent.  Third quarter 2009 effective tax rate reflects an $11 million tax charge associated with the recapture of gasification investment tax credits.

Excluding discrete items, first nine months 2010 effective tax rate reflects the Company's expected full year tax rate on reported earnings before income taxes of approximately 34 percent.  First nine months 2009 effective tax rate reflects an $11 million tax charge associated with the recapture of gasification investment tax credits and a $7 million tax charge associated with a change in accounting method for tax purposes to accelerate timing of deductions for manufacturing repairs expense.

Net Earnings and Diluted Earnings per Share
		Third Quarter
		2010				2009
(Dollars in millions, except diluted EPS)		$		EPS		$		EPS
Net earnings	$	170	$	2.33	$	101	$	1.38

		First Nine Months
		2010				2009
(Dollars in millions, except diluted EPS)		$		EPS		$		EPS
Net earnings	$	419	$	5.70	$	168	$	2.29
Asset impairments and restructuring charges, net of tax		2		0.03		14		0.20
Net earnings excluding asset impairments and restructuring charges, net of tax	$	421	$	5.73	$	182	$	2.49

26

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SUMMARY BY OPERATING SEGMENT

The Company's products and operations are managed and reported in five reportable operating segments, consisting of the CASPI segment, the Fibers segment, the PCI segment, the Performance Polymers segment, and the Specialty Plastics segment.  For additional information concerning the Company's operating businesses and products,see Note 22, "Segment Information", to the consolidated financial statements in Part II, Item 8 of the Company's 2009 Annual Report on Form 10-K.

Sales revenue and expenses not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown as "other" sales revenue and operating losses when applicable.  For more information, refer to Note 17, "Segment Information", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In first quarter 2010, the Company transferred certain intermediates product lines from the Performance Polymers segment to the PCI segment to improve optimization of manufacturing assets supporting the three raw material streams that supply the Company's downstream businesses.  The revised segment composition reflects how management views and evaluates operations.  Accordingly, the amounts for sales and operating earnings have been adjusted to retrospectively apply these changes to all periods presented.

CASPI Segment
			Third Quarter							First Nine Months
							Change							Change
(Dollars in millions)			2010		2009		$	%		2010		2009		$	%
Sales		$	406	$	338	$	68	20 %	$	1,195	$	890	$	305	34 %
	Volume effect						28	8 %						163	18 %
	Price effect						37	11 %						87	10 %
	Product mix effect						9	3 %						56	6 %
	Exchange rate effect						(6)	(2) %						(1)	-- %
Operating earnings			91		84		7	8 %		251		148		103	70 %
Asset impairments and restructuring charges, net			--		--		--			--		5		(5)
Operating earnings excluding asset impairments and restructuring charges, net			91		84		7	8 %		251		153		98	64 %

Sales revenue increased third quarter 2010 compared to third quarter 2009 due to higher selling prices and higher sales volume.  The higher selling prices were in response to higher raw material and energy costs.  The higher sales volume was attributed to improved end-use demand in the packaging and transportation markets primarily in the Europe, Middle East, and Africa and the United States and Canada regions and the positive impact of growth initiatives, including the hydrogenated hydrocarbon resins manufacturing capacity expansion in Middelburg, the Netherlands which was completed in fourth quarter 2009.

Sales revenue increased first nine months 2010 compared to first nine months 2009 due to higher sales volume, higher selling prices, and a favorable shift in product mix.  The higher sales volume in first nine months was attributed to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives.  The higher selling prices were in response to higher raw material costs.  The favorable shift in product mix was due to higher sales volume for specialty polymers and specialty coalescents product lines attributed to the demand recovery in the coatings markets, particularly in the Asia Pacific and Europe, Middle East, and Africa regions.

27

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Operating earnings increased $7 million in third quarter 2010 compared to third quarter 2009 and included $9 million from the partial settlement of the Longview, Texas insurance claim.  Operating earnings were negatively impacted by higher raw material and energy costs and increased costs of growth initiatives more than offsetting higher selling prices and higher sales volume.

Excluding the segment's portion of the severance charge for a reduction in force in first nine months 2009, operating earnings increased $98 million in first nine months 2010 compared to first nine months 2009 due primarily to higher sales volume and higher capacity utilization which led to lower unit costs and the favorable shift in product mix.  Operating earnings in first nine months 2010 were negatively impacted by higher raw material and energy costs.  In first nine months 2010, operating earnings included $12 million of the insurance proceeds from partial settlement related to the outage.  First nine months 2009 operating earnings included approximately $5 million in costs related to the reconfiguration of the Longview, Texas facility.  The asset impairments and restructuring charges, net for 2009 reflect the segment's portion of the severance charge for a reduction in force in first quarter 2009.

Fibers Segment
			Third Quarter							First Nine Months
							Change							Change
(Dollars in millions)			2010		2009		$	%		2010		2009		$	%
Sales		$	301	$	257	$	44	17 %	$	842	$	779	$	63	8 %
	Volume effect						30	12 %						44	6 %
	Price effect						--	-- %						2	-- %
	Product mix effect						15	5 %						17	2 %
	Exchange rate effect						(1)	-- %						--	-- %
Operating earnings			90		79		11	14 %		252		222		30	14 %
Asset impairments and restructuring charges, net			--		--		--			--		4		(4)
Operating earnings excluding asset impairments and restructuring charges, net			90		79		11	14 %		252		226		26	12 %

Sales revenue increased in third quarter 2010 compared to third quarter 2009 due to higher sales volume primarily for acetate tow, attributed to customer buying patterns, and acetate yarn product lines.

Sales revenue increased in first nine months 2010 compared to first nine months 2009 due to higher sales volume primarily for acetate yarn product lines.

Operating earnings increased $11 million in third quarter 2010 compared to third quarter 2009 primarily due to higher sales volume, particularly for acetate tow, and higher acetyl stream capacity utilization.

Excluding the segment's portion of the severance charge for a reduction in force in first nine months 2009, operating earnings increased $26 million in first nine months 2010 primarily due to higher sales volume and higher capacity utilization for acetate yarn product lines.

28

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

During first quarter 2010, the Company completed the acquisition of and commenced production at the Korean acetate tow manufacturing facility.  Commercial operations have commenced and customer qualifications are continuing.  The operation of the facility is expected to be fully integrated into the segment's production and sales processes in 2011.

PCI Segment
		Third Quarter							First Nine Months
						Change							Change
(Dollars in millions)		2010		2009		$	%		2010		2009		$	%
Sales	$	534	$	377	$	157	42 %	$	1,557	$	997	$	560	56 %
Volume effect						83	22 %						277	28 %
Price effect						67	18 %						234	23 %
Product mix effect						9	3 %						49	5 %
Exchange rate effect						(2)	(1) %						--	-- %
Operating earnings		77		31		46	>100 %		183		22		161	>100 %
Asset impairments and restructuring charges, net		--		--		--			3		6		(3)
Operating earnings excluding asset impairments and restructuring charges, net		77		31		46	>100 %		186		28		158	>100 %

Sales revenue increased in third quarter compared to third quarter 2009 due to higher sales volume and higher selling prices.  The higher sales volume was primarily due to growth in plasticizer product lines, which includes the addition of new plasticizer product lines from the acquisition of Genovique, and improved end-use demand in markets such as industrial chemicals and processing, agriculture, and health and wellness.  The higher selling prices were in response to higher raw material and energy costs.

Sales revenue increased in first nine months compared to the same period in 2009 due to higher sales volume, higher selling prices, and improved product mix.  The higher sales volume was primarily due to growth in plasticizer product lines, which includes the addition of new plasticizer product lines from the acquisition of Genovique, improved customer demand particularly in olefin-based product lines due to the upturn in the global economy, and the impact of competitor outages during the period.  Sales revenue also included $12 million from an acetyl technology licensing agreement in first nine months 2010.

Operating earnings increased $46 million in third quarter 2010 compared to third quarter 2009 due to higher selling prices which more than offset higher raw material and energy costs, and higher sales volume and higher capacity utilization which led to lower unit costs.  Operating earnings in third quarter 2010 were positively impacted by $12 million from the partial settlement of the Longview, Texas insurance claim.

29

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Excluding asset impairments and restructuring charges, net, operating earnings increased $158 million in first nine months 2010 compared to first nine months 2009 primarily due to higher selling prices and higher sales volume and higher capacity utilization which led to lower unit costs.  Operating earnings in first nine months 2010 were negatively impacted by higher raw material and energy costs.  First nine months 2010 operating earnings also included $12 million from acetyl license revenue and $3 million in restructuring charges, primarily for severance associated with the acquisition and integration of Genovique.  In first nine months 2010, operating earnings included $18 million of the insurance proceeds from partial settlement related to the outage.  Operating earnings in first nine months 200 9 included approximately $15 million of costs related to the reconfiguration of the Longview, Texas facility.  A restructuring charge in first nine months 2009 consisted of the segment's portion of the severance charge for a reduction in force.

In second quarter 2010, the Company acquired Genovique, a global producer of specialty non-phthalate plasticizers for water-based adhesives and other applications.  The transaction is expected to be accretive to the Company's full-year 2010 earnings per share.

Performance Polymers Segment
		Third Quarter							First Nine Months
						Change							Change
(Dollars in millions)		2010		2009		$	%		2010		2009		$	%
Sales	$	222	$	165	$	57	34 %	$	638	$	509	$	129	25 %
Volume effect						44	27 %						67	13 %
Price effect						14	8 %						69	13 %
Product mix effect						(1)	(1) %						(7)	(1) %
Exchange rate effect						--	-- %						--	-- %
Operating earnings (loss)		6		(8)		14	>100 %		(1)		(19)		18	95 %
Asset impairments and restructuring charges, net		--		--		--			--		4		(4)
Operating earnings (loss) excluding asset impairments and restructuring charges, net		6		(8)		14	>100 %		(1)		(15)		14	93 %

Sales revenue increased in third quarter and first nine months 2010 compared to third quarter and first nine months 2009 primarily due to higher sales volume and higher selling prices.  Sales volume increased due to improved operations of the Eastman IntegRexTM-based PET manufacturing facility.  Higher selling prices were due to sales in higher value end-use markets.

Operating results in third quarter 2010 increased $14 million compared to third quarter 2009 as the favorable impact of improved IntegRex™ operations and higher selling prices were partially offset by higher raw material and energy costs.  

Excluding the segment's portion of the severance charge for a reduction in force in first quarter 2009, operating results in first nine months 2010 increased $14 million compared to first nine months 2009 as the favorable impact of improved IntegRex™ operations and higher selling prices were partially offset by higher raw material and energy costs.  

30

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The Company announced in fourth quarter 2010 that it has entered into a definitive agreement with DAK Americas, LLC, to sell the PET business, related assets at the Columbia, South Carolina site, and technology of the Performance Polymers segment.  The transaction is expected to close during fourth quarter of 2010.

Specialty Plastics Segment
			Third Quarter							First Nine Months
							Change							Change
(Dollars in millions)			2010		2009		$	%		2010		2009		$	%
Sales		$	266	$	200	$	66	33 %	$	785	$	544	$	241	44 %
	Volume effect						55	27 %						201	37 %
	Price effect						3	1 %						1	-- %
	Product mix effect						9	5 %						35	6 %
	Exchange rate effect						(1)	-- %						4	1 %
Operating earnings			31		13		18	>100 %		73		3		70	>100 %
Asset impairments and restructuring charges, net			--		--		--			--		4		(4)
Operating earnings excluding asset impairments and restructuring charges, net			31		13		18	>100 %		73		7		66	>100 %

Sales revenue increased in third quarter and first nine months 2010 compared to third quarter and first nine months 2009 primarily due to higher sales volume.  The higher sales volume in third quarter was attributed to improved end-use demand for specialty packaging and consumer and durable goods as well as the positive impact of growth initiatives for core copolyesters and the TritanTM copolyester product line.  The higher sales volume in first nine months was attributed to improved customer demand due to the upturn in the global economy and the positive impact of growth initiatives for core copolyesters and the TritanTM copolyester product line. 

Operating earnings increased $18 million in third quarter 2010 compared to third quarter 2009 primarily due to higher sales volume, resulting in higher capacity utilization and lower unit costs which more than offset higher raw material and energy costs.

Excluding the segment's portion of the severance charge for a reduction in force in first quarter 2009, operating results increased $66 million in first nine months 2010 compared to first nine months 2009 primarily due to higher sales volume and higher capacity utilization which led to lower unit costs.

The adoption of the new TritanTM copolyester product line continues to be ahead of schedule.  The TritanTM copolyester is supplied from the monomer manufacturing facility and the first TritanTM copolyester polymer manufacturing facility in Kingsport, Tennessee which became operational in first quarter 2010.  The Company is adding another 30 thousand metric tons of resin capacity for TritanTM, which is expected to be online by the end of 2011.

31

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SUMMARY BY CUSTOMER LOCATION

   Sales Revenue

		Third Quarter
(Dollars in millions)		2010		2009	Change	Volume Effect	Price Effect	Product Mix Effect	Exchange Rate Effect
United States and Canada	$	946	$	737	28 %	18 %	10 %	-- %	-- %
Asia Pacific		369		282	31 %	15 %	9 %	6 %	1 %
Europe, Middle East, and Africa		291		222	31 %	20 %	7 %	10 %	(6) %
Latin America		123		96	28 %	19 %	10 %	(1) %	-- %
	$	1,729	$	1,337	29 %	18 %	9 %	3 %	(1) %

Sales revenue in the United States and Canada increased in third quarter 2010 compared to third quarter 2009 primarily due to higher sales volumes in all segments and higher selling prices in the PCI, CASPI, and Performance Polymers segments.

Sales revenue in Asia Pacific increased in third quarter 2010 compared to third quarter 2009 primarily due to higher sales volume particularly in the Specialty Plastics and Fibers segments, higher selling prices in all segments, and a favorable shift in product mix in all segments, particularly the Fibers segment.

Sales revenue in Europe, Middle East, and Africa increased in third quarter 2010 compared to third quarter 2009 primarily due to higher sales volume and a favorable shift in product mix in all segments and higher selling prices in the CASPI and PCI segments.

Sales revenue in Latin America increased in third quarter 2010 compared to third quarter 2009 primarily due to higher sales volume and higher selling prices particularly in the Performance Polymers segment.

		First Nine Months
(Dollars in millions)		2010		2009	Change	Volume Effect	Price Effect	Product Mix Effect	Exchange Rate Effect
United States and Canada	$	2,746	$	2,096	31 %	19 %	12 %	-- %	-- %
Asia Pacific		1,058		769	38 %	18 %	10 %	9 %	1 %
Europe, Middle East, and Africa		852		607	40 %	23 %	3 %	15 %	(1) %
Latin America		361		247	46 %	31 %	15 %	-- %	-- %
	$	5,017	$	3,719	35 %	20 %	11 %	4 %	-- %

Sales revenue in the United States and Canada increased in first nine months 2010 compared to first nine months 2009 primarily due to higher sales volumes and higher selling prices particularly in the PCI segment.

32

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Sales revenue in Asia Pacific increased in first nine months 2010 compared to first nine months 2009 primarily due to higher sales volume, higher selling prices, and a favorable shift in product mix in all segments.

Sales revenue in Europe, Middle East, and Africa increased in first nine months 2010 compared to first nine months 2009 primarily due to higher sales volume and a favorable shift in product mix in all segments.  Product mix included sales revenue from the acetyl license in the PCI segment.The region had minimal price effect change compared to other regions due to fewer sales from commodity product lines.

Sales revenue in Latin America increased in first nine months 2010 compared to first nine months 2009 primarily due to higher sales volume and higher selling prices particularly in the Performance Polymers segment.

With a substantial portion of sales to customers outside the United States, Eastman is subject to the risks associated with operating in international markets.  To mitigate its exchange rate risks, the Company frequently seeks to negotiate payment terms in U.S. dollars or euros.  In addition, where it deems such actions advisable, the Company engages in foreign currency hedging transactions and requires letters of credit and prepayment for shipments where its assessment of individual customer and country risks indicates their use is appropriate.  For additional information concerning these practices, see Note 9, "Fair Value of Financial Instruments", to the consolidated financial statements in Part II, Item 8 and Part II, Item 7A of the Company's 2009 Annual Report on Form 10-K and Forward-Looking Statements and Risk Factors of this Quarterly Report on Form 10-Q.

LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION

Cash Flows

		First Nine Months
(Dollars in millions)		2010		2009
Net cash provided by (used in)
Operating activities	$	297	$	668
Investing activities		(323)		(313)
Financing activities		(126)		(74)
Effect of exchange rate changes on cash and cash equivalents		1		--
Net change in cash and cash equivalents		(151)		281
Cash and cash equivalents at beginning of period		793		387
Cash and cash equivalents at end of period	$	642	$	668

		First Nine Months
(Dollars in millions)		2010		2009
Net cash provided by operating activities	$	297	$	668
Impact of adoption of amended accounting guidance (1)		200		--
Net cash provided by operating activities excluding item		497		668
Additions to properties and equipment		(133)		(268)
Dividends paid to stockholders		(96)		(96)
Free Cash Flow	$	268	$	304

(1)   First nine months 2010 cash from operating activities reflected the adoption of amended accounting guidance for transfers of financial assets which resulted in $200 million of receivables, which were previously accounted for as sold and removed from the balance sheet when transferred under the accounts receivable securitization program, being included on the first quarter balance sheet as trade receivables, net.  This increase in receivables reduced cash from operations by $200 million in first quarter 2010.

33

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Cash provided by operating activities was $297 million during first nine months 2010 compared to $668 million provided by operating activities in first nine months 2009.  The cash provided in first nine months 2010 was primarily due to higher net earnings partially offset by an increase in working capital, particularly trade receivables and inventories.  End of first nine months 2010 receivables were higher primarily due to increased sales and the impact of the adoption of amended accounting guidance for transfers of financial assets which impacts the financial statement presentation for activity under the Company's accounts receivable securitization program.  Inventories increased due to higher quantities and costs attributed to improved demand for the Company's products.  Both the increase in rece ivables and inventory were partially offset by an increase in accounts payable driven by a higher level of purchasing activity.  The 2009 operating cash flows were positively impacted by more than $100 million due to a change in the tax method for capitalizing assets.

Cash used in investing activities was $323 million in first nine months 2010 compared to $313 million used in investing activities in first nine months 2009.  First nine months 2010 includes the acquisition of Genovique and payments for the acquisition of the Korean acetate tow facility.  Capital spending of $133 million in first nine months 2010 was lower compared to $268 million in first nine months 2009 primarily due to the deferral of discretionary spending in response to the global recession compared to first nine months 2009 which included the completion of large growth initiatives.

Cash used in financing activities totaled $126 million in first nine months 2010 compared to $74 million used in financing activities in first nine months 2009.  Share repurchases in first nine months 2010 were $68 million.

The payment of dividends is also reflected in financing activities in all periods.

The Company expects to generate positive free cash flow (operating cash flow excluding the $200 million impact of adoption of amended accounting guidance, less capital expenditures and dividends) in 2010 of greater than $300 million, assuming capital expenditures of approximately $225 million and U.S. defined benefit pension plan funding of $135 million, of which $100 million is expected to be contributed in fourth quarter 2010.  The priorities for uses of available cash in 2010 are payment of the quarterly cash dividend, funding targeted growth initiatives (including organic initiatives, joint ventures and acquisitions) and defined benefit pension plans, and repurchasing shares.

Liquidity

At September 30, 2010, the Company had a $700 million revolving credit facility ("Credit Facility") in two tranches, with $125 million expiring in 2012 and $575 million expiring in 2013.  Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a facility fee is paid on the total commitment.  In addition, the Credit Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios.  The Company was in compliance with all such covenants for all periods presented.  At September 30, 2010 and December 31, 2009, the Company had no outstanding borrowings under the Credit Facility.

The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes.  Accordingly, any outstanding commercial paper borrowings reduce borrowings available under the Credit Facility.  Given the expiration dates of the Credit Facility, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings on a long-term basis.

Additionally, at September 30, 2010, the Company also had a $200 million line of credit under its annually renewable accounts receivable securitization agreement ("A/R Facility").  The A/R Facility was renewed in July 2010.  Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and the Company pays a fee to maintain availability of the A/R Facility.  In addition, the A/R Facility contains a number of customary covenants and events of default, including the maintenance of certain financial ratios.  The Company was in compliance with all such covenants for all periods presented.  At September 30, 2010, the Company had no outstanding borrowings under the A/R Facility.

For more information regarding interest rates, refer to Note 8, "Borrowings", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

34

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

In third quarter 2010, the Company made a $35 million contribution to its U.S. defined benefit pension plan.  In 2009, the Company made $181 million in contributions to its U.S. defined benefit pension plan.  The Company expects to make a $100 million additional contribution to its U.S. defined benefit plan in fourth quarter 2010.

Cash flows from operations and the other sources of liquidity described above are expected to be available and sufficient to meet foreseeable cash flow requirements.  However, the Company's cash flows from operations can be affected by numerous factors including risks associated with global operations, raw material availability and cost, demand for and pricing of Eastman's products, capacity utilization, and other factors described under "Forward-Looking Statements and Risk Factors" below.  The Company believes maintaining a financial profile consistent with an investment grade company is important to its long term strategic and financial flexibility.

Capital Expenditures

Capital expenditures were $133 million and $268 million in first nine months 2010 and 2009, respectively.  The lower expenditures in first nine months 2010 were primarily due to the deferral of discretionary spending in response to the global recession compared to first nine months 2009 which included the completion of large growth initiatives.  The Company expects that 2010 capital spending will be approximately $225 million as the Company increases spending on discretionary infrastructure projects and certain strategic growth initiatives.

Other Commitments

At September 30, 2010, the Company's obligations related to notes and debentures totaled approximately $1.6 billion to be paid over a period of approximately 20 years.  Other borrowings, related primarily to credit facility borrowings, totaled $4 million.

The Company had various purchase obligations at September 30, 2010 totaling approximately $1 billion over a period of approximately 15 years for materials, supplies, and energy incident to the ordinary conduct of business.  For information regarding the Company's lease commitments, refer to Note 11, "Commitments", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In addition, the Company had other liabilities at September 30, 2010 totaling approximately $1.4 billion primarily related to pension, retiree medical, and other post-employment obligations.

The items described above are summarized in the following table:

(Dollars in millions)		Payments Due for
Period		Notes and Debentures		Credit Facility Borrowings and Other		Interest Payable		Purchase Obligations		Operating Leases		Other Liabilities (a)		Total
2010	$	--	$	4	$	25	$	65	$	8	$	134	$	236
2011		2		--		110		252		23		61		448
2012		152		--		105		246		18		56		577
2013		--		--		99		232		12		58		401
2014		--		--		99		37		8		60		204
2015 and beyond		1,448		--		889		155		19		981		3,492
Total	$	1,602	$	4	$	1,327	$	987	$	88	$	1,350	$	5,358

(a) Amounts represent the current estimated cash payments to be made by the Company primarily for pension and other post-employment benefits and taxes payable in the periods indicated.  The amount and timing of such payments is dependent upon interest rates, health care cost trends, actual returns on plan assets, retirement and attrition rates of employees, continuation or modification of the benefit plans, and other factors.  Such factors can significantly impact the amount and timing of any future contributions by the Company.

35

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Off Balance Sheet and Other Financing Arrangements

If certain operating leases are terminated by the Company, it has guaranteed a portion of the residual value loss, if any, incurred by the lessors in disposing of the related assets.  For information on the Company's residual value guarantees, refer to Note 11, "Commitments", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

At September 30, 2010, the Company did not have any other material relationships with unconsolidated entities or financial partnerships, including special purpose entities, for the purpose of facilitating off-balance sheet arrangements with contractually narrow or limited purposes.  Thus, Eastman is not materially exposed to any financing, liquidity, market, or credit risk related to the above or any other such relationships.

The accounting guidance on consolidation of Variable Interest Entities ("VIEs") is effective for all VIEs or potential VIEs the Company is involved with on or after January 1, 2010.  This guidance amends the evaluation criteria to identify which entity has a controlling financial interest of a variable interest entity and requires ongoing reassessments.  The Company has evaluated its material contractual relationships under this new guidance and has concluded that the entities involved in these relationships are not VIEs or, in the case of Primester, a joint venture that manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the Company has shared control of the VIE.  As such, the Company is not required to consolidate these entities.

Guarantees and claims also arise during the ordinary course of business from relationships with suppliers, customers, and other parties when the Company undertakes an obligation to guarantee the performance of others, if specified triggering events occur.  Non-performance under a contract could trigger an obligation of the Company.  These potential claims include actions based upon alleged exposures to products, intellectual property and environmental matters, and other indemnifications.  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.  However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, managemen t does not anticipate they will have a material adverse effect on the Company's consolidated financial position or liquidity.

Treasury Stock

In August 2010, the Company's Board of Directors authorized an additional repurchase of up to $300 million of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined to be in the best interests of the Company.  The authorization is in addition to the remaining amount available under the previous October 2007 $700 million repurchase authorization of the Company's outstanding common stock.  As of September 30, 2010, a total of 10.9 million shares have been repurchased for a total amount of approximately $673 million.  During first nine months 2010, the Company repurchased 1,132,800 shares of common stock for a cost of approximately $68 million.

Dividends

The Company declared cash dividends of $0.44 per share in third quarter 2010 and 2009 and $1.32 per share in first nine months 2010 and 2009.

36

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

OUTLOOK

For 2010, the Company expects:

·   increases in volume due to the recovery from the global recession and continued substitution of Eastman products for other materials and new applications for existing products;

·   the volatility of market prices for raw materials and energy to continue and that the Company will continue to use pricing and hedging strategies to offset this volatility and for raw material and energy costs to be higher than 2009;

·   the cellulose acetate tow manufacturing facility and related business in Korea, which was acquired and operational in first quarter 2010, to be fully integrated into the Fibers segment's production and sales processes in 2011;

·   to continue to progress with the introduction of its new Eastman TritanTM copolyester product line, which it supplies from the monomer manufacturing facility and its first TritanTM copolyester polymer manufacturing facility in Kingsport, Tennessee;

·   to complete the sale of the PET business and related assets and technology of its Performance Polymers segment to DAK Americas, LLC during fourth quarter of 2010 for cash of $600 million before transaction fees and working capital adjustments at closing;

·   the acquisition of Genovique Specialties Corporation, a global producer of specialty non-phthalate plasticizers for water-based adhesives and other applications, completed in the second quarter, to be accretive to the Company's full-year earnings per share;

·   depreciation and amortization to be slightly higher than 2009 primarily due to expected completion of manufacturing facilities in 2010;

·   net interest expense to increase compared with 2009 primarily due to lower capitalized interest and higher average borrowings;

·   the effective tax rate to be approximately 34 percent;

·   capital spending to be approximately $225 million for required maintenance, discretionary infrastructure projects, and certain strategic growth initiatives;

·   pension expense to be slightly higher than 2009, and U.S. defined benefit pension plan funding to be $135 million;

·   to generate greater than $300 million of positive free cash flow (operating cash flow excluding the $200 million impact of adoption of amended accounting guidance, less capital expenditures and dividends);

·   prioritiesfor uses of available cash to be payment of the quarterly cash dividend, funding targeted growth initiatives (including organic initiatives, joint ventures and acquisitions) and defined benefit pension plans, and repurchasing shares; and

·   full year 2010 earnings per share to be greater than $7.00 excluding charges related to restructuring actions.

See "Forward-Looking Statements and Risk Factors" below.

37

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

The expectations under "Outlook" and certain other statements in this Quarterly Report on Form 10-Q which are not statements of historical fact may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  These statements, and other written and oral forward-looking statements made by the Company from time to time 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; legal proceedings; exposure to, and effects of hedging of, raw material and energy costs, foreign currencies and interest rates; global and regional economic, political, and business conditions; competition; growth opportun ities; supply and demand, volume, price, cost, margin, and sales; earnings, cash flow, dividends and other expected financial results and conditions; expectations, strategies, and plans for individual assets and products, businesses and segments as well as for the whole of Eastman; cash requirements and uses of available cash; financing plans; pension expenses and funding; credit ratings; anticipated restructuring, divestiture, and consolidation activities; cost reduction and control efforts and targets; integration of any acquired businesses; strategic initiatives and development, production, commercialization, and acceptance of new products, services and technologies and related costs; asset, business and product portfolio changes; and expected tax rates and net interest costs.

These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements.  Such assumptions are based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions and other factors.  These plans and expectations and the underlying assumptions are necessarily subject to risks and uncertainties inherent in projecting future conditions and results.  Actual results could differ materially from expectations expressed in any forward-looking statement if one or more of the underlying assumptions or expectations proves to be inaccurate or is unrealized.  In addition to the factors described elsewhere in this report, the following are the most significant known factors that could ca use the Company's actual results to differ materially from those in any such forward-looking statement.  Additional factors not presently known to the Company, or that the Company does not currently believe to be material, may also cause actual results to differ materially from expectations:

Adverse and uncertain conditions in the global economy and the financial markets could negatively impact the Company.

Conditions in the global economy and global capital markets may adversely affect the Company's results of operations, financial condition, and cash flows.  The Company's business and operating results have been affected by the impact of the recentglobal recession, including the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges currently affecting the global economy.  The Company's customers may experience deterioration of their businesses, cash flow shortages, and difficulty obtaining financing.  As a result, existing or potential customers may still delay or cancel plans to purchase products and may not be able to, or may be unwilling to, fulfill their obligations in a timely fashion.  Further, suppliers may experience similar conditions, which could impact their ability to fulfill their obligations to the Company.  If weakness in the global economy continues for significant future periods or if the global economy or financial markets experience significant new disruptions or deteriorations, the Company's results of operations, financial condition and cash flows could be materially adversely affected and the Company's ability to access the credit and capital markets under attractive rates and terms could be constrained, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives.

38

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Volatility in costs for strategic raw material and energy commodities or disruption in the supply of these commodities could adversely affect our financial results.

The Company is reliant on certain strategic raw material and energy commodities for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate short-term market fluctuations in raw material and energy costs.  It is unlikely, however, that these risk mitigation measures will eliminate all exposure to market fluctuations.  In addition, natural disasters, plant interruptions, changes in laws or regulations, war or other outbreak of hostilities or terrorism, and breakdown or degradation of transportation infrastructure used for delivery of strategic raw material and energy commodities, could adversely impact both the cost and availability of these commodities.

The Company could be materially adversely affected by disruptions to manufacturing operations or related infrastructure.

Significant limitation of the Company's ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse affect on sales revenue, costs, results of operations, and financial condition.  Disruptions could occur due to internal factors such as computer or equipment malfunction, operator error, or process failures; or external factors such as natural disasters, pandemic illness, changes in laws or regulations, war or other outbreak of hostilities or terrorism, or breakdown or degradation of transportation infrastructure used for delivery of supplies to the Company or for delivery of products to customers.

Loss or financial weakness of the Company's largest customers could adversely affect our financial results.

The Company has an extensive customer base; however, loss of, or material financial weakness of, certain of the largest customers could adversely affect the Company's financial condition and results of operations until such business is replaced and no assurances can be made that the Company would be able to regain or replace any lost customers.

Growth initiatives may not achieve desired business or financial objectives and may require a significant use of resources.

The Company continues to identify and pursue growth opportunities through both internal development and acquisitions and joint ventures to diversify and extend the portfolio of our businesses.  These growth opportunities include development and commercialization of new products and technologies, expansion into new markets and geographic regions, and alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses and capabilities.  There can be no assurance that such efforts, investments, or acquisitions and alliances will result in financially successful commercialization of products or acceptance by existing or new customers or new markets or achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations.  T here also can be no assurance that capital projects for such growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers.  Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively affect the returns from any proposed investments and projects.

39

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Legislative and regulatory actions could increase the Company's future compliance costs.

The Company's facilities and businesses are subject to complex health, safety and environmental laws and regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future.  The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based.  The amount accrued reflects the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties.  Changes in the estimates on which the accruals are based, unanticipated gover nment enforcement action, or changes in health, safety, environmental, chemical control regulations, and testing requirements could result in higher costs.  Pending and proposed U.S. Federal legislation and regulation increase the likelihood that the Company's manufacturing sites will in the future be impacted by regulation or taxation of greenhouse gas emissions, which legislation and regulation, if enacted, may result in capital expenditures, increases in costs for raw materials and energy, limitations on raw material and energy source and supply choices, and other direct compliance costs.

In addition to the foregoing most significant known risk factors to the Company, there may be other factors, not currently known to the Company, which could, in the future, materially adversely affect the Company, its business, financial condition, or results of operations.  The foregoing discussion of the most significant risk factors to the Company does not necessarily present them in order of importance.  This disclosure, including that under "Outlook" and "Forward-Looking Statements and Risk Factors," and other forward-looking statements and related disclosures made by the Company in this Quarterly Report on Form 10-Q and elsewhere from time to time, represents management's best judgment as of the date the information is given.  The Company does no t undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law.  Investors are advised, however, to consult any further public Company disclosures (such as in filings with the Securities and Exchange Commission or in Company press releases) on related subjects.

40

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes to the Company's market risks from those disclosed in Part II, Item 7A of the Company's 2009 Annual Report on Form 10-K.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  An evaluation was carri ed out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures.  Based on that evaluation, the CEO and CFO have concluded that as of September 30, 2010, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed was accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company's internal control over financial reporting that occurred during the third quarter 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

41

 

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

General

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

Jefferson (Pennsylvania) Environmental Proceeding

In December 2005, Eastman Chemical Resins, Inc., a wholly-owned subsidiary of the Company (the "ECR Subsidiary"), received a Notice of Violation ("NOV") from the United States Environmental Protection Agency's Region III Office ("EPA") alleging that the ECR Subsidiary's West Elizabeth, Jefferson Borough, Allegheny County, Pennsylvania manufacturing operation violated certain federally enforceable local air quality regulations and certain provisions in a number of air quality-related permits.  In October 2006, the EPA referred the matter to the United States Department of Justice's Environmental Enforcement Section ("DOJ").  Company representatives have met with the EPA and DOJ on a number of occasions since the NOV's issuance and have determined that it is not reasonably likely that any civil penalty assessed by the EP A and DOJ will be less than $100,000.  While the Company intends to vigorously defend against these allegations, this disclosure is made pursuant to Securities and Exchange Commission Regulation S-K, Item 103, Instruction 5.C., which requires disclosure of administrative proceedings commenced under environmental laws that involve governmental authorities as parties and potential monetary sanctions of at least $100,000.  The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company's financial condition, results of operations, or cash flows.

Kingsport (Tennessee) Environmental Proceeding

In September 2010, representatives of the Company met with the Tennessee Department of Environment and Conservation ("TDEC") regarding alleged violations of state air quality regulations by the Company's manufacturing operations in Kingsport, Tennessee.  In October 2010, TDEC sent the Company an NOV addressing these alleged violations.  Based on the Company's meeting with TDEC and the NOV, the Company has determined that it is not reasonably likely that any civil penalty assessed by TDEC will be less than $100,000.  While the Company intends to vigorously defend against these allegations, this disclosure is made pursuant to Securities and Exchange Commission Regulation S-K, Item 103, Instruction 5.C., which requires disclosure of administrative proceedings commenced under environmental laws that involve gover nmental authorities as parties and potential monetary sanctions of at least $100,000.  The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company's financial condition, results of operation, or cash flows.

42

 

Franklin (Virginia) Environmental Proceeding

In 2005, the EPA’s National Enforcement Investigations Center ("NEIC") conducted a multimedia inspection of the ECR Subsidiary’s Franklin manufacturing operation located in Courtland, Virginia.  The NEIC’s report resulting from that inspection alleges that the Franklin operations violated certain federally enforceable environmental laws and regulations.  Based on recent communication with EPA Region III and the DOJ, the Company has determined that it is not reasonably likely that any civil penalty assessed by the EPA and DOJ will be less than $100,000.  While the Company intends to vigorously defend against these allegations, this disclosure is made pursuant to Securities and Exchange Commission Regulation S-K, Item 103, Instruction 5.C., which requires disclosure of administrative proceedin gs commenced under environmental laws that involve governmental authorities as parties and potential monetary sanctions of at least $100,000.  The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company's financial condition, results of operations, or cash flows.

ITEM 1A.  RISK FACTORS

For identification and discussion of the most significant risks applicable to the Company and its business, see "Part I – Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements and Risk Factors" of this Quarterly Report on Form 10-Q.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 (c)  Purchases of Equity Securities by the Issuer

Period		Total Number of Shares Purchased (1)		Average Price Paid Per Share (2)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3)		Approximate Dollar Value (in millions) that May Yet Be Purchased Under the Plans or Programs (3)
	July 1 - 31, 2010	273,162	$	54.93	272,900	$	27
	August 1 - 31, 2010	0	$	--	0	$	327
	September 1 - 30, 2010	0	$	--	0	$	327
	Total	273,162	$	54.93	272,900

(1)   Shares repurchased under a Company announced repurchase plan and shares surrendered to the Company by employees to satisfy individual tax withholding obligations upon vesting of previously issued shares of restricted common stock.

(2)   Average price paid per share reflects the weighted average purchase price paid for share repurchases and the closing price of Eastman stock on the business day the shares were surrendered by the employee stockholder to satisfy individual tax withholding.

(3)   In August 2010, the Company's Board of Directors authorized an additional repurchase of up to $300 million of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined to be in the best interests of the Company.  The authorization is in addition to the remaining amount available under the previous October 2007 $700 million repurchase authorization of the Company's outstanding common stock.  As of September 30, 2010, a total of 10.9 million shares have been repurchased for a total amount of approximately $673 million.  For additional information, see Note 13, "Stockholders' Equity", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 6.  EXHIBITS

Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 45.

43

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Eastman Chemical Company
Date:  November 1, 2010	By:	/s/Curtis E. Espeland
		Curtis E. Espeland
		Senior Vice President and Chief Financial Officer

44

 

	EXHIBIT INDEX	Sequential
Exhibit		Page
Number	Description	Number
3.01	Amended and Restated Certificate of Incorporation of Eastman Chemical Company, as amended (incorporated herein by reference to Exhibit 3.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)
3.02	Amended and Restated Bylaws of Eastman Chemical Company	47-58
4.01	Form of Eastman Chemical Company common stock certificate as amended February 1, 2001 (incorporated herein by reference to Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)
4.02	Indenture, dated as of January 10, 1994, between Eastman Chemical Company and The Bank of New York, as Trustee (the "Indenture") (incorporated herein by reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated January 10, 1994)
4.03	Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the Company's Current Report on Form 8-K dated January 10, 1994)
4.04	Officers' Certificate pursuant to Sections 201 and 301 of the Indenture (incorporated herein by reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated June 8, 1994)
4.05	Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the Company's Current Report on Form 8-K dated June 8, 1994)
4.06	Form of 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.08 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
4.07	Form of 7% Notes due April 15, 2012 (incorporated herein by reference to Exhibit 4.09 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002)
4.08	Officer's Certificate pursuant to Sections 201 and 301 of the Indenture related to 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.09 to the Company's Annual Report on Form 10-K for the year ended December 31, 2006)
4.09	Form of 5.500% Notes due 2019 (incorporated  herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated November 2, 2009)
4.10	July 7, 2010 Letter Amendment to $200,000,000 Accounts Receivable Securitization agreement dated July 9, 2008 (amended February 18, 2009, and July 8, 2009), between the Company and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as agent. (incorporated herein by reference to Exhibit 4.09 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 [and Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)]
4.11	Amended and Restated Credit Agreement, dated as of April 3, 2006 (the "Credit Agreement") among Eastman Chemical Company, the Lenders named therein, and Citigroup Global Markets , Inc. and J. P. Morgan Securities Inc., as  joint lead arrangers, as amended on November 16, 2007 and March 10, 2008 (incorporated herein by reference to Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and Exhibit 4.10 to the Company's Quarterly  Report on Form 10-Q for the quarter ended March 31, 2008)

45

 

	EXHIBIT INDEX	Sequential
Exhibit		Page
Number	Description	Number
4.12	Form of 6.30% Notes due 2018 (incorporated herein by reference to Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003)
10.01	Form of Award Notice for Stock Options Granted to Executive Officers on November 2, 2010 under the 2007 Omnibus Long-Term Compensation Plan	59-60
10.02	Form of Award Notice for Stock Options Granted to Mark J. Costa, Executive Vice President, Specialty Polymers, Coatings and Adhesives, and Chief Marketing Officer, on November 2, 2010 under the 2007 Omnibus Long-Term Compensation Plan	61-62
10.03	Form of Performance Share Award to Executive Officers under the 2007 Omnibus Long-Term Compensation Plan (2011 – 2013 Performance Period)	63-74
10.04	Form of Performance Share Award to Mark J. Costa, Executive Vice President, Specialty Polymers, Coatings and Adhesives, and Chief Marketing Officer, under the 2007 Omnibus Long-Term Compensation Plan (2011 – 2013 Performance Period)	75-86
12.01	Statement re: Computation of Ratios of Earnings to Fixed Charges	87
31.01	Rule 13a – 14(a) Certification by James P. Rogers, President and Chief Executive Officer, for the quarter ended September 30, 2010	88
31.02	Rule 13a – 14(a) Certification by Curtis E. Espeland, Senior Vice President and Chief Financial Officer, for the quarter ended September 30, 2010	89
32.01	Section 1350 Certification by James P. Rogers, President and Chief Executive Officer, for the quarter ended September 30, 2010	90
32.02	Section 1350 Certification by Curtis E. Espeland, Senior Vice President and Chief Financial Officer, for the quarter ended September 30, 2010	91
101.INS	XBRL Instance Document (furnished, not filed)
101.SCH	XBRL Taxonomy Extension Schema (furnished, not filed)
101.CAL	XBRL Taxonomy Calculation Linkbase (furnished, not filed)
101.LAB	XBRL Taxonomy Label Linkbase (furnished, not filed)
101.PRE	XBRL Presentation Linkbase Document (furnished, not filed)
101.DEF	XBRL Definition Linkbase Document (furnished, not filed)

46

EX-3.01

Exhibit 3.02

EASTMAN CHEMICAL COMPANY BYLAWS

SECTION I

Capital Stock

Section 1.1.  Certificates.  Every holder of stock in the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman of the Board of Directors, the Chief Executive Officer, or the Vice Chairman or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation certifying the number of shares in the Corporation owned by such holder.  Any or all of the signatures on the certificate may be a facsimile.  In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or regis trar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent, or registrar at the date of issue.

Section 1.2.  Record Ownership.  A record of the name and address of the holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation's books.  The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by the laws of the State of Delaware.

Section 1.3.  Transfer of Record Ownership.  Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby, which certificate shall be canceled before the new certificate is issued.

Section 1.4.  Lost Certificates.  Any person claiming a stock certificate in lieu of one lost, stolen or destroyed shall give the Corporation an affidavit as to such person's ownership of the certificate and of the facts which go to prove its loss, theft or destruction.  Such person shall also, if required by policies adopted by the Board of Directors, give the Corporation a bond, in such form as may be approved by the Corporation, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of the certificate or the issuance of a new certificate.

Section 1.5.  Transfer Agents; Registrars; Rules Respecting Certificates.  The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars.  The Board of Directors may make such further rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates of the Corporation.

Section 1.6.  Record Date.  The Board of Directors may fix in advance a future date, not exceeding 60 days (nor, in the case of a stockholders' meeting, less than ten days) preceding the date of any meeting of stockholders, payment of dividend or other distribution, allotment of rights, or change, conversion or exchange of capital stock or for the purpose of any other lawful action, as the record date for determination of the stockholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or other distribution or allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to participate in an y such other lawful action, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or other distribution or allotment of rights, or to exercise such rights, or to participate in any such other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid.

47

Exhibit 3.02

SECTION II

Meetings of Stockholders

Section 2.1.  Annual.  The annual meeting of stockholders for the election of directors and the transaction of such other proper business shall be held on the first Thursday in May, unless otherwise specified by resolution adopted by the Board of Directors, and at the time and place, within or without the State of Delaware, as determined by the Board of Directors.

Section 2.2.  Special.  (a) Special meetings of stockholders for any purpose or purposes may be called only by the Board of Directors, (i) pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office, or (ii) upon the written request of the holders of at least twenty-five percent of the outstanding voting stock of the Corporation (a “Request”) in accordance with the requirements set forth in Section 2.2(b) hereof.

(b)  Any Request shall set forth with particularity (i) the names and business addresses of the stockholder or stockholders requesting the meeting (each a “Meeting Proponent”) and all Persons (as such term is defined in Article V of the Certificate of Incorporation) acting in concert with any Meeting Proponent; (ii) the name and address of each Meeting Proponent and the Persons identified in clause (i), as they appear on the Corporation’s books (if they so appear); (iii) the class and number of shares of the Corporation beneficially owned by each Meeting Proponent and the Persons identified in clause (i); (iv) the text of the proposal or business (including the text of any resolutions proposed for consideration and, if the business includes a proposal to amend th ese Bylaws or the Certificate of Incorporation, the language of the proposed amendment); and (v) all arrangements or understandings between each Meeting Proponent and any other Persons, including their names, in connection with the proposed business of the special meeting and any material interest of each Meeting Proponent in such business.  Except as permitted in Section 2.2(c), the only business that may be conducted at the special meeting shall be the business proposed in the Request. The Request shall be delivered personally or sent by registered mail to the Secretary of the Corporation at its principal executive offices.  If the Board of Directors determines that the Request complies with the Certificate of Incorporation and the provisions of these Bylaws and that the proposal to be considered or business to be conducted is a proper subject for stockholder action under applicable law, the Board of Directors shall call and send notice of a special meeting for the purpose set forth in the Request in accordance with Section 2.3 of these Bylaws. The Board of Directors shall determine the date for such special meeting, which date shall be not later than 90 days following the Corporation’s receipt of the Request, and the record date(s) for stockholders entitled to notice of and to vote at such special meeting.

(c)  Special meetings may be held at any place, within or without the State of Delaware, as determined by the Board of Directors.  The only business which may be conducted at a special meeting, other than procedural matters and matters relating to the conduct of the special meeting, shall be the matter or matters described in the notice of the meeting.

Section 2.3.  Notice. Notice of each meeting of stockholders, shall be made in writing, or electronically to such stockholders as have consented to the receipt of such notice by electronic means, or by any such other means permitted by the Delaware General Corporation Law.  Such notice shall state the date, time, place and, in the case of a special meeting, the purpose thereof, shall be given as provided by law by the Secretary or an Assistant Secretary not less than ten days nor more than 60 days before such meeting (unless a different time is specified by law) to every stockholder entitled by law to notice of such meeting.

48

Exhibit 3.02

Section 2.4.  List of Stockholders.  A complete list of the stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary.  Such list shall be available for examination of any stockholder, for any purpose germane to the meeting, either on a reasonably accessible electronic network or, during normal business hours, at the Corporation’s principal place of business, for at least ten days before the meeting and at the place of the meeting during the whole time of the meeting.  In the event that such list is to be made available on an electronic network, the notice of meeting given under Section 2.3 hereof shall provide the information required to gain access to such list.

Section 2.5.  Quorum.  The holders of shares of stock entitled to cast a majority of the votes on the matters at issue at a meeting of stockholders, present in person or represented by proxy, shall constitute a quorum, except as otherwise required by the Delaware General Corporation Law.  In the event of a lack of a quorum, the chairman of the meeting or a majority in interest of the stockholders present in person or represented by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be obtained.  At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the mee ting originally called.

Section 2.6.  Organization and Procedure.  (a)  The Chairman of the Board, the Chief Executive Officer, or such other officer of the Corporation designated by a majority of the directors that the Corporation would have if there were no vacancies on the Board of Directors (the “Whole Board”), will call meetings of the stockholders to order and will act as presiding officer thereof.  Unless otherwise determined prior to the meeting by a majority of the Whole Board, the presiding officer of the meeting of the stockholders will have the right and the authority to determine and maintain the rules, regulations and procedures for the proper conduct of the meeting, including, without limitation, restricting entry to the meeting after it has commenced, maintaining order and the safety of those in attendance, opening and closing the polls for voting, dismissing business or proposals not properly submitted, limiting the time allowed for discussion of the business of the meeting, restricting the persons (other than stockholders of the Corporation or their duly appointed proxies) that may attend the meeting, and ascertaining whether any stockholder or proxy holder may be excluded from the meeting based upon any determination by the presiding officer, in his or her sole discretion, that the stockholder or proxy holder is unduly disruptive or is likely to disrupt the meeting.  The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary.

(b)  At an annual meeting of the stockholders, only such business will be conducted or considered as is properly brought before the meeting.  To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given in accordance with these bylaws, (ii) brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board, or (iii) otherwise properly requested to be brought before the meeting by a stockholder of the Corporation in accordance with these bylaws.

(c)  At a special meeting of stockholders, only such business may be conducted or considered as is properly brought before the meeting.  To be properly brought before a special meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given in accordance with these bylaws or (ii) brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board.  The determination of whether any business sought to be brought before any annual or special meeting of the stockholders is properly brought before such meeting will be made by the presiding officer of the meeting.  If the presiding officer determines that any business is not properly brought before such meeting, he or she will so declare at the meeting and any such business will not be conducted or considered.

49

Exhibit 3.02

Section 2.7.  Stockholder Nominations and Proposals.  (a)  No proposal for a stockholder vote shall be submitted by a stockholder (a "Stockholder Proposal") to the Corporation's stockholders unless the stockholder submitting such proposal (the "Proponent") shall have filed a written notice setting forth with particularity (i) the names and business addresses of the Proponent and all Persons (as such term is defined in Article V of the Certificate of Incorporation) acting in concert with the Proponent; (ii) the name and address of the Proponent and the Persons identified in clause (i), as they appear on the Corporation's books (if they so appear); (iii) the class and number of shares of the Corporation beneficially owned by the Proponent and the Persons identified in clause (i); (iv) a description of the Stockholder Proposal containing all material information relating thereto; and (v) such other information as the Board of Directors reasonably determines is necessary or appropriate to enable the Board of Directors and stockholders of the Corporation to consider the Stockholder Proposal.  The presiding officer at any stockholders' meeting may determine that any Stockholder Proposal was not made in accordance with the procedures prescribed in these Bylaws or is otherwise not in accordance with law, and if it is so determined, such officer shall so declare at the meeting and the Stockholder Proposal shall be disregarded.

(b)  Only persons who are selected and recommended by the Board of Directors or the committee of the Board of Directors designated to make recommendations, or who are nominated by stockholders in accordance with the procedures set forth in this Section 2.7 (a “Stockholder Nomination”), shall be eligible for election, or qualified to serve, as directors.  Nominations of individuals for election to the Board of Directors of the Corporation at any annual meeting or any special meeting of stockholders at which directors are to be elected may be made by any stockholder of the Corporation entitled to vote for the election of directors at that meeting by compliance with the procedures set forth in this Section 2.7.  Nominations by stockholders shall be mad e by written notice (a "Nomination Notice"), which shall set forth (i) as to each individual nominated, (A) the name, date of birth, business address and residence address of such individual; (B) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience; (C) whether the nominee is or has ever been at any time a director, officer or owner of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity; (D) any directorships currently held, or held within the preceding five years, by such nominee in any company with a class of sec urities registered pursuant to Section 12 of the Securities Exchange Act of 1934, or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended; (E) whether, in the last ten years, such nominee has been convicted in a criminal proceeding or has been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee; and (F) all information relevant to a determination of the nominee's status as to "independence," including references to the criteria established by the New York Stock Exchange (or any other exchange or quotation system on which the Corporation's equity securities are then listed or quoted) and the Corporation's Corporate Governance Guidelines, i n each case as in effect at the time of such Stockholder Nomination; (ii) as to the Person submitting the Nomination Notice and any Person acting in concert with such Person, (x) the name and business address of such Person, (y) the name and address of such Person as they appear on the Corporation's books (if they so appear), and (z) the class and number of shares of the Corporation that are beneficially owned by such Person; and (iii) if the Person submitting the Nomination Notice is seeking to have the nominee included as such in the Corporation’s proxy statement for the Stockholder Nomination, the information required by Rule 14a-11 under the Securities Exchange Act of 1934. A written consent to being named in a proxy statement as a nominee, and to serve as a director if elected, signed by the nominee, shall be filed with any Nomination Notice. If the presiding officer at any stockholders' meeting determines that a nomination was not made in accordance with the procedures prescribed by these Bylaws, he shall so declare to the meeting and the defective nomination shall be disregarded.

50

Exhibit 3.02

(c)  In the case of an annual meeting of stockholders, Nomination Notices and Stockholder Proposals shall be delivered to the Secretary at the principal executive office of the Corporation no earlier than 150 days and not later than 120 days prior to the date on which the notice of the immediately preceding year's annual meeting of stockholders was first sent to the stockholders of the Corporation.  In the case of a special meeting of stockholders, Nomination Notices and Stockholder Proposals shall be delivered to the Secretary at the principal executive office of the Corporation no later than the close of business on the 15th day following the day on which notice of the date of a special meeting of stockholders was given.

Section 2.8.  Voting. Unless otherwise provided in a resolution or resolutions providing for any class or series of Preferred Stock pursuant to Article IV of the Certificate of Incorporation or by the Delaware General Corporation Law, each stockholder shall be entitled to one vote, in person or by proxy, for each share held of record by such stockholder who is entitled to vote generally in the election of directors.  Each stockholder voting by proxy shall grant such authority in writing, by electronic or telephonic transmission or communication, or by any such other means permitted by the Delaware General Corporation Law.  All questions, including elections for the Board of Directors, shall be decided by a majority of the votes cast, except as otherwise required by the Delaware General Corporation Law or as provided for in the Certificate of Incorporation or these Bylaws. Abstentions shall not be considered to be votes cast. For purposes of this Bylaw, a majority of votes cast shall mean that the number of shares voted "for" a director's election exceeds 50% of the number of votes cast with respect to that director's election or, in the case where the number of nominees exceeds the number of directors to be elected, cast with respect to election of directors generally. Votes cast shall include votes to withhold authority in each case and exclude abstentions with respect to that director's election, or, in the case where the number of nominees exceeds the number of directors to be elected, abstentions with respect to election of directors generally.

If a nominee for director who is an incumbent director is not elected and no successor has been elected at such meeting, the director shall promptly tender his or her resignation to the Board of Directors. The Nominating and Corporate Governance Committee of the Board of Directors shall make a recommendation to the Board of Directors as to whether to accept or reject the tendered resignation, or whether other action should be taken. The Board of Directors shall act on the tendered resignation, taking into account the Nominating and Corporate Governance Committee's recommendation, and publicly disclose (by a press release, a filing with the Securities and Exchange Commission, or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale for the decision within 90 days from the date of the certification of the election results. The Nominating and Corporate Governance Committee in making its recommendation, and the Board of Directors in making its decision, may each consider any factors or other information that it considers appropriate and relevant. The director who tenders his or her resignation will not participate in the recommendation of the Nominating and Corporate Governance Committee or the decision of the Board of Directors with respect to his or her resignation. If such incumbent director's resignation is not accepted by the Board of Directors, such director shall continue to serve until the next annual meeting of stockholders at which the class in which he or she is serving is nominated and re-elected and until his or her successor is duly elected, or his or her earlier resignation and removal. If a director's resignation is accepted by the Board of Directors pursuant to this Bylaw, or if a nominee for director is not elected and the nominee is not an incumbent director, then the Board of Directors, in its sole discretion, may fill any resulting vacancy or may decrease the size of the Board of Directors pursuant to the Delaware General Corporation Law and the Certificate of Incorporation and these Bylaws of the Company.

51

Exhibit 3.02

Section 2.9.  Inspectors.  The Board of Directors by resolution shall, in advance of any meeting of stockholders, appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation, to act at the meeting and make a written report thereof.  One or more persons may be designated by the Board of Directors as alternate inspectors to replace any inspector who fails to act.  If no inspector or alternate is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting.   Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability.  The inspectors shall have the duties prescribed by the Delaware General Corporation Law.

SECTION III

Board of Directors

Section 3.1.  Number and Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors.  The number of directors constituting the Board of Directors shall be as authorized from time to time exclusively by a vote of a majority of the members of the Board of Directors then in office.  The maximum number of consecutive three-year terms of office that may be served by any director is three, and for purposes of calculating such maximum number of terms there shall not be counted as a three-year term any service during a partial term for which such director is serving or during any initial term; provided, however, that the Board of Directors is authorized in circumstances it deems appropriate to nominate and thereby render eligible a person for a fourth or subsequent consecutive three-year term. These term limits shall not apply to a Chief Executive Officer of the Corporation who is also a member of the Board of Directors. Notwithstanding the foregoing, (i) a person who is not serving as a director shall not be eligible for nomination, appointment, or election if such person has or will have reached age 70 on the date of his or her appointment or election; and (ii) any director reaching the age of 70 during any term of office shall continue to be qualified to serve as a director only until the next annual meeting of stockholders following his or her 70th birthday, provided, however, that the Board of Directors is authorized, in circumstances it deems appropriate and by unanimous approval of all of the directors then in office (excepting the director whose qualification is the subject of the action),  to render a director then in office eligible to serve until the next annual meeting of stockholders following his or her 71st birthday.

Section 3.2.  Resignation.  A director may resign at any time by giving notice, in writing, by electronic transmission or by any other means permitted by the Delaware General Corporation Law, to the Chairman of the Board or to the Secretary.  Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof.

Section 3.3.  Regular Meetings.  Regular meetings of the Board of Directors may be held without further notice at such time as shall from time to time be determined by the Board of Directors.  Unless otherwise determined by the Board of Directors, the locations of the regular meetings of the Board of Directors shall be in Kingsport, Tennessee.  A meeting of the Board of Directors for the election of officers and the transaction of such other business as may come before it may be held without notice immediately following the annual meeting of stockholders.

Section 3.4.  Special Meetings.  Special meetings of the full Board of Directors may be called by the Chairman of the Board, the Lead Director, or the Vice Chairman. Special meetings of the non-employee, independent directors may be called by the Lead Director. Special meetings of the Board of Directors or of the non-employee, independent directors also may be called at the request in writing of one-third of the members of the Board of Directors then in office.

52

Exhibit 3.02

Section 3.5.  Notice of Special Meetings.  Notice of the date, time and place of each special meeting shall be mailed by regular mail to each director at his designated address at least six days before the meeting; or sent by overnight courier to each director at his designated address at least two days before the meeting (with delivery scheduled to occur no later than the day before the meeting); or given orally by telephone or other means, or by telegraph or telecopy, or by any other means comparable to any of the foregoing, to each director, as applicable, at his designated address at least 24 hours before the meeting; provided, however, that if less than five days' notice is provided and one third of the members of the Board of Directors then in office, or one-third of the number of non-employee, independent directors (in the case of a meeting of such directors) object in writing prior to or at the commencement of the meeting, such meeting shall be postponed until five days after such notice was given pursuant to this sentence (or such shorter period to which a majority of those who objected in writing agree), provided that notice of such postponed meeting shall be given in accordance with this Section 3.5.  The notice of the special meeting shall state the general purpose of the meeting, with no other routine business conducted at the special meeting without such matter being stated in the notice.

Section 3.6.  Place of Meetings.  The Board of Directors may hold their meetings and have an office or offices inside or outside of the State of Delaware.

Section 3.7.  Telephonic Meeting and Participation.  Any or all of the directors may participate in a meeting of the Board of Directors or any committee thereof by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting.

Section 3.8  Action by Directors Without a Meeting.Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the full Board of Directors, the non-employee, independent directors, or of any committee thereof, may be taken without a meeting if all members of the Board, the non-employee, independent directors, or of such committee, as the case may be, consent thereto in writing, by electronic transmission, or by any other means permitted by the Delaware General Corporation Law, and the writing or writings or, if the consent action is taken by electronic transmissi on, paper reproductions of such electronic transmissions, are filed with the minutes of proceedings of the Board or committee.

Section 3.9.  Quorum and Adjournment.  A majority of the directors then holding office, or a majority of non-employee, independent directors then in office, for purposes of a meeting of such directors, shall constitute a quorum.  The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, or of the non-employee, independent directors, as the case may be.  Whether or not a quorum is present to conduct a meeting, any meeting of the Board of Directors, or of the non-employee, independent directors, as the case may be (including an adjourned meeting) may be adjourned by a majority of the directors present, to reconvene at a s pecific time and place.  It shall not be necessary to give to the directors present at the adjourned meeting notice of the reconvened meeting or of the business to be transacted, other than by announcement at the meeting that was adjourned; provided, however, notice of such reconvened meeting, stating the date, time, and place of the reconvened meeting, shall be given to the directors not present at the adjourned meeting in accordance with the requirements of Section 3.5 hereof.

53

Exhibit 3.02

Section 3.10.  Organization.  The Chairman of the Board, or, in the absence of the Chairman of the Board, the Lead Director or the Vice Chairman, or in the absence of the Lead Director or Vice Chairman, a member of the Board selected by the members present, shall preside at meetings of the Board. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary.

Section 3.11.  Compensation of Directors.  Directors shall receive such compensation for their services as the Board of Directors may determine.  Any director may serve the Corporation in any other capacity and receive compensation therefor.

Section 3.12.  Presumption of Assent.  A director of the Corporation who is present at a meeting of the Board of Directors when a vote on any matter is taken is deemed to have assented to the action taken unless he votes against or abstains from the action taken, or unless at the beginning of the meeting or promptly upon arrival the director objects to the holding of the meeting or transacting specified business at the meeting.  Any such dissenting votes, abstentions or objections shall be entered in the minutes of the meeting.

SECTION IV

Chairman, Lead Director, and Committees of the Board of Directors

Section 4.1.  Chairman. The Board of Directors shall, by resolution passed by a majority of the members of the Board of Directors, designate a member of the Board of Directors to serve as Chairman. The Chairman of the Board may also be the Chief Executive Officer, or other officer of the Corporation, and shall have such powers and perform such duties as may be provided for herein, and as may be incident to the office and as may be assigned by the Board of Directors.

Section 4.2.  Lead Director.  If the Chairman is the Chief Executive Officer or other officer or employee of the Corporation or is not an independent (as determined by the Board of Directors) director, the non-employee, independent directors, by resolution passed by a majority of the non-employee, independent members of the Board of Directors, shall designate a non-employee, independent member of the Board of Directors to serve as Lead Director. The Lead Director shall have such powers and perform such duties as may be provided for herein and as may be incident to the office and as may be assigned by the non-employee, independent members of Board of Directors.

Section 4.3.  Committees. The Board of Directors shall, by resolutions passed by a majority of the members of the Board of Directors, designate members of the Board of Directors to constitute committees which shall in each case consist of such number of directors, and shall have and may execute such powers as may be determined and specified in the respective resolutions appointing them.  Any such committee may fix its rules of procedure, determine its manner of acting and the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall otherwise by resolution provide.  Unless otherwise provided by the Board of Directors or such committee, the quorum, voting and other procedures shall be the same as those applicable to actions taken by the Board of Directors.  A majority of the members of the Board of Directors then in office shall have the power to change the membership of any such committee at any time, to fill vacancies therein and to discharge any such committee or to remove any member thereof, either with or without cause, at any time.

54

Exhibit 3.02

SECTION V

Officers

Section 5.1.  Designation.  The officers of the Corporation shall be a Chief Executive Officer, a Chief Financial Officer, a Treasurer, a Controller, and a Secretary, and such other officers as the Board of Directors may elect or appoint, or provide for the appointment of, as may from time to time appear necessary or advisable in the conduct of the business and affairs of the Corporation.  Any number of offices may be held by the same persons.

Section 5.2.  Election Term.  At its first meeting after each annual meeting of stockholders, the Board of Directors shall elect the officers or provide for the appointment thereof.  Subject to Section 5.3 and Section 5.4 hereof, the term of each officer elected by the Board of Directors shall be until the first meeting of the Board of Directors following the next annual meeting of stockholders and until such officer’s successor is chosen and qualified.

Section 5.3.  Resignation.  Any officer may resign at any time by giving written notice to the Secretary.  Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof.

Section 5.4.  Removal.  Any officer may be removed at any time with or without cause by affirmative vote of a majority of the members of the Board of Directors then in office.  Any officer appointed by another officer may be removed with or without cause by such officer or the Chief Executive Officer.

Section 5.5.  Vacancies.  A vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors or, in the case of offices held by officers who may be appointed by other officers, by any officer authorized to appoint such officer.

Section 5.6.  Chief Executive Officer.  The Chief Executive Officer shall be responsible for carrying out the policies adopted by the Board of Directors.

Section 5.7.  Chief Financial Officer.  The Chief Financial Officer shall act in an executive financial capacity, and assist the Chief Executive Officer in the general supervision of the Corporation’s financial policies and affairs, and shall perform all acts incident to the position of Chief Financial Officer, subject to the control of the Board of Directors.

Section 5.8.  Treasurer.  The Treasurer shall have charge of all funds of the Corporation and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors.

Section 5.9.  Controller.  The Controller shall serve as principal accounting officer of the Corporation, having the custody and operation of the accounting books and records of the Corporation, and shall perform all acts incident to the position of Controller, subject to the control of the Board of Directors.

55

Exhibit 3.02

Section 5.10.  Secretary.  The Secretary shall keep the minutes, and give notices, of all meetings of stockholders and directors and of such committees as directed by the Board of Directors.  The Secretary shall have charge of such books and papers as the Board of Directors may require.  The Secretary (or any Assistant Secretary) is authorized to certify copies of extracts from minutes and of documents in the Secretary’s charge and anyone may rely on such certified copies to the same effect as if such copies were originals and may rely upon any statement of fact concerning the Corporation certified by the Secretary (or any Assistant Secretary).  The Secretary shall perform all acts incident to the office of Secretary, subject t o the control of the Board of Directors.

Section 5.11.  Compensation of Officers.  The officers of the Corporation shall receive such compensation for their services as the Board of Directors or the appropriate committee thereof may determine.  The Board of Directors may delegate its authority to determine compensation (other than that of the Chief Executive Officer) to designated officers of the Corporation.

Section 5.12.  Execution of Instruments.  Checks, notes, drafts, other commercial instruments, assignments, guarantees of signatures and contracts (except as otherwise provided herein or by law) shall be executed by the Chief Executive Officer or other officers or employees or agents, in any such case as the Board of Directors may direct or authorize.

Section 5.13.  Mechanical Endorsements.  The Chief Executive Officer, the Secretary, or other authorized officers may authorize any endorsement on behalf of the Corporation to be made by such mechanical means or stamps as any of such officers may deem appropriate.

SECTION VI

Indemnification

Section 6.1.  Indemnification Provisions in Certificate of Incorporation.  The provisions of this Section VI are intended to supplement Article VII of the Certificate of Incorporation pursuant to Sections 7.2 and 7.3 thereof.  To the extent that this Section VI contains any provisions inconsistent with said Article VII, the provisions of the Certificate of Incorporation shall govern.  Terms defined in such Article VII shall have the same meaning in this Section VI.

Section 6.2.  Indemnification of Employees.  The Corporation shall indemnify and advance expenses to its employees to the same extent as to its directors and officers, as set forth in the Certificate of Incorporation and in this Section VI of the Bylaws of the Corporation.

Section 6.3.  Undertakings for Advances of Expenses.  If and to the extent the Delaware General Corporation Law requires, an advancement by the Corporation of expenses incurred by an indemnitee pursuant to clause (iii) of the last sentence of Section 7.1 of the Certificate of Incorporation (hereinafter an "advancement of expenses") shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under Article VII of the Certificate of Incorporation or otherwise.

56

Exhibit 3.02

Section 6.4.  Claims for Indemnification.  If a claim for indemnification under Section 7.1 of the Certificate of Incorporation is not paid in full by the Corporation within 60 days after it has been received in writing by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim.  If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of pro secuting or defending such suit.  In any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses only upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in Section 145 of the Delaware General Corporation Law (or any successor provision or provisions).  Neither the failure of the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in Section 145 of the Delaware General Corp oration Law (or any successor provision or provisions), nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit.  In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to have or retain such advancement of expenses, under Article VII of the Certificate of Incorporation or this Section VI or otherwise, shall be on the Corporation.

Section 6.5.  Insurance.  The Corporation may maintain insurance, at its expense, to protect itself and any director, trustee, officer, employee or agent of the Corporation or another enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

Section 6.6.  Severability.  In the event that any of the provisions of this Section VI (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law.

SECTION VII

Miscellaneous

Section 7.1.  Seal.  The Corporation shall have a suitable seal, containing the name of the Corporation.  The Secretary shall be in charge of the seal and may authorize one or more duplicate seals to be kept and used by any other officer or person.

Section 7.2.  Waiver of Notice.  Whenever any notice is required to be given, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein shall be deemed equivalent thereto.  Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

57

Exhibit 3.02

Section 7.3.  Voting of Stock Owned by the Corporation.  Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board, the Chief Executive Officer, the Vice Chairman, any Vice President or such officers or employees or agents as the Board of Directors or any of such designated officers may direct.  Any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may o wn securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present.  The Board of Directors may from time to time confer like powers upon any other person or persons.

SECTION VIII

Amendment of Bylaws

Section 8.1.  Power to Amend.  Except as otherwise provided by law or by the certificate of incorporation or these bylaws, these bylaws or any of them may be amended in any respect or repealed at any time, either (i) at any meeting of stockholders, subject to these bylaws, provided that any amendment or supplement proposed to be acted upon at any such meeting has been described in reasonable detail in the notice of such meeting, or (ii) at any meeting of the Board of Directors, provided in all events that any action relating to the last sentence of Section 3.1 hereof concerning the age 70 qualification limitation on Board service shall require the vote of 100% of the directors then in office, and provided further in all events that no amendment to any by-law that conflicts or varies with, or frustrates the purposes or effect of, any provision of the certificate of incorporation or other provisions of these bylaws may be adopted (including, without limitation, any bylaw the purpose or effect of which is to require approvals of matters by supermajority vote of the Board of Directors or a committee) without amendment of such provision of the certificate of incorporation or other provision of the bylaws in accordance with applicable law and, to the extent otherwise applicable, these bylaws.

Section 8.2.  Approval of Amendments.  Notwithstanding the foregoing and anything contained in these bylaws to the contrary, these bylaws may not be amended, supplemented, or repealed by the stockholders, and no provision inconsistent in intent, operation, or effect therewith may be adopted by the stockholders, without the affirmative vote of the holders of at least 66-2/3% of the stock of the Corporation of any class or series entitled to vote generally in the election of the directors of the Board of Directors, voting together as a single class.  Notwithstanding anything contained in these bylaws to the contrary, the affirmative vote of the holders of at least 66-2/3% of the stock of the Corporation of a ny class or series entitled to vote generally in the election of the directors of the Board of Directors, voting together as a single class, is required to amend, supplement or repeal, or to adopt any provisions inconsistent with, this section.

58

EX-10.01

Exhibit 10.01

AWARD NOTICE

NOTICE OF NONQUALIFIED STOCK OPTION

GRANTED PURSUANT TO THE

EASTMAN CHEMICAL COMPANY

2007 OMNIBUS LONG-TERM COMPENSATION PLAN

                                                          Grantee:

                                                          Number of Shares:

                                                          Option Price:  $____

                                                          Grant Date:  November 2, 2010

1.           Grant of Option.  This Award Notice serves to notify you that the Compensation and Management Development Committee (the “Committee”) of the Board of Directors of Eastman Chemical Company ("Company") has granted to you, under the Company’s 2007 Omnibus Long-Term Compensation Plan (the "Plan"), a nonqualified stock option ("Option") to purchase, on the terms and conditions set forth in this Award Notice and the Plan, up to the number of shares of its $.01 par value Common Stock ("Common Stock") set forth above, at a price equal to $____ per share. The Plan is incorporated herein by reference and made a part of this Award Notice.
60; Capitalized terms not defined herein have the respective meanings set forth in the Plan.  The principal terms of the Plan, and of the offer by the Company of the shares of Common Stock covered by the Option, are described in the Prospectus for the Plan, which Prospectus will be delivered to you by the Company.

2.           Period of Option and Limitations on Right to Exercise.  Subject to earlier cancellation of all or a portion of the Option as described in Sections 6 and 7 of this Award Notice, the Option will expire at 4:00 p.m., Eastern Standard Time, on November 1, 2020 ("Expiration Date").

3.           Exercise of Option.

(a)           Subject to the terms set forth in this Award Notice, the Option will become exercisable as to one-third of the shares covered hereby on November 2, 2011, and one-third of the shares covered hereby on November 2, 2012, and as to the remaining shares on November 2, 2013.

(b)           Upon your death, your personal representative may exercise the Option, subject to the terms set forth in Section 6 of this Award Notice.

(c)           The Option may be exercised in whole or in part.  The exercise generally must be accompanied by, or make provision for, full payment in cash, by check, by a broker-assisted cashless method, or by surrendering unrestricted shares of Common Stock having a value on the date of exercise equal to the exercise price, or in any combination of the foregoing; however, if you wish to pay with shares of Common Stock already held by you, you may submit an Affidavit of Ownership form attesting to the ownership of the shares instead of share certificates.

4.           Nontransferability.  The Option is not transferable except by will or by the laws of descent and distribution, and may not be sold, assigned, pledged or encumbered in any way, whether by operation of law or otherwise.  The Option may be granted only to and exercised only by you during your lifetime, except in the case of a permanent disability involving mental incapacity.

5.           Limitation of Rights.  You will not have any rights as a stockholder with respect to the shares covered by the Option until you become the holder of record of such shares by exercising the Option.  Neither the Plan, the granting of the Option, nor this Award Notice gives you any right to remain employed by the Company or its Subsidiaries.

59

Exhibit 10.01

6.         Termination.  Upon termination of your employment with the Company and its Subsidiaries ("termination") by reason of death, disability, or retirement, the Option will remain exercisable according to its terms until the earliest to occur of: 1) five (5) years following your date of termination or 2) the Expiration Date.  Upon termination due to resignation, the Option will remain exercisable according to its terms until the earliest to occur of: 1) ninety (90) days following your date of termination or 2) the Expiration Date. Upon termination for cause, any portion of the Option not previously exercised by you will be canceled and forfeited by yo u, without payment of any consideration by the Company.  Upon termination for a reason other than those described in this Section (e.g., reduction in force, divestiture, special separation, termination by mutual consent), the Option will remain exercisable until the Expiration Date, unless the Committee (for executive officers) or the executive officer responsible for Human Resources (for non-executive employees) determines that any portion of the Option will not remain exercisable or that the Option will be exercisable for a shorter period .

7.           Noncompetition; Confidentiality.  You will not, without the written consent of the Company, either during your employment by the Company or thereafter, disclose to anyone or make use of any confidential information which you have acquired during your employment relating to any of the business of the Company, except as such disclosure or use may be required in connection with your work as an employee of the Company.  During your employment by the Company, and for a period of two years after the termination of such employment, you will not, either as principal, agent, consultant, employee or otherwise, engage in any work or other activity i n competition with the Company in the field or fields in which you have worked for the Company.  The agreement in this Section 7 applies separately in the United States and in other countries but only to the extent that its application shall be reasonably necessary for the protection of the Company.  You will forfeit all rights under this Award Notice to or related to the Option if, in the determination of the Committee (in the case of executive officers) or of the  executive officer responsible for Human Resources (in the case of non-executive employees), you have violated any of the provisions of this Section 7, and in that event any issuance of shares, payment or other action with respect to the Option shall be made or taken, if at all, in the sole discretion of the Committee or the executive officer responsible for Human Resources.   

8.           Restrictions on Issuance of Shares.  If at any time the Company determines that listing, registration, or qualification of the shares covered by the Option upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

9.           Change in Ownership; Change in Control.  Article 14 of the Plan contains certain special provisions that will apply to the Option in the event of a Change in Ownership or Change in Control, respectively.

10.         Adjustment ofOption Terms.  The adjustment provisions of Article 15 of the Plan will control in the event of a nonreciprocal transaction between the Company and its stockholders that causes the per-share value of the Common Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend) or upon the occurrence of or in anticipation of any other corporate event or transaction involving the Company (including, without limitation, any merger, combina tion, or exchange of shares).

11.         Reimbursement of Certain Compensation Following Restatement.  The Award is subject to the provisions of the Plan, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring reimbursement to the Company of certain incentive-based compensation following an accounting restatement due to material non-compliance by the Company with any financial reporting requirement.

12.         Plan Controls.  In the event of any conflict between the provisions of the Plan and the provisions of this Award Notice, the provisions of the Plan will be controlling and determinative.

60

EX-10.02

Exhibit 10.02

AWARD NOTICE

NOTICE OF NONQUALIFIED STOCK OPTION

GRANTED PURSUANT TO THE

EASTMAN CHEMICAL COMPANY

2007 OMNIBUS LONG-TERM COMPENSATION PLAN

                                                               Grantee:  Mark J. Costa

                                                               Number of Shares:

                                                               Option Price:  $____

                                                               Grant Date:  November 2, 2010

1.           Grant of Option.  This Award Notice serves to notify you that the Compensation and Management Development Committee (the “Committee”) of the Board of Directors of Eastman Chemical Company ("Company") has granted to you, under the Company’s 2007 Omnibus Long-Term Compensation Plan (the "Plan"), a nonqualified stock option ("Option") to purchase, on the terms and conditions set forth in this Award Notice and the Plan, up to the number of shares of its $.01 par value Common Stock ("Common Stock") set forth above, at a price equal to $____ per share. The Plan is incorporated herein by reference and made a part of this Award Notice.
60; Capitalized terms not defined herein have the respective meanings set forth in the Plan.  The principal terms of the Plan, and of the offer by the Company of the shares of Common Stock covered by the Option, are described in the Prospectus for the Plan, which Prospectus will be delivered to you by the Company.

2.           Period of Option and Limitations on Right to Exercise.  Subject to earlier cancellation of all or a portion of the Option as described in Sections 6 and 7 of this Award Notice, the Option will expire at 4:00 p.m., Eastern Standard Time, on November 1, 2020 ("Expiration Date").

3.           Exercise of Option.

(a)           Subject to the terms set forth in this Award Notice, the Option will become exercisable as to one-third of the shares covered hereby on November 2, 2011, and one-third of the shares covered hereby on November 2, 2012, and as to the remaining shares on November 2, 2013.

(b)           Upon your death, your personal representative may exercise the Option, subject to the terms set forth in Section 6 of this Award Notice.

(c)           The Option may be exercised in whole or in part.  The exercise generally must be accompanied by, or make provision for, full payment in cash, by check, by a broker-assisted cashless method, or by surrendering unrestricted shares of Common Stock having a value on the date of exercise equal to the exercise price, or in any combination of the foregoing; however, if you wish to pay with shares of Common Stock already held by you, you may submit an Affidavit of Ownership form attesting to the ownership of the shares instead of share certificates.

4.           Nontransferability.  The Option is not transferable except by will or by the laws of descent and distribution, and may not be sold, assigned, pledged or encumbered in any way, whether by operation of law or otherwise.  The Option may be granted only to and exercised only by you during your lifetime, except in the case of a permanent disability involving mental incapacity.

5.           Limitation of Rights.  You will not have any rights as a stockholder with respect to the shares covered by the Option until you become the holder of record of such shares by exercising the Option.  Neither the Plan, the granting of the Option, nor this Award Notice gives you any right to remain employed by the Company or its Subsidiaries.

61

Exhibit 10.02 

  6.           Termination.  Upon termination of your employment with the Company and its Subsidiaries ("termination") by reason of death, disability, or retirement, the Option will remain exercisable according to its terms until the earliest to occur of: 1) five (5) years following your date of termination, or, 2) the Expiration Date.  Upon termination of your employment with the Company and its Subsidiaries without "Cause" or upon your resignation for "Good Reason" (as such terms are defined in your Employment Agreement dated May 4, 2006), the Option shall immediately vest and remain exercisable until the earliest to occur of: 1) five (5) years following your date of termination or 2) the Expiration Date.  Upon other termination due to voluntary resignation, the Option will remain exercisable according to its terms until the earliest to occur of: 1) ninety (90) days following your date of termination or 2) the Expiration Date. Upon termination for “Cause”, any portion of the Option not previously exercised by you will be canceled and forfeited by you, without payment of any consideration by the Company.  Upon termination for a reason other than those described in this Section, the Committee will determine if all or any portion of the Option will remain exercisable and, if so, the period of time the Option may be exercised, up to, but not later than, the Expiration Date.

7.           Noncompetition; Confidentiality.  You will not, without the written consent of the Company, either during your employment by the Company or thereafter, disclose to anyone or make use of any confidential information which you have acquired during your employment relating to any of the business of the Company, except as such disclosure or use may be required in connection with your work as an employee of the Company.  During your employment by the Company, and for a period of two years after the termination of such employment, you will not, either as principal, agent, consultant, employee or otherwise, engage in any work or other activity i n competition with the Company in the field or fields in which you have worked for the Company.  The agreement in this Section 7 applies separately in the United States and in other countries but only to the extent that its application shall be reasonably necessary for the protection of the Company.  You will forfeit all rights under this Award Notice to or related to the Option if, in the determination of the Committee (in the case of executive officers) or of the  executive officer responsible for Human Resources (in the case of non-executive employees), you have violated any of the provisions of this Section 7, and in that event any issuance of shares, payment or other action with respect to the Option shall be made or taken, if at all, in the sole discretion of the Committee or the executive officer responsible for Human Resources.   

8.           Restrictions on Issuance of Shares.  If at any time the Company determines that listing, registration, or qualification of the shares covered by the Option upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

9.           Change in Ownership; Change in Control.  Article 14 of the Plan contains certain special provisions that will apply to the Option in the event of a Change in Ownership or Change in Control, respectively.

10.         Adjustment ofOption Terms.  The adjustment provisions of Article 15 of the Plan will control in the event of a nonreciprocal transaction between the Company and its stockholders that causes the per-share value of the Common Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend) or upon the occurrence of or in anticipation of any other corporate event or transaction involving the Company (including, without limitation, any merger, combina tion, or exchange of shares).

             11.         Reimbursement of Certain Compensation Following Restatement.  The Award is subject to the provisions of the Plan, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring reimbursement to the Company of certain incentive-based compensation following an accounting restatement due to material non-compliance by the Company with any financial reporting requirement.

             12.         Plan Controls.  In the event of any conflict between the provisions of the Plan and the provisions of this Award Notice, the provisions of the Plan will be controlling and determinative.

62

EX-10.03

Exhibit 10.03

PERFORMANCE SHARE AWARD SUBPLAN

OF THE 2007 OMNIBUS LONG-TERM COMPENSATION PLAN

2011-2013 PERFORMANCE PERIOD

EASTMAN CHEMICAL COMPANY

63

Exhibit 10.03

EASTMAN CHEMICAL COMPANY

PERFORMANCE SHARE AWARD SUBPLAN

OF THE 2007 OMNIBUS LONG-TERM COMPENSATION PLAN

2011-2013 PERFORMANCE PERIOD

Section 1.    Background.  Under Article 4 of the Eastman Chemical Company 2007 Omnibus Long-Term Compensation Plan (the “Plan”), the “Committee” (as defined in the Plan), may, among other things, award shares of the $.01 par value common stock (“Common Stock”) of Eastman Chemical Company (the “Company”) to “Participants” (as defined in the Plan), and such awards may take the form of “Performance Awards” (as defined in the Plan) or “Qualified Performance-Based Awards” (as defined in the Plan) which are contingent upon the attainment of certain performance object ives during a specified period, and subject to such other terms, conditions, and restrictions as the Committee deems appropriate.  The purpose of this Performance Share Award Subplan (this “Subplan”) is to set forth the terms of the award of  performance shares for the 2011-2013 Performance Period specified herein, effective as of January 1, 2011 (the “Effective Date”).

Section 2.    Definitions.

(a)    The following definitions shall apply to this Subplan:

(i)“Actual Grant Amount” means the number of shares of Common Stock to which a participant is entitled under this Subplan, calculated in accordance with Section 6 of this Subplan.

(ii)“Award Amount” means the performance shares awarded to the Participant under this Subplan at the beginning of the Performance Period.

(iii)     “Award Payment Date” means the date the Committee approves the payout of Common Stock covered by an award under this Subplan to a Participant.

(iv)“Comparison Group” is the group of companies within the S&P 1500 “Materials Sector” that are classified by Standard & Poor’sas Chemical companies.  The S&P “Materials Sector” index is an index of industrial companies selected from the S&P “Super Composite 1500” Index, identified as Global Industry Classification Standard (“GICS”) 15.

(v)“Cost of Capital” reflects the Company’s cost of debt and the cost of equity, expressed as a percentage, reflecting the percentage of interest charged on debt and the percentage of expected return on equity.

(vi)     “Earnings from Continuing Operations” shall be defined as the total sales of the Company minus the costs of all operations of any nature used to produce such sales, including taxes, plus after-tax interest associated with the Company’s capital debt.

(vii)“Maximum Deductible Amount” means the maximum amount deductible by the Company under Section 162(a), taking into consideration the limitations under Section 162(m), of the Internal Revenue Code of 1986, as amended, or any similar or successor provisions thereto.

(viii)    “Participation Date” means November 2, 2010.

(ix) “Performance Period” means January 1, 2011 through December 31, 2013.

    (x)  “Performance Year” means one of the three calendar years in the Performance Period.

64

Exhibit 10.03

(xi)“Return on Capital” shall mean the return produced by funds invested in the Company and shall be determined as Earnings from Continuing Operations, as defined in Section 2.a.(vi), divided by the Average Capital Employed.  Average Capital Employed shall be derived by adding the Company’s capital debt plus equity at the close of the last day of the year preceding the Performance Year, to the Company’s capital debt plus equity at the close of the last day of the present Performance Year, with the resulting sum being divided by two.  Capital debt is defined as the sum of borrowing by the Company due within one year and long-term borrowing, as designated on the Company’s balance she et.  The resulting ratio shall be multiplied by One Hundred (100) in order to convert such to a percentage.  Such percentage shall be calculated to the third place after the decimal point (i.e., xx.xxx%), and then rounded to the second place after the decimal point (i.e., xx.xx%).

(xii)    “Target Award Range” means, with respect to any eligible Participant, the number of performance shares within the range specified on Exhibit A hereto for the Salary Grade applicable to such Participant.

(xiii)   “TSR” means total stockholder return, as reflected by the sum of (A) change in stock price (measured as the difference between (I) the average of the closing prices of a company’s common stock on the New York Stock Exchange, or of the last sale prices or closing prices of such stock on another national trading exchange, as applicable, in the period beginning on the tenth trading day preceding the beginning of the Performance Period and ending on the tenth trading day of the Performance Period and (II) the average of such closing or last sale prices for such stock in the period beginning on the tenth trading day preceding the end of the Performance Period and ending on the tenth trading day follo wing the end of the Performance Period) plus (B) dividends declared, assuming reinvestment of dividends, and expressed as a percentage return on a stockholder’s hypothetical investment.

(b)    Any capitalized terms used but not otherwise defined in this Subplan shall have the respective meanings set forth in the Plan.

Section 3.    Administration.  This Subplan shall be administered by the Compensation and Management Development Committee of the Board of Directors.  The Committee shall have authority to interpret this Subplan, to prescribe rules and regulations relating to this Subplan, and to take any other actions it deems necessary or advisable for the administration of this Subplan, and shall retain all general authority granted to it under Article 4 of the Plan.  At the end of the Performance Period, the Committee shall approve Actual Grant Amounts awarded to participants under this Subplan.

Section 4.Eligibility; Types of Awards.  The Participants who are eligible to participate in this Subplan are those employees who, as of the Participation Date, are at Salary Grade 49 and 105 and above.  Employees who are promoted during the Performance Period to a position that would meet the above criteria, but who do not hold such position as of the Participation Date, are not eligible to participate in this Subplan.  The Covered Employees identified on Schedule A shall receive Qualified Performance-Based Awards.  The remainder of the Participants shall receive Performance Awards.

Section 5.     Form of Payout of Awards.  Subject to the terms and conditions of the Plan and this Subplan, earned Awards under this Subplan shall be paid out in the form of unrestricted shares of Common Stock, except for conversions to cash and deferrals under Section 9 of this Subplan, and except that if a participant is entitled to any fraction of a share of Common Stock, as a result of Section 10 of this Subplan or otherwise, then in lieu of receiving such fraction of a share, the participant shall be paid a cash amount representing the market value of such fraction of a share at the time of payment.

65

Exhibit 10.03

Section 6.    Size of Awards.

(a)    Target Award Range.  Exhibit A hereto shows by Salary Grade the Target Award Range. The Salary Grade to be used in determining the size of any Award Amount to a Participant under this Subplan shall be the Salary Grade applicable to the position held by the participant on the Participation Date.  The actual size of the Award Amount to the Participant shall be determined based on an assessment by his or her senior management (and, in the case of executive officers, by the Committee) of the Participant’s past performance and potential for contributions to the Company’s future long term success.  Based on this asses sment, the Participant may receive no award, the target award amount, or any amount within the Target Award Range in increments of 10 performance shares.  Each member of senior management will have a performance share budget, based on the cumulative award targets for their Participants, which must be balanced for their organizations.

(b)    Actual Grant Amount.  Subject to the Committee’s authority to adjust the Actual Grant Amount described in Section 12, the Actual Grant Amount awarded to the Participant at the end of the Performance Period is determined by applying a multiplier to the Participant’s Award Amount.  The multiplier shall be determined by comparing Company performance relative to two measures:

 (i)   The Company’s TSR during the Performance Period relative to the TSRs of the companies in the Comparison Group during the Performance Period.  The Company and each company in the Comparison Group shall be ranked by TSR, in descending order, with the company having the highest TSR during the Performance Period being ranked number one.  The Comparison Group shall further be separated into quintiles (first 20%, second 20%, etc.) and the Company’s position, in relation to the Comparison Group, shall be exp ressed as a position in the applicable quintile ranking; and

 (ii)   The arithmetic average, for each of the Performance Years during the Performance Period, of the Company’s average Return on Capital minus a Return on Capital target. The Return on Capital target will be determined by the Committee.  In the case of Qualified Performance-Based Awards, the Return on Capital target for each year included in the Performance Period shall be established within 90 days after commencement of the Performance Period in a manner that complies with Code Section 162(m).  Moreover, in th e case of Qualified Performance-Based Awards, Return on Capital will be measured in a manner that complies with Code Section 162(m), including the requirement that the performance goals be objectively measured.

An award multiplier table is shown in Exhibit B.  The award multiplier is based on the Company’s performance relative to its quintile ranking relative to the Comparison Group, and its average Return on Capital relative to a target during the Performance Period.  The award multipliers range from 3.0 (i.e., 300%), if the Company’s TSR is in the top performing quintile (top 20%) of companies in the Comparison Group and the average Return on Capital minus the target Return on Capital is greater than 10 percentage points, to 0.0 (with no shares of Common Stock earned by Participants under this Subplan) if the Company does not meet the specified levels of performance relative to the two measures.

Section 7.    Composition of Comparison Group.

(a)    Qualified Performance-Based Awards.  In the case of Qualified Performance-Based Awards, there shall be no adjustment in the Comparison Group during the Performance Period that would cause the Qualified Performance-Based Awards not to qualify for the Section 162(m) Exemption.

66

Exhibit 10.03

(b)    Performance Awards.  In the case of Performance Awards, the Committee retains the discretion to make the following adjustments in the Comparison Group during the Performance Period.  A company in the Comparison Group may be dropped from the Comparison Group if a company’s common stock ceases to be publicly traded on a national stock exchange or market; or a company is a party to a significant merger, acquisition, or other reorganization.  Under these, or similar, circumstances, the company or companies may be removed from the Comparison Group, and may be replaced with another company or companies by Standard & Poo r’s, consistent with their established criteria for selection of companies for the Comparison Group.  In any case where the Comparison Group ceases to exist, or is otherwise determined to no longer be appropriate as the basis for a measure under this Subplan, the Committee may designate a replacement Comparison Group.  In any such case, the Committee shall have authority to determine the appropriate method of calculating the TSR of such former and/or replacement Comparison Group, whether by complete substitution of the replacement Comparison Group (and disregard of the former Comparison Group) over the entire Performance Period or by pro rata calculations for each Comparison Group or otherwise.

Section 8.   Preconditions to Payout Under Award.

(a)     Continuous Employment.  Except as specified in paragraph (b) below, to remain eligible for payout under an Award under this Subplan, a Participant must remain continuously employed with the Company or a Subsidiary at all times from the Effective Date through the Award Payment Date.

(b)     Death, Disability, Retirement, or Termination for an Approved Reason Before the Award Payment Date.  If a Participant’s employment is terminated due to death, disability, retirement, or any approved reason as determined by the Committee (in the case of an executive officer) or the executive officer responsible for Human Resources (in the case of non-executive officers)  (including reduction in force, divestiture, special separation, or termination by mutual consent) prior to the Award Payment Date, the Participant shall receive, subject to the terms and conditions of the Plan and this Subplan, a payout representing a pror ated portion of the Actual Grant Amount to which such participant otherwise would be entitled, with the precise amount of such payout to be determined by multiplying the Actual Grant Amount by a fraction, the numerator of which is the number of full calendar months employed in the Performance Period from the Effective Date through and including the effective date of such termination, and the denominator of which is 36 (the total number of months in the Performance Period).

Section 9.    Manner and Timing of Award Payments.

(a)     Timing of Award Payment.  Except for deferrals under Section 9(c), if any Awards are payable under this Subplan, the payment of such Awards to Participants shall be made as soon as is administratively practicable after the end of the Performance Period and final approval by the Committee.

(b)     Tax Withholding.  The Company may withhold or require the grantee to remit a cash amount sufficient to satisfy federal, state, and local taxes (including the participant’s FICA obligation) required by law to be withheld.  Further, either the Company or the grantee may elect to satisfy the withholding requirement by having the Company withhold shares of Common Stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

(c)     Deferral of Award in Excess of the Maximum Deductible Amount.  If payment of the Award would, or could in the reasonable estimation of the Committee, result in the participant’s receiving compensation in excess of the Maximum Deductible Amount in a given year, then such portion (or all, as applicable) of the Award as would, or could in the reasonable estimation of the Committee, cause such participant to receive compensation from the Company in excess of the Maximum Deductible Amount may, at the sole discretion of the Committee, be converted into the right to receive a cash payment, which shall be deferred until after the participa nt retires or otherwise terminates employment with the Company and its Subsidiaries, provided that such deferral is compliant with the requirements of Internal Revenue Code Section 409A and Treasury Regulations and guidance thereunder.

67

Exhibit 10.03

(d)     Award Deferral to the EDCP.  In the event that all or any portion of an Award is converted into a right to receive a cash payment pursuant to Section 9(c) (except as otherwise provided in this Section with respect to Participants who are subject to Section 16(a) of the 1934 Act),  an amount representing the Fair Market Value, as of the date the shares of Common Stock covered by the Award otherwise would be issued to the participant, of the Actual Grant Amount (or the deferred portion thereof) will be credited to the Stock Account of the Executive Deferred Compensation Plan (the “EDCP”), and hypothetically invested i n units of Common Stock. Notwithstanding the foregoing, for each Participant who is subject to Section 16(a) of the 1934 Act. the deferrable amount, when initially credited to the participant’s EDCP Account, shall be held in a participant’s Interest Account until the next date that dividends are paid on Common Stock, and on such date the deferrable amount that would have been initially credited to the participant’s Stock Account but for this sentence shall be transferred, together with allocable interest thereon, to the participant’s Stock Account, subject to provisions set forth in the EDCP. Thereafter, such amount shall be treated in the same manner as other investments in the EDCP and shall be subject to the terms and conditions thereof.

Section 10.     No Rights as Stockholder.  No certificates for shares of Common Stock shall be issued under this Subplan, nor shall any participant have any rights as a stockholder as a result of participation in this Subplan, until the Actual Grant Amount has been determined and such participant has otherwise become entitled to an Award under the terms of the Plan and this Subplan.  In particular, no participant shall have any right to vote or to receive dividends on any shares of Common Stock under this Subplan until certificates for such shares have been issued as described above.

Section 11.     Application of Plan.  The provisions of the Plan shall apply to this Subplan, except to the extent that any such provisions are inconsistent with specific provisions of this Subplan.

Section 12.     Adjustment of Actual Grant Amount.  The Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect overall Company performance and business and financial conditions, except in the case of a Qualified Performance-Based Award where such actions would cause the Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption.  In the case of a Qualified Performance-Based Award, the Committee shall retain the discretion to adjust such Award downward, either on a formula or discretionary basis or any combination, as the Committee determined.

Section 13.     Reimbursement of Certain Compensation Following Restatement.  The Award is subject to the provisions of the Plan, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring reimbursement to the Company of certain incentive-based compensation following an accounting restatement due to material non-compliance by the Company with any financial reporting requirement.

Section 14.     Amendments.  The Committee may, from time to time, amend this Subplan in any manner.

68

Exhibit 10.03

EXHIBIT A

Eastman Chemical Company

Performance Share Award Grant Table

2011-2013 Cycle

ON FILE IN GLOBAL COMPENSATION

69

Exhibit 10.03

EXHIBIT B

2011 -2013 Award Multiplier Table

Differential from Target Return on Capital (ROC-(COC+1))
Eastman TSR Relative to Comparison Companies	<-7%	-7% to -5%	-4.99 to -3%	-2.99 to -1%	-0.99 to 0%	.01 to +1%	+1.01 to +3%	+3.01 to +5%	+5.01 to +7%	+7.01 to +10%	>10%
5th quintile	0	0	0	0	.4	.5	.6	.7	.8	1.1	1.5
4th quintile	0	0	0	.4	.5	.7	.8	.9	1.1	1.5	2
3rd quintile	0	0	.4	.5	.8	1	1.2	1.5	1.8	2.1	2.4
2nd quintile	0	.4	.6	.8	1	1.3	1.6	1.9	2.2	2.5	2.8
1st quintile	0	.6	.8	1	1.3	1.6	1.9	2.2	2.5	2.8	3

70

Exhibit 10.03

AWARD NOTICE

NOTICE OF PERFORMANCE SHARES

AWARDED PURSUANT TO THE

EASTMAN CHEMICAL COMPANY

2007 OMNIBUS LONG-TERM COMPENSATION PLAN

                                               Recipient:

                                               Performance Period: 2011-2013

                                               Target Award:

1.         Award of Performance Shares.  This Award Notice serves to notify you that the Compensation and Management Development Committee of the Board of Directors (the “Committee”) of Eastman Chemical Company ("Company") has awarded to you, under the 2011-2013 Performance Share Award Subplan ("Subplan") of the 2007 Omnibus Long-Term Compensation Plan ("Plan"), on the terms and conditions set forth in the Subplan and the Plan, the number of performance shares (the "Performance Shares") of its $.01 par value Common Stock ("Common Stock") specified above.  The Performance Shares are rights to receive Awards in the form of shares of Common Stock, subjec t to the attainment of specified performance conditions by the Company.  Subject to satisfaction of the minimum performance conditions and the other terms of the Subplan, Awards under the Subplan will ultimately be paid in the form of unrestricted shares of Common Stock.

This Award Notice provides a summary of the terms and conditions of your performance shares, all of which terms and conditions are contained in the Subplan and the Plan.  Capitalized terms not defined herein have the respective meanings set forth in the Subplan and the Plan, as applicable.

2.         Performance Conditions.  The performance conditions for the Subplan are: 1)  a comparison of the total stockholder return (referred to in the Subplan as "TSR," and reflecting both the change in stock price and the amount of dividends declared) of the Company during the period from January 1, 2011 through December 31, 2013 (the "Performance Period"), to the TSRs of the companies in the Comparison Group (the group of companies within the Standard and Poor’s “Materials Sector” that are classified as Chemical companies.  The S&P “Materials Sector” index, identified as Global Industry Classification Standard 15, i s an index of industrial companies selected from the S&P “Super Composite 1500” index); and 2) the arithmetic average for each of the Performance Years during the Performance Period, of the Company’s average Return on Capital minus a Return on Capital target.   The specific terms of the performance conditions are summarized in Section 3 of this Award Notice and are detailed in Section 6 of the Subplan.

3.         Number of Performance Shares Awarded.  The number of Performance Shares that you have been awarded is shown above (the "Target Award").  However, the actual number of shares of Common Stock to which you will be entitled under the Subplan (the "Actual Grant Amount") may be more or less than the Target Award, depending upon the quintile ranking of the Company's TSR when ranked among the TSRs of the Comparison Group, and the Company’s average Return on Capital relative to a Return on Capital target for each of the Performance Years during the Performance Period.  The Company’s performance relative to these measures shall determine a multiplier to be applied to the Target Grant Amount.  Multipliers range from 3.0 (i.e., 300%), if the Company’s TSR is ranked in the top performing quintile (top 20%) of companies in the Comparison Group, and the average Return on Capital minus the target Return on Capital is greater than 10 percentage points, to 0.0 (with no shares of Common Stock being delivered to participants), if the Company does not meet certain levels of performance relative to the two measures.  The award multiplier table is shown in Exhibit A.  Subject to the Committee’s authority to adjust the Actual Grant Amount described in Section 12 of this Award Notice, your Actual Grant Amount is determined by applying the multiplier corresponding to the Company’s performance (Exhibit A) to your Target Award.

71

Exhibit 10.03

4.         Payment of Award.  If you are entitled to payment of an Award under the Subplan, such payment will be made as soon as administratively practicable after the end of the Performance Period and final approval by the Committee; provided, however, that if payment of the Award could, in the reasonable estimation of the Committee, result in your receiving compensation, in the year of scheduled payment, in excess of the amount deductible by the Company under Section 162(m) of the Internal Revenue Code, then such portion (or all, as applicable) of the Award as could, in the reasonable estimation of the Committee,  create such excess compensation, may, at the so le discretion of the Committee, be converted into the right to receive a cash payment, which will be deferred until after you terminate employment with the Company and its Subsidiaries, provided that such deferral is compliant with the requirements of Internal Revenue Code Section 409A and Treasury Regulations and guidance thereunder, as specified in Section 9 of the Subplan.

If any portion of an Award is converted into a right to receive a cash payment as described above, an amount representing the Fair Market Value of the deferred portion of the Actual Grant Amount will be credited to the Stock Account of the Executive Deferred Compensation Plan (the “EDCP”) and hypothetically invested in units of Common Stock.  Thereafter, such amount will be treated in the same manner as other investments in the EDCP, all as specified in Section 9 of the Subplan.

The Company may withhold or require you to remit a cash amount sufficient to satisfy federal, state, and local taxes (including your FICA obligation) required by law to be withheld.  Further, either the Company or you may elect to satisfy the withholding requirement by having the Company withhold shares of common stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

5.         Nontransferability.  Unless and until unrestricted shares of Common Stock are delivered or, if applicable, an amount is credited under the EDCP to you in payment of an earned Award of the Performance Shares, the Performance Shares are not transferable except by will or by the laws of descent and distribution, and may not be sold, assigned, pledged or encumbered in any way, whether by operation of law or otherwise.

6.         Limitation of Rights.  You will not have any rights as a stockholder with respect to the Performance Shares unless and until certificates for shares of Common Stock have been issued to you.  No such certificates will be issued under the Subplan until the Actual Grant Amount has been determined and you have otherwise become entitled to payment of an Award under the terms of the Plan and the Subplan.    Neither the Plan, the Subplan, the granting of these Performance Shares nor this Award Notice gives you any right to remain employed by the Company.

7.         Termination.  Upon termination of your employment with the Company and its Subsidiaries by reason of death, disability or retirement, or for another approved reason as determined by the Committee (in the case of executive officers) or the executive officer responsible for Human Resources (in the case of non-executive employees), you will receive after the end of the Performance Period, subject to the terms and conditions of the Plan and the Subplan, an Award representing a prorated portion of the Actual Grant Amount to which you otherwise would be entitled, based on the number of full calendar months from January 1, 2011 through the effective date of such termin ation.  Upon termination of your employment with the Company and its Subsidiaries for a reason other than death, disability, retirement or another approved reason prior to the date the shares of Common Stock covered by the Award are delivered to you, you will not be eligible or entitled to receive any Award under the Subplan.

8.         Noncompetition; Confidentiality.  You will not, without the written consent of the Company, either during your employment by the Company or thereafter, disclose to anyone or make use of any confidential information which you have acquired during your employment relating to any of the business of the Company, except as such disclosure or use may be required in connection with your work as an employee of the Company.  During your employment by the Company, and for a period of two years after the termination of such employment, you will not, either as principal, agent, consultant, employee or otherwise, engage in any work or other activity in competition with the Company in the field or fields in which you have worked for the Company.  The agreement in this Section 8 applies separately in the United States and in other countries but only to the extent that its application shall be reasonably necessary for the protection of the Company.  You will forfeit all rights under this Award Notice to or related to the Performance Shares if,  in the determination of the Committee (in the case of executive officers) or of the executive officer responsible for Human Resources (in the case of non-executive employees), you have violated any of the provisions of this Section 8, and in that event any issuance of shares, payment or other action with respect to the Performance Shares shall be made or taken, if at all, in the sole discretion of the Committee or the executive officer responsible for Human Resources.

72

Exhibit 10.03

        9.          Restrictions on Issuance of Shares.  If at any time the Company determines that listing, registration or qualification of the shares covered by an Award upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable prior to the delivery of any certificate for shares of Common Stock subject to the Award, no such certificate may be delivered unless and until such listing, registration, qualification or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

10.         Change in Ownership; Change in Control.  Article 14 of the Plan contains certain special provisions that will apply in the event of a Change in Ownership or Change in Control, respectively.

11.         Adjustment of Terms.  The adjustment provisions Article 15 of the Plan will control in the event of a nonreciprocal transaction between the company and its stockholders that causes the per-share value of the Common Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend) or upon the occurrence of in anticipation of any other corporate event or transaction involving the Company (including, without limitation, any merger, combination, or exchange of shares).

12.         Adjustment of Actual Grant Amount.  The Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect overall Company performance and business and financial conditions, except in the case of a Qualified Performance-Based Award where such actions would cause the Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption.  In the case of a Qualified Performance-Based Award, the Committee shall retain the discretion to adjust such Award downward, either on a formula or discretionary basis or any combination, as the Committee determined.

13.         Reimbursement of Certain Compensation Following Restatement.  The Award is subject to the provisions of the Plan, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring reimbursement to the Company of certain incentive-based compensation following an accounting restatement due to material non-compliance by the Company with any financial reporting requirement.

14.         Plan and Subplan Control.  In the event of any conflict between the provisions of the Plan or the Subplan and the provisions of this Award Notice, the provisions of the Plan or the Subplan, as applicable, will be controlling and determinative.

73

Exhibit 10.03

EXHIBIT A

Award Multiplier Table 2011 -2013 Award Multiplier Table

Differential from Target Return on Capital (ROC-(COC+1))
Eastman TSR Relative to Comparison Companies	<-7%	-7% to -5%	-4.99 to -3%	-2.99 to -1%	-0.99 to 0%	.01 to +1%	+1.01 to +3%	+3.01 to +5%	+5.01 to +7%	+7.01 to +10%	>10%
5th quintile	0	0	0	0	.4	.5	.6	.7	.8	1.1	1.5
4th quintile	0	0	0	.4	.5	.7	.8	.9	1.1	1.5	2
3rd quintile	0	0	.4	.5	.8	1	1.2	1.5	1.8	2.1	2.4
2nd quintile	0	.4	.6	.8	1	1.3	1.6	1.9	2.2	2.5	2.8
1st quintile	0	.6	.8	1	1.3	1.6	1.9	2.2	2.5	2.8	3

74

EX-10.04

Exhibit 10.04

PERFORMANCE SHARE AWARD SUBPLAN

OF THE 2007 OMNIBUS LONG-TERM COMPENSATION PLAN

2011-2013 PERFORMANCE PERIOD

Mark J. Costa

EASTMAN CHEMICAL COMPANY

75

Exhibit 10.04

EASTMAN CHEMICAL COMPANY

PERFORMANCE SHARE AWARD SUBPLAN

OF THE 2007 OMNIBUS LONG-TERM COMPENSATION PLAN

2011-2013  PERFORMANCE PERIOD

Mark J. Costa

Section 1.    Background.  Under Article 4 of the Eastman Chemical Company 2007 Omnibus Long-Term Compensation Plan (the “Plan”), the “Committee” (as defined in the Plan), may, among other things, award shares of the $.01 par value common stock (“Common Stock”) of Eastman Chemical Company (the “Company”) to “Participants” (as defined in the Plan), and such awards may take the form of “Performance Awards” (as defined in the Plan) or “Qualified Performance-Based Awards” (as defined in the Plan) which are contingent upon the attainment of certain performance object ives during a specified period, and subject to such other terms, conditions, and restrictions as the Committee deems appropriate.  The purpose of this Performance Share Award Subplan (this “Subplan”) is to set forth the terms of the award of  performance shares for the 2011-2013 Performance Period specified herein, effective as of January 1, 2011 (the “Effective Date”).

Section 2.    Definitions.

(a)     The following definitions shall apply to this Subplan:

(i)“Actual Grant Amount” means the number of shares of Common Stock to which a participant is entitled under this Subplan, calculated in accordance with Section 6 of this Subplan.

(ii)    “Award Amount” means the performance shares awarded to the Participant under this Subplan at the beginning of the Performance Period.

(iii)    “Award Payment Date” means the date the Committee approves the payout of Common Stock covered by an award under this Subplan to a Participant.

(iv)   “Comparison Group” is the group of companies within the S&P 1500 “Materials Sector” that are classified by Standard & Poor’sas Chemical companies.  The S&P “Materials Sector” index is an index of industrial companies selected from the S&P “Super Composite 1500” Index, identified as Global Industry Classification Standard (“GICS”) 15.

(v)    “Cost of Capital” reflects the Company’s cost of debt and the cost of equity, expressed as a percentage, reflecting the percentage of interest charged on debt and the percentage of expected return on equity.

(vi)   “Earnings from Continuing Operations” shall be defined as the total sales of the Company minus the costs of all operations of any nature used to produce such sales, including taxes, plus after-tax interest associated with the Company’s capital debt.

(vii)   “Maximum Deductible Amount” means the maximum amount deductible by the Company under Section 162(a), taking into consideration the limitations under Section 162(m), of the Internal Revenue Code of 1986, as amended, or any similar or successor provisions thereto.

(viii)  “Participation Date” means November 2, 2010.

(ix)    “Performance Period” means January 1, 2011 through December 31, 2013.

(x)     “Performance Year” means one of the three calendar years in the Performance Period.

76

Exhibit 10.04

(xi)    “Return on Capital” shall mean the return produced by funds invested in the Company and shall be determined as Earnings from Continuing Operations, as defined in Section 2.a.(vi), divided by the Average Capital Employed.  Average Capital Employed shall be derived by adding the Company’s capital debt plus equity at the close of the last day of the year preceding the Performance Year, to the Company’s capital debt plus equity at the close of the last day of the present Performance Year, with the resulting sum being divided by two.  Capital debt is defined as the sum of borrowing by the Company due within one year and long-term borrowing, as designated on the Company&# 8217;s balance sheet.  The resulting ratio shall be multiplied by One Hundred (100) in order to convert such to a percentage.  Such percentage shall be calculated to the third place after the decimal point (i.e., xx.xxx%), and then rounded to the second place after the decimal point (i.e., xx.xx%).

(xii)   “Target Award Range” means, with respect to any eligible Participant, the number of performance shares within the range specified on Exhibit A hereto for the Salary Grade applicable to such Participant.

(xiii)  “TSR” means total stockholder return, as reflected by the sum of (A) change in stock price (measured as the difference between (I) the average of the closing prices of a company’s common stock on the New York Stock Exchange, or of the last sale prices or closing prices of such stock on another national trading exchange, as applicable, in the period beginning on the tenth trading day preceding the beginning of the Performance Period and ending on the tenth trading day of the Performance Period and (II) the average of such closing or last sale prices for such stock in the period beginning on the tenth trading day preceding the end of the Performance Period and ending on the tenth trading day following the end of the Performance Period) plus (B) dividends declared, assuming reinvestment of dividends, and expressed as a percentage return on a stockholder’s hypothetical investment.

(b)    Any capitalized terms used but not otherwise defined in this Subplan shall have the respective meanings set forth in the Plan.

Section 3.    Administration.  This Subplan shall be administered by the Compensation and Management Development Committee of the Board of Directors.  The Committee shall have authority to interpret this Subplan, to prescribe rules and regulations relating to this Subplan, and to take any other actions it deems necessary or advisable for the administration of this Subplan, and shall retain all general authority granted to it under Article 4 of the Plan.  At the end of the Performance Period, the Committee shall approve Actual Grant Amounts awarded to participants under this Subplan.

Section 4.    Eligibility; Types of Awards.  The Participants who are eligible to participate in this Subplan are those employees who, as of the Participation Date, are at Salary Grade 49 and 105 and above.  Employees who are promoted during the Performance Period to a position that would meet the above criteria, but who do not hold such position as of the Participation Date, are not eligible to participate in this Subplan.  The Covered Employees identified on Schedule A shall receive Qualified Performance-Based Awards.  The remainder of the Participants shall receive Performance Awards.

Section 5.    Form of Payout of Awards.  Subject to the terms and conditions of the Plan and this Subplan, earned Awards under this Subplan shall be paid out in the form of unrestricted shares of Common Stock, except for conversions to cash and deferrals under Section 9 of this Subplan, and except that if a participant is entitled to any fraction of a share of Common Stock, as a result of Section 10 of this Subplan or otherwise, then in lieu of receiving such fraction of a share, the participant shall be paid a cash amount representing the market value of such fraction of a share at the time of payment.

77

Exhibit 10.04

Section 6.    Size of Awards.

(a)    Target Award Range.  Exhibit A hereto shows by Salary Grade the Target Award Range. The Salary Grade to be used in determining the size of any Award Amount to a Participant under this Subplan shall be the Salary Grade applicable to the position held by the participant on the Participation Date.  The actual size of the Award Amount to the Participant shall be determined based on an assessment by his or her senior management (and, in the case of executive officers, by the Committee) of the Participant’s past performance and potential for contributions to the Company’s future long term success.  Based on this assessment, the Participant may receive no award, the target award amount, or any amount within the Target Award Range in increments of 10 performance shares.  Each member of senior management will have a performance share budget, based on the cumulative award targets for their Participants, which must be balanced for their organizations.

(b)    Actual Grant Amount.  Subject to the Committee’s authority to adjust the Actual Grant Amount described in Section 12, the Actual Grant Amount awarded to the Participant at the end of the Performance Period is determined by applying a multiplier to the Participant’s Award Amount.  The multiplier shall be determined by comparing Company performance relative to two measures:

(i)   The Company’s TSR during the Performance Period relative to the TSRs of the companies in the Comparison Group during the Performance Period.  The Company and each company in the Comparison Group shall be ranked by TSR, in descending order, with the company having the highest TSR during the Performance Period being ranked number one.  The Comparison Group shall further be separated into quintiles (first 20%, second 20%, etc.) and the Company’s position, in relation to the Comparison Group, shall be expressed as a position in the applicable quintile ranking; and

(ii)   The arithmetic average, for each of the Performance Years during the Performance Period, of the Company’s average Return on Capital minus a Return on Capital target. The Return on Capital target will be determined by the Committee.  In the case of Qualified Performance-Based Awards, the Return on Capital target for each year included in the Performance Period shall be established within 90 days after commencement of the Performance Period in a manner that complies with Code Section 162(m).  Moreover, in the case of Qualified Performance-Based Awards, Return on Capital will be measured in a manner that complies with Code Section 162(m), including the requirement that the performan ce goals be objectively measured.

An award multiplier table is shown in Exhibit B.  The award multiplier is based on the Company’s performance relative to its quintile ranking relative to the Comparison Group, and its average Return on Capital relative to a target during the Performance Period.  The award multipliers range from 3.0 (i.e., 300%), if the Company’s TSR is in the top performing quintile (top 20%) of companies in the Comparison Group and the average Return on Capital minus the target Return on Capital is greater than 10 percentage points, to 0.0 (with no shares of Common Stock earned by Participants under this Subplan) if the Company does not meet the specified levels of performance relative to the two measures.

Section 7.    Composition of Comparison Group.

(a)    Qualified Performance-Based Awards.  In the case of Qualified Performance-Based Awards, there shall be no adjustment in the Comparison Group during the Performance Period that would cause the Qualified Performance-Based Awards not to qualify for the Section 162(m) Exemption.

78

Exhibit 10.04

(b)    Performance Awards.  In the case of Performance Awards, the Committee retains the discretion to make the following adjustments in the Comparison Group during the Performance Period.  A company in the Comparison Group may be dropped from the Comparison Group if a company’s common stock ceases to be publicly traded on a national stock exchange or market; or a company is a party to a significant merger, acquisition, or other reorganization.  Under these, or similar, circumstances, the company or companies may be removed from the Comparison Group, and may be replaced with another company or companies by Standard &am p; Poor’s, consistent with their established criteria for selection of companies for the Comparison Group.  In any case where the Comparison Group ceases to exist, or is otherwise determined to no longer be appropriate as the basis for a measure under this Subplan, the Committee may designate a replacement Comparison Group.  In any such case, the Committee shall have authority to determine the appropriate method of calculating the TSR of such former and/or replacement Comparison Group, whether by complete substitution of the replacement Comparison Group (and disregard of the former Comparison Group) over the entire Performance Period or by pro rata calculations for each Comparison Group or otherwise.

Section 8.    Preconditions to Payout Under Award.

(a)    Continuous Employment.  Except as specified in paragraphs (b) and (c) below, to remain eligible for an Award under this Subplan, an eligible Employee must remain continuously employed with the Company or a Subsidiary at all times from the Effective Date through the Award Payment Date.

(b)    Death, Disability, Retirement, or Termination for an Approved Reason Before the Award Payment Date.  If a participant's employment with the Company or a Subsidiary is terminated due to death, disability, retirement, or any approved reason as determined by the Committee prior to the Award Payment Date, the participant shall receive, subject to the terms and conditions of the Plan and this Subplan, an Award representing a prorated portion of the Actual Grant Amount to which such participant otherwise would be entitled, with the precise amount of such Award to be determined by multiplying the Actual Grant Amount by a fraction, the numerator of which is the number of full calendar months employed in the Performance Period from the Effective Date through and including the effective date of such termination, and the denominator of which is 36 (the total number of months in the Performance Period).

(c)    Termination Without Cause or for Good Reason Before the Award Payment Date.  If a participant's employment with the Company or a Subsidiary is terminated without "Cause" or for "Good Reason" (as such terms are defined in the participants' Employment Agreement dated May 4, 2006) prior to the Award Payment Date, the participant shall receive, subject to the terms and conditions of the Plan and this Subplan, within 30 days of termination (or such other date as may be required under Internal Revenue Code Section 409A), shares of Common Stock underlying outstanding performance shares (as if all performance objectives with respect thereto had been met at a level of 100%) on a pro rata basis based upon the number of full calendar months employed in the Performance Period from the Effective Date through and including the effective date of such termination.

Section 9.    Manner and Timing of Award Payments.

(a)    Timing of Award Payment.  Except for deferrals under Section 9(c), if any Awards are payable under this Subplan, the payment of such Awards to Participants shall be made as soon as is administratively practicable after the end of the Performance Period and final approval by the Committee.

(b)    Tax Withholding.  The Company may withhold or require the grantee to remit a cash amount sufficient to satisfy federal, state, and local taxes (including the participant’s FICA obligation) required by law to be withheld.  Further, either the Company or the grantee may elect to satisfy the withholding requirement by having the Company withhold shares of Common Stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

79

Exhibit 10.04

(c)    Deferral of Award in Excess of the Maximum Deductible Amount.  If payment of the Award would, or could in the reasonable estimation of the Committee, result in the participant’s receiving compensation in excess of the Maximum Deductible Amount in a given year, then such portion (or all, as applicable) of the Award as would, or could in the reasonable estimation of the Committee, cause such participant to receive compensation from the Company in excess of the Maximum Deductible Amount may, at the sole discretion of the Committee, be converted into the right to receive a cash payment, which shall be deferred until after the participant retires or otherwise terminates employment with the Company and its Subsidiaries, provided that such deferral is compliant with the requirements of Internal Revenue Code Section 409A and Treasury Regulations and guidance thereunder.

(d)    Award Deferral to the EDCP.  In the event that all or any portion of an Award is converted into a right to receive a cash payment pursuant to Section 9(c) (except as otherwise provided in this Section with respect to Participants who are subject to Section 16(a) of the 1934 Act),  an amount representing the Fair Market Value, as of the date the shares of Common Stock covered by the Award otherwise would be issued to the participant, of the Actual Grant Amount (or the deferred portion thereof) will be credited to the Stock Account of the Executive Deferred Compensation Plan (the “EDCP”), and hypothetically invested i n units of Common Stock.  Notwithstanding the foregoing, for each Participant who is subject to Section 16(a) of the 1934 Act. the deferrable amount, when initially credited to the participant’s EDCP Account, shall be held in a participant’s Interest Account until the next date that dividends are paid on Common Stock, and on such date the deferrable amount that would have been initially credited to the participant’s Stock Account but for this sentence shall be transferred, together with allocable interest thereon, to the participant’s Stock Account, subject to provisions set forth in the EDCP.  Thereafter, such amount shall be treated in the same manner as other investments in the EDCP and shall be subject to the terms and conditions thereof.

Section 10.    No Rights as Stockholder.  No certificates for shares of Common Stock shall be issued under this Subplan, nor shall any participant have any rights as a stockholder as a result of participation in this Subplan, until the Actual Grant Amount has been determined and such participant has otherwise become entitled to an Award under the terms of the Plan and this Subplan.  In particular, no participant shall have any right to vote or to receive dividends on any shares of Common Stock under this Subplan until certificates for such shares have been issued as described above.

Section 11.    Application of Plan.  The provisions of the Plan shall apply to this Subplan, except to the extent that any such provisions are inconsistent with specific provisions of this Subplan.

Section 12.    Adjustment of Actual Grant Amount.  The Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect overall Company performance and business and financial conditions, except in the case of a Qualified Performance-Based Award where such actions would cause the Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption.  In the case of a Qualified Performance-Based Award, the Committee shall retain the discretion to adjust such Award downward, either on a formula or discretionary basis or any combination, as the Committee determined.

Section 13.    Reimbursement of Certain Compensation Following Restatement.  The Award is subject to the provisions of the Plan, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring reimbursement to the Company of certain incentive-based compensation following an accounting restatement due to material non-compliance by the Company with any financial reporting requirement.

Section 14.    Amendments.  The Committee may, from time to time, amend this Subplan in any manner.

80

Exhibit 10.04

EXHIBIT A

Eastman Chemical Company

Performance Share Award Grant Table

2011-2013 Cycle

ON FILE IN GLOBAL COMPENSATION

81

Exhibit 10.04

EXHIBIT B

2011 -2013 Award Multiplier Table

Differential from Target Return on Capital (ROC-(COC+1))
Eastman TSR Relative to Comparison Companies	<-7%	-7% to -5%	-4.99 to -3%	-2.99 to -1%	-0.99 to 0%	.01 to +1%	+1.01 to +3%	+3.01 to +5%	+5.01 to +7%	+7.01 to +10%	>10%
5th quintile	0	0	0	0	.4	.5	.6	.7	.8	1.1	1.5
4th quintile	0	0	0	.4	.5	.7	.8	.9	1.1	1.5	2
3rd quintile	0	0	.4	.5	.8	1	1.2	1.5	1.8	2.1	2.4
2nd quintile	0	.4	.6	.8	1	1.3	1.6	1.9	2.2	2.5	2.8
1st quintile	0	.6	.8	1	1.3	1.6	1.9	2.2	2.5	2.8	3

82

Exhibit 10.04

AWARD NOTICE

NOTICE OF PERFORMANCE SHARES

AWARDED PURSUANT TO THE

EASTMAN CHEMICAL COMPANY

2007 OMNIBUS LONG-TERM COMPENSATION PLAN

                                                Recipient:   Mark J. Costa

                                                Performance Period: 2011-2013

                                                Target Award:

1.         Award of Performance Shares.  This Award Notice serves to notify you that the Compensation and Management Development Committee of the Board of Directors (the “Committee”) of Eastman Chemical Company ("Company") has awarded to you, under the 2011-2013Performance Share Award Subplan ("Subplan") of the 2007 Omnibus Long-Term Compensation Plan ("Plan"), on the terms and conditions set forth in the Subplan and the Plan, the number of performance shares (the "Performance Shares") of its $.01 par value Common Stock ("Common Stock") specified above.  The Performance Shares are rights to receive Awards in the form of shares of Common Stock, subject to the attainment of specified performance conditions by the Company.  Subject to satisfaction of the minimum performance conditions and the other terms of the Subplan, Awards under the Subplan will ultimately be paid in the form of unrestricted shares of Common Stock.

This Award Notice provides a summary of the terms and conditions of your performance shares, all of which terms and conditions are contained in the Subplan and the Plan.  Capitalized terms not defined herein have the respective meanings set forth in the Subplan and the Plan, as applicable.

2.         Performance Conditions.  The performance conditions for the Subplan are: 1)  a comparison of the total stockholder return (referred to in the Subplan as "TSR," and reflecting both the change in stock price and the amount of dividends declared) of the Company during the period from January 1, 2011 through December 31, 2013 (the "Performance Period"), to the TSRs of the companies in the Comparison Group (the group of companies within the Standard and Poor’s “Materials Sector” that are classified as Chemical companies.  The S&P “Materials Sector” index, identified as Global Industry Classification Standard 15, i s an index of industrial companies selected from the S&P “Super Composite 1500” index); and 2) the arithmetic average for each of the Performance Years during the Performance Period, of the Company’s average Return on Capital minus a Return on Capital target.   The specific terms of the performance conditions are summarized in Section 3 of this Award Notice and are detailed in Section 6 of the Subplan.

3.         Number of Performance Shares Awarded.  The number of Performance Shares that you have been awarded is shown above (the "Target Award").  However, the actual number of shares of Common Stock to which you will be entitled under the Subplan (the "Actual Grant Amount") may be more or less than the Target Award, depending upon the quintile ranking of the Company's TSR when ranked among the TSRs of the Comparison Group, and the Company’s average Return on Capital relative to a Return on Capital target for each of the Performance Years during the Performance Period.  The Company’s performance relative to these measures shall determine a multiplier to be applied to the Target Grant Amount.  Multipliers range from 3.0 (i.e., 300%), if the Company’s TSR is ranked in the top performing quintile (top 20%) of companies in the Comparison Group, and the average Return on Capital minus the target Return on Capital is greater than 10 percentage points, to 0.0 (with no shares of Common Stock being delivered to participants), if the Company does not meet certain levels of performance relative to the two measures.  The award multiplier table is shown in Exhibit A.  Subject to the Committee’s authority to adjust the Actual Grant Amount described in Section 12 of this Award Notice, your Actual Grant Amount is determined by applying the multiplier corresponding to the Company’s performance (Exhibit A) to your Target Award.

83

Exhibit 10.04

4.         Payment of Award.  If you are entitled to payment of an Award under the Subplan, such payment will be made as soon as administratively practicable after the end of the Performance Period and final approval by the Committee; provided, however, that if payment of the Award could, in the reasonable estimation of the Committee, result in your receiving compensation, in the year of scheduled payment, in excess of the amount deductible by the Company under Section 162(m) of the Internal Revenue Code, then such portion (or all, as applicable) of the Award as could, in the reasonable estimation of the Committee,  create such excess compensation, may, at the so le discretion of the Committee, be converted into the right to receive a cash payment, which will be deferred until after you terminate employment with the Company and its Subsidiaries, provided that such deferral is compliant with the requirements of Internal Revenue Code Section 409A and Treasury Regulations and guidance thereunder, as specified in Section 9 of the Subplan.

If any portion of an Award is converted into a right to receive a cash payment as described above, an amount representing the Fair Market Value of the deferred portion of the Actual Grant Amount will be credited to the Stock Account of the Executive Deferred Compensation Plan (the “EDCP”) and hypothetically invested in units of Common Stock.  Thereafter, such amount will be treated in the same manner as other investments in the EDCP, all as specified in Section 9 of the Subplan.

The Company may withhold or require you to remit a cash amount sufficient to satisfy federal, state, and local taxes (including your FICA obligation) required by law to be withheld.  Further, either the Company or you may elect to satisfy the withholding requirement by having the Company withhold shares of common stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

5.         Nontransferability.  Unless and until unrestricted shares of Common Stock are delivered or, if applicable, an amount is credited under the EDCP to you in payment of an earned Award of the Performance Shares, the Performance Shares are not transferable except by will or by the laws of descent and distribution, and may not be sold, assigned, pledged or encumbered in any way, whether by operation of law or otherwise.

6.         Limitation of Rights.  You will not have any rights as a stockholder with respect to the Performance Shares unless and until certificates for shares of Common Stock have been issued to you.  No such certificates will be issued under the Subplan until the Actual Grant Amount has been determined and you have otherwise become entitled to payment of an Award under the terms of the Plan and the Subplan.    Neither the Plan, the Subplan, the granting of these Performance Shares nor this Award Notice gives you any right to remain employed by the Company.

7.         Termination.  Upon termination of your employment with the Company and its Subsidiaries ("termination")  by reason of death, disability or retirement, or for another approved reason as determine by the Committee, you will receive after the end of the Performance Period, subject to the terms and conditions of the Plan and the Subplan, an Award representing a prorated portion of the Actual Grant Amount to which you otherwise would be entitled, based on the number of full calendar months employed from January 1, 2011 through the effective date of such termination.  Upon termination without "Cause" or resignation for "Good Reason" (as such terms are defined in your Employment Agreement dated May 4, 2006) Eastman will issue to you, within 30 days of your termination (or such other date as may be required under Internal Revenue Code Section 409A), shares of Common Stock underlying outstanding performance shares (as if all performance objectives with respect thereto had been met at a level of 100%) on a pro rata basis based upon the number of full calendar months employed during the performance period.  Upon termination for a reason other than death, disability, retirement or another reason described above prior to the date the shares of Common Stock covered by the Award are delivered to you, you will not be eligible or entitled to receive any Award under the Subplan.

84

Exhibit 10.04

8.         Noncompetition; Confidentiality.  You will not, without the written consent of the Company, either during your employment by the Company or thereafter, disclose to anyone or make use of any confidential information which you have acquired during your employment relating to any of the business of the Company, except as such disclosure or use may be required in connection with your work as an employee of the Company.  During your employment by the Company, and for a period of two years after the termination of such employment, you will not, either as principal, agent, consultant, employee or otherwise, engage in any work or other activity in competition with the Company in the field or fields in which you have worked for the Company.  The agreement in this Section 8 applies separately in the United States and in other countries but only to the extent that its application shall be reasonably necessary for the protection of the Company.  You will forfeit all rights under this Award Notice to or related to the Performance Shares if,. in the determination of the Committee (in the case of executive officers) or of the executive officer responsible for Human Resources (in the case of non-executive employees), you have violated any of the provisions of this Section 8, and in that event any issuance of shares, payment or other action with respect to the Performance Shares shall be made or taken, if at all, in the sole discretion of the Committee or the executive officer responsible for Human Resources.

9.         Restrictions on Issuance of Shares.  If at any time the Company determines that listing, registration or qualification of the shares covered by an Award upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable prior to the delivery of any certificate for shares of Common Stock subject to the Award, no such certificate may be delivered unless and until such listing, registration, qualification or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

10.       Change in Ownership; Change in Control.  Article 14 of the Plan contains certain special provisions that will apply in the event of a Change in Ownership or Change in Control, respectively.

11.       Adjustment of Terms.  The adjustment provisions Article 15 of the Plan will control in the event of a nonreciprocal transaction between the company and its stockholders that causes the per-share value of the Common Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend) or upon the occurrence of in anticipation of any other corporate event or transaction involving the Company (including, without limitation, any merger, combination, or exchange of shares).

12.       Adjustment of Actual Grant Amount.    The Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect overall Company performance and business and financial conditions, except in the case of a Qualified Performance-Based Award where such actions would cause the Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption.  In the case of a Qualified Performance-Based Award, the Committee shall retain the discretion to adjust such Award downward, either on a formula or discretionary basis or any combination, as the Committee determined.

13.       Reimbursement of Certain Compensation Following Restatement.  The Award is subject to the provisions of the Plan, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring reimbursement to the Company of certain incentive-based compensation following an accounting restatement due to material non-compliance by the Company with any financial reporting requirement.

14.       Plan and Subplan Control.  In the event of any conflict between the provisions of the Plan or the Subplan and the provisions of this Award Notice, the provisions of the Plan or the Subplan, as applicable, will be controlling and determinative.

85

Exhibit 10.04

EXHIBIT A

2011 -2013 Award Multiplier Table

Differential from Target Return on Capital (ROC-(COC+1))
Eastman TSR Relative to Comparison Companies	<-7%	-7% to -5%	-4.99 to -3%	-2.99 to -1%	-0.99 to 0%	.01 to +1%	+1.01 to +3%	+3.01 to +5%	+5.01 to +7%	+7.01 to +10%	>10%
5th quintile	0	0	0	0	.4	.5	.6	.7	.8	1.1	1.5
4th quintile	0	0	0	.4	.5	.7	.8	.9	1.1	1.5	2
3rd quintile	0	0	.4	.5	.8	1	1.2	1.5	1.8	2.1	2.4
2nd quintile	0	.4	.6	.8	1	1.3	1.6	1.9	2.2	2.5	2.8
1st quintile	0	.6	.8	1	1.3	1.6	1.9	2.2	2.5	2.8	3

86

EX-12.01

EXHIBIT 12.01

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Computation of Ratios of Earnings to Fixed Charges

	Third Quarter					First Nine Months
(Dollars in millions)		2010		2009			2010		2009
Earnings before income taxes	$	258	$	170	$		633	$	278
Add:
Interest expense		26		20			79		63
Appropriate portion of rental expense (1)		3		4			9		11
Amortization of capitalized interest		2		2			6		6
Earnings as adjusted	$	289	$	196	$		727	$	358
Fixed charges:
Interest expense	$	26	$	20	$		79	$	63
Appropriate portion of rental expense (1)		3		4			9		11
Capitalized interest		--		--			2		14
Total fixed charges	$	29	$	24	$		90	$	88
Ratio of earnings to fixed charges		10.0x		8.2x			8.1x		4.1x

(1)   For all periods presented, the interest component of rental expense is estimated to equal one-third of such expense.

87

EX-31.01

Exhibit 31.01

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Rule 13a – 14(a)/15d – 14(a) Certifications

I, James P. Rogers, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Eastman Chemical Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 1, 2010

 /s/James P. Rogers                                 

James P. Rogers

President and Chief Executive Officer

88

EX-31.02

Exhibit 31.02

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Rule 13a – 14(a)/15d – 14(a) Certifications

 I, Curtis E. Espeland, certify that:

 1.    I have reviewed this quarterly report on Form 10-Q of Eastman Chemical Company;

 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 1, 2010

 /s/Curtis E. Espeland                                                 

Curtis E. Espeland

Senior Vice President and Chief Financial Officer

89

EX-32.01

Exhibit 32.01

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Section 1350 Certifications

In connection with the Quarterly Report of Eastman Chemical Company (the "Company") on Form 10-Q for the period ending September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:

1.   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

A signed original of this written statement required by Section 906 has been provided to Eastman Chemical Company and will be retained by Eastman Chemical Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: November 1, 2010

 /s/James P. Rogers                                

James P. Rogers

President and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.

90

EX-32.02

Exhibit 32.02

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Section 1350 Certifications

In connection with the Quarterly Report of Eastman Chemical Company (the "Company") on Form 10-Q for the period ending September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

A signed original of this written statement required by Section 906 has been provided to Eastman Chemical Company and will be retained by Eastman Chemical Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: November 1, 2010

 /s/Curtis E. Espeland                                                 

Curtis E. Espeland

Senior Vice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.

91