Eastman Chemical Company (EMN, NYSE)
Industry: Specialty Chemicals
Annual report, fiscal year 2015


EASTMAN
The results of insight \( ^{™} \) 

Focus: Innovation






## End-market and geographic diversity contribute to growth

2015 sales revenue by region Total Sales $9.6B

45%
North America
$4.35B

25%
Europe, Middle East & Africa
$2.42B

24%
Asia Pacific
$2.33B

6%
Latin America
$543M

2015 Sales revenue by end-use market

Electronics
Energy, Fuels & Water
Other

3%
Other

3%

6%

6%

7%

8%

8%

12%

14%

Transportation

Building & Construction



## Dear Stockholders,

Looking back at 2015, I am happy to write that it was another strong year for Eastman Chemical Company, with record free cash flow and earnings that keep us in select company. It was a very strong year — but I believe 2015 was much more than that.

I see 2015 as a proving ground for our corporate growth strategy. In 2015, we provided evidence that, even in the face of significant headwinds, Eastman has plotted a strategic course that enables us to deliver on our commitments.

We have the right growth strategy. In 2015, we saw a compelling demonstration of increasing organic growth, further progress toward a specialty portfolio, and evolution of our business structure that leaves us better aligned and more poised to maximize growth potential. Our organic growth and growth from attractive acquisitions have provided us strong optionality as we continue our focus on managing our portfolio in 2016.

Looking over the rest of 2016, we recognize it will be a year of significant challenges. We are operating in the midst of a difficult environment, with the chemical industry, manufacturing, and other sectors being pressured by a variety of factors, including collapsing oil prices that have fallen below anyone's expectations, weakening currencies outside the U.S., and lackluster global demand.

Our company is armored not just to withstand this economic downturn but to continue growing despite it. I believe we are well positioned to execute a strategy that will enable consistent growth in a stunted economy. Even in what looks to be a challenging year, we are driving hard to deliver another solid year in 2016.

## 2015: A year of successes

With increased adjusted earnings per share in 2015, we had a sixth consecutive year of growth — an achievement matched only by about 25 percent of companies in the S&P 500 over the past decade. Our accomplishments in 2015 include:

• Record cash flows from operations, which reflect our progression toward a specialty portfolio and the robust growth in those specialty products. Our free cash flow of $960 million resulted from both our strong earnings and cash flows from our recently acquired businesses. This level of cash flow sets us apart and is a distinct advantage in an uncertain economy.
• Increased operating earnings in three of our business segments, with particularly strong earnings growth of 40 percent in Advanced Materials. Our operating margin for the year was 18 percent, an increase of nearly 100 basis points compared to 2014 despite the challenging business climate.

• Earnings growth in our specialty businesses as a result of our organic growth initiatives, such as strong growth in our acoustic interlayers, head-up displays (HUD), and optical films for mobile devices in the Advanced Materials segment and the contribution of tackifying resins for tires in our Additives & Functional Products segment.

• Substantial progress in deleveraging, reducing net debt by approximately $590 million.

• Substantially completed integration of the four high quality acquisitions we made in 2014, demonstrating our consistent ability to bring companies together to capture synergies and create value. Combined, the acquisitions delivered more than $0.50 per share of accretion as expected.

• Returned cash to our stockholders, demonstrating our confidence in future earnings and cash flow. Consistent with our philosophy to grow the dividend as our earnings grow, the Board of Directors increased the dividend by 15 percent in 2015 and has more than doubled it since 2010. We also repurchased more than $100 million of common stock.

• Cost reductions and productivity gains helped to more than offset inflation in 2015 by approximately $25 million, which is a reflection of the cost discipline and productivity that is ingrained in our culture.

## Strength in our culture and our people

On a daily basis, we at Eastman strive to do things the right way. It makes good business sense and goes beyond the bottom line by impacting the world in positive ways. We want you, our stockholders, to feel good about your investment in us and our employees to know they are in a place where innovation, accomplishment, and inclusion are foundational attributes. Some of our accomplishments in 2015 that reflect this spirit include:

• For the third straight year, our employees declared Eastman one of the Best Places to Work, an achievement of which I am immensely proud. We were honored in 2015 with our third consecutive Employees' Choice Award by Glassdoor \( ^{®} \) , and the Best Places to Work award is determined solely by direct input of Eastman employees.



• Eastman was honored by the American Institute of Chemical Engineers (AIChE) with its 2015 award for Excellence in Advancing Process Safety, with AIChE lauding Eastman's process safety experts for consistently sharing insights and expertise with colleagues around the world. Operating safely strengthens our overall business and shapes an industry culture of higher standards and accountability. For Eastman, process and personal safety isn't just a priority, it is a core value and a responsibility that we take very seriously.

• Eastman received the ENERGY STAR \( ^{®} \)  Partner of the Year—Sustained Excellence Award, the fourth consecutive year the Environmental Protection Agency has recognized our company. We are the only chemical company to be named Partner of the Year more than once and the only one ever to receive the Sustained Excellence Award.

• We were recognized as a 2015 World’s Most Ethical Company \( ^{®} \) , the second consecutive year that the Ethisphere Institute has pointed to Eastman as a company that continually raises the bar on ethical leadership and corporate behavior.

• Recognizing Eastman innovation, the American Chemical Society selected our company to receive the 2015 Heroes of Chemistry Award for Eastman Tritan \( ^{™} \)  copolyester. Only six companies received this award, which is given to celebrate innovative work in chemistry and chemical engineering that led to commercial products benefiting the world.

## Looking ahead:

## Meeting challenges with the right choices

What is most striking about the business accomplishments I highlighted previously is that they were all achieved in a pretty stark business environment, which we expect to continue this year.

Clearly, we have our challenges but we also have a proven plan of attack. We will approach these headwinds as we did in 2015 — with focus and determination.

We are concentrating our efforts in 2016 on:

• Driving organic growth and continued volume growth in our specialty products

• Accelerating growth through innovation and improved product mix

• Aggressively reducing costs and doubling down on our productivity efforts, which we expect will contribute about $0.50 per share to EPS

• Optimizing our business structure

• Continued portfolio management

I’d like to elaborate on these last two points as I believe they will help us derive significant value over the long term. Early in 2016, we announced the decision to streamline our business structure, which reduced the segments in which we report our financial results from five to four. With integration of our Taminco acquisition substantially complete, we are able to better align our businesses and combine those with similar strategies and operating models, helping to facilitate greater collaboration and spur innovation. This also enables us to reduce complexity and enhance visibility of our reporting structure. From the former Adhesives & Plasticizers segment, the adhesives business was moved to Additives & Functional Products (AFP) and the plasticizers business was moved to the new Chemical Intermediates segment. Combining plasticizers and chemical intermediates into the same segment will better optimize the oxo stream and benefit the company overall. We believe that managing adhesives resins and tire resins together in the AFP segment will help us grow the tire resins business and accelerate adhesives innovation.

Another main area of focus for us in 2016 is continuation of our portfolio transformation to reduce our commodity position and increase our mix of specialty products. In particular, we are actively pursuing strategic options to divest or otherwise monetize both our excess ethylene capacity position and certain commodity olefin intermediates that are not essential to our specialty strategy while retaining the advantages of our Longview, Texas, site's large-scale integration and operational reliability.

As you can see, we are not standing still in this difficult environment. We are using every available lever to control the things that we can and tackle our challenges head on. Growth remains our mandate, and though 2016 will be challenging, we are driving hard to deliver earnings in 2016 that approach 2015 earnings per share. We also expect to generate greater than $900 million of free cash flow.

As you've come to expect from us, we will remain disciplined in our uses of cash. Our priorities are to pay an increasing dividend as earnings increase, continue debt repayment, repurchase shares, and consider opportunistic, strategic bolt-on acquisitions that are attractive to our portfolio.






## Focus: Innovation

Addressing near-term challenges and successfully adapting to the current environment are priorities for us in 2016, but we are not just acting in the moment. We remain focused on the future and are fully committed to our growth initiatives and continued investment in innovation. Our innovation strategy allows us to provide practical solutions where global macrotrends such as sustainability intersect with our world-class technology and application platforms.

In recent years, we have emphasized investment in R&D and market development to fuel organic growth and we are seeing the benefits through accelerated innovation leading to new product commercialization.

## Highlights include

• Our PVB interlayer films continue to grow at an impressive rate. Our Saflex \( ^{®} \)  PVB interlayers are a preferred, real-world solution for customers in the automotive and building and construction markets. Our materials enable a quiet cabin through superior sound dampening and provide protection from UV rays. Saflex also enables head-up displays in car windshields.

• Our very successful Eastman Tritan \( ^{™} \)  copolyesters continue to be adopted by customers who work with our application and market development teams to find innovative uses. Recent application wins include the areas of medical devices, infant care and durables.

• The same copolyester chemistry responsible for Tritan — the TMCD molecule — has led to the development of a potential innovative breakthrough in coatings technology for multiple market segments. Building from our unparalleled expertise in polyesters, our coatings solution could deliver superior performance and savings in several markets, including auto OEMs, packaging, and industrial uses.

• Our electronic films program produces a material that enables superior side-angle viewing when looking at liquid crystal display (LCD) screens. LCD TVs and higher-end mobile devices incorporate our material into the devices to deliver the superior viewing that customers expect.

• Our technologies, applications expertise, and customer connect make us a preferred collaborator in the tires industry. New additives created for tires, such as Eastman Impera \( ^{™} \)  performance resins, can reduce energy output by improving rolling resistance and make tires handle better and last longer.

• Our microfibers technology platform is early stage; however, textile industry feedback from consumer brands indicates our materials have a unique combination of outstanding functional performance and great feel when compared to existing materials in segments such as performance apparel. These innovations build from a wide range of nonwoven applications, such as our commercial launch in fuel filtration with our Eastman Cyphex \( ^{™} \)  microfibers. We are making great progress with our innovation and market development portfolio and accelerating investment in these efforts because I firmly believe they are key to the long-term success of Eastman.

We expect that over the next three years our innovation and market development initiatives will add between one and two percent to Eastman's overall compound revenue growth and that the operating margins for these revenues will be above Eastman's corporate average.

## Why Eastman?

It’s not uncommon for me to get a question that goes like this: Mark, why are you so confident in Eastman? I do my best to capture the answer to that question here, through these words and these pages, through my conviction that we have a winning strategy, and through the world-class technologies that are delivering solutions like no other company can. But the real Eastman advantage cannot fully be captured on paper. Our greatest advantage is in our people who come together to make the most insightful, customer-focused team any leader could ask for — a team of men and women who set high expectations for themselves and refuse to settle for anything less than achievement. I stand together with them in the utmost confidence that their innovative spirit and pursuit of excellence will enable us to continue delivering the results you deserve.

Regards,



Mark J. Costa
Chairman and
Chief Executive Officer
March 21, 2016






## Contents

1 About our business

6 Selected financial data

8 Management's discussion and analysis of financial condition and results of operations

43 Forward-looking statements and risk factors

47 Quantitative and qualitative disclosures about market risk

49 Financial statements and supplementary data

116 Performance graph

117 Stockholder information

Non-GAAP Financial Measures — Earnings, Free Cash Flow, and Net Debt: The historical and projected earnings in the Chairman and CEO's letter that immediately precede this page of this Annual Report are non-GAAP earnings that exclude certain noncore or nonrecurring costs, charges, and gains. Reconciliations to the most directly comparable historical GAAP financial measures and other associated disclosures, including descriptions of the excluded noncore items, for the periods referenced in the Chairman and CEO's letter are included in the "Management's discussion and analysis of financial condition and results of operations" section of this Annual Report and in the corresponding annual reports for the prior periods referenced. The Chairman and CEO's letter also includes the term "free cash flow," which means cash provided by operating activities less cash used for additions to properties and equipment, and "net debt," which is total borrowings less cash and cash equivalents.

Forward-Looking Statements: This Annual Report includes forward-looking statements concerning plans and expectations for Eastman Chemical Company. Actual results could differ materially from our expectations. See the "Forward-looking statements and risk factors" section of this Annual Report.



# EASTMAN

## ABOUT OUR BUSINESS

Eastman Chemical Company ("Eastman" or the "Company") is a global specialty chemical company that produces a broad range of advanced materials, chemicals, and fibers that are found in products people use every day. Eastman began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company's photographic business and became a public company, incorporated in Delaware, on December 31, 1993. Eastman has 49 manufacturing sites and equity interests in four manufacturing joint ventures in 14 countries that supply products to customers throughout the world. The Company's headquarters and largest manufacturing site are located in Kingsport, Tennessee.

The Company completed four acquisitions in 2014. On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business (the "aviation turbine oil business"). On August 6, 2014, the Company acquired Knowlton Technologies, LLC ("Knowlton"), a leader in the design, accelerated prototyping, and manufacture of wet-laid nonwovens in filtration, friction, and custom designed composite webs. On December 5, 2014, Eastman acquired Taminco Corporation ("Taminco"), a global specialty chemical company. On December 11, 2014 Eastman acquired Commonwealth Laminating & Coating, Inc. ("Commonwealth"), a specialty films business. Results of the acquired businesses are included in Eastman results as of the date of acquisitions. For additional information on these acquisitions see Note 2, "Acquisitions" to the Company's consolidated financial statements in this 2015 Annual Report (this "Annual Report"). As required by Securities and Exchange Commission ("SEC") rules, certain pro forma combined financial information giving effect to the acquisition of Taminco is presented in the Company's Current Report on Form 8-K/A filed with the SEC on February 19, 2015.

On July 2, 2012, the Company acquired Solutia Inc. ("Solutia"), a global leader in performance materials and specialty chemicals.

Eastman's objective is to be an outperforming specialty chemical company with consistent earnings growth and strong cash flow. The Company sells differentiated products into diverse markets and geographic regions. Eastman works with customers to meet their needs in existing and new markets through development of innovative products and technologies. Management believes that the Company can deliver consistent financial results by leveraging the Company's world class technology platforms, improving product mix through innovation and increasing emphasis on specialty businesses and products, sustaining and expanding advantaged market positions and leveraging advantaged cost positions. Consistently increasing earnings are expected to result from both organic (internal) growth initiatives and strategic inorganic (external growth through acquisitions complementary or additive to existing products and joint ventures) initiatives.

The Company benefits from proprietary technologies and advantaged feedstocks, and is focusing on sustainability as a competitive strength for growth. Eastman has developed new products and technologies that enable customers' development and sales of sustainable products. Examples of Eastman's leading position in providing sustainable solutions are Eastman Tritan \( ^{®} \)  copolyester, Saflex \( ^{®} \)  acoustic and acoustic head up displays ("HUD"), Eastman Impera \( ^{®} \)  high performance resins for tires, and Eastman's Visualize \( ^{®} \)  materials for optical compensation films in liquid crystal displays ("LCDs").

Management is actively pursuing additional opportunities to leverage world class technology platforms for continued near-term and long-term growth both sustaining our leadership in existing markets and expanding into new markets. Examples of these technologies include cellulose esters for tires and Eastman microfibers technology.

The Company's products and operations were managed and reported in five reporting segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids & Intermediates ("SFI"). This organizational structure was based on the management of the strategies, operating models, and sales channels that the various businesses employed.



# EASTMAN

As a result of changes in the Company's organizational structure and management, beginning first quarter 2016, the Company's products and operations will be managed and reported in four operating segments: AFP, AM, Fibers, and Chemical Intermediates ("CI"). The new structure supports the Company's strategy to transform towards a specialty portfolio by better aligning similar businesses in a more streamlined structure. As a result of the re-segmentation, the adhesives resins product lines of the A&P segment will be part of the AFP segment, the plasticizers product lines of the A&P segment will be part of the CI segment. Further, specialty fluids, animal nutrition, and food ingredients products are moved from the SFI segment to the AFP segment, and distribution solvents and ethyl acetate products are moved from the AFP segment to the CI segment. Segment results will be disclosed under the new basis of segmentation beginning first quarter of 2016.

## ADDITIVES & FUNCTIONAL PRODUCTS SEGMENT

In the AFP segment, the Company manufactures chemicals for products in the coatings, tires, consumables, animal nutrition, crop protection, and energy markets. In 2015, the AFP segment had sales revenue of $2.4 billion, 25 percent of Eastman's total sales. Key technology platforms in this segment are propylene derivatives, alkylamine derivatives, insoluble sulfur, cellulose esters, polyester polymers, and hydrocarbon resins.

AFP sales growth is typically similar to or slightly above general economic growth due to the segment’s sales to diversified end markets such as coatings, tires, consumables, and animal nutrition. The segment is focused on high-value additives that provide critical functionality but which comprise a small percentage of total customer product cost. The segment principally competes on the unique performance characteristics of its products and through leveraging its strong customer base and long-standing customer relationships to promote substantial recurring business and product development. Within each segment product market, the Company may compete with other smaller, regionally focused companies that may have advantages based upon location, local market knowledge, manufacturing strength in a specific product, or other similar factors.

## ADHESIVES & PLASTICIZERS SEGMENT

The adhesives resins and plasticizers businesses focus on producing intermediate chemicals, rather than finished products, and developing long-term, strategic relationships to enable customers' growth in their end markets. In 2015, the A&P segment had sales revenue of $1.2 billion, 12 percent of Eastman's total sales. Key adhesives resins and plasticizers technology platforms are the integrated olefins and polyesters platforms and the hydrocarbon resins platform.

Eastman manufactures adhesives resins and plasticizers which are used in the manufacture of products sold into consumables, building and construction, health and wellness, industrial chemicals and processing, and durable goods markets. Market growth for adhesives resins in emerging markets such as China, south east Asia, eastern Europe, and Latin America continues to be higher than regional economic growth, mainly due to growing use of consumables in these emerging economies. Increase in relative use of non-phthalate rather than phthalate plasticizers in the United States, Canada, and Europe has accelerated and is expected to continue to increase more than general economic growth due to increasing regulatory requirements and consumer preferences. In addition, the plasticizers product line is expected to benefit from recovery in the North American building and construction industry and the shift of vinyl flooring production to the United States from Asia Pacific. Some of the products are sensitive to periods of supply and demand imbalance, either when incremental capacity additions are not offset by corresponding increases in demand or when demand exceeds existing supply. Industry supply of some adhesives resins products is affected by changes in the availability of key raw materials. In addition to leveraging integrated manufacturing facilities and scale of production, the segment is well positioned to capitalize on meeting evolving market needs and supporting adoption of Eastman products in new or existing customer formulations. Major competitors in this segment include large, multinational companies. The segment competes primarily based on the breadth of its product portfolio, performance, and price.



# EASTMAN

## ADVANCED MATERIALS SEGMENT

In the AM segment, the Company produces and markets its polymers, films, and plastics with differentiated performance properties for value-added end uses in transportation, consumables, building and construction, durable goods, and health and wellness products. In 2015, the AM segment had sales revenue of $2.4 billion, 25 percent of Eastman's total sales. Key technology platforms for this segment include cellulose esters, polyesters, polyvinyl butyral (“PVB”) films, and polyester films.

Eastman has strong technical and market development capabilities that enable the segment to modify its polymers, films, and plastics to control and customize their final properties for development of new applications with enhanced functionality. Tritan \( ^{®} \)  copolyesters specialty plastics are a leading solution for food contact applications due to performance and processing attributes and Bisphenol A (“BPA”) free properties. The Saflex Q \( ^{®} \)  series product line is a leading solution for sound reduction in the cabin of an automobile. The Company maintains what management believes is a leading solar control technology position in the window film market through the use of high performance sputter coatings which enhance solar heat rejection while maintaining superior optical properties. The segment principally competes on differentiated technology and application development capabilities. Management believes the AM segment's competitive advantages also include long-term customer relationships, vertical integration and scale in manufacturing, and leading market positions.

## FIBERS SEGMENT

In the Fibers segment, Eastman manufactures and sells Estron \( ^{®} \)  acetate tow and Estrobond \( ^{®} \)  triacetin plasticizers for use primarily in the manufacture of cigarette filters; Estron \( ^{®} \)  natural (undyed) and Chromspun \( ^{®} \)  solution-dyed acetate yarns for use in apparel, home furnishings, and industrial fabrics; and cellulose acetate flake and acetyl raw materials for other acetate fiber producers. Eastman is one of the world's two largest suppliers of acetate tow and has been a market leader in the manufacture and sale of acetate tow since it began production in the early 1950s. The Company is the world's largest producer of acetate yarn and has been in this business for over 75 years. In 2015, the Fibers segment had sales revenue of 1.2 billion, 13 percent of Eastman's total sales.

Eastman's Fibers segment customers are located in all regions of the world, with approximately 50 percent of 2015 revenues in Asia Pacific. The largest 13 Fibers segment customers account for 80 percent of the segment's 2015 sales revenue, and include multinational as well as regional cigarette producers, fabric manufacturers, and other acetate fiber producers. Sales prices for a significant portion of the Fibers segment's products are typically negotiated on an annual basis.

The Company's long history and experience in the fibers markets are reflected in the Fibers segment's operating expertise, both within the Company and in support of its customers' processes. The Fibers segment's knowledge of the industry and of customers' processes allows it to assist its customers in maximizing their processing efficiencies, promoting repeat sales, and mutually beneficial, long-term customer relationships.

The Company's fully integrated fiber manufacturing process employs unique technology that allows it to use a broad range of high-purity wood pulps for which the Company has dependable sources of supply.

Contributing to profitability in the Fibers segment is the limited number of competitors, high industry capacity utilization, and significant barriers to entry. These barriers include, but are not limited to, high capital costs for integrated manufacturing facilities.



# EASTMAN

The Fibers segment's competitive strengths include a reputation for high-quality products, technical expertise, large scale vertically-integrated processes, reliability of supply, acetate flake supply in excess of internal needs, a reputation for customer service excellence, and a customer base characterized by strategic long-term customer relationships. The Company intends to continue to capitalize and build on these strengths to improve the strategic position of its Fibers segment. The principal methods of competition include maintaining the Company's large-scale vertically integrated manufacturing process from acetyl raw materials, reliability of supply, product quality, and sustaining long-term customer relationships. Management expects continued strong Fibers segment cash flow and earnings despite continued challenging acetate tow market conditions.

## SPECIALTY FLUIDS & INTERMEDIATES SEGMENT

The Company leverages large scale and vertical integration from the acetyl, olefins, and alkylamine streams and proprietary manufacturing technology for specialty fluids to manufacture diversified products that are sold externally for use in markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals. Certain products are also used internally by other segments of the Company. Management believes it is well-positioned in key markets for acetyl chemical intermediates, olefin derivatives, specialty fluids, and alkylamines due to its competitive cost position, scale, technology, and reliability of supply. In 2015, the SFI segment had sales revenue of $2.4 billion, 25 percent of the Company's total sales. Key technology platforms include acetyls, oxos, benzenes and derivatives, polyesters and alkylamines.

Historically, the intermediates product line's competitive cost position has been primarily due to use of and access to lower cost raw materials, including natural gas, which are used in the production of acetyl stream products, and olefin feedstocks which are used in the production of olefin derivative products. Some of the product line's products are affected by the olefins cycle. This cyclicality is caused by periods of supply and demand imbalance, either when incremental capacity additions are not offset by corresponding increases in demand or when demand exceeds existing supply. While management continues to take steps to reduce the impact of the trough of the olefins cycle, future intermediates products results are expected to continue to fluctuate from time to time due both to general economic conditions and olefins supply and demand.

Functional amines products are alkylamines sold to external customers as an integral element in their chemical processes for the production of formulated products sold in a variety of end-markets. Functional amines products are also used internally as building blocks for production of downstream derivatives for our specialty amines and crop protection businesses.

The specialty fluids product line includes heat transfer and aviation fluids products. The heat transfer fluids product line offers a portfolio of high temperature synthetic aromatic fluids used primarily for indirect heat transfer in many chemical and manufacturing processes including solar energy market applications. Due to timing of customer project completions, heat transfer fluids product line revenues and earnings fluctuate from period to period. The aviation fluids product line includes brands that sell into critical applications in the airline industry. Aviation fluids product revenues have historically been stable and influenced by general consumer demand and product performance in global fleet engines.



## CORPORATE INITIATIVES

In addition to its business segments, the Company manages certain growth initiatives and costs at the corporate level, including certain research and development costs not allocated to any one operating segment. The Company uses a stage-gating process, which is a disciplined decision making framework for evaluating targeted opportunities, with a number of projects at various stages of development. As projects meet milestones, additional investment is committed to those projects. The Company continues to explore and invest in research and development initiatives that are aligned with macro trends in sustainability, consumerism, and energy efficiency such as high performance materials, advanced cellulosics, and reduced environmental impact. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company's core competency in polyesters, spinning capability, and in-house application expertise, for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles. The acquisition of Knowlton accelerates the innovation cycle for the Eastman microfibers technology platform.



## SELECTED FINANCIAL DATA

<table><tr><td>Operating Data</td><td colspan="6">Year Ended December 31,</td></tr><tr><td>(Dollars in millions, except per share amounts)</td><td>2015</td><td>2014</td><td>2013</td><td>2012</td><td>2011</td><td></td></tr><tr><td>Sales</td><td>$ 9,648</td><td>$ 9,527</td><td>$ 9,350</td><td>$ 8,102</td><td>$ 7,178</td><td></td></tr><tr><td>Operating earnings</td><td>1,384</td><td>1,162</td><td>1,862</td><td>800</td><td>937</td><td></td></tr><tr><td>Earnings from continuing operations</td><td>854</td><td>755</td><td>1,172</td><td>443</td><td>607</td><td></td></tr><tr><td>Earnings from discontinued operations</td><td>—</td><td>2</td><td>—</td><td>—</td><td>9</td><td></td></tr><tr><td>Gain from disposal of discontinued operations</td><td>—</td><td>—</td><td>—</td><td>1</td><td>31</td><td></td></tr><tr><td>Net earnings</td><td>854</td><td>757</td><td>1,172</td><td>444</td><td>647</td><td></td></tr><tr><td>Less: Net earnings attributable to noncontrolling interest</td><td>6</td><td>6</td><td>7</td><td>7</td><td>1</td><td></td></tr><tr><td>Net earnings attributable to Eastman</td><td>$ 848</td><td>$ 751</td><td>$ 1,165</td><td>$ 437</td><td>$ 646</td><td></td></tr><tr><td>Amounts attributable to Eastman stockholders</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations, net of tax</td><td>$ 848</td><td>$ 749</td><td>$ 1,165</td><td>$ 436</td><td>$ 606</td><td></td></tr><tr><td>Earnings from discontinued operations, net of tax</td><td>—</td><td>2</td><td>—</td><td>1</td><td>40</td><td></td></tr><tr><td>Net earnings attributable to Eastman stockholders</td><td>$ 848</td><td>$ 751</td><td>$ 1,165</td><td>$ 437</td><td>$ 646</td><td></td></tr><tr><td>Basic earnings per share attributable to Eastman</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations</td><td>$ 5.71</td><td>$ 5.01</td><td>$ 7.57</td><td>$ 2.99</td><td>$ 4.34</td><td></td></tr><tr><td>Earnings from discontinued operations</td><td>—</td><td>0.02</td><td>—</td><td>0.01</td><td>0.29</td><td></td></tr><tr><td>Net earnings</td><td>$ 5.71</td><td>$ 5.03</td><td>$ 7.57</td><td>$ 3.00</td><td>$ 4.63</td><td></td></tr><tr><td>Diluted earnings per share attributable to Eastman</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations</td><td>$ 5.66</td><td>$ 4.95</td><td>$ 7.44</td><td>$ 2.92</td><td>$ 4.24</td><td></td></tr><tr><td>Earnings from discontinued operations</td><td>—</td><td>0.02</td><td>—</td><td>0.01</td><td>0.28</td><td></td></tr><tr><td>Net earnings</td><td>$ 5.66</td><td>$ 4.97</td><td>$ 7.44</td><td>$ 2.93</td><td>$ 4.52</td><td></td></tr><tr><td>Statement of Financial Position Data</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Current assets</td><td>$ 2,878</td><td>$ 3,173</td><td>$ 2,840</td><td>$ 2,699</td><td>$ 2,302</td><td></td></tr><tr><td>Net properties</td><td>5,130</td><td>5,087</td><td>4,290</td><td>4,181</td><td>3,107</td><td></td></tr><tr><td>Goodwill</td><td>4,518</td><td>4,486</td><td>2,637</td><td>2,644</td><td>406</td><td></td></tr><tr><td>Other intangibles</td><td>2,650</td><td>2,905</td><td>1,781</td><td>1,870</td><td>101</td><td></td></tr><tr><td>Total assets</td><td>15,611</td><td>16,072</td><td>11,845</td><td>11,710</td><td>6,184</td><td></td></tr><tr><td>Current liabilities</td><td>2,056</td><td>2,022</td><td>1,470</td><td>1,364</td><td>1,114</td><td></td></tr><tr><td>Long-term borrowings</td><td>6,608</td><td>7,248</td><td>4,254</td><td>4,779</td><td>1,445</td><td></td></tr><tr><td>Total liabilities</td><td>11,590</td><td>12,482</td><td>7,970</td><td>8,682</td><td>4,283</td><td></td></tr><tr><td>Total Eastman stockholders&#x27; equity</td><td>3,941</td><td>3,510</td><td>3,796</td><td>2,943</td><td>1,870</td><td></td></tr><tr><td>Dividends declared per share</td><td>1.660</td><td>1.450</td><td>1.250</td><td>1.080</td><td>0.990</td><td></td></tr></table>

On December 5, 2014, Eastman completed its acquisition of Taminco Corporation ("Taminco"), a global specialty chemical company. The fair value of total consideration transferred was $2.8 billion, consisting of cash of $1.7 billion, net of cash acquired, and repayment of Taminco's debt of $1.1 billion. The acquisition was accounted for as a business combination. Taminco's former specialty amines and crop protection businesses are managed and reported as part of the Additives & Functional Products ("AFP") segment and its former functional amines business are managed and reported as part of the Specialty Fluids & Intermediates ("SFI") segment.



# EASTMAN

On December 11, 2014, the Company acquired Commonwealth Laminating & Coating, Inc. ("Commonwealth") for a total purchase price of $438 million including the repayment of debt. The acquisition was accounted for as a business combination and the acquired Commonwealth business is managed and reported in the Advanced Materials segment.

On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business ("aviation turbine oil business") for a total cash purchase price of $283 million. The acquisition was accounted for as a business combination and the acquired aviation turbine oil business is managed and reported in the SFI segment.

On August 6, 2014, the Company acquired Knowlton Technologies, LLC ("Knowlton"), for a total cash purchase price of $42 million. The acquisition was accounted for as a business combination. The acquired Knowlton business is a developing business of the Eastman \( ^{®} \)  microfiber technology platform, the financial results of which are not identifiable to an operating segment and are shown as "other" operating earnings (loss).

For additional information about the above acquired businesses see Note 2, "Acquisitions", to the Company's consolidated financial statements in this Annual Report. As of the date of acquisition, results of the acquired businesses are included in Eastman results.

On July 2, 2012, the Company completed its acquisition of Solutia Inc. ("Solutia"), a global leader in performance materials and specialty chemicals. The fair value of total consideration transferred was $4.8 billion, consisting of cash of $2.6 billion, net of cash acquired; equity in the form of Eastman stock of approximately $700 million; and the assumption and subsequent repayment of Solutia's debt at fair value of $1.5 billion.

In third quarter 2011, the Company completed three acquisitions, each accounted for as a business combination: Sterling Chemicals, Inc., a single site North American petrochemical producer, to produce non-phthalate plasticizers in the Adhesives & Plasticizers (A&P) segment, including Eastman 168 \( ^{®} \)  non-phthalate plasticizers, and acetic acid in the SFI segment; Scandiflex do Brasil S.A. Indústrias Químicas, a manufacturer of plasticizers located in São Paulo, Brazil, which is reported in the A&P segment; and Dynaloy, LLC, a producer of formulated solvents, which is reported in the AFP segment.

In 2011, the Company completed the sale of the polyethylene terephthalate ("PET") business, related assets at the Columbia, South Carolina site, and technology of its former Performance Polymers segment. The PET business, assets, and technology sold were substantially all of the Performance Polymers segment. Performance Polymers segment operating results are presented as discontinued operations for all periods presented and are therefore not included in results from continuing operations in accordance with accounting principles generally accepted ("GAAP") in the United States.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Page

Critical Accounting Estimates 9

Non-GAAP and Pro Forma Combined Financial Measures 15

2015 Overview 18

Results of Operations
Summary of Consolidated Results 19
Summary by Operating Segment 26
Summary by Customer Location 33

Liquidity, Capital Resources, and Other Financial Information 34

Environmental 39

Inflation 42

Recently Issued Accounting Standards 42

Outlook 42

Risk Factors 43

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States, and should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Annual Report. All references to earnings per share ("EPS") contained in this report are to diluted earnings per share unless otherwise noted.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## CRITICAL ACCOUNTING ESTIMATES

In preparing the consolidated financial statements in conformity with 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, pension and other postretirement benefits, litigation and contingent liabilities, income taxes, and purchase accounting. 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 below 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.

## Allowances for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company believes, based on historical results, the likelihood of actual write-offs having a material impact on financial results is low. However, if one of the Company's key customers was to file for bankruptcy, or otherwise be unwilling or unable to make its required payments, or there was a significant weakening of the economy, the Company could increase its allowances. This could result in a material charge to earnings. The Company's allowance for doubtful accounts was $13 million and $10 million at December 31, 2015 and 2014, respectively.

## Impairment of Long-Lived Assets

## Definite-lived Assets

Properties and equipment and definite-lived intangible assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of these long-lived assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is either salvage value determined through market analysis or alternative future use. As the Company's assumptions related to long-lived assets are subject to change, write-downs may be required in the future. If estimates of fair value less costs to sell are revised, the carrying amount of the related asset is adjusted, resulting in a charge to earnings.

## Timing of Annual Impairment Testing

The Company conducts testing of goodwill and indefinite-lived intangible assets annually or when events and circumstances indicate an impairment may have occurred. The Company conducted annual goodwill and indefinite-lived intangible assets impairment testing as of July 1. In fourth quarter of 2015, the annual impairment testing date was changed to October 1. This change is in response to a change in the timing of corporate forecasting, a key input to the annual impairment testing process. This change did not accelerate, delay or cause a goodwill or indefinite-lived intangible asset impairment charge. The reporting units acquired from Taminco Corporation ("Taminco") were first tested for annual impairment during fourth quarter 2015.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Goodwill

The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.

The Company uses an income approach and applies a fair value methodology based on discounted cash flows in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's July 1 and October 1, 2015 goodwill impairment testing included projections of revenues, expenses, and cash flows determined using the Company's annual multi-year strategic plan and a market participant tax rate. The most critical assumptions are the estimated discount rate and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different determinations. In order to determine the discount rate, the Company uses a market perspective weighted average cost of capital ("WACC") approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value.

If the estimated fair value of a reporting unit is determined to be less than the carrying value of the net assets of the reporting unit including goodwill, additional steps, including an allocation of the estimated fair value to the assets and liabilities of the reporting unit, would be necessary to determine the amount, if any, of goodwill impairment.

As a result of the tests performed during third quarter and fourth quarter 2015, there were no impairments of the Company's goodwill. As of October 1, 2015, fair values substantially exceeded the carrying values for each reporting unit tested, except for the specialty fluids reporting unit (a part of the Specialty Fluids and Intermediates operating segment) and the recently acquired crop protection reporting unit (a part of the Additives and Functional Products operating segment).

As of fourth quarter testing, specialty fluids had an estimated fair value that exceeded the carry value including goodwill by 11 percent. As of December 31, 2015, goodwill of $546 million is allocated to the specialty fluids reporting unit. Cash flows from the specialty fluids reporting unit are susceptible to changes in demand due to cyclicality and timing of customer project completions primarily in the industrial and solar markets. Weakened demand in solar markets has caused lower sales volume for specialty fluids products and further delay in the timing of customer project completions or slower overall growth in these markets could decrease the estimated fair value of the specialty fluids reporting unit. The specialty fluids reporting unit is indirectly impacted by low oil prices. Long term low oil prices could also decrease the estimated fair value of the specialty fluids reporting unit. Two of the most critical assumptions used in the calculation of the fair value of the specialty fluids reporting unit are the target market long-term growth rate and the discount rate. The Company performed a sensitivity analysis on both of those assumptions. The fair value was three percent less than the carrying value with a one percent decrease in the target market long-term growth rate and four percent less than the carrying value with a one percent increase in the discount rate. The business performance for 2015 exceeded the expectations for 2015 used in the previous impairment analysis. Although management believes its estimate of fair value is reasonable, if the specialty fluids reporting unit's financial performance falls below expectations or there are negative revisions to key assumptions, the Company may be required to recognize an impairment charge.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of fourth quarter testing, crop protection had an estimated fair value that exceeded the carry value including goodwill by 11 percent. As of December 31, 2015, goodwill of $275 million is allocated to the crop protection reporting unit. As anticipated, because of the recent acquisition of Taminco, the fair value of the crop protection reporting unit was not substantially in excess of the carrying value. The crop protection reporting unit is directly impacted by the agricultural market. Two of the most critical assumptions used in the calculation of the fair value of the crop protection reporting unit are the target market long-term growth rate and the discount rate. The Company performed a sensitivity analysis on both of those assumptions. The fair value approximated the carrying value with a one percent decrease in the target market long-term growth rate and was two percent less than the carrying value with a one percent increase in the discount rate. Although management believes its estimate of fair value is reasonable, if the crop protection reporting unit's financial performance falls below expectations or there are negative revisions to key assumptions, the Company may be required to recognize an impairment charge.

## Indefinite-lived Intangible Assets

The carrying value of an indefinite-lived intangible asset is considered to be impaired when the fair value, as established by appraisal or based on discounted future cash flows of certain related products, is less than the respective carrying value.

Indefinite-lived intangible assets, consisting of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium. The carrying value of an indefinite-lived intangible asset is considered to be impaired when the estimated fair value is less than the carrying value of the tradename.

In third quarter 2015, as a result of the historical annual impairment testing, the Company recognized intangible asset impairments of $18 million in the Advanced Materials segment primarily to adjust the carrying value of the V-KOOL \( ^{\circledR} \)  window films products tradename to $35 million as a result of a decrease in projected revenues since the tradename was acquired. The decrease in projected revenues was primarily due to the Asian economic downturn impacting car sales growth in those geographic markets.

As of October 1, 2015, the Company had $524 million in indefinite-lived intangible assets. There was no impairment of the Company’s indefinite-lived intangible assets as a result of the tests performed during fourth quarter 2015.

The Company will continue to monitor both goodwill and indefinite-lived intangible assets for any indication of triggering events which might require additional testing before the next required annual impairment test.

## Environmental Costs

The Company accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. This undiscounted accrued amount reflects liabilities expected to be paid out within 30 years and 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 government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for remediation costs ranged from the minimum or best estimate of $308 million to the maximum of $516 million at December 31, 2015. The maximum estimated future costs are considered to be reasonably possible and are inclusive of the amounts accrued at December 31, 2015.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In accordance with GAAP, the Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets, as defined by GAAP, include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the future costs anticipated to be associated with the retirement or closure of the asset based on an expected life of the environmental assets and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged against earnings over the estimated useful life of the assets. Currently, the Company estimates the useful life of each individual asset is up to 50 years. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, expenses charged against earnings could increase or decrease.

In accordance with GAAP, the Company also monitors conditional obligations and recognizes loss contingencies associated with them when and to the extent that more detailed information becomes available concerning applicable retirement costs.

The Company's total environmental loss contingency reserve, including the above remediation, closure and post-closure costs, was $336 million at December 31, 2015 and $345 million at December 31, 2014, representing the minimum or best estimate for remediation costs (undiscounted) and the best estimate of the amount accrued to date over the regulated assets' estimated useful lives for asset retirement obligation costs (discounted).

## Pension and Other Postretirement Benefits

The Company maintains defined benefit pension plans that provide eligible employees with retirement benefits. Additionally, Eastman subsidizes life insurance, health care, and dental benefits for eligible retirees, and health care and dental benefits for retirees' eligible survivors. The costs and obligations related to these benefits reflect the Company's assumptions related to general economic conditions (particularly interest rates) and expected return on plan assets. For valuing the obligations and assets of the Company's U.S. and non-U.S. defined benefit pension plans, the Company assumed weighted average discount rates of 4.13 percent and 3.26 percent, respectively, and a weighted average expected return on plan assets of 7.60 percent and 5.11 percent, respectively, at December 31, 2015. The Company assumed a weighted average discount rate of 4.17 percent for its other postretirement benefit plans and an expected return on plan assets of 3.75 percent for its voluntary employees' beneficiary association retiree trust at December 31, 2015. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.

The Company performed a five year experience study of the assumptions for the U.S. plans in 2014 which included a review of the mortality tables. As a result of the experience study, the Company continues to use the RP-2000 table with scale AA static improvement scale and no collar adjustment as it most closely aligns with the Company's experience.

The projected benefit obligation as of December 31, 2015 and 2016 expense are affected by year-end 2015 assumptions. The following table illustrates the sensitivity to changes in the Company's long-term assumptions in the expected return on assets and assumed discount rate for all pension plans and other postretirement benefit plans. The sensitivities below are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.



## MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

<table><tr><td>Change in Assumption</td><td>Impact on 2016 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Pension Plans</td><td>Impact on December 31, 2015 Projected Benefit Obligation for Pension Plans</td><td>Impact on 2016 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Other Postretirement Benefit Plans</td><td>Impact on December 31, 2015 Benefit Obligation for Other Postretirement Benefit Plans</td></tr><tr><td>25 basis point decrease in discount rate</td><td>-U.S.</td><td>Non-U.S.</td><td></td><td></td></tr><tr><td>25 basis point increase in discount rate</td><td>+$3 Million</td><td>+$56 Million</td><td>+$35 Million</td><td>-$1 Million</td></tr><tr><td>25 basis point increase in discount rate</td><td>+$2 Million</td><td>-$54 Million</td><td>-$33 Million</td><td>+$1 Million</td></tr><tr><td>25 basis point decrease in expected return on assets</td><td>+$6 Million</td><td>No Impact</td><td>No Impact</td><td>&lt;+$0.5 Million</td></tr><tr><td>25 basis point increase in expected return on assets</td><td>-$6 Million</td><td>No Impact</td><td>No Impact</td><td>No Impact</td></tr></table>

The expected return on assets and assumed discount rate used to calculate the Company's pension and other postretirement benefit obligations are established each December 31. The expected return on assets is based upon prior performance and the long-term expected returns in the markets in which the trusts invest their funds, primarily in the following markets: U.S. and non-U.S. fixed income, U.S. and non-U.S. public equity, private equity, and real estate markets. Moreover, the expected return on plan assets is a long-term assumption and on average is expected to approximate the actual return on assets. Actual returns will be subject to year-to-year variances and could vary materially from assumptions. The assumed discount rate is based upon a portfolio of high-grade corporate bonds, which are used to develop a yield curve. This yield curve is applied to the expected durations of the pension and other postretirement benefit obligations. Because future health care benefits under the U.S. benefit plan have been fixed at a certain contribution amount, changes in the health care cost trend assumptions do not have a material impact on the results of operations.

In 2016, the Company will change the approach used to calculate service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans. The Company has elected to calculate service and interest costs by applying the specific spot rates along the yield curve to the plans' projected cash flows. The Company believes the new approach provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates as compared to the historical single weighted average discount rate derived from the yield curve. The change does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans as the change in the service and interest costs will be offset in the reported mark-to-market actuarial gain or loss. The Company will account for this change as a change in accounting estimate and, accordingly, will account for it prospectively beginning in 2016.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company uses fair value accounting for plan assets. If actual experience differs from long-term assumptions for asset returns and discount rates which were used in determining the current year expense, the difference is recognized immediately as part of the mark-to-market ("MTM") net gain or loss in the fourth quarter of each year, and any other quarter in which an interim remeasurement is triggered. The MTM net gain or loss applied to earnings from continuing operations in 2015, 2014, and 2013 due to the actual experience versus assumptions of returns on plan assets and discount rates for the defined benefit pension and other postretirement benefit plans were a net loss of $115 million, net loss of $304 million, and net gain of $383 million, respectively. At December 31, 2015, the Company's weighted-average assumed discount rate was 3.97 percent, up from the prior year, resulting in an actuarial gain of approximately $90 million. Overall asset values decreased approximately $205 million due to asset values depreciating below the assumed weighted-average rate of return. The actual loss was approximately $15 million, or an approximately one percent loss, which was below the expected return of approximately $190 million, or 7 percent, and resulted in the approximately $205 million decrease.

The Company does not anticipate that a change in pension and other postretirement benefit obligations caused by a change in the assumed discount rate during 2016 will impact the cash contributions to be made to the pension plans during 2016. While the amount of the change in these obligations does not correspond directly to cash funding requirements, it is an indication of the amount the Company will be required to contribute to the plans in future years. The amount and timing of such cash contributions is dependent upon interest rates, actual returns on plan assets, retirement, attrition rates of employees, and other factors. For further information regarding pension and other postretirement benefit obligations, see Note 11, "Retirement Plans", to the Company's consolidated financial statements in this Annual Report.

## Litigation and Contingent Liabilities

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 handled and defended in the ordinary course of business. The Company accrues a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred. Based upon facts and information currently available, the Company believes the amounts reserved are adequate for such pending matters; however, results of operations could be adversely affected by monetary damages, costs or expenses, and charges against earnings in particular periods.

## Income Taxes

Amounts of deferred tax assets and liabilities on the Company's balance sheet are based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income, and domestic and foreign taxes, using historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In the event that the actual outcome of future tax consequences differs from management estimates and assumptions, the resulting change to the provision for income taxes could have a material adverse impact on the consolidated results of operations and statement of financial position. As of December 31, 2015, a valuation allowance of $254 million has been provided against the deferred tax assets.

The Company recognizes income tax positions that are more likely than not to be realized and accrues interest related to unrecognized income tax positions, which is included as a component of the income tax provision on the balance sheet.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Purchase Accounting

In general, the acquisition method of accounting requires recognition of assets acquired and liabilities assumed at their respective fair values at the date of acquisition. For assets and liabilities other than intangible assets and property, plant, and equipment, the Company estimates fair value using the exit price approach which is the price that would be received to sell an asset or paid to transfer a liability in an orderly market. An exit price is determined from the viewpoint of unrelated market participants as a whole, in the principal or most advantageous market, and may result in the Company valuing assets or liabilities at a fair value that is not reflective of the Company's intended use of the assets or liabilities. Any amount of the purchase price paid that is in excess of the estimated fair values of net assets acquired or liabilities assumed is recognized as goodwill on the Company's balance sheet.

The Company values intangible assets using the income, market, or cost approach (or a combination thereof) as appropriate, and uses valuation inputs in these models and analyses that are based on market participant assumptions. Management values property, plant and equipment using the cost approach supported where available by observable market data which includes consideration of obsolescence. Management's judgment is used to determine the estimated fair values assigned to assets acquired and liabilities assumed, and asset lives for property, plant and equipment and amortization periods for intangible assets, and subsequent adjustments to such initial valuations can materially affect the Company's results of operations in particular periods. The use of different estimates or assumptions could result in materially different allocations.

## NON-GAAP FINANCIAL MEASURES

Non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented in "2015 Overview", "Results of Operations", and "Summary by Operating Segment" in this MD&A.

## Company Use of Non-GAAP Financial Measures

In addition to evaluating the Company's financial condition, results of operations, liquidity, and cash flows as reported in accordance with GAAP, Eastman management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly arise from Eastman's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature. These transactions, costs, and losses or gains relate to, among other things, cost reduction, growth and profitability improvement initiatives, and other events outside of core business operations (such as asset impairments and restructuring charges and MTM losses or gains for pension and other postretirement benefit plans, typically in the fourth quarter of each year and any other quarters in which an interim remeasurement is triggered). Because non-core or non-recurring transactions, costs, and losses or gains may materially affect the Company's, or any particular operating segment's, financial condition or results in a specific period in which they are recognized, Eastman believes it is appropriate to evaluate both the financial measures prepared and calculated in accordance with GAAP and the related non-GAAP financial measures excluding the effect on our results of these non-core or non-recurring items. In addition to using such measures to evaluate results in a specific period, management evaluates such non-GAAP measures, and believes that investors may also evaluate such measures, because such measures may provide more complete and consistent comparisons of the Company's, and its segments', operational performance on a period-over-period historical basis and, as a result, provide a better indication of expected future trends. Management discloses these non-GAAP measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's, and its operating segments', performance, make resource allocation decisions and evaluate organizational and individual performance in determining certain performance-based compensation. Non-GAAP measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

cautions investors not to place undue reliance on any non-GAAP measure, but to consider such measures with the most directly comparable GAAP measure.

## Non-GAAP Measures in this Annual Report

The following non-core items are excluded by management in its evaluation of certain results in this Annual Report:

- MTM pension and other postretirement benefit plans gains and losses, net, which are actuarial gains and losses measured as the changes in discount rates and other actuarial assumptions and the difference between actual and expected returns on plan assets during the period. These actuarial gains and losses were primarily due to changes in discount rates and asset returns reflective of changes in global market conditions and interest rates on high-grade corporate bonds and did not arise from Eastman's core business or operations;

- Asset impairments and restructuring charges, net, of which asset impairments are non-cash transactions impacting profitability;

• Acquisition integration, transaction, and financing costs; and

- Costs resulting from the sale of acquired inventories at fair value, net of the last-in, first-out ("LIFO") impact for certain of these inventories (as required by purchase accounting, these inventories were marked to fair value);

in each case for the periods and in the amounts in the table below.

## Non-GAAP Financial Measures -- Excluded Non-Core Items

<table><tr><td>(Dollars in millions)</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Non-core items impacting operating earnings:</td><td></td><td></td><td></td></tr><tr><td>Mark-to-market pension and other postretirement benefits (gain) loss, net</td><td>$ 115</td><td>$ 304</td><td>$ (383)</td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>183</td><td>77</td><td>76</td></tr><tr><td>Acquisition integration and transaction costs</td><td>28</td><td>46</td><td>36</td></tr><tr><td>Additional costs of acquired inventories</td><td>7</td><td>24</td><td>—</td></tr><tr><td>Non-core items impacting earnings before income taxes:</td><td></td><td></td><td></td></tr><tr><td>Taminco acquisition financing costs</td><td>$ —</td><td>$ 13</td><td>$ —</td></tr></table>

This MD&A includes the effect of the foregoing on the following financial measures:

• Gross profit,

• Selling, general, and administrative ("SG&A") expenses,

• Research and development ("R&D") expenses,

• Operating earnings,

• Net interest expense,

• Other (income) charges, net,

• Earnings from continuing operations, and

• Diluted earnings per share.

For more detail about MTM pension and other postretirement benefit plans net gains and losses, including actual and expected return on plan assets and the components of the net gain or loss, see "CRITICAL ACCOUNTING ESTIMATES -- Pension and Other Postretirement Benefits" above and Note 11, "Retirement Plans - Summary of Changes and - Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income" to the Company's consolidated financial statements in this Annual Report.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Other Non-GAAP Financial Measures

## Alternative Non-GAAP Cash Flow Measures

In addition to the non-GAAP measures presented in this Annual Report and other periodic reports, from time to time management evaluates and discloses to investors and securities analysts the non-GAAP measure cash provided by operating activities excluding certain non-core or non-recurring items ("cash provided by operating activities, as adjusted") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Eastman management uses this non-GAAP measure in conjunction with the GAAP measure cash provided by operating activities because it believes it is a more appropriate metric to evaluate the cash flows from Eastman's core operations that are available for organic and inorganic growth initiatives and create stockholder value, and because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, Eastman management generally excludes the impact of certain non-core activities and decisions of management because such activities and decisions are not considered core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations. From time to time, management discloses this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.

Similarly, from time to time, Eastman may disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow", which management defines as cash provided by operating activities, as adjusted, described above, less the amount of capital expenditures. Management believes such items are generally funded from available cash and, as such, should be considered in determining free cash flow. Eastman management believes this is an appropriate metric to use to evaluate the Company's overall ability to generate cash to fund future operations, inorganic growth opportunities, and to meet the Company's debt repayment obligations. Management believes this metric is useful to investors and securities analysts in order to provide them with information similar to that used by management in evaluating potential future cash available for various initiatives and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies. In addition, Eastman may disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow yield", which management defines as free cash flow per outstanding share of common stock divided by per share stock price.

## Alternative Non-GAAP Earnings Measures

From time to time, Eastman may also disclose to investors and securities analysts the non-GAAP earnings measures "Adjusted EBITDA" and "Return on Invested Capital" (or "ROIC"). Management defines "Adjusted EBITDA" as EBITDA (net earnings or net earnings per share before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core and non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. "EBITDA Margin" is Adjusted EBITDA divided by the GAAP measure sales revenue in the Company's income statement for the same periods. Management defines "ROIC" as net income plus interest expense after tax divided by average total borrowings plus average stockholders' equity for the periods presented, each derived from the GAAP measures in the Company's financial statements for the periods presented. Management believes that Adjusted EBITDA and ROIC are useful as supplemental measures in evaluating the performance of and returns from Eastman's operating businesses, and from time to time uses such measures in internal performance calculations. Further, management understands that investors and securities analysts often use similar measures of Adjusted EBITDA and ROIC to compare the results, returns, and value of the Company with those of other companies.



# EASTMAN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## 2015 OVERVIEW

For the periods reported, Eastman's businesses were managed and reported in five reporting segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids & Intermediates ("SFI"). Eastman is focused on consistent earnings growth through a market-driven approach that takes advantage of the Company's existing technology platforms, global market and manufacturing presence, and leading positions in key end markets such as transportation, building and construction, and consumables. Eastman management believes that the Company's end-market diversity is a source of strength, and that many of the markets into which the Company's products are sold are benefiting from longer-term global trends such as energy efficiency, a rising middle class in emerging economies, and an increased focus on health and wellness. Management believes that these trends, combined with the diversity of the Company's end markets, facilitate more consistent demand for the Company's products over time. As a result of changes in organizational structure and management, beginning first quarter 2016, the Company's products and operations will be managed and reported in four operating segments: AFP, AM, Fibers, and Chemical Intermediates ("CI") as described in the "About Our Business" section of this Annual Report.

The Company generated sales revenue of $9.6 billion and $9.5 billion for 2015 and 2014, respectively. The sales revenue increase of $121 million in 2015 was primarily due to sales volume from businesses acquired in 2014, partially offset by lower selling prices, particularly in the SFI segment, primarily due to lower raw material and energy costs.

Operating earnings were $1.4 billion in 2015 compared to $1.2 billion in 2014. Excluding the non-core items referenced in "Non-GAAP and Pro Forma Combined Financial Measures", adjusted operating earnings were $1.7 billion in 2015 and $1.6 billion in 2014. Adjusted operating earnings increased in 2015 primarily due to lower raw material and energy costs exceeding lower selling prices by $255 million and earnings from businesses acquired in 2014. Adjusted operating earnings were negatively impacted $201 million by commodity hedges, particularly for propane, lower sales volume of $92 million as lower Fibers segment sales volume was partially offset by higher AM segment sales volume and improved product mix, and an unfavorable shift in foreign currency exchange rates of $47 million.

As described in more detail in "Results of Operations", earnings and earnings per share and adjusted earnings and earnings per share attributable to Eastman were as follows

<table><tr><td></td><td colspan="2">2015</td><td colspan="2">2014</td></tr><tr><td></td><td>$</td><td>EPS</td><td>$</td><td>EPS</td></tr><tr><td>(Dollars in millions, except diluted EPS)</td><td></td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations, net of tax</td><td>$ 848</td><td>$ 5.66</td><td>$ 749</td><td>$ 4.95</td></tr><tr><td>Total non-core items, net of tax</td><td>243</td><td>1.62</td><td>319</td><td>2.12</td></tr><tr><td>Earnings from continuing operations excluding non-core items, net of tax</td><td>$ 1,091</td><td>$ 7.28</td><td>$ 1,068</td><td>$ 7.07</td></tr></table>

The Company generated $1.6 billion in cash from operating activities in 2015, compared to $1.4 billion cash generated from operating activities during 2014. The increase in cash from operating activities was primarily due to higher earnings and lower working capital requirements partially offset by increased interest payments.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## RESULTS OF OPERATIONS

The Company's results of operations as presented in the Company's consolidated financial statements in this Annual Report are summarized and analyzed below. During 2014, the Company completed four acquisitions as described in the "About Our Business" section of this Annual Report, which are referred to as the "acquired businesses". The inclusion of results of operations of each acquired business in Eastman's consolidated results of operations from the date of acquisitions may limit comparability to prior period results.

## SUMMARY OF CONSOLIDATED RESULTS

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015 Compared to 2014</td><td colspan="3">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>%</td><td>2014</td><td>2013</td><td>%</td></tr><tr><td>Sales</td><td>$ 9,648</td><td>$ 9,527</td><td>1 %</td><td>$ 9,527</td><td>$ 9,350</td><td>2 %</td></tr><tr><td>Acquired business effect</td><td></td><td></td><td>13 %</td><td></td><td></td><td>2 %</td></tr><tr><td>Volume / product mix effect</td><td></td><td></td><td>(2)%</td><td></td><td></td><td>(1)%</td></tr><tr><td>Price effect</td><td></td><td></td><td>(8)%</td><td></td><td></td><td>1 %</td></tr><tr><td>Exchange rate effect</td><td></td><td></td><td>(2)%</td><td></td><td></td><td>— %</td></tr></table>

## 2015 Compared to 2014

Sales revenue increased $121 million in 2015 compared to 2014, primarily due to sales volume from the acquired businesses partially offset by lower selling prices, particularly in the SFI segment, primarily due to lower raw material and energy costs.

## 2014 Compared to 2013

Sales revenue increased $177 million in 2014 compared to 2013, primarily due to higher AFP, A&P, and AM segments sales volume and higher Fibers segment selling prices, partially offset by lower Fibers segment sales volume. The higher AFP segment sales volume was primarily due to sales of products of the acquired Taminco specialty amines and crop protection product lines and higher coatings products sales volume. The higher A&P segment sales volume was primarily attributed to stronger adhesives resins products end-market demand and the continued substitution of phthalate plasticizers with Eastman non-phthalate plasticizers. The higher AM segment sales volume was primarily due to higher premium product sales, including Eastman Tritan \( ^{®} \)  copolyester and interlayers with acoustic properties. The lower Fibers segment sales volume was primarily due to lower acetate tow volume attributed to additional industry capacity.

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015 Compared to 2014</td><td colspan="3">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>Change</td><td>2014</td><td>2013</td><td>Change</td></tr><tr><td>Gross Profit</td><td>$ 2,580</td><td>$ 2,221</td><td>16%</td><td>$ 2,221</td><td>$ 2,776</td><td>(20)%</td></tr><tr><td>Mark-to-market pension and other postretirement benefit (gain) loss, net</td><td>84</td><td>240</td><td></td><td>240</td><td>(297)</td><td></td></tr><tr><td>Additional costs of acquired inventories</td><td>7</td><td>24</td><td></td><td>24</td><td>—</td><td></td></tr><tr><td>Gross Profit excluding non-core items</td><td>$ 2,671</td><td>$ 2,485</td><td>7%</td><td>$ 2,485</td><td>$ 2,479</td><td>—%</td></tr></table>



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## 2015 Compared to 2014

Gross profit increased $359 million in 2015 compared with 2014, primarily due to a $156 million reduction in the MTM pension and other postretirement benefit adjustment loss in 2015 compared to 2014. Excluding non-core items, gross profit increased primarily due to lower raw material and energy costs exceeding lower selling prices by $255 million and gross profit from the acquired businesses. Gross profit was negatively impacted $201 million by commodity hedges, particularly for propane, lower sales volume of $92 million as lower Fibers segment sales volume was partially offset by higher AM segment sales volume and improved product mix, and an unfavorable shift in foreign currency exchange rates of $66 million.

## 2014 Compared to 2013

Gross profit decreased $555 million in 2014 compared with 2013 primarily due to the difference between a $240 million MTM pension and other postretirement benefit adjustment loss in 2014 and a $297 million MTM pension and other postretirement benefit adjustment gain in 2013. The $297 million MTM gain included a $68 million MTM interim remeasurement gain triggered by an other postretirement benefit plan amendment. Excluding non-core items, gross profit increased slightly as higher gross profit in the AM, Fibers, and A&P segments was partially offset by lower gross profit in the SFI segment. The lower SFI segment gross profit was primarily due to higher raw material and energy costs, particularly for propane in the first half of the year, exceeding higher selling prices, primarily for intermediates, by $33 million and due to $27 million of manufacturing capacity shutdown costs.

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015 Compared to 2014</td><td colspan="3">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>Change</td><td>2014</td><td>2013</td><td>Change</td></tr><tr><td>Selling, General &amp; Administrative Expenses</td><td>$ 762</td><td>$ 755</td><td>1%</td><td>$ 755</td><td>$ 645</td><td>17%</td></tr><tr><td>Mark-to-market pension and other postretirement benefit gain (loss), net</td><td>(18)</td><td>(57)</td><td></td><td>(57)</td><td>76</td><td></td></tr><tr><td>Acquisition integration and transaction costs</td><td>(28)</td><td>(46)</td><td></td><td>(46)</td><td>(36)</td><td></td></tr><tr><td>Selling, General, and Administrative Expenses excluding non-core items</td><td>$ 716</td><td>$ 652</td><td>10%</td><td>$ 652</td><td>$ 685</td><td>(5)%</td></tr></table>

## 2015 Compared to 2014

SG&A expenses in 2015 were slightly higher compared to 2014. SG&A expenses included an $18 million and $57 million MTM pension and other postretirement benefit adjustment loss in 2015 and 2014, respectively. Excluding non-core items, SG&A expenses were higher primarily due to the additional SG&A expenses of the acquired businesses and higher variable compensation expense, partially offset by the decrease in expense due to foreign currency exchange rates.

## 2014 Compared to 2013

SG&A expenses in 2014 were higher compared to 2013. SG&A expenses in 2014 included a $57 million MTM pension and other postretirement benefit adjustment loss. SG&A expenses in 2013 were reduced by a $76 million MTM pension and other postretirement benefit adjustment gain.

Excluding non-core items, SG&A expenses in 2014 were lower compared to 2013 primarily due to Solutia acquisition cost reduction synergies and lower share-based compensation expense.



## MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015 Compared to 2014</td><td colspan="3">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>Change</td><td>2014</td><td>2013</td><td>Change</td></tr><tr><td>Research &amp; Development Expenses</td><td>$ 251</td><td>$ 227</td><td>11%</td><td>$ 227</td><td>$ 193</td><td>18%</td></tr><tr><td>Mark-to-market pension and other postretirement benefit gain (loss), net</td><td>(13)</td><td>(7)</td><td></td><td>(7)</td><td>10</td><td></td></tr><tr><td>Research &amp; Development Expenses excluding non-core items</td><td>$ 238</td><td>$ 220</td><td>8%</td><td>$ 220</td><td>$ 203</td><td>8%</td></tr></table>

## 2015 Compared to 2014

R&D expenses were higher for 2015 compared to 2014. R&D expenses included a $13 million and $7 million MTM pension and other postretirement benefit adjustment loss in 2015 and 2014, respectively. Excluding non-core items, R&D expenses were higher in 2015 compared to 2014 primarily due to the additional R&D expenses of the acquired businesses.

## 2014 Compared to 2013

R&D expenses were higher for 2014 compared to 2013. R&D expenses in 2014 included a $7 million MTM pension and other postretirement benefit adjustment loss. R&D expenses in 2013 were reduced by a $10 million MTM pension and other postretirement benefit adjustment gain. Excluding non-core items, R&D expenses were higher in 2014 compared to 2013 primarily due to increased R&D for growth initiatives in the AFP and AM segments.

## Asset Impairments and Restructuring Charges, Net

## 2015

In 2015, there were net asset impairments and restructuring charges of $183 million.

The Company took actions during fourth quarter 2015 to reduce its non-operations workforce resulting in restructuring charges of $51 million for severance. These actions were taken to offset impacts on business and financial results of low oil prices, a strengthened U.S. dollar, and continued weak worldwide economic and business conditions. Management anticipates annual total cost savings of approximately $55 million, primarily SG&A expenses and cost of sales, beginning in 2016.

As a result of the annual impairment testing of indefinite-lived intangible assets in 2015, the Company recognized intangible asset impairments of $18 million in the AM segment primarily to reduce the carrying value of the V-KOOL \( ^{\circledR} \)  window films products tradename to the estimated fair value. The estimated fair value was determined using an income approach, specifically, the relief from royalty method. The impairment resulted from a decrease in projected revenues since the tradename was acquired. The decrease in projected revenues was primarily due to the Asian economic downturn impacting car sales growth in those geographic markets.

In 2015, net asset impairments and restructuring charges included $81 million of asset impairments and $17 million of restructuring charges, including severance, in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing facility which was substantially completed in 2015. Management expects annual cost savings in the Fibers segment of approximately $20 million as a result of the closure, including approximately $10 million in 2015 primarily reducing cost of sales. Additionally, in 2015, management decided not to continue a growth initiative that was reported in "Other". This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $3 million.



# EASTMAN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Additionally, in 2015, net asset impairments and restructuring charges included $4 million of restructuring charges primarily for severance associated with the integration of Taminco.

## 2014

In 2014, there were net asset impairments and restructuring charges of $77 million.

In 2014, asset impairments of $18 million and restructuring charges, including severance, of $24 million were recognized in the AFP segment for the closure of a Crystex \( ^{\circledR} \)  R&D facility in France.

As a result of the annual impairment testing of indefinite-lived intangible assets in 2014, the Company recognized an intangible asset impairment of $22 million in the AFP segment to adjust the carrying value of the Crystex \( ^{\circledR} $  tradename to $135 million. This impairment resulted from a decrease in projected revenues since the tradename was acquired as part of the 2012 Solutia acquisition. The estimated fair value was determined using an income approach, specifically the relief from royalty method.

In addition, during 2014, a change in estimate of certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site resulted in a $5 million restructuring charge in addition to previously recognized asset impairments and restructuring charges.

During 2014, the Company recognized gains from the sales of previously impaired assets at the former Photovoltaics production facility in Germany and a former polymers production facility in China of $5 million and $2 million, respectively.

In 2014, charges in the AM segment included $10 million of asset impairments, including intangible assets, and $2 million of restructuring charges primarily due to the closure of a production facility in Taiwan for the Flexvue \( ^{\circledR} \)  product line. In addition, there were $5 million of restructuring charges for severance associated with the integration of Solutia.

## 2013

In 2013, there were $76 million of net asset impairments and restructuring charges, including $23 million of restructuring charges primarily for severance associated with the integration of Solutia.

During 2013, management decided not to continue its Perennial Wood \( ^{™} \)  growth initiative. This resulted in asset impairment charges of $16 million and restructuring charges of $14 million primarily for inventory and contract termination costs. Also during fourth quarter 2013, management decided to terminate efforts to develop a continuous resin process in Kuantan, Malaysia and Antwerp, Belgium. This resulted in asset impairment charges of $4 million.

During 2013, management decided to shut-down the Photovoltaics product line, including the primary production facility in Germany. This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $6 million including charges for severance.

During 2013, a voluntary separation plan for certain employees resulted in recognition of severance charges of $6 million.

In addition, during 2013, a change in estimate for certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site resulted in a $4 million reduction of previously recognized asset impairments and restructuring charges.



## MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Operating Earnings

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015 Compared to 2014</td><td colspan="3">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>Change</td><td>2014</td><td>2013</td><td>Change</td></tr><tr><td>Operating earnings</td><td>$ 1,384</td><td>$ 1,162</td><td>19%</td><td>$ 1,162</td><td>$ 1,862</td><td>(38)%</td></tr><tr><td>Mark-to-market pension and other postretirement benefit (gain) loss, net</td><td>115</td><td>304</td><td></td><td>304</td><td>(383)</td><td></td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>183</td><td>77</td><td></td><td>77</td><td>76</td><td></td></tr><tr><td>Acquisition integration and transaction costs</td><td>28</td><td>46</td><td></td><td>46</td><td>36</td><td></td></tr><tr><td>Additional costs of acquired inventories</td><td>7</td><td>24</td><td></td><td>24</td><td>—</td><td></td></tr><tr><td>Operating earnings excluding non-core items</td><td>$ 1,717</td><td>$ 1,613</td><td>6%</td><td>$ 1,613</td><td>$ 1,591</td><td>1%</td></tr></table>

## Net Interest Expense

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015 Compared to 2014</td><td colspan="3">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>Change</td><td>2014</td><td>2013</td><td>Change</td></tr><tr><td>Gross interest costs</td><td>$ 286</td><td>$ 210</td><td></td><td>$ 210</td><td>$ 190</td><td></td></tr><tr><td>Less: Capitalized interest</td><td>7</td><td>7</td><td></td><td>7</td><td>4</td><td></td></tr><tr><td>Interest expense</td><td>279</td><td>203</td><td>37%</td><td>203</td><td>186</td><td>9%</td></tr><tr><td>Interest income</td><td>16</td><td>16</td><td></td><td>16</td><td>6</td><td></td></tr><tr><td>Net interest expense</td><td>263</td><td>187</td><td></td><td>187</td><td>180</td><td></td></tr><tr><td>Taminco acquisition financing costs</td><td>—</td><td>(3)</td><td></td><td>(3)</td><td>—</td><td></td></tr><tr><td>Net interest expense excluding Taminco acquisition financing costs</td><td>$ 263</td><td>$ 184</td><td>43%</td><td>$ 184</td><td>$ 180</td><td>2%</td></tr></table>

## 2015 Compared to 2014

Net interest expense increased $76 million in 2015 compared to 2014, primarily due to interest on the additional $3 billion of debt incurred in fourth quarter 2014 to finance the Taminco acquisition.

## 2014 Compared to 2013

Net interest expense increased $7 million in 2014 compared to 2013. The increase was primarily due to the interest on the additional $500 million of debt in May 2014 and on the additional $3 billion debt in fourth quarter 2014 as partial financing of the Taminco acquisition. The increase was partially offset by repayment in 2013 of the five-year term loan (the "Term Loan") used to finance part of the Solutia acquisition.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Other (Income) Charges, Net

<table><tr><td>(Dollars in millions)</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Foreign exchange transaction (gains) losses, net</td><td>$ 6</td><td>$ (7)</td><td>$ 7</td></tr><tr><td>Financing costs related to the acquisition of Taminco</td><td>—</td><td>10</td><td>—</td></tr><tr><td>(Income) loss from equity investments and other investment (gains) losses, net</td><td>(15)</td><td>(13)</td><td>(5)</td></tr><tr><td>Other, net</td><td>1</td><td>(5)</td><td>1</td></tr><tr><td>Other (income) charges, net</td><td>(8)</td><td>(15)</td><td>3</td></tr><tr><td>Financing costs related to the acquisition of Taminco</td><td>—</td><td>(10)</td><td>—</td></tr><tr><td>Other (income) charges, net excluding financing costs related to the acquisition of Taminco</td><td>$ (8)</td><td>$ (25)</td><td>$ 3</td></tr></table>

## Provision for Income Taxes from Continuing Operations

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015 Compared to 2014</td><td colspan="3">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>Change</td><td>2014</td><td>2013</td><td>Change</td></tr><tr><td>Provision for income taxes from continuing operations</td><td>$ 275</td><td>$ 235</td><td>17%</td><td>$ 235</td><td>$ 507</td><td>(54)%</td></tr><tr><td>Effective tax rate</td><td colspan="2">24%</td><td>24%</td><td colspan="2">24%</td><td>30%</td></tr></table>

The effective tax rate was 24 percent for both 2015 and 2014. The 2015 effective tax rate reflected a benefit from both the U.S. federal tax manufacturing deduction due to an increase in domestic taxable income and increased U.S. federal tax credits, compared to 2014. This was offset by a reduction in the foreign rate variance as a result of an unfavorable shift in foreign income to higher tax jurisdictions and limited benefit from the asset impairment of the Workington, UK acetate tow manufacturing facility. Both years reflect a benefit from the extension of favorable U.S. federal tax provisions, which resulted in a net benefit of approximately $15 million primarily related to research and development credits and deferral of certain earnings of foreign subsidiaries from U.S. income taxes.

The 2014 effective tax rate of 24 percent reflected incremental benefit of approximately 6 percent over the 2013 effective tax rate of 30 percent. The primary items benefiting the Company’s effective tax rate were the impact of the annual pension and other postretirement benefit MTM accounting and incremental foreign rate benefit from the integration of the Solutia acquisition. The Company recognized a MTM loss of $304 million in 2014 and a MTM gain of $383 million in 2013, which were primarily recognized in U.S. legal entities. The $687 million reduction in U.S. earnings accounted for an approximately 5 percent benefit to the 2014 effective tax rate compared to 2013. The 2014 effective tax rate also benefited 3 percent compared to 2013 due to an incremental $50 million foreign rate variance. The incremental benefit was the result of the Company’s integration of Eastman and Solutia business operations and legal entity structures, including relocating certain of the Company’s global business headquarters, which are primarily international, to Europe to better serve customers, and implementing an integrated entity financing structure allowing more efficient redeployment of cash for subsidiaries outside the U.S. These 2014 incremental benefits over 2013 were partially offset by a 2013 $14 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of the 2012 consolidated U.S. Federal income tax return and a 2013 $14 million benefit for the finalization of foreign tax audits.



## MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Earnings from Continuing Operations and Diluted Earnings per Share

<table><tr><td rowspan="2">(Dollars in millions, except per share amounts)</td><td colspan="3">2015</td><td colspan="3">2014</td><td colspan="3">2013</td></tr><tr><td>$</td><td>EPS</td><td>$</td><td>EPS</td><td>$</td><td>EPS</td><td>$</td><td>EPS</td><td></td></tr><tr><td>Earnings from continuing operations, net of tax</td><td>$</td><td>848</td><td>$</td><td>5.66</td><td>$</td><td>749</td><td>$</td><td>4.95</td><td>$</td></tr><tr><td>Mark-to-market pension and other postretirement benefit (gain) loss, net of tax</td><td></td><td>70</td><td></td><td>0.47</td><td></td><td>202</td><td></td><td>1.34</td><td>(233)</td></tr><tr><td>Asset impairments and restructuring charges, net of tax</td><td></td><td>151</td><td></td><td>1.00</td><td></td><td>63</td><td></td><td>0.42</td><td>53</td></tr><tr><td>Acquisition transaction, integration, and financing costs, net of tax</td><td></td><td>18</td><td></td><td>0.12</td><td></td><td>39</td><td></td><td>0.26</td><td>23</td></tr><tr><td>Additional costs of acquired inventories, net of tax</td><td></td><td>4</td><td></td><td>0.03</td><td></td><td>15</td><td></td><td>0.10</td><td>—</td></tr><tr><td>Earnings from continuing operations excluding non-core items, net of tax</td><td>$</td><td>1,091</td><td>$</td><td>7.28</td><td>$</td><td>1,068</td><td>$</td><td>7.07</td><td>$</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td>$</td></tr></table>

## Net Earnings and Diluted Earnings per Share

<table><tr><td rowspan="2">(Dollars in millions, except per share amounts)</td><td colspan="3">2015</td><td colspan="3">2014</td><td colspan="3">2013</td></tr><tr><td>$</td><td>EPS</td><td>$</td><td>EPS</td><td>$</td><td>EPS</td><td>$</td><td>EPS</td><td></td></tr><tr><td>Earnings from continuing operations, net of tax</td><td>$</td><td>848</td><td>$</td><td>5.66</td><td>$</td><td>749</td><td>$</td><td>4.95</td><td>$</td></tr><tr><td>Earnings from discontinued operations, net of tax</td><td>—</td><td>—</td><td>—</td><td>—</td><td>2</td><td>0.02</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Net earnings</td><td>$</td><td>848</td><td>$</td><td>5.66</td><td>$</td><td>751</td><td>$</td><td>4.97</td><td>$</td></tr></table>

In 2014, the Company recognized $2 million, net of tax, in earnings from discontinued operations from final settlement of commercial litigation related to the previously discontinued polyethylene terephthalate ("PET") business.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## SUMMARY BY OPERATING SEGMENT

For the periods reported, Eastman had five reporting segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids & Intermediates ("SFI"). For additional financial and product information for each segment, see Note 20, "Segment Information", to the Company's consolidated financial statements in this Annual Report. As a result of changes in the Company's organizational structure and management, beginning first quarter 2016, the Company's products and operations will be managed and reported in four operating segments: AFP, AM, Fibers, and Chemical Intermediates ("CI"). See "About Our Business" section of this Annual Report.

## Additives & Functional Products Segment

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="5">2015 Compared to 2014</td><td colspan="5">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>Change</td><td>%</td><td>2014</td><td>2013</td><td>Change</td><td>%</td><td></td><td></td></tr><tr><td>Sales</td><td>$ 2,368</td><td>$ 1,821</td><td>$ 547</td><td>30 %</td><td>$ 1,821</td><td>$ 1,719</td><td>$ 102</td><td></td><td>6 %</td><td></td></tr><tr><td>Acquired business effect</td><td></td><td></td><td>706</td><td>39 %</td><td></td><td></td><td>56</td><td></td><td>3 %</td><td></td></tr><tr><td>Volume / product mix effect</td><td></td><td></td><td>24</td><td>1 %</td><td></td><td></td><td>26</td><td></td><td>2 %</td><td></td></tr><tr><td>Price effect</td><td></td><td></td><td>(136)</td><td>(7)%</td><td></td><td></td><td>20</td><td></td><td>1 %</td><td></td></tr><tr><td>Exchange rate effect</td><td></td><td></td><td>(47)</td><td>(3)%</td><td></td><td></td><td>—</td><td></td><td>— %</td><td></td></tr><tr><td>Operating earnings</td><td>462</td><td>329</td><td>133</td><td>40 %</td><td>329</td><td>405</td><td>(76)</td><td></td><td>(19)%</td><td></td></tr><tr><td>Additional costs of acquired inventories</td><td>—</td><td>7</td><td>(7)</td><td></td><td>7</td><td>—</td><td>7</td><td></td><td></td><td></td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>—</td><td>62</td><td>(62)</td><td></td><td>62</td><td>1</td><td>61</td><td></td><td></td><td></td></tr><tr><td>Operating earnings excluding non-core items</td><td>462</td><td>398</td><td>64</td><td>16 %</td><td>398</td><td>406</td><td>(8)</td><td></td><td>(2)%</td><td></td></tr></table>

## 2015 Compared to 2014

Sales revenue in 2015 increased compared to 2014, primarily due to sales of products of the acquired Taminco specialty amines and crop protection businesses. These revenues were partially offset by lower coatings and other formulated products selling prices, primarily due to lower raw material and energy costs, and an unfavorable shift in foreign currency exchange rates.

Operating earnings in 2015 increased compared to 2014. Operating earnings in 2014 included $62 million of asset impairments and restructuring charges, primarily $42 million for the closure of a Crystex \( ^{\circledR} \)  R&D facility in France and a $22 million intangible asset impairment of the Crystex \( ^{\circledR} \)  tradename. The impairment of the Crystex \( ^{\circledR} \)  tradename was a result of a decrease in projected revenue since the tradename was acquired. Operating earnings in fourth quarter 2014 included $7 million of additional costs of the acquired Taminco specialty amines and crop protection business inventories.

Excluding non-core items, operating earnings increased in 2015 compared to 2014 primarily due to earnings of the acquired businesses, and lower raw material and energy costs exceeding lower coatings and other formulated products selling prices by $28 million. These items were partially offset by the negative impact of commodity hedges, primarily for propane, of $41 million.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## 2014 Compared to 2013

Sales revenue in 2014 increased compared to 2013, primarily due to higher coatings products sales volume and selling prices and sales of products of the acquired Taminco specialty amines and crop protection businesses more than offsetting lower rubber additives sales volume. The higher coatings sales volume and selling prices were attributed to strengthened demand in key end markets, particularly building and construction and transportation. The lower rubber additives sales volume was primarily attributed to decreased commercial tire production in Asia Pacific.

Operating earnings in 2014 decreased compared to 2013. Operating earnings in 2014 included $62 million of asset impairments and restructuring charges, primarily $42 million for the closure of a Crystex \( ^{\circledR} \)  R&D facility in France and a $22 million intangible asset impairment of the Crystex \( ^{\circledR} \)  tradename acquired in the 2012 acquisition of Solutia. Operating earnings in fourth quarter 2014 included $7 million of additional costs of the acquired Taminco specialty amines and crop protection business inventories. Excluding non-core items, operating earnings decreased in 2014 compared to 2013. The decrease was primarily due to higher raw material and energy costs, particularly for propane in the first half of 2014, offsetting higher selling prices by $17 million and $7 million of lower rubber additives sales volume. The decrease was partially offset by $13 million of higher sales volume, primarily sales of coatings products and the sales of products of the acquired Taminco specialty amines business.

## Growth Initiatives

The Company began construction of a 40,000 metric ton expansion of the Crystex \( ^{®} \)  insoluble sulfur rubber additives manufacturing facility in Kuantan, Malaysia, expected to be operational in 2017, and retrofitted an existing manufacturing facility in Germany that became operational in the second half of 2015. These actions are expected to capitalize on recent enhancements of technology for the manufacture of Crystex \( ^{®} \)  insoluble sulfur by improving the Company's cost position and enhancing product characteristics.

## Adhesives & Plasticizers Segment

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="5">2015 Compared to 2014</td><td colspan="5">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td>Change</td><td>%</td><td>2014</td><td>2013</td><td>Change</td><td>%</td><td></td></tr><tr><td>Sales</td><td>$ 1,214</td><td>$ 1,363</td><td>$ (149)</td><td>(11)%</td><td>$ 1,363</td><td>$ 1,326</td><td>$ 37</td><td>3%</td><td></td></tr><tr><td>Volume / product mix effect</td><td></td><td></td><td>(14)</td><td>(1)%</td><td></td><td></td><td>61</td><td>5%</td><td></td></tr><tr><td>Price effect</td><td></td><td></td><td>(90)</td><td>(7)%</td><td></td><td></td><td>(28)</td><td>(2)%</td><td></td></tr><tr><td>Exchange rate effect</td><td></td><td></td><td>(45)</td><td>(3)%</td><td></td><td></td><td>4</td><td>—%</td><td></td></tr><tr><td>Operating earnings</td><td>239</td><td>196</td><td>43</td><td>22%</td><td>196</td><td>172</td><td>24</td><td>14%</td><td></td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>—</td><td>—</td><td>—</td><td></td><td>—</td><td>1</td><td>(1)</td><td></td><td></td></tr><tr><td>Operating earnings excluding non-core item</td><td>239</td><td>196</td><td>43</td><td>22%</td><td>196</td><td>173</td><td>23</td><td>13%</td><td></td></tr></table>

## 2015 Compared to 2014

Sales revenue in 2015 decreased compared to 2014, primarily due to lower plasticizers products selling prices and an unfavorable shift in foreign currency exchange rates. Lower plasticizers products selling prices were primarily in response to lower raw material and energy costs and continued competitive pressures resulting from weakened demand in Asia Pacific.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating earnings in 2015 increased compared to 2014, primarily due to lower raw material and energy costs for both adhesives resins and plasticizers products exceeding lower plasticizers products selling prices by $90 million, partially offset by the negative impact of commodity hedges, primarily for propane, of $19 million, and an unfavorable shift in foreign currency exchange rates of $16 million.

## 2014 Compared to 2013

Sales revenue in 2014 increased compared to 2013, primarily due to higher sales volume more than offsetting lower selling prices. Higher plasticizers products sales volume was primarily attributed to the substitution of phthalate plasticizers with Eastman non-phthalate plasticizers. Higher adhesives resins products sales volume was primarily attributed to stronger end-market demand, particularly for packaging and hygiene, and customer inventory management that negatively impacted first half 2013 sales volume. Lower plasticizers products selling prices were primarily due to continued competitive pressures resulting from weakened demand in Asia Pacific and Europe. Lower adhesives resins products selling prices were primarily due to continued competitive pressure resulting from greater industry supply attributed to increased availability of key raw materials and additional competitor capacity in the first half of 2014.

Operating earnings in 2014 increased compared to 2013, primarily due to $22 million of lower operating costs including the benefit of higher capacity utilization that resulted in lower unit costs and targeted cost reductions, and $18 million of higher sales volume, more than offsetting $21 million of lower selling prices and relatively unchanged raw material and energy costs.

## Growth Initiatives

The Company has expanded its Eastman 168 \( ^{®} \)  non-phthalate plasticizers manufacturing capacity at its Texas City, Texas site to meet expected plasticizer demand growth and has options to further expand capacity.

The Company is planning to expand capacity at its existing sites to support expected demand growth for its adhesives resins products in hygiene and packaging applications. In addition, the Company and Sinopec Yangzi Petrochemical Company Limited continue to evaluate the timing of a joint project to build a hydrogenated hydrocarbons resin plant in Nanjing, China.

## Advanced Materials Segment

<table><tr><td rowspan="3">(Dollars in millions)</td><td colspan="5">2015 Compared to 2014</td><td colspan="5">2014 Compared to 2013</td></tr><tr><td rowspan="2">2015</td><td rowspan="2">2014</td><td colspan="3">Change</td><td rowspan="2">2014</td><td rowspan="2">2013</td><td colspan="3">Change</td></tr><tr><td>$</td><td>%</td><td></td><td>$</td><td>%</td></tr><tr><td>Sales</td><td>$ 2,414</td><td>$ 2,378</td><td>$ 36</td><td>2</td><td>%</td><td>$ 2,378</td><td>$ 2,349</td><td>$ 29</td><td>1</td><td>%</td></tr><tr><td>Acquired business effect</td><td></td><td></td><td>123</td><td>5</td><td>%</td><td></td><td></td><td>6</td><td>—</td><td>%</td></tr><tr><td>Volume / product mix effect</td><td></td><td></td><td>88</td><td>4</td><td>%</td><td></td><td></td><td>50</td><td>2</td><td>%</td></tr><tr><td>Price effect</td><td></td><td></td><td>(84)</td><td>(3)%</td><td></td><td></td><td></td><td>(23)</td><td>(1)%</td><td></td></tr><tr><td>Exchange rate effect</td><td></td><td></td><td>(91)</td><td>(4)%</td><td></td><td></td><td></td><td>(4)</td><td>—</td><td>%</td></tr><tr><td>Operating earnings</td><td>384</td><td>276</td><td>108</td><td>39</td><td>%</td><td>276</td><td>257</td><td>19</td><td>7</td><td>%</td></tr><tr><td>Additional costs of acquired inventories</td><td>7</td><td>1</td><td>6</td><td></td><td></td><td>1</td><td>—</td><td>1</td><td></td><td></td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>18</td><td>16</td><td>2</td><td></td><td></td><td>16</td><td>3</td><td>13</td><td></td><td></td></tr><tr><td>Operating earnings excluding non-core items</td><td>409</td><td>293</td><td>116</td><td>40</td><td>%</td><td>293</td><td>260</td><td>33</td><td>13</td><td>%</td></tr></table>



# EASTMAN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## 2015 Compared to 2014

Sales revenue in 2015 increased compared to 2014, due to sales of products of the acquired Commonwealth Laminating & Coating, Inc. ("Commonwealth") performance films business and increased sales volume, partially offset by an unfavorable shift in foreign currency exchange rates and lower selling prices, primarily for copolyesters, due to lower raw material and energy costs.

Operating earnings in 2015 increased compared to 2014. Operating earnings in 2015 included $18 million of indefinite-lived intangible asset impairments, primarily to reduce the carrying value of tradenames in the window films market to their estimated current fair value. Operating earnings in 2015 also included additional costs of acquired Commonwealth inventories of $7 million. Included in 2014 operating earnings are asset impairments, including intangible assets, and restructuring charges of $12 million primarily for the closure of a production facility in Taiwan for the Flexvue \( ^{\circledR} $  product line and $4 million of asset impairments related to a change in estimate of certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site.

Excluding these non-core items, operating earnings in 2015 increased compared to 2014 due to lower raw material and energy costs exceeding lower selling prices by $76 million and higher sales volume and improved product mix, especially relative increased sales of optical film solutions and premium interlayers products, of $46 million. Operating earnings also benefited from earnings of the acquired business. These items were partially offset by the negative impact of commodity hedges of $22 million and an unfavorable shift in foreign currency exchange rates of $13 million.

## 2014 Compared to 2013

Sales revenue in 2014 increased slightly compared to 2013, primarily due to higher premium products sales volume, including Eastman Tritan \( ^{®} \)  copolyester and interlayers with acoustic properties, largely offset by lower core copolyester product selling prices primarily due to lower raw material and energy costs. The increased premium product sales is attributed to continued market adoption. Sales revenue in 2014 included revenue from the acquired Commonwealth business.

Included in 2014 operating earnings are asset impairments, including intangible assets, and restructuring charges of $12 million primarily for the closure of a production facility in Taiwan for the Flexvue \( ^{\circledR} $  product line and $4 million of asset impairments related to a change in estimate of certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site. Excluding non-core items, operating earnings increased in 2014 compared to 2013, primarily due to higher premium products sales volume and improved product mix with relatively more premium products.

## Growth Initiatives

The acquisition of Commonwealth in December 2014 further expanded the AM segment's product portfolio and channel network in the diverse window film markets, has enabled further manufacturing and distribution efficiencies, and added industry leading paint protection film technology to expand AM segment offerings in after-market automotive and protective film markets.

The Company is continuing an additional 60,000 metric ton expansion of Eastman Tritan \( ^{®} \)  copolyester capacity at the Kingsport, Tennessee manufacturing facility to meet expected future demand.

Construction of a manufacturing facility for PVB Resin at the Kuantan, Malaysia site is expected to be operational in 2017 to support growth of the AM segment’s transportation and building and construction markets, particularly in the Asia Pacific region.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Fibers Segment

<table><tr><td rowspan="3">(Dollars in millions)</td><td colspan="6">2015 Compared to 2014</td><td colspan="6">2014 Compared to 2013</td></tr><tr><td rowspan="2">2015</td><td rowspan="2">2014</td><td colspan="3">Change</td><td rowspan="2">2014</td><td rowspan="2">2013</td><td colspan="3">Change</td><td rowspan="2">%</td><td rowspan="2">%</td></tr><tr><td>$</td><td>%</td><td></td><td></td><td></td></tr><tr><td>Sales</td><td>$</td><td>1,219</td><td>$</td><td>1,457</td><td>$</td><td>(238)</td><td>(16)%</td><td>$</td><td>1,457</td><td>$</td><td>1,441</td><td>$</td><td>16</td></tr><tr><td>Volume / product mix effect</td><td></td><td></td><td></td><td></td><td>(219)</td><td>(15)%</td><td></td><td></td><td></td><td></td><td>(38)</td><td>(3)%</td></tr><tr><td>Price effect</td><td></td><td></td><td></td><td></td><td>(10)</td><td>(1)%</td><td></td><td></td><td></td><td></td><td>52</td><td>4%</td></tr><tr><td>Exchange rate effect</td><td></td><td></td><td></td><td></td><td>(9)</td><td>—%</td><td></td><td></td><td></td><td></td><td>2</td><td>—%</td></tr><tr><td>Operating earnings</td><td></td><td>292</td><td></td><td>474</td><td>(182)</td><td>(38)%</td><td></td><td>474</td><td></td><td>462</td><td></td><td>12</td><td>3%</td></tr><tr><td>Asset impairments and restructuring charges, net</td><td></td><td>98</td><td></td><td>—</td><td>98</td><td></td><td></td><td>—</td><td></td><td>—</td><td></td><td>—</td><td></td></tr><tr><td>Operating earnings excluding non-core item</td><td></td><td>390</td><td></td><td>474</td><td>(84)</td><td>(18)%</td><td></td><td>474</td><td></td><td>462</td><td></td><td>12</td><td>3%</td></tr></table>

## 2015 Compared to 2014

Sales revenue in 2015 decreased compared to 2014, primarily due to lower acetate tow sales volume attributed to customer inventory destocking, especially in China, and lower acetyl chemicals sales volume due to decreased sales to the cellulose acetate flake joint venture in Kingsport.

Operating earnings in 2015 decreased compared to 2014. Excluding the non-core item, operating earnings decreased primarily due to $112 million of lower acetate tow and acetyl chemicals sales volume, partially offset by approximately $10 million of cost savings resulting from closure of the Workington, UK acetate tow manufacturing facility in 2015.

## 2014 Compared to 2013

Sales revenue in 2014 increased slightly compared to 2013, primarily due to higher acetate tow selling prices and higher acetate flake sales volume to Eastman's China acetate tow joint venture more than offsetting lower acetate tow sales volume. The lower acetate tow sales volume was attributed to additional industry capacity, including at Eastman's China acetate tow joint venture.

Operating earnings in 2014 were higher compared to 2013, as higher selling prices and lower raw material and energy costs of $64 million more than offset $48 million of lower sales volume, as lower acetate tow sales volume was partially offset by higher acetate flake sales volume, and related lower capacity utilization resulting in higher unit costs.

## Cost Initiatives

As a result of challenging market conditions for acetate tow, including additional industry capacity, the Company closed its Workington, U.K. acetate tow manufacturing facility in 2015 resulting in $98 million of asset impairments and restructuring charges.



## MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Specialty Fluids & Intermediates Segment

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="5">2015 Compared to 2014</td><td colspan="5">2014 Compared to 2013</td></tr><tr><td>2015</td><td>2014</td><td colspan="2">Change</td><td>2014</td><td>2013</td><td colspan="2">Change</td><td>2014</td><td>2013</td></tr><tr><td>Sales</td><td>$ 2,388</td><td>$ 2,490</td><td>$ (102)</td><td>(4)%</td><td>$ 2,490</td><td>$ 2,497</td><td>$ (7)</td><td>— %</td><td></td><td></td></tr><tr><td>Acquired business effect</td><td></td><td></td><td>417</td><td>17 %</td><td></td><td></td><td>96</td><td>4 %</td><td></td><td></td></tr><tr><td>Volume / product mix effect</td><td></td><td></td><td>(96)</td><td>(4)%</td><td></td><td></td><td>(133)</td><td>(5)%</td><td></td><td></td></tr><tr><td>Price effect</td><td></td><td></td><td>(399)</td><td>(16)%</td><td></td><td></td><td>30</td><td>1 %</td><td></td><td></td></tr><tr><td>Exchange rate effect</td><td></td><td></td><td>(24)</td><td>(1)%</td><td></td><td></td><td>—</td><td>— %</td><td></td><td></td></tr><tr><td>Operating earnings</td><td>253</td><td>289</td><td>(36)</td><td>(12)%</td><td>289</td><td>363</td><td>(74)</td><td>(20)%</td><td></td><td></td></tr><tr><td>Additional costs of acquired inventories</td><td>—</td><td>16</td><td>(16)</td><td></td><td>16</td><td>—</td><td>16</td><td></td><td></td><td></td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>—</td><td>—</td><td>—</td><td></td><td>—</td><td>1</td><td>(1)</td><td></td><td></td><td></td></tr><tr><td>Operating earnings excluding non-core items</td><td>253</td><td>305</td><td>(52)</td><td>(17)%</td><td>305</td><td>364</td><td>(59)</td><td>(16)%</td><td></td><td></td></tr></table>

## 2015 Compared to 2014

Sales revenue in 2015 decreased compared to 2014, primarily due to lower selling prices and lower chemical and other intermediates sales volume more than offsetting sales of products of the acquired Taminco functional amines business and BP plc's global aviation turbine engine oil business (the "aviation turbine oil business"). The lower selling prices were primarily in response to lower raw material and energy costs.

Operating earnings in 2014 included $8 million of additional costs of the acquired aviation turbine oil business inventories and $8 million of additional costs of the acquired Taminco functional amines product lines inventories. Excluding the non-core items, operating earnings decreased in 2015 compared to 2014, primarily due to the negative impact of commodity hedges, primarily for propane, of $118 million and lower chemical and other intermediates sales volume of $26 million, partially offset by earnings from the acquired businesses and lower raw material and energy costs exceeding lower selling prices by $39 million.

## 2014 Compared to 2013

Sales revenue in 2014 was relatively unchanged compared to 2013, due to acquired aviation turbine oil business and Taminco functional amines products sales volume in 2014 and higher selling prices offset by overall lower 2014 sales volume. The lower sales volume was due to manufacturing capacity shutdowns, increased internal use of intermediates in the manufacture of higher-value downstream derivatives in other Eastman business segments, and weakness in the heat transfer fluids market.

Operating earnings in 2014 included $8 million of additional costs of the acquired aviation turbine oil business inventories and $8 million of additional costs of the acquired Taminco functional amines product lines inventories. Excluding non-core items, operating earnings decreased in 2014, primarily due to higher raw material and energy costs, particularly for propane in the first half of the year, exceeding higher selling prices, primarily for intermediates, by $33 million and $27 million of manufacturing capacity shutdowns costs, partially offset by $10 million of 2014 earnings from the acquired businesses.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Cost and Strategic Initiatives

In January 2016, the Company announced that as part of its strategy to increase emphasis on specialty businesses and products it is pursuing strategic options to divest or otherwise monetize its excess ethylene capacity position and certain commodity olefin intermediates product lines, while retaining its cost-advantaged integrated position to propylene which supports specialty derivatives throughout the Company.

In 2012, the Company entered into an agreement with Enterprise Products Partners L.P. to purchase propylene from a planned propane dehydrogenation plant expected to further improve the Company's competitive cost position compared to purchasing olefins in the North American market beginning in 2017. Prior to completion of the plant, the Company continues to benefit from a propylene market contract with an advantaged cost position for purchased propylene. The Company continues to optimize the ethane content in its olefin cracking units feedstock mix based on relative market prices of olefins and olefins feedstocks.

## Other

<table><tr><td>(Dollars in millions)</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Sales</td><td>$ 45</td><td>$ 18</td><td>$ 18</td></tr><tr><td>Operating loss</td><td></td><td></td><td></td></tr><tr><td>Growth initiatives and businesses not allocated to segments</td><td>$ (87)</td><td>$ (58)</td><td>$ (132)</td></tr><tr><td>Pension and other postretirement benefit income (expense) and gain (loss) not allocated to operating segments</td><td>(76)</td><td>(293)</td><td>394</td></tr><tr><td>Acquisition integration and transaction costs and asset impairments and restructuring charges, net</td><td>(83)</td><td>(51)</td><td>(59)</td></tr><tr><td>Operating loss before non-core items</td><td>(246)</td><td>(402)</td><td>203</td></tr><tr><td>Mark-to-market pension and other postretirement benefit plans (gain) loss, net</td><td>115</td><td>304</td><td>(383)</td></tr><tr><td>Acquisition integration and transaction costs</td><td>28</td><td>46</td><td>36</td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>67</td><td>(1)</td><td>70</td></tr><tr><td>Operating loss excluding non-core items</td><td>$ (36)</td><td>$ (53)</td><td>$ (74)</td></tr></table>

Sales revenue and costs related to growth initiatives, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in segment operating results for any of the periods presented and are shown as "other" sales revenue and "other" operating earnings (loss). Sales revenue in 2015 increased compared to 2014, primarily due to sales of products of the acquired Knowlton Technologies, LLC ("Knowlton") business, part of the Eastman microfiber technology platform. Due to decisions made by management in 2013 not to continue its Perennial Wood \( ^{™} \)  growth initiative and to shut-down the Photovoltaics product line, there were no related sales revenues or costs in 2014 or 2015. For more information, see Note 20, "Segment Information", to the Company's audited consolidated financial statements in this Annual Report.

Pension expense (income) not allocated to operating segments was $76 million, $293 million, and ($394 million) in 2015, 2014, and 2013 respectively, and included $115 million of an MTM loss in 2015, $304 million of an MTM loss in 2014, and ($383 million) of an MTM gain in 2013.

Included in 2015 operating losses are integration and transaction costs of $28 million, primarily for the acquired Taminco and Commonwealth businesses. Included in 2015 operating losses are $51 million of severance costs for a corporate reduction in force, $11 million of asset impairments and restructuring charges resulting from management's decision not to continue a growth initiative, and $4 million of severance associated with the integration of Taminco.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Included in 2014 operating losses were transaction costs of $22 million for the acquisitions of Taminco, Commonwealth, the aviation turbine oil business, and Knowlton. Also included in 2014 operating losses were integration costs of $24 million for the acquired Solutia, aviation turbine oil, Commonwealth, Knowlton, and Taminco businesses. Included in 2014 operating losses were $4 million for severance related to the integration of Solutia. Included in 2014 was a $5 million gain for sales of previously impaired assets at the former Photovoltaics production facility in Germany.

Included in 2013 operating losses were acquisition integration costs of $36 million. During 2013, there were $44 million of asset impairments and restructuring charges primarily for management's decision not to continue the Perennial Wood \( ^{™} \)  growth initiative and the shut-down of the Photovoltaics product line primarily in Germany, and $23 million of restructuring charges primarily for severance for the continued integration of Solutia.

The Company continues to explore and invest in research and development initiatives that are aligned with macro trends in sustainability, consumerism, and energy efficiency such as high performance materials, advanced cellulosics, and reduced environmental impact. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company’s core competency in polyesters, spinning capability, and in-house application expertise, for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles. The acquisition of Knowlton accelerates the innovation cycle for the Eastman microfibers technology platform.

## SUMMARY BY CUSTOMER LOCATION

Sales by Company Regions: United States and Canada ("US"), Asia Pacific ("AP"), Europe, Middle East, and Africa ("EMEA"), and Latin America ("LA")



Sales revenue in Asia Pacific decreased in 2015 compared to 2014, primarily due to lower Fibers segment sales volume, particularly for acetate tow, and lower selling prices, partially offset by sales of products of the acquired Taminco, Commonwealth and aviation turbine oil businesses.

Sales revenue in Europe, Middle East, and Africa increased in 2015 compared to 2014, primarily due to sales of products of the acquired Taminco businesses, partially offset by an unfavorable shift in foreign currency exchange rates.

Sales revenue in Europe, Middle East, and Africa increased in 2014 compared to 2013, primarily due to higher AFP segment sales revenue, partially due to the revenue from the Taminco specialty amines and crop protection product lines acquired in December 2014, and higher Fibers segment sales revenue, primarily for acetate tow.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 10, "Derivatives", to the Company's consolidated financial statements in this Annual Report and "Quantitative and Qualitative Disclosures About Market Risk" of this Annual Report.

## LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION

## Cash Flows

<table><tr><td>(Dollars in millions)</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Net cash provided by (used in):</td><td></td><td></td><td></td></tr><tr><td>Operating activities</td><td>$     1,612</td><td>$     1,408</td><td>$     1,297</td></tr><tr><td>Investing activities</td><td>(693)</td><td>(4,091)</td><td>(457)</td></tr><tr><td>Financing activities</td><td>(832)</td><td>2,664</td><td>(859)</td></tr><tr><td>Effect of exchange rate changes on cash and cash equivalents</td><td>(8)</td><td>(4)</td><td>7</td></tr><tr><td>Net change in cash and cash equivalents</td><td>$     79</td><td>$      (23)</td><td>$      (12)</td></tr><tr><td>Cash and cash equivalents at beginning of period</td><td>214</td><td>237</td><td>249</td></tr><tr><td>Cash and cash equivalents at end of period</td><td>$     293</td><td>$     214</td><td>$     237</td></tr></table>

## 2015 Compared to 2014

Cash provided by operating activities increased $204 million in 2015 compared with 2014. The increase in cash from operating activities was primarily due to higher earnings and lower working capital requirements partially offset by higher interest payments. The increase in earnings was primarily due to lower raw material and energy costs exceeding lower selling prices and earnings from businesses acquired in 2014. The decrease in working capital requirements was primarily due to the impact of declining raw material and energy costs in 2015 compared with 2014. Interest payments were higher in 2015 as compared with 2014 primarily due to a full year of interest payments on borrowings for the 2014 acquisitions.

Cash used in investing activities decreased $3.4 billion in 2015 compared with 2014. The decrease was primarily due to cash used for acquisitions in 2014. Cash used for additions to properties and equipment was $652 million in 2015 and $593 million in 2014.

Cash used in financing activities was $832 million in 2015 compared with cash provided by financing activities of $2.7 billion in 2014. The increase in cash used is primarily due to the repayment of borrowings in 2015 compared to proceeds from borrowings in 2014 used for acquisitions. During 2015, the Company repaid $650 million of borrowings under the Taminco acquisition Term Loan Agreement and the $250 million 3% notes due 2015 using available cash and $200 million borrowings under the accounts receivable securitization agreement (the "A/R Facility") and $195 million commercial paper borrowings. During 2014, the Company had net proceeds of $3.4 billion from the issuance of new debt and repaid $190 million of commercial paper borrowings. Share repurchases totaled $103 million in 2015 compared with $410 million in 2014. Dividend payments were $238 million in 2015 and $210 million in 2014.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The priorities for uses of available cash in 2016 are expected to be payment of the quarterly cash dividend to stockholders, repayment of debt, funding targeted growth initiatives, and repurchasing shares.

## 2014 Compared to 2013

Cash provided by operating activities increased $111 million in 2014 compared with 2013. The increase in cash from operating activities was primarily due to higher cash earnings and lower income tax payments partially offset by higher variable compensation payouts and increased working capital requirements. The increase in working capital requirements was primarily due to a decrease in trade payables in 2014 mostly due to declining raw material and energy costs.

Cash used in investing activities increased $3.6 billion in 2014 compared with 2013. The increase was primarily due to cash used for the acquisitions of the aviation turbine oil business, Knowlton, Taminco, and Commonwealth in 2014. Cash used for additions to properties and equipment was $593 million in 2014 and $483 million in 2013.

Cash provided by financing activities was $2.7 billion in 2014 and cash used in financing activities was $859 million in 2013. During 2014, the Company had net proceeds of $3.4 billion from the issuance of new debt and repaid $190 million of commercial paper borrowings. During 2013, the Company had net proceeds of $425 million from commercial paper borrowings and repaid $950 million of borrowings. Share repurchases totaled $410 million in 2014 compared with $238 million in 2013. Dividend payments were $210 million in 2014 and $140 million in 2013. The fourth quarter 2012 dividend of $45 million was paid in December 2012 rather than January 2013.

## Liquidity and Capital Resources

The Company had cash and cash equivalents as follows:

(Dollars in millions)

Cash and cash equivalents

December 31,

<table><tr><td></td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>$</td><td>293</td><td>$</td><td>214</td></tr></table>

In addition, at December 31, 2015, the Company had access to the sources of liquidity described below.

The Company has access to a $1.25 billion revolving credit agreement (the "Credit Facility") that was amended in October 2015 to extend the maturity to October 2020. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce capacity for borrowings available under the Credit Facility. Beginning in fourth quarter 2015, commercial paper borrowings were classified as short-term. At December 31, 2015 and December 31, 2014, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2015, the Company's commercial paper borrowings were $430 million with a weighted average interest rate of 0.80 percent. At December 31, 2014, the Company's commercial paper borrowings were $235 million with a weighted average interest rate of 0.47 percent.

In July 2015, the Company amended its $250 million accounts receivable securitization agreement (the "A/R Facility") to extend the maturity to April 2018. 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. At December 31, 2015, the Company's borrowings under the A/R Facility were $200 million supported by trade receivables with an interest rate of 1.11 percent. In 2015, $50 million of the Company's borrowings under the A/R Facility were repaid using available cash. At December 31, 2014, the Company had no outstanding borrowings under the A/R Facility.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Term Loan Agreement, Credit Facility, and the A/R Facility contain a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. Total available borrowings under the Credit Facility and A/R Facility were $842 million and $1.3 billion as of December 31, 2015 and December 31, 2014, respectively. The reduction in available borrowings was due primarily to increases in commercial paper borrowings and borrowings under the A/R Facility. The Company would not have violated applicable covenants for these periods if the total available amounts of the facilities had been borrowed.

In 2015, the Company made $125 million in contributions to its U.S. defined benefit pension plans.

Cash flows from operations, cash and cash equivalents, and the other sources of liquidity described above are expected to be available and sufficient to meet foreseeable cash 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 "Risk Factors" below. Eastman management believes maintaining a financial profile consistent with an investment grade credit rating is important to its long-term strategic and financial flexibility.

## Capital Expenditures

Capital expenditures were $652 million, $593 million, and $483 million for 2015, 2014, and 2013, respectively. Capital expenditures in 2015 were primarily for the costs of modernization and expansion of the Kingsport, Tennessee site, expansion and construction at the Kuantan, Malaysia manufacturing site in the AFP and AM segments, a Thermino \( ^{®} \)  heat transfer fluid capacity expansion in Newport, Wales, and additional expansion of Eastman Tritan \( ^{®} \)  copolyester capacity in Kingsport. The Company expects that 2016 capital spending will be similar to 2015 including the continuation of the expansion projects in Kuantan, Kingsport and Longview, Texas site modernization projects, and the Eastman Tritan \( ^{®} \)  copolyester expansion in Kingsport.

## Debt and Other Commitments

## Debt Securities and Term Loan Agreement

At December 31, 2015, the Company's borrowings totaled approximately $7.0 billion to be paid over a period of approximately 30 years. See Note 9, "Borrowings", to the Company's consolidated financial statements in this Annual Report.

In December 2015, the Company repaid the $250 million principal amount of the 3% notes due 2015 using available cash and other borrowings.

In connection with the acquisition of Taminco, Eastman entered into a $1.0 billion five-year Term Loan Agreement. As of December 31, 2015, the Term Loan Agreement balance outstanding was $350 million with an interest rate of 1.67 percent. In 2015, $650 million of the Term Loan Agreement balance was repaid using available cash and other borrowings. As of December 31, 2014, the Term Loan Agreement balance outstanding was $1.0 billion with an interest rate of 1.41 percent. Borrowings under the Term Loan Agreement are subject to interest at varying spreads above quoted market rates.

On November 20, 2014, the Company issued public debt securities consisting of 2.7% notes due 2020 in the principal amount of $800 million, 3.8% notes due 2025 in the principal amount of $800 million, and 4.65% notes due 2044 in the principal amount of $400 million. Proceeds from these borrowings were used to pay a part of the purchase price for the acquisition of Taminco, including the repayment of outstanding Taminco borrowings and a portion of acquisition fees and expenses. Proceeds from the sale of the notes, net of original issue discounts, issuance costs, and the monetization of interest rate swaps, was $2.0 billion.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On May 15, 2014, the Company issued public debt securities consisting of 4.65% notes due 2044 in the principal amount of $500 million. Proceeds from the sale of the notes, net of transaction costs, were $490 million.

## Other Commitments

The Company had various purchase obligations at December 31, 2015, totaling $1.4 billion over a period of approximately 30 years for materials, supplies and energy incident to the ordinary conduct of business. The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling approximately $273 million over a period of approximately 40 years. Of the total lease commitments, approximately 50 percent relate to real property, including office space, storage facilities, and land; approximately 45 percent relate to railcars; and approximately 5 percent relate to machinery and equipment, including computer and communications equipment and production equipment.

In addition, the Company had other liabilities at December 31, 2015, totaling approximately $2.1 billion related primarily to pension, retiree medical, other postretirement benefit obligations, environmental loss contingency reserves, and commodity and foreign exchange hedging.

In 2015, the Company made $125 million in contributions to its U.S. defined benefit pension plans. For 2015, there was no minimum required cash contribution under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. In both 2014 and 2013, the Company made $120 million in contributions to its U.S. defined benefit pension plans. Excess contributions are periodically made by management in order to keep the plans' funded status above 80 percent under the funding provisions of the Pension Protection Act to avoid partial benefit restrictions on accelerated forms of payment. The Company's U.S. defined benefit pension plans are not currently under any benefit restrictions.

The obligations described above are summarized in the following table:

<table><tr><td colspan="10">(Dollars in millions)</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td colspan="5">Payments Due for</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td>Period</td><td>Debt Securities</td><td>Credit Facilities and Other</td><td>Interest Payable</td><td>Purchase Obligations</td><td>Operating Leases</td><td>Other Liabilities \( ^{(1)} \)</td><td></td><td>Total</td></tr><tr><td>2016</td><td></td><td>—</td><td>431</td><td>26</td><td>145</td><td>63</td><td>376</td><td>1,280</td><td></td></tr><tr><td>2017</td><td></td><td>999</td><td>1</td><td>283</td><td>164</td><td>50</td><td>154</td><td>1,651</td><td></td></tr><tr><td>2018</td><td></td><td>167</td><td>326</td><td>238</td><td>161</td><td>38</td><td>136</td><td>1,066</td><td></td></tr><tr><td>2019</td><td></td><td>250</td><td>226</td><td>218</td><td>148</td><td>28</td><td>89</td><td>959</td><td></td></tr><tr><td>2020</td><td></td><td>799</td><td>—</td><td>190</td><td>134</td><td>22</td><td>90</td><td>1,235</td><td></td></tr><tr><td>2021 and beyond</td><td></td><td>3,840</td><td>—</td><td>1,926</td><td>673</td><td>72</td><td>1,302</td><td>7,813</td><td></td></tr><tr><td>Total</td><td></td><td>6,055</td><td>984</td><td>3,120</td><td>1,425</td><td>273</td><td>2,147</td><td>14,004</td><td></td></tr></table>

(1) Amounts represent the current estimated cash payments required to be made by the Company primarily for pension and other postretirement benefits, environmental loss contingency reserves, commodity and foreign exchange hedging, uncertain tax liabilities, and accrued compensation benefits in the periods indicated. The amount and timing of such pension and other postretirement benefit 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. See Note 13, "Environmental Matters and Asset Retirement Obligations" to the Company's consolidated financial statements in this Annual Report for expected cash payments related to environmental loss contingency reserves. See Note 10, "Derivatives", to the Company's consolidated financial statements in this Annual Report for additional information. Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, management is unable to determine the timing of payments related to uncertain tax liabilities and these amounts are included in the "2021 and beyond" line item.



# EASTMAN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Allowance For Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. An analysis of trends including the aging of accounts receivable and days sales outstanding is performed on a regular basis in order to ensure appropriate adjustments are made to the allowance for doubtful accounts in a timely manner. No significant variances were identified in the trend analysis performed during 2015. The Company believes, based on historical results and its regular analysis, the likelihood of write-offs having a material impact on financial results is remote.

## 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, see Note 12, "Commitments", to the Company's consolidated financial statements in this Annual Report.

Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, and other parties when the Company undertakes an obligation to guarantee the performance of others, if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating primarily to intellectual property, environmental matters, and other indemnifications and have arisen through the normal course of business. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims, if they were to occur. These other guarantees have terms up to 30 years with maximum potential future payments of approximately $35 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. The Company's current expectation is that future payment or performance related to non-performance under other guarantees is considered remote.

The Company assumed the rights and obligations under non-recourse factoring facilities as part of the acquisition of Taminco. The non-recourse factoring facilities have a combined limit of $173 million (the U.S. Dollar equivalent of the €158 million commitment amount as of December 31, 2015) and are committed until December 2017. These arrangements include receivables in the United States, Belgium, Germany, and Finland, and are subject to various eligibility requirements. The Company sells the receivables at face value but receives funding (approximately 85 percent) net of a deposit amount until collections are received from customers for the receivables sold. The total amounts of cumulative receivables sold in 2015 were approximately $995 million. The total amount of cumulative receivables sold during the year ended December 31, 2014, since the acquisition of Taminco on December 5, 2014, was $70 million. As part of the program, the Company continues to service the receivables at market rates with no servicing assets or liabilities recognized. The amounts of sold receivables outstanding under the non-recourse factoring facilities were $106 million and $105 million at December 31, 2015 and December 31, 2014, respectively. The fair value of the receivables sold equals the carrying value at the time of the sale, and no gain or loss is recognized. The Company is exposed to a credit loss of up to 10 percent on sold receivables.

The Company did not have any 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 any such relationships.

## Treasury Stock

During 2015, the Company repurchased 1,477,660 shares of common stock for a cost of approximately $103 million. During 2014, the Company repurchased 4,945,452 shares of common stock for a cost of approximately $410 million.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In February 2014, the Company's Board of Directors authorized repurchase of up to an additional $1 billion 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. As of December 31, 2015, a total of 4,410,689 shares have been repurchased under this authorization for a total amount of $353 million.

In May 2013, the Company's Board of Directors authorized an additional repurchase of up to $300 million of the Company's outstanding common stock. The Company completed the $300 million of repurchases in March 2014, acquiring a total of 3,840,949 shares.

## Dividends

The Company's Board of Directors declared quarterly cash dividends of $0.40 per share in first, second, and third quarters and $0.46 per share in fourth quarter 2015 for a total of $1.66 per share in 2015. The Company's Board of Directors declared quarterly cash dividends of $0.35 per share in first, second, and third quarters and $0.40 per share in fourth quarter 2014 for a total of $1.45 per share in 2014. The Board of Directors declared quarterly cash dividends of $0.30 per share in first, second, and third quarters and $0.35 per share in fourth quarter 2013 for a total of $1.25 per share in 2013. The Board of Directors has declared a cash dividend of $0.46 per share during the first quarter of 2016, payable on April 1, 2016 to stockholders of record on March 15, 2016.

## ENVIRONMENTAL AND ASSET RETIREMENT OBLIGATIONS

Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP"), by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure and post-closure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in this Annual Report. Although the resolution of uncertainties related to these environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized, because of 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 or cash flows. The Company's total reserve for environmental contingencies was $336 million and $345 million at December 31, 2015 and December 31, 2014, respectively. At December 31, 2015 and December 31, 2014, this reserve included $8 million and $10 million, respectively, related to sites previously closed and impaired by Eastman and sites that have been divested by Eastman but for which the Company retains the environmental liability related to these sites.

The Company's total environmental reserve for environmental contingencies, including remediation costs and asset retirement obligations, is reflected in the Consolidated Statements of Financial Position as follows:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="2">December 31,</td></tr><tr><td>2015</td><td>2014</td></tr><tr><td>Environmental contingent liabilities, current</td><td>35</td><td>35</td></tr><tr><td>Environmental contingent liabilities, long-term</td><td>301</td><td>310</td></tr><tr><td>Total</td><td>336</td><td>345</td></tr></table>



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Remediation

The Company accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. This undiscounted accrued amount reflects liabilities expected to be paid out within 30 years and 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 government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for remediation costs ranged from the undiscounted minimum or best estimate of $308 million to the maximum of $516 million at December 31, 2015. The maximum estimated future costs are considered to be only reasonably possible and include the amounts accrued at December 31, 2015.

Reserves for environmental remediation that management believes to be probable and estimable are recognized as current and long-term liabilities in the Consolidated Statements of Financial Position. The amounts charged to pre-tax earnings for environmental remediation and related charges are included in cost of sales and other (income) charges, net, and are summarized below:

<table><tr><td>(Dollars in millions)</td><td>Environmental Remediation Liabilities</td></tr><tr><td>Balance at December 31, 2014</td><td>$ 324</td></tr><tr><td>Changes in estimates recorded to earnings and other</td><td>12</td></tr><tr><td>Cash reductions</td><td>(28)</td></tr><tr><td>Balance at December 31, 2015</td><td>$ 308</td></tr></table>

Costs of certain remediation projects included in the environmental reserve are subject to a cost-sharing arrangement with Monsanto Company ("Monsanto") under the provisions of the Amended and Restated Settlement Agreement effective February 28, 2008 (the "Effective Date"), into which Solutia entered with Monsanto upon its emergence from bankruptcy (the "Monsanto Settlement Agreement"). Under the provisions of the Monsanto Settlement Agreement, the Company shares responsibility with Monsanto for remediation at certain locations outside of the boundaries of plant sites in Anniston, Alabama and Sauget, Illinois (the "Shared Sites"). The Company is responsible for the funding of environmental liabilities at the Shared Sites up to a total of $325 million from the Effective Date. If remediation costs for the Shared Sites exceed this amount, such costs will thereafter be shared equally between the Company and Monsanto. Including payments by Solutia prior to its acquisition by Eastman, $71 million had been paid for costs at the Shared Sites as of December 31, 2015. As of December 31, 2015, an additional $205 million has been accrued for estimated future remediation costs at the Shared Sites, over a period of thirty years.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## Closure/Post-Closure

An asset retirement obligation is an obligation for the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying value of the long-lived assets and depreciated over their useful life. Environmental asset retirement obligations consist of primarily closure and post-closure costs. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a reserve is established for the anticipated future costs associated with the closure of the asset based on its expected life and the applicable regulatory closure requirements. These future costs are charged into earnings over the estimated useful life of the assets. For facilities that have environmental asset retirement obligations, the best estimate accrued to date over the facilities' estimated useful lives for these environmental asset retirement obligation costs were $28 million and $21 million at December 31, 2015 and December 31, 2014, respectively.

Reserves related to environmental asset retirement obligations accounted for less than 10 percent of the total environmental reserve at December 31, 2015. Currently, the Company's environmental assets are expected to reach the end of their useful lives at different times over the next 50 years. If the Company was to invest in numerous new environmental assets, or these assets were to require closure a significant number of years before the Company anticipated they would, the amortization on them would increase, and could have a material negative impact on the Company's financial condition and results of operations. The Company views the likelihood of this occurrence to be remote, and does not anticipate, based on its past experience with this type of planned remediation, that an additional accrual related to environmental assets will be necessary.

## Other

GAAP requires an entity to recognize a liability for a conditional asset retirement obligation ("CARO") when incurred if the liability can be reasonably estimated. The Company has performed an examination of various asset categories as of December 31, 2015. Although it may have CAROs at certain of its facilities, including, but not limited to, the potential for asbestos abatement activities, the Company is unable to determine potential settlement dates to be used in fair value calculations for estimating these obligations as a result of an absence of plans or expectations to undertake a major renovation or demolition project that would require the removal of asbestos. The Company continues to monitor these conditional obligations, as well as any new ones that may develop, and will recognize contingent liabilities associated with them when and to the extent that more detailed information becomes available concerning applicable retirement costs. The accrued obligations do not have a material impact on the Company's consolidated financial position, results of operations and cash flows.

The amounts charged to earnings related to environmental protection and improvement were $290 million, $319 million, and $285 million in 2015, 2014, and 2013, respectively. These amounts were primarily for operating costs associated with environmental protection equipment and facilities, but also included $61 million and $79 million in expenditures for engineering and construction in 2015 and 2014, respectively. Management anticipates that capital expenditures associated with boiler air emissions regulations will modestly increase average annual environmental capital expenditures over the next three years compared to recent historical levels. However, over that period the Company has decided to convert 50 percent of its steam and electric generation capacity at the Kingsport, Tennessee facility and the Springfield, Massachusetts facility to natural gas which the Company believes is more cost-efficient. Management does not believe that these expenditures will have a material effect on the Company's consolidated financial position or cash flows. Other than these planned capital expenditures at the Company's Kingsport, Tennessee and Springfield, Massachusetts facilities, the Company does not currently expect near-term environmental capital expenditures arising from requirements of recently promulgated environmental laws and regulations to materially increase the Company's planned level of annual capital expenditures for environmental control facilities.



# EASTMAN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company also has contractual obligations that include asset retirement obligations not associated with environmental liabilities. Eastman's non-environmental asset retirement obligations are primarily associated with the future closure of leased manufacturing assets at Pace, Florida and Oulu, Finland acquired from Taminco. These accrued non-environmental asset retirement obligations were $46 million and $44 million as of December 31, 2015 and December 31, 2014, respectively.

## INFLATION

In recent years, general economic inflation has not had a material adverse impact on Eastman's costs. The cost of raw materials is generally based on market prices, although derivative financial instruments are utilized, as appropriate, to mitigate short-term market price fluctuations. Management expects the volatility of raw material and energy costs to continue and the Company will continue to pursue pricing and hedging strategies and ongoing cost control initiatives to offset the effects. For additional information see Note 10, "Derivatives", to the Company's consolidated financial statements in this Annual Report.

## RECENTLY ISSUED ACCOUNTING STANDARDS

For information regarding the impact of recently issued accounting standards, see Note 23, "Recently Issued Accounting Standards", to the Company's consolidated financial statements in this Annual Report.

## OUTLOOK

Eastman is focused on consistent earnings growth through a market-driven approach that takes advantage of the Company's existing technology platforms, global market and manufacturing presence, leading positions in key end markets, vertically integrated manufacturing streams, and advantaged cost positions. This focus is supported by the Company's end-market and geographic diversity as it serves global markets and offers both original equipment manufacturing and after-market products in a variety of end markets, such as transportation, building and construction, and consumables.

Management expects that market prices for commodity products and raw material and energy costs will continue to be volatile, and will continue to evaluate and use pricing strategies to mitigate this volatility. Management expects that the significant declines in crude oil and certain related commodity prices will not be fully reflected in Company raw material and energy costs primarily because the positive impact will be largely offset in 2016 by our current commodity hedges, particularly for propane. Management also expects the strength of the U.S. dollar in recent periods to continue to have an overall negative impact on the Company's results, partially offset by hedging of those foreign currencies, particularly the euro.

For 2016, management also expects:

• operating results to continue to benefit from organic growth and improved product mix from continued market adoption of specialty products;

• cost reductions to result in annual cost savings of approximately $100 million;

• acquisition costs and tax synergies;

• cash generated by operating activities of approximately $1.6 billion;

• capital spending to be approximately $650 million;

• priorities for uses of available cash to include payment of the quarterly cash dividend to stockholders, repayment of debt, funding targeted growth initiatives, and repurchasing shares; and

- the full year effective tax rate on reported earnings before income tax to be approximately 25 percent, excluding non-core items.

Based on the foregoing expectations and assumptions, management expects that 2016 earnings per share excluding non-core and any non-recurring items will approach 2015 earnings per share of $7.28 excluding non-core items.

See “Forward Looking Statements” and "Risk Factors" below.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## FORWARD LOOKING STATEMENTS

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

Forward-looking statements are based upon certain underlying assumptions as of the date such statements were made. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. Forward-looking statements and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. The most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements are identified and discussed under “Risk Factors” below.

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

## RISK FACTORS

In addition to the factors described elsewhere in this Annual Report, the following are the most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements made in this Annual Report and elsewhere from time to time. See "Forward Looking Statements".



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Continued uncertain 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 were affected by the impact of the last global recession, including the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that affected the global economy. Continuing deterioration and weakness of the global economy and financial markets and uncertainty over timing and extent of recovery have adversely affected the Company's results of operations, financial condition, and cash flows. In addition, 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.

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 market fluctuations in raw material and energy costs. These risk mitigation measures cannot eliminate all exposure to market fluctuations and have from time-to-time reduced the positive impact of unexpected decreases of the market price of purchased raw materials. 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.

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

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

The Company's business is subject to operating risks common to chemical manufacturing businesses, including cyber risks, any of which could disrupt manufacturing operations or related infrastructure and adversely affect results of operations.

As a global specialty chemicals manufacturing company, our business is subject to operating risks common to chemical manufacturing, storage, handling, and transportation including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases. Significant limitation on the Company's ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse effect on the Company's sales revenue, costs, results of operations, and financial condition. Disruptions could occur due to internal factors such as computer or equipment malfunction (accidental or intentional), operator error, or process failures; or external factors such as computer or equipment malfunction at third-party service providers, natural disasters, pandemic illness, changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber attacks, or breakdown or degradation of transportation infrastructure used for delivery of supplies to the Company or for delivery of products to customers. The Company has in the past experienced cyber attacks and breaches of its computer information systems, and although none of these has had a material adverse effect on the Company's operations, no assurances can be provided that any future disruptions due to these, or other, circumstances will not have a material effect on operations. Such disruptions could result in an unplanned event that could be significant in scale and could negatively impact operations, neighbors, and the environment, and could have a negative impact on the Company's results of operations.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Growth initiatives may not achieve desired business or financial objectives and may require a significant use of resources in excess of those estimated or budgeted for such initiatives.

The Company continues to identify and pursue growth opportunities through both organic growth initiatives and inorganic initiatives. These growth opportunities include development and commercialization or licensing of innovative new products and technologies and related employee leadership, expertise, and skill development and retention, 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 innovation, development and commercialization or licensing efforts, investments, or acquisitions and alliances (including integration of acquired businesses) will result in financially successful commercialization of products, or acceptance by existing or new customers, or successful entry into new markets or otherwise achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations. There also can be no assurance regarding the timing of completion of proposed acquisitions or licensing, expected benefits of proposed acquisitions or licensing, completion of integration plans, and synergies therefrom. There also can be no assurance that capital projects for 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 or current investments and projects.

Significant acquisitions expose the Company to risks and uncertainties, the occurrence of any of which could materially adversely affect the Company's business, financial condition, and results of operations.

While acquisitions have been and continue to be a part of the Company's growth strategy, acquisitions of large companies (such as the acquisition of Taminco and Solutia) subject the Company to a number of risks and uncertainties, the occurrence of any of which could have a material adverse effect on Eastman. These include, but are not limited to the possibilities that the financial performance of the acquired business may be significantly worse than expected; that significant additional indebtedness may constrain the Company's ability to access the credit and capital markets at attractive interest rates and favorable terms, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives; that the Company may not be able to achieve the cost, revenue, tax, or other "synergies" expected from any acquisition, or that there may be delays in achieving any such synergies; that management's time and effort may be dedicated to the new business resulting in a loss of focus on the successful operation of the Company's existing businesses; and that the Company may be required to expend significant additional resources in order to integrate any acquired business into Eastman or that the integration efforts will not achieve the expected benefits.



# MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s substantial global operations subject it to risks of doing business in foreign countries, which could adversely affect its business, financial condition and results of operations.

More than half of the Company’s sales for 2015 were to customers outside of North America. The Company expects sales from international markets to continue to represent a significant portion of the Company’s sales. Also, a significant portion of manufacturing capacity is located outside of the United States. Accordingly, the Company’s business is subject to risks related to the differing legal, political, cultural, social and regulatory requirements and economic conditions of many jurisdictions. Fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided in foreign countries. In addition, foreign countries may impose additional withholding taxes or otherwise tax Eastman’s foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls. Certain legal and political risks are also inherent in the operation of a company with Eastman’s global scope. For example, it may be more difficult for Eastman to enforce its agreements or collect receivables through foreign legal systems. There is a risk that foreign governments may nationalize private enterprises in certain countries where Eastman operates. Social and cultural norms in certain countries may not support compliance with Eastman’s corporate policies including those that require compliance with substantive laws and regulations. Also, changes in general economic and political conditions in countries where Eastman operates are a risk to the Company’s financial performance. As Eastman continues to operate its business globally, its success will depend, in part, on its ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to its multinational operations will not have an adverse effect on Eastman’s business, financial condition or results of operations.

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

The Company and its 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. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. For example, any amount accrued for environmental matters 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 government enforcement action, or changes in health, safety, environmental, chemical control regulations, and testing requirements could result in higher costs. Specifically, 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 of greenhouse gas emissions and energy policy, 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 other forward-looking statements and related disclosures made by the Company in this Annual Report and elsewhere from time to time, represents management's best judgment as of the date the information is given. The Company does not 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.



# EASTMANN

## QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Eastman has exposure to various market risks principally due to changes in foreign currency exchange rates, the pricing of various commodities, and interest rates. In an effort to manage these risks, the Company employs various strategies, including pricing, inventory management, and hedging. The Company enters into derivative contracts which are governed by policies, procedures, and internal processes set forth by its Board of Directors.

The Company determines its exposures to market risk by utilizing sensitivity analyses, which measure the potential losses in fair value resulting from one or more selected hypothetical changes in foreign currency exchange rates, commodity prices, or interest rates.

Due to the Company's operating cash flows and borrowings denominated in foreign currencies, the Company is exposed to market risk from changes in foreign currency exchange rates. The Company continually evaluates its foreign currency exposure based on current market conditions and the locations in which the Company conducts business. The Company manages most foreign currency exposures on a consolidated basis, which allows it to net certain exposures and take advantage of natural offsets. In order to mitigate foreign currency risk, the Company from time to time enters into derivative transactions to hedge the cash flows related to certain sales and purchase transactions expected within no more than five years and denominated in foreign currencies, and enters into forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. The gains and losses on these contracts offset changes in the value of related exposures. It is the Company's policy to enter into foreign currency derivative financial instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency derivative financial instruments for speculative purposes. At December 31, 2015, the market risk associated with certain cash flows denominated in certain foreign currencies assuming a 10 percent adverse move in the U.S. dollar relative to these foreign currencies was $67 million, with an additional $7 million exposure for each additional one percentage point adverse change in those foreign currency rates. At December 31, 2014, the market risk associated with cash flows denominated in certain foreign currencies assuming a 10 percent adverse move in the U.S. dollar relative to those currencies was $100 million, with an additional $10 million exposure for each additional one percentage point adverse change in those exchange rates. Since the Company utilizes currency-sensitive derivative instruments for hedging anticipated foreign currency transactions, a loss in fair value from those instruments is generally offset by an increase in the value of the underlying anticipated transactions.

The Company is exposed to fluctuations in market prices for certain of its raw materials and energy, as well as contract sales of certain commodity products. To mitigate short-term fluctuations in market prices for certain commodities, principally propane, ethane, natural gas, paraxylene, ethylene, and benzene, as well as selling prices for ethylene, the Company from time and time enters into derivative transactions. At December 31, 2015 and December 31, 2014, the market risk associated with these derivative contracts, assuming an instantaneous parallel shift in the underlying commodity price of 10 percent and no corresponding change in the selling price of finished goods, was $41 million and $71 million, respectively, with an additional $4 million and $7 million, respectively, of exposure for each one percentage point move in closing price thereafter. The decrease in market risk in 2015 compared to 2014 was due to a smaller commodity derivative portfolio at December 31, 2015.

The Company is exposed to interest rate risks primarily as a result of its borrowing and investing activities, which include long-term borrowings used to maintain liquidity and to fund its business operations and capital requirements. The nature and amount of the Company's long-term and short-term debt may vary from time to time as a result of business requirements, market conditions, and other factors. The Company manages global interest rate exposure as part of our regular operational and financing strategies. The Company had variable interest rate borrowings (including credit facility borrowings and commercial paper borrowings) of $980 million and $1.2 billion at December 31, 2015 and 2014, respectively. These borrowings represented 15 percent and 17 percent of total outstanding debt and bore average interest rates of 1.17 percent and 1.23 percent at December 31, 2015 and 2014, respectively. A hypothetical 10 percent increase in the average interest rate applicable to these borrowings would change our annualized interest expense by approximately $1 million and $2 million as of December 31, 2015 and 2014, respectively.



## EASTMAN

The Company may enter into interest rate swaps, collars, or similar instruments with the objective of reducing interest rate volatility relating to our borrowing costs. As of December 31, 2015 and 2014, the Company had interest rate swaps outstanding with notional values totaling $500 million and $775 million, respectively. For purposes of calculating the market risks associated with the fair value of interest-rate-sensitive instruments, the Company uses a hypothetical 10 percent increase in interest rates. The corresponding market risk associated with interest rate swaps hedging the interest rate risk for the future issuance of debt was $10 million at December 31, 2015. The corresponding market risk associated with interest rate swaps for the future issuance of debt and interest rate swaps hedging the interest rate risk on the 3.6% bonds maturing 2022 was $6 million at December 31, 2014.



## EASTMAN

## FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
Management's Responsibility for Financial Statements 50
Report of Independent Registered Public Accounting Firm 51
Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings 52
Consolidated Statements of Financial Position 54
Consolidated Statements of Cash Flows 55
Notes to the Audited Consolidated Financial Statements
Note 1. Significant Accounting Policies 56
Note 2. Acquisitions 63
Note 3. Inventories 69
Note 4. Properties and Accumulated Depreciation 69
Note 5. Goodwill and Other Intangible Assets 70
Note 6. Equity Investments 71
Note 7. Payables and Other Current Liabilities 72
Note 8. Provision for Income Taxes 73
Note 9. Borrowings 77
Note 10. Derivatives 79
Note 11. Retirement Plans 84
Note 12. Commitments 94
Note 13. Environmental Matters and Asset Retirement Obligations 95
Note 14. Legal Matters 97
Note 15. Stockholders' Equity 98
Note 16. Asset Impairments and Restructuring Charges, Net 101
Note 17. Other (Income) Charges, Net 104
Note 18. Share-Based Compensation Plans and Awards 104
Note 19. Supplemental Cash Flow Information 107
Note 20. Segment Information 108
Note 21. Quarterly Sales and Earnings Data - Unaudited 112
Note 22. Reserve Rollforwards 113
Note 23. Recently Issued Accounting Standards 114



# EASTMAN

## MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the preparation and integrity of the accompanying consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company") appearing on pages 52 through 115. Eastman has prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States, and the statements of necessity include some amounts that are based on management's best estimates and judgments.

Eastman's accounting systems include extensive internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties, and are monitored through a comprehensive internal audit program. The Company's policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that its business practices throughout the world are to be conducted in a manner that is above reproach.

The accompanying consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, who were responsible for conducting their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Their report is included herein.

The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of non-management Board members. The independent registered public accounting firm and internal auditors have full and free access to the Audit Committee. The Audit Committee meets periodically with PricewaterhouseCoopers LLP and Eastman's director of internal auditing, both privately and with management present, to discuss accounting, auditing, policies and procedures, internal controls, and financial reporting matters.

/s/ Mark J. Costa

Mark J. Costa
Chief Executive Officer

/s/ Curtis E. Espeland

Curtis E. Espeland
Executive Vice President and
Chief Financial Officer

February 25, 2016



# Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Eastman Chemical Company

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Eastman Chemical Company (the "Company") and its subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 23 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in 2015.

A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



## CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS

<table><tr><td rowspan="2">(Dollars in millions, except per share amounts)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Sales</td><td>$ 9,648</td><td>$ 9,527</td><td>$ 9,350</td></tr><tr><td>Cost of sales</td><td>7,068</td><td>7,306</td><td>6,574</td></tr><tr><td>Gross profit</td><td>2,580</td><td>2,221</td><td>2,776</td></tr><tr><td>Selling, general and administrative expenses</td><td>762</td><td>755</td><td>645</td></tr><tr><td>Research and development expenses</td><td>251</td><td>227</td><td>193</td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>183</td><td>77</td><td>76</td></tr><tr><td>Operating earnings</td><td>1,384</td><td>1,162</td><td>1,862</td></tr><tr><td>Net interest expense</td><td>263</td><td>187</td><td>180</td></tr><tr><td>Other (income) charges, net</td><td>(8)</td><td>(15)</td><td>3</td></tr><tr><td>Earnings from continuing operations before income taxes</td><td>1,129</td><td>990</td><td>1,679</td></tr><tr><td>Provision for income taxes from continuing operations</td><td>275</td><td>235</td><td>507</td></tr><tr><td>Earnings from continuing operations</td><td>854</td><td>755</td><td>1,172</td></tr><tr><td>Earnings from discontinued operations, net of tax</td><td>—</td><td>2</td><td>—</td></tr><tr><td>Net earnings</td><td>854</td><td>757</td><td>1,172</td></tr><tr><td>Less: Net earnings attributable to noncontrolling interest</td><td>6</td><td>6</td><td>7</td></tr><tr><td>Net earnings attributable to Eastman</td><td>$ 848</td><td>$ 751</td><td>$ 1,165</td></tr><tr><td>Amounts attributable to Eastman stockholders</td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations, net of tax</td><td>$ 848</td><td>$ 749</td><td>$ 1,165</td></tr><tr><td>Earnings from discontinued operations, net of tax</td><td>—</td><td>2</td><td>—</td></tr><tr><td>Net earnings attributable to Eastman stockholders</td><td>$ 848</td><td>$ 751</td><td>$ 1,165</td></tr><tr><td>Basic earnings per share attributable to Eastman</td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations</td><td>$ 5.71</td><td>$ 5.01</td><td>$ 7.57</td></tr><tr><td>Earnings from discontinued operations</td><td>—</td><td>0.02</td><td>—</td></tr><tr><td>Basic earnings per share attributable to Eastman</td><td>$ 5.71</td><td>$ 5.03</td><td>$ 7.57</td></tr><tr><td>Diluted earnings per share attributable to Eastman</td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations</td><td>$ 5.66</td><td>$ 4.95</td><td>$ 7.44</td></tr><tr><td>Earnings from discontinued operations</td><td>—</td><td>0.02</td><td>—</td></tr><tr><td>Diluted earnings per share attributable to Eastman</td><td>$ 5.66</td><td>$ 4.97</td><td>$ 7.44</td></tr></table>



## CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS (continued)

<table><tr><td rowspan="2">(Dollars in millions, except per share amounts)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Comprehensive Income</td><td></td><td></td><td></td></tr><tr><td>Net earnings including noncontrolling interest</td><td>$     854</td><td>$     757</td><td>$     1,172</td></tr><tr><td>Other comprehensive income (loss), net of tax</td><td></td><td></td><td></td></tr><tr><td>Change in cumulative translation adjustment</td><td>(216)</td><td>(201)</td><td>28</td></tr><tr><td>Defined benefit pension and other postretirement benefit plans:</td><td></td><td></td><td></td></tr><tr><td>Prior service credit arising during the period</td><td>87</td><td>—</td><td>29</td></tr><tr><td>Amortization of unrecognized prior service credits included in net periodic costs</td><td>(19)</td><td>(17)</td><td>(16)</td></tr><tr><td>Derivatives and hedging:</td><td></td><td></td><td></td></tr><tr><td>Unrealized gain (loss) during period</td><td>(48)</td><td>(230)</td><td>6</td></tr><tr><td>Reclassification adjustment for (gains) losses included in net income, net</td><td>83</td><td>—</td><td>1</td></tr><tr><td>Total other comprehensive income (loss), net of tax</td><td>(113)</td><td>(448)</td><td>48</td></tr><tr><td>Comprehensive income including noncontrolling interest</td><td>741</td><td>309</td><td>1,220</td></tr><tr><td>Comprehensive income attributable to noncontrolling interest</td><td>6</td><td>6</td><td>7</td></tr><tr><td>Comprehensive income attributable to Eastman</td><td>$     735</td><td>$     303</td><td>$     1,213</td></tr><tr><td>Retained Earnings</td><td></td><td></td><td></td></tr><tr><td>Retained earnings at beginning of period</td><td>$     4,545</td><td>$     4,012</td><td>$     3,038</td></tr><tr><td>Net earnings attributable to Eastman</td><td>848</td><td>751</td><td>1,165</td></tr><tr><td>Cash dividends declared</td><td>(247)</td><td>(218)</td><td>(191)</td></tr><tr><td>Retained earnings at end of period</td><td>$     5,146</td><td>$     4,545</td><td>$     4,012</td></tr></table>

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



## CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

<table><tr><td>(Dollars in millions, except per share amounts)</td><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Current assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 293</td><td>$ 214</td></tr><tr><td>Trade receivables, net</td><td>792</td><td>936</td></tr><tr><td>Miscellaneous receivables</td><td>246</td><td>264</td></tr><tr><td>Inventories</td><td>1,479</td><td>1,509</td></tr><tr><td>Other current assets</td><td>68</td><td>250</td></tr><tr><td>Total current assets</td><td>2,878</td><td>3,173</td></tr><tr><td>Properties</td><td></td><td></td></tr><tr><td>Properties and equipment at cost</td><td>11,234</td><td>11,026</td></tr><tr><td>Less: Accumulated depreciation</td><td>6,104</td><td>5,939</td></tr><tr><td>Net properties</td><td>5,130</td><td>5,087</td></tr><tr><td>Goodwill</td><td>4,518</td><td>4,486</td></tr><tr><td>Intangible assets, net of accumulated amortization</td><td>2,650</td><td>2,905</td></tr><tr><td>Other noncurrent assets</td><td>435</td><td>421</td></tr><tr><td>Total assets</td><td>$ 15,611</td><td>$ 16,072</td></tr><tr><td>Liabilities and Stockholders&#x27; Equity</td><td></td><td></td></tr><tr><td>Current liabilities</td><td></td><td></td></tr><tr><td>Payables and other current liabilities</td><td>$ 1,625</td><td>$ 1,721</td></tr><tr><td>Borrowings due within one year</td><td>431</td><td>301</td></tr><tr><td>Total current liabilities</td><td>2,056</td><td>2,022</td></tr><tr><td>Long-term borrowings</td><td>6,608</td><td>7,248</td></tr><tr><td>Deferred income tax liabilities</td><td>928</td><td>946</td></tr><tr><td>Post-employment obligations</td><td>1,297</td><td>1,498</td></tr><tr><td>Other long-term liabilities</td><td>701</td><td>768</td></tr><tr><td>Total liabilities</td><td>11,590</td><td>12,482</td></tr><tr><td>Commitments and contingencies (Note 12)</td><td></td><td></td></tr><tr><td>Stockholders&#x27; equity</td><td></td><td></td></tr><tr><td>Common stock ($0.01 par value per share - 350,000,000 shares authorized; shares issued - 216,899,964 and 216,256,971 for 2015 and 2014, respectively)</td><td>2</td><td>2</td></tr><tr><td>Additional paid-in capital</td><td>1,863</td><td>1,817</td></tr><tr><td>Retained earnings</td><td>5,146</td><td>4,545</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(390)</td><td>(277)</td></tr><tr><td></td><td>6,621</td><td>6,087</td></tr><tr><td>Less: Treasury stock at cost (69,137,973 shares for 2015 and 67,660,313 shares for 2014)</td><td>2,680</td><td>2,577</td></tr><tr><td>Total Eastman stockholders&#x27; equity</td><td>3,941</td><td>3,510</td></tr><tr><td>Noncontrolling interest</td><td>80</td><td>80</td></tr><tr><td>Total equity</td><td>4,021</td><td>3,590</td></tr><tr><td>Total liabilities and stockholders&#x27; equity</td><td>$ 15,611</td><td>$ 16,072</td></tr></table>

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



## CONSOLIDATED STATEMENTS OF CASH FLOWS

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Operating activities</td><td></td><td></td><td></td><td></td></tr><tr><td>Net earnings</td><td>$     854</td><td>$     757</td><td>$     1,172</td><td></td></tr><tr><td>Adjustments to reconcile net earnings to net cash provided by operating activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Depreciation and amortization</td><td>571</td><td>450</td><td>433</td><td></td></tr><tr><td>Asset impairment charges</td><td>107</td><td>52</td><td>28</td><td></td></tr><tr><td>Gains on sale of assets</td><td>—</td><td>(5)</td><td>—</td><td></td></tr><tr><td>Provision for deferred income taxes</td><td>107</td><td>99</td><td>331</td><td></td></tr><tr><td>Mark-to-market (gain) loss on pension and other postretirement benefit plans</td><td>115</td><td>304</td><td>(383)</td><td></td></tr><tr><td>Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:</td><td></td><td></td><td></td><td></td></tr><tr><td>(Increase) decrease in trade receivables</td><td>114</td><td>19</td><td>(38)</td><td></td></tr><tr><td>(Increase) decrease in inventories</td><td>(26)</td><td>(61)</td><td>(6)</td><td></td></tr><tr><td>Increase (decrease) in trade payables</td><td>(102)</td><td>(30)</td><td>(2)</td><td></td></tr><tr><td>Pension and other postretirement contributions (in excess of) less than expenses</td><td>(259)</td><td>(165)</td><td>(149)</td><td></td></tr><tr><td>Variable compensation (in excess of) less than expenses</td><td>71</td><td>27</td><td>82</td><td></td></tr><tr><td>Other items, net</td><td>60</td><td>(39)</td><td>(171)</td><td></td></tr><tr><td>Net cash provided by operating activities</td><td>1,612</td><td>1,408</td><td>1,297</td><td></td></tr><tr><td>Investing activities</td><td></td><td></td><td></td><td></td></tr><tr><td>Additions to properties and equipment</td><td>(652)</td><td>(593)</td><td>(483)</td><td></td></tr><tr><td>Proceeds from sale of assets and investments</td><td>4</td><td>13</td><td>31</td><td></td></tr><tr><td>Acquisitions and investments in joint ventures, net of cash acquired</td><td>(45)</td><td>(3,509)</td><td>—</td><td></td></tr><tr><td>Other items, net</td><td>—</td><td>(2)</td><td>(5)</td><td></td></tr><tr><td>Net cash used in investing activities</td><td>(693)</td><td>(4,091)</td><td>(457)</td><td></td></tr><tr><td>Financing activities</td><td></td><td></td><td></td><td></td></tr><tr><td>Net increase (decrease) in commercial paper and other borrowings</td><td>195</td><td>(190)</td><td>425</td><td></td></tr><tr><td>Proceeds from borrowings</td><td>250</td><td>3,565</td><td>150</td><td></td></tr><tr><td>Repayment of borrowings</td><td>(950)</td><td>(125)</td><td>(1,105)</td><td></td></tr><tr><td>Dividends paid to stockholders</td><td>(238)</td><td>(210)</td><td>(140)</td><td></td></tr><tr><td>Treasury stock purchases</td><td>(103)</td><td>(410)</td><td>(238)</td><td></td></tr><tr><td>Dividends paid to noncontrolling interests</td><td>(6)</td><td>(9)</td><td>(10)</td><td></td></tr><tr><td>Proceeds from stock option exercises and other items, net</td><td>20</td><td>43</td><td>59</td><td></td></tr><tr><td>Net cash (used in) provided by financing activities</td><td>(832)</td><td>2,664</td><td>(859)</td><td></td></tr><tr><td>Effect of exchange rate changes on cash and cash equivalents</td><td>(8)</td><td>(4)</td><td>7</td><td></td></tr><tr><td>Net change in cash and cash equivalents</td><td>79</td><td>(23)</td><td>(12)</td><td></td></tr><tr><td>Cash and cash equivalents at beginning of period</td><td>214</td><td>237</td><td>249</td><td></td></tr><tr><td>Cash and cash equivalents at end of period</td><td>$     293</td><td>$     214</td><td>$     237</td><td></td></tr></table>

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



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## 1. SIGNIFICANT ACCOUNTING POLICIES

## Financial Statement Presentation

The consolidated financial statements of Eastman and subsidiaries are prepared in conformity with accounting principles generally accepted ("GAAP") in the United States and of necessity include some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The consolidated financial statements include assets, liabilities, sales revenue, and expenses of all majority-owned subsidiaries and joint ventures in which a controlling interest is maintained. Eastman accounts for other joint ventures and investments in minority-owned companies where it exercises significant influence on the equity basis. Intercompany transactions and balances are eliminated in consolidation. Certain prior period data has been reclassified in the Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.

Information related to the Commonwealth Laminating and Coating, Inc., ("Commonwealth") acquisition completed on December 11, 2014, the Taminco Corporation ("Taminco") acquisition completed on December 5, 2014, the Knowlton Technologies, LLC ("Knowlton") acquisition completed on August 6, 2014, and the BP plc Global Aviation Turbine Engine Oil Business ("aviation turbine oil business") acquisition completed on June 2, 2014 is in Note 2, "Acquisitions". As of the date of acquisition, results of the acquired businesses are included in Eastman results.

## Cash and Cash Equivalents

Cash and cash equivalents include cash, time deposits, and readily marketable securities with original maturities of three months or less.

## Fair Value Measurements

The Company records recurring and non-recurring financial assets and liabilities as well as all non-financial assets and liabilities subject to fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.

## Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances are based on the number of days an individual receivable is delinquent and management's regular assessment of the financial condition of the Company's customers. The Company considers a receivable delinquent if it is unpaid after the terms of the related invoice have expired. The Company evaluates the allowance based on a monthly assessment of the aged receivables. Write-offs are recorded at the time a customer receivable is deemed uncollectible. Allowance for doubtful accounts was $13 million and $10 million at December 31, 2015 and 2014, respectively. The Company does not enter into receivables of a long-term nature, also known as financing receivables, in the normal course of business.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company assumed the rights and obligations under non-recourse factoring facilities as part of the acquisition of Taminco. The non-recourse factoring facilities have a combined limit of $173 million (the U.S. Dollar equivalent of the €158 million commitment amount as of December 31, 2015) and are committed until December 2017. These arrangements include receivables in the United States, Belgium, Germany, and Finland, and are subject to various eligibility requirements. The Company sells the receivables at face value but receives funding (approximately 85 percent) net of a deposit amount until collections are received from customers for the receivables sold. The total amounts of cumulative receivables sold in 2015 were approximately $995 million. The total amount of cumulative receivables sold during the year ended December 31, 2014, since the acquisition of Taminco on December 5, 2014 was $70 million. As part of the program, the Company continues to service the receivables at market rates with no servicing assets or liabilities recognized. The amounts of sold receivables outstanding under the non-recourse factoring facilities were $106 million and $105 million at December 31, 2015 and December 31, 2014, respectively. The fair value of the receivables sold equals the carrying value at the time of the sale, and no gain or loss is recognized. The Company is exposed to a credit loss of up to 10 percent on sold receivables.

## Inventories

Inventories are valued at the lower of cost or market. The Company determines the cost of most raw materials, work in process, and finished goods inventories in the United States and Switzerland by the last-in, first-out ("LIFO") method. The cost of all other inventories is determined by the average cost method, which approximates the first-in, first-out ("FIFO") method. The Company writes-down its inventories for estimated obsolescence or unmarketable inventory equal to the difference between the carrying value of inventory and the estimated market value based upon assumptions about future demand and market conditions.

## Properties

The Company records properties at cost. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. When Eastman retires or otherwise disposes of assets, it removes the cost of such assets and related accumulated depreciation from the accounts. The Company records any profit or loss on retirement or other disposition into earnings. Asset impairments are reflected as increases in accumulated depreciation for properties that have been placed in service. In instances when an asset has not been placed in service and is impaired, the associated costs are removed from the appropriate property accounts.

## Depreciation and Amortization

Depreciation expense is calculated based on historical cost and the estimated useful lives of the assets, generally using the straight-line method. Estimated useful lives for buildings and building equipment generally range from 20 to 50 years. Estimated useful lives generally ranging from 3 to 33 years are applied to machinery and equipment in the following categories: computer software (3 to 5 years); office furniture and fixtures and computer equipment (5 to 10 years); vehicles, railcars, and general machinery and equipment (5 to 20 years); and manufacturing-related improvements (20 to 33 years). Accelerated depreciation is reported when the estimated useful life is shortened and continues to be reported in cost of sales.

Amortization expense for definite-lived intangible assets is generally determined using a straight-line method over the estimated useful life of the asset.

For additional information, see Note 5, "Goodwill and Other Intangible Assets".



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## Computer Software Costs

Capitalized software costs are amortized primarily on a straight-line basis over three years, the expected useful life of such assets, beginning when the software project is substantially complete and placed in service. Capitalized software costs in 2015, 2014, and 2013 were approximately $2 million, $3 million, and $5 million, respectively, and consisted of costs to internally develop computer software used by the Company. During 2015, $5 million and during 2014 and 2013, $7 million, each period, of previously capitalized costs were amortized. At December 31, 2015 and 2014, unamortized capitalized software costs were $8 million and $11 million, respectively. Capitalized software costs are reflected in other noncurrent assets.

## Impairment of Long-Lived Assets

## Definite-lived Assets

Properties and equipment and definite-lived intangible assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of these long-lived assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is either salvage value determined through market analysis or alternative future use.

## Goodwill

The Company conducts testing of goodwill annually or when events and circumstances indicate an impairment may have occurred. The Company conducted annual goodwill impairment testing as of July 1. In fourth quarter 2015, the annual impairment testing date was changed to October 1. This change is in response to a change in the timing of corporate forecasting, a key input to the annual impairment testing process.

The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.

The Company uses an income approach and applies a fair value methodology based on discounted cash flows in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2015 goodwill impairment testing included projections of revenues, expenses, and cash flows determined using the Company's annual multi-year strategic plan and a market participant tax rate. The most critical assumptions are the estimated discount rate and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different determinations. In order to determine the discount rate, the Company uses a market perspective weighted average cost of capital ("WACC") approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value.

If the estimated fair value of a reporting unit is determined to be less than the carrying value of the net assets of the reporting unit including goodwill, additional steps, including an allocation of the estimated fair value to the assets and liabilities of the reporting unit, would be necessary to determine the amount, if any, of goodwill impairment.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## Indefinite-lived Intangible Assets

The Company conducts testing of indefinite-lived intangible assets annually or when impairment indicators arise, whichever comes first. The Company conducted annual indefinite-lived intangible assets impairment testing as of July 1. In fourth quarter 2015, the annual impairment testing date was changed to October 1. This change is in response to a change in the timing of the corporate forecasting process as the forecast is a key input to the annual impairment testing process.

The carrying value of indefinite-lived intangible assets is considered to be impaired when the fair value, as established by appraisal or based on discounted future cash flows of certain related products, is less than the respective carrying value.

Indefinite-lived intangible assets, consisting of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of the tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant weighted average cost of capital plus a risk premium. The carrying value of an indefinite-lived intangible asset is considered to be impaired when the estimated fair value is less than the carrying value of the tradename.

## Investments

The consolidated financial statements include the accounts of the Company and all its subsidiaries and entities/joint ventures in which a controlling interest is maintained.

Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis. Under the equity method of accounting, these investments are included in other noncurrent assets. The Company includes its share of earnings and losses of such investments in other (income) charges, net, and its share of other comprehensive income (loss) in the appropriate component of accumulated other comprehensive income (loss) in stockholders' equity.

## Pension and Other Postretirement Benefits

The Company maintains defined benefit pension plans that provide eligible employees with retirement benefits. Additionally, Eastman provides a subsidy toward life insurance, health care, and dental benefits for eligible retirees and a subsidy toward health care and dental benefits for retirees' eligible survivors. The costs and obligations related to these benefits reflect the Company's assumptions related to general economic conditions (particularly interest rates), expected return on plan assets, rate of compensation increase or decrease for employees, and health care cost trends. The cost of providing plan benefits depends on demographic assumptions including retirements, mortality, turnover, and plan participation.

Eastman's pension and other postretirement benefit plans costs consist of two elements: 1) ongoing costs recognized quarterly, which are comprised of service and interest costs, expected returns on plan assets, and amortization of prior service credits; and 2) mark-to-market ("MTM") gains and losses recognized annually, in the fourth quarter of each year, resulting from changes in actuarial assumptions for discount rates and the differences between actual and expected returns on plan assets. Any interim remeasurements triggered by a curtailment, settlement, or significant plan changes are recognized as an MTM adjustment in the quarter in which such remeasurement event occurs.

For additional information, see Note 11, "Retirement Plans".



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## Environmental Costs

The Company accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. This undiscounted accrued amount reflects liabilities expected to be paid out within 30 years and 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 government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs.

The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a reserve is established for the future costs anticipated to be associated with the closure of the site based on an expected life of the environmental assets and the applicable regulatory closure requirements. The asset retirement obligations are recognized in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These expenses are charged into earnings over the estimated useful life of the assets. Currently, the Company estimates the useful life of each individual asset up to 50 years. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, the expenses charged into earnings could increase or decrease. The Company also monitors conditional obligations and recognizes contingent liabilities associated with them when and to the extent that more detailed information becomes available concerning applicable retirement costs.

The current portion of accruals for environmental liabilities is included in payables and other current liabilities with the long-term portion included in other long-term liabilities. These accruals exclude claims for recoveries from insurance companies or other third parties. Environmental costs are capitalized if they extend the life of the related property, increase its capacity, and/or mitigate or prevent future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred.

For additional information see Note 13, "Environmental Matters and Asset Retirement Obligations".

## Derivative Financial Instruments

Derivative financial instruments are used by the Company when appropriate to manage its exposures to fluctuations in foreign currency exchange rates, certain contract sales prices, raw material and energy costs, and interest rates. These instruments are used to mitigate the risk that changes in exchange rates, sales prices, raw material and energy costs, or interest rates will adversely affect the eventual dollar cash flows resulting from the hedged transactions.

From time to time, the Company enters into currency option and forward contracts to hedge anticipated, but not yet committed, export sales and purchase transactions expected within no more than five years and denominated in foreign currencies (principally the euro and the Japanese yen); and forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. To mitigate fluctuations in the market prices of commodities and their effects on the cash costs of the underlying transactions expected over the next five years for propane, ethane, natural gas, paraxylene, and benzene (certain raw materials and energy used in the manufacturing process) and selling prices for ethylene, the Company may enter into option and forward contracts. From time to time, the Company also utilizes interest rate derivative instruments, primarily forward starting interest rate swaps and Treasury locks, to hedge the Company's exposure to movements in interest rates.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company's qualifying option and forward contracts are accounted for as hedges because the derivative instruments are designated and demonstrated to be effective as hedges of the underlying risks. Gains and losses resulting from effective hedges of existing liabilities, firm commitments, or anticipated transactions are deferred and recognized when the offsetting gains and losses are recognized on the related hedged items and are reported as a component of operating earnings. Derivative assets and liabilities are recorded at fair value.

The gains or losses on nonqualifying derivatives or derivatives that are not designated as hedges are marked to market and immediately recorded into earnings from continuing operations.

Deferred option premiums are included in the fair market value of the hedges. The related obligation for payment is generally included in other liabilities and is paid in the period in which the options are exercised or expire.

For additional information see Note 10, "Derivatives".

## Litigation and Contingent Liabilities

The Company and its operations from time to time are, and in the future may be, parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred.

## Revenue Recognition and Customer Incentives

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectability is reasonably assured. Revenue for products is recognized when title and risk of loss transfer to the customer.

The Company records estimated obligations for customer programs and incentive offerings, which consist primarily of revenue or volume-based amounts that a customer must achieve over a specified period of time, as a reduction of revenue from each underlying revenue transaction as the customer progresses toward goals specified in incentive agreements. These estimates are based on a combination of forecasts of customer sales and actual sales volume and revenues against established goals, the customer's current level of purchases, Eastern's knowledge of customer purchasing habits, and industry pricing practice. The incentive payment rate may be variable, based upon the customer reaching higher sales volume or revenue levels over a specified period of time in order to receive an agreed upon incentive payment.

## Shipping and Handling Fees and Costs

Shipping and handling fees related to sales transactions are billed to customers and are recorded as sales revenue. Shipping and handling costs incurred are recorded in cost of sales.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## Restructuring of Operations

The Company records restructuring charges incurred in connection with consolidation of operations, exited business or product lines, or shutdowns of specific sites that are expected to be substantially completed within twelve months. These restructuring charges are recorded as incurred, and are associated with site closures, legal and environmental matters, demolition, contract terminations, obsolete inventory, or other costs directly related to the restructuring. The Company records severance charges for employee separations when the separation is probable and reasonably estimable. In the event employees are required to perform future service, the Company records severance charges ratably over the remaining service period of those employees.

## Share-based Compensation

The Company recognizes compensation expense in the financial statements for stock options and other share-based compensation awards based upon the grant-date fair value over the substantive vesting period.

For additional information, see Note 18, "Share-Based Compensation Plans and Awards".

## Research and Development

All costs identified as research and development ("R&D") costs are charged to expense when incurred with the exception of third-party reimbursed and government-funded R&D. Expenses for third-party reimbursed and government-funded R&D are deferred until reimbursement is received to ensure appropriate matching of revenue and expense, provided specific criteria are met.

## Income Taxes

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except for subsidiaries in which earnings are deemed to be indefinitely reinvested.

The Company recognizes income tax positions that meet the more likely than not threshold and accrues interest related to unrecognized income tax positions which is recorded as a component of the income tax provision.

Accounting Standard ASU 2015-17, Income Taxes (Topic 740), effective for annual reporting periods beginning after December 15, 2016, requires the presentation of deferred income taxes such that deferred tax liabilities and assets are to be classified as noncurrent in a classified balance sheet. At December 31, 2015, the prospective adoption resulted in a reclassification from current to noncurrent deferred tax assets and deferred tax liabilities of $240 million and $12 million, respectively.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## Purchase Accounting

In general, the acquisition method of accounting requires recognition of assets acquired and liabilities assumed at their respective fair values at the date of acquisition. For assets and liabilities other than intangible assets and property, plant, and equipment, the Company estimates fair value using the exit price approach which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly market. An exit price is determined from the viewpoint of unrelated market participants as a whole, in the principal or most advantageous market, and may result in the Company valuing assets or liabilities at a fair value that is not reflective of the Company's intended use of the assets or liabilities. Any amount of the purchase price paid that is in excess of the estimated fair values of net assets acquired or liabilities assumed is recorded in the line item goodwill on the Company's consolidated balance sheets.

For intangible assets, the Company uses the income, market, or cost approach (or a combination thereof) for the valuation as appropriate, and uses valuation inputs in these models and analyses that are based on market participant assumptions. Management values property, plant, and equipment using the cost approach supported where available by observable market data which includes consideration of obsolescence. See Note 2, "Acquisitions". Management's judgment is used to determine the estimated fair values assigned to assets acquired and liabilities assumed, as well as asset lives for property, plant, and equipment and amortization periods for intangible assets, and can materially affect the Company's results of operations.

## 2. ACQUISITIONS

## Tamino Corporation

On December 5, 2014, the Company completed its acquisition of the Tamino Corporation ("Taminco"), a global specialty chemical company. In the acquisition, each outstanding share of Tamino common stock was cancelled and converted automatically into the right to receive $26.00 in cash ("Acquisition Consideration"). Additionally, each outstanding option to acquire shares of Tamino common stock issued under any of Tamino's equity incentive plans, whether or not then vested, was converted into the right to receive, in cash and for each share of Tamino common stock subject to such option, the amount by which the value of the Acquisition Consideration exceeded such option's exercise price. The fair value of total consideration transferred was $2.8 billion, consisting of cash of $1.7 billion, net of cash acquired, and repayment of Tamino's debt of $1.1 billion. The acquisition was accounted for as a business combination. Tamino's former specialty amines and crop protection businesses are now operated as part of the Additives & Functional Products ("AFP") segment and its former functional amines business is now operated as part of the Specialty Fluids & Intermediates ("SFI") segment. The businesses acquired from Tamino are providing additional opportunities for growth to Eastman in agriculture, personal care, coatings, and oil and gas markets.

The funding of the cash portion of the purchase price, repayment of Tamino's debt, and acquisition costs were provided primarily from borrowings, including the $2.0 billion net proceeds from the public offering of notes on November 20, 2014 and borrowings of $1.0 billion on December 5, 2014 under a five-year term loan agreement (the "Term Loan Agreement"). See Note 9, "Borrowings".



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the final purchase price allocation for the Taminco acquisition, all adjustments from preliminary values did not have a material impact on the Company's results of operations:

Assets acquired and liabilities assumed

<table><tr><td>(Dollars in millions)</td><td>As of December 5, 2014</td><td>2015 Net Adjustments to Fair Value</td><td>December 31, 2015</td></tr><tr><td>Current assets</td><td>$ 266</td><td>$ 1</td><td>$ 267</td></tr><tr><td>Properties and equipment</td><td>658</td><td>3</td><td>661</td></tr><tr><td>Intangible assets</td><td>1,002</td><td>(17)</td><td>985</td></tr><tr><td>Other noncurrent assets</td><td>37</td><td>5</td><td>42</td></tr><tr><td>Goodwill</td><td>1,509</td><td>46</td><td>1,555</td></tr><tr><td>Current liabilities</td><td>(161)</td><td>4</td><td>(157)</td></tr><tr><td>Long-term liabilities</td><td>(546)</td><td>(42)</td><td>(588)</td></tr><tr><td>Total purchase price, net of cash acquired</td><td>$ 2,765</td><td>$ —</td><td>$ 2,765</td></tr></table>

The Company used the income, market, or cost approach (or a combination thereof) for the valuation as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to Eastman in the principal or most advantageous market for the asset or liability. For certain items, the carrying value was determined to be a reasonable approximation of fair value based on information available to Eastman management. Current assets consist primarily of inventory, cash, and trade receivables. The fair value and gross contractual amounts trade receivables acquired from Taminco on December 5, 2014 was $94 million. Properties acquired included a number of manufacturing, sales, and distribution sites and related facilities, land and leased sites that include leasehold improvements, and machinery and equipment for use in manufacturing operations. Management valued properties using the cost approach supported where available by observable market data which includes consideration of obsolescence.

Acquired intangible assets are definite-lived assets and consist primarily of customer relationships, developed technologies, and contracts. Customer relationships acquired are in industries such as agriculture and personal care. The Company has concluded that it has a favorable methanol supply contract. In addition, assets acquired include technologies related to many products protected by a number of existing patents and trade secrets. Management valued customer relationships using the excess from earnings method, contracts using the Black Scholes model, and developed technologies using the relief from royalty method. All valuation methods are forms of the income approach supported by observable market data for peer chemical companies.

## Intangible Assets acquired

<table><tr><td>(Dollars in millions)</td><td>Fair Value</td><td>Weighted-Average Amortization Period (Years)</td></tr><tr><td>Amortizable intangible assets</td><td></td><td></td></tr><tr><td>Customer relationships</td><td>$ 604</td><td>24</td></tr><tr><td>Developed technologies</td><td>201</td><td>17</td></tr><tr><td>Contracts</td><td>180</td><td>5</td></tr><tr><td>Total</td><td>$ 985</td><td></td></tr></table>



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Other noncurrent assets consist primarily of deferred tax assets and investments. In connection with the acquisition, the Company recorded goodwill, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of liabilities assumed. The goodwill is attributed primarily to Taminco as a going concern and the fair value of expected cost synergies and revenue growth from combining the Eastman and Taminco businesses. The going concern element represents the ability to earn a higher return on the combined assembled collection of assets and businesses of Taminco than if those assets and businesses were to be acquired and managed separately. Other relevant elements of goodwill are the benefits of access to certain markets and work force. Goodwill from the Taminco acquisition has been allocated to certain of the Company's reportable segments as set out in the table below. None of the goodwill is deductible for tax purposes.

<table><tr><td>Goodwill</td><td>Goodwill by Segment</td></tr><tr><td>(Dollars in millions)</td><td></td></tr><tr><td>Additives &amp; Functional Products</td><td>$ 916</td></tr><tr><td>Specialty Fluids &amp; Intermediates</td><td>639</td></tr><tr><td>Total</td><td>$ 1,555</td></tr></table>

Current liabilities consist primarily of trade payables, deferred tax liabilities, and accrued charges. Long-term liabilities are primarily deferred tax liabilities, pension and other postretirement welfare plan obligations, and asset retirement liabilities. Management also evaluated probable loss contingencies, including those for legal, asset retirement, and environmental matters, as prescribed under GAAP. Due to the lack of observable market inputs, assumed liabilities for asset retirement and environmental loss contingencies that were both probable and estimable were recorded based upon estimates of future cash outflows for such contingencies as of the acquisition date. See Note 13, "Environmental Matters and Asset Retirement Obligations", for more information.

In 2015 and 2014, the Company recognized $3 million and $14 million, respectively, in transaction costs, and $15 million and $1 million, respectively, in integration costs. In 2014 the Company recognized $13 million in pre-close financing costs related to the acquisition. Transaction costs and integration costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item and pre-close financing costs are included in the "Other (income) charges, net" and "Net interest expense" line items in the Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings. As required by purchase accounting, acquired inventories were marked to fair value. These inventories were sold in 2014 resulting in a $15 million increase in cost of sales.

Beginning December 2014, the Company's consolidated results of operations included the results of the acquired Taminco businesses. Since the date of the acquisition, sales revenue of $84 million and an operating loss of $9 million from the acquired Taminco businesses have been included in the Company's consolidated results of operations for 2014. The operating loss includes the additional costs of acquired inventories, transaction costs, integration costs, and pre-close financing costs.

The unaudited pro forma financial results for years ended December 31, 2014 and 2013 combine the consolidated results of Eastman and Taminco giving effect to the acquisition of Taminco as if it had been completed on January 1, 2013, the beginning of the comparable annual reporting period prior to the year of acquisition. Such unaudited pro forma financial results do not give pro forma effect to any other transaction or event. The unaudited pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisition. This unaudited pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the acquisition been completed as of January 1, 2013 or any other date.

The unaudited pro forma financial results include certain adjustments for additional depreciation and amortization expense based upon the fair value step-up and estimated useful lives of Taminco depreciable fixed assets and definite-life amortizable assets acquired in the transaction. The unaudited pro forma results also include adjustments to net interest expense. The provision for income taxes from continuing operations also has been adjusted for all periods, based upon the foregoing adjustments to historical results.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td rowspan="2">(Unaudited, dollars in millions)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2014</td><td>2013</td><td></td></tr><tr><td>Pro forma sales</td><td>$ 10,819</td><td>$ 10,550</td><td></td></tr><tr><td>Pro forma earnings from continuing operations</td><td>834</td><td>1,101</td><td></td></tr></table>

Unaudited pro forma earnings from continuing operations for 2013 have been adjusted to include certain items, such as pre-close financing, integration, and transaction costs historically recorded by Eastman and Taminco in 2014 and directly attributable to the acquisition, which will not have an ongoing impact. Additionally, the unaudited pro forma financial results for 2013 have been adjusted to reflect the additional costs of acquired inventories. These non-recurring costs have been eliminated from unaudited pro forma earnings from continuing operations for 2014.

## Commonwealth Laminating and Coating, Inc.

On December 11, 2014, the Company acquired Commonwealth Laminating and Coating, Inc. ("Commonwealth") for a total cash purchase price of $438 million. The acquisition was accounted for as a business combination and is reported in the Advanced Materials ("AM") segment. The acquisition of Commonwealth strengthens the Company's window film product portfolio, adds industry leading protective film technology, and increases scale cost efficiencies. There was no change to the final purchase price allocation from the preliminary allocation in the Company's 2014 Annual Report on Form 10-K, see Note 2, "Acquisitions", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.

The following table summarizes the final purchase price allocation for the Commonwealth acquisition. Adjustments from preliminary values did not have a material impact on the Company's results of operations:

Assets acquired and liabilities assumed

<table><tr><td>(Dollars in millions)</td><td>As of December 11, 2014</td></tr><tr><td>Current assets</td><td>$ 51</td></tr><tr><td>Machinery and equipment</td><td>38</td></tr><tr><td>Goodwill</td><td>274</td></tr><tr><td>Intangible assets</td><td>125</td></tr><tr><td>Long-term liabilities</td><td>(50)</td></tr><tr><td>Total purchase price</td><td>$ 438</td></tr></table>

Current assets consist primarily of inventory acquired. Machinery and equipment acquired included a manufacturing operation in Martinsville, Virginia. Management valued machinery and equipment using the cost approach supported by published industry sources.

Acquired intangible assets included customer relationships and developed technologies in the window film industry. Also acquired was the SunTek \( ^{®} \)  brand name that is business-to-business in nature. Management valued intangible assets using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data for peer chemical companies.



## Intangible Assets acquired

<table><tr><td>(Dollars in millions)</td><td>Fair Value</td><td>Weighted-Average Amortization Period (Years)</td></tr><tr><td>Amortizable intangible assets</td><td></td><td></td></tr><tr><td>Customer relationships</td><td>$ 72</td><td>14</td></tr><tr><td>Developed technologies</td><td>41</td><td>18</td></tr><tr><td>Indefinite-lived intangible asset</td><td></td><td></td></tr><tr><td>Brand name</td><td>12</td><td></td></tr><tr><td>Total</td><td>$ 125</td><td></td></tr></table>

In connection with this acquisition, the Company recorded goodwill equal to the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed. None of the goodwill is deductible for tax purposes.

In 2015 the Company did not incur any transaction costs. In 2014, the Company recognized $5 million in transaction costs. In 2015 and 2014, the Company recognized $7 million and $2 million, respectively, in integration costs. Transaction costs and integration costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item in the Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings. As required by purchase accounting, acquired inventories were marked to fair value. In 2015, the remaining portion of these inventories was sold resulting in an increase in cost of sales of $7 million. Approximately one fifth of these inventories were sold in December 2014 resulting in a $1 million increase in cost of sales.

Beginning in December 2014, the Company's consolidated results of operations included the results of Commonwealth. Based on applicable accounting and reporting guidance, the acquisition is not material to the Company's consolidated financial statements; therefore, pro forma financial information has not been presented.

## BP plc's Global Aviation Turbine Engine Oil Business

On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business ("aviation turbine oil business") for a total cash purchase price of $283 million. The acquisition was accounted for as a business combination and is reported in the SFI segment. In combination with Eastman's Skydrol \( ^{\circledR} \)  aviation hydraulic fluids business, the acquired aviation turbine oil business enables Eastman to better supply the global aviation industry.

There was no change to the final purchase price allocation from the preliminary allocation in the Company's 2014 Annual Report on Form 10-K, see Note 2, "Acquisitions", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the final purchase price allocation for the aviation turbine oil business acquisition. Adjustments from preliminary values did not have a material impact on the Company's results of operations:

Assets acquired and liabilities assumed

<table><tr><td>(Dollars in millions)</td><td>As of June 2, 2014</td></tr><tr><td>Current assets</td><td>$ 42</td></tr><tr><td>Machinery and equipment</td><td>10</td></tr><tr><td>Goodwill</td><td>92</td></tr><tr><td>Intangible assets</td><td>139</td></tr><tr><td>Total purchase price</td><td>$ 283</td></tr></table>

Current assets consist primarily of inventory acquired. Machinery and equipment acquired included manufacturing operations in Linden, New Jersey and technology resources in Naperville, Illinois. Management valued machinery and equipment using the cost approach supported by published industry sources.

In connection with this acquisition, the Company recorded goodwill equal to the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed. All goodwill is expected to be deductible for tax purposes.

Intangible assets acquired included brands that are business-to-business in nature. Also acquired were customer relationships in the aviation industry. Management valued intangible assets using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data for peer chemical companies.

Intangible Assets acquired

<table><tr><td>(Dollars in millions)</td><td>Fair Value</td><td>Weighted-Average Amortization Period (Years)</td></tr><tr><td>Amortizable intangible assets</td><td></td><td></td></tr><tr><td>Brands</td><td>$ 74</td><td>30</td></tr><tr><td>Customer relationships</td><td>65</td><td>16</td></tr><tr><td>Total</td><td>$ 139</td><td></td></tr></table>

In 2015, the Company did not incur any transaction costs. In 2014, the Company recognized $3 million in transaction costs. In 2015 and 2014, the Company recognized $1 million and $3 million, respectively, in integration costs. Transaction costs and integration costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item in the Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings. As required by purchase accounting, acquired inventories were marked to fair value. These inventories were sold in 2014 resulting in an $8 million increase in cost of sales.

Beginning in June 2014, the Company's consolidated results of operations included the results of the acquired aviation turbine oil business. Based on applicable accounting and reporting guidance, the acquisition is not material to the Company's consolidated financial statements; therefore, pro forma financial information has not been presented.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## Knowlton Technologies, LLC

On August 6, 2014, the Company acquired Knowlton Technologies, LLC. ("Knowlton"), a leader in the design, accelerated prototyping, and manufacture of wet-laid nonwovens in filtration, friction, and custom designed composite webs, for a total cash purchase price of $42 million. The acquisition was accounted for as a business combination. The acquired Knowlton business is a developing business of the Eastman \( ^{\circledR} \)  microfiber technology platform, the financial results of which are not identifiable to an operating segment and are shown as "other" operating earnings (loss). Current assets consist primarily of $14 million in accounts receivable and inventory acquired. Management valued properties and equipment, totaling $19 million, using the cost approach supported where available by observable market data which includes consideration of obsolescence. Goodwill of $7 million, which represents the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed, is expected to be deductible for tax purposes. Acquired intangible assets of $6 million consist primarily of developed technologies with an amortization period of 15 years. Management valued intangible assets using the relief from royalty method, a form of the income approach supported by observable market data from peer chemical companies. Current liabilities of $4 million consist primarily of accounts payable. Values assigned were finalized in 2014.

## 3. INVENTORIES

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="2">December 31,</td></tr><tr><td>2015</td><td>2014</td></tr><tr><td>Finished goods</td><td>$ 1,063</td><td>$ 1,130</td></tr><tr><td>Work in process</td><td>212</td><td>288</td></tr><tr><td>Raw materials and supplies</td><td>500</td><td>553</td></tr><tr><td>Total inventories at FIFO or average cost</td><td>1,775</td><td>1,971</td></tr><tr><td>Less: LIFO reserve</td><td>296</td><td>462</td></tr><tr><td>Total inventories</td><td>$ 1,479</td><td>$ 1,509</td></tr></table>

Inventories valued on the LIFO method were approximately 60 percent and 55 percent of total inventories as of December 31, 2015 and 2014, respectively.

## 4. PROPERTIES AND ACCUMULATED DEPRECIATION

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">December 31,</td></tr><tr><td>2015</td><td>2014</td><td></td></tr><tr><td>Properties</td><td></td><td></td><td></td></tr><tr><td>Land</td><td>$ 163</td><td>$ 175</td><td></td></tr><tr><td>Buildings and building equipment</td><td>1,148</td><td>1,128</td><td></td></tr><tr><td>Machinery and equipment</td><td>9,333</td><td>9,252</td><td></td></tr><tr><td>Construction in progress</td><td>590</td><td>471</td><td></td></tr><tr><td>Properties and equipment at cost</td><td>$ 11,234</td><td>$ 11,026</td><td></td></tr><tr><td>Less: Accumulated depreciation</td><td>6,104</td><td>5,939</td><td></td></tr><tr><td>Net properties</td><td>$ 5,130</td><td>$ 5,087</td><td></td></tr></table>

Depreciation expense was $402 million, $355 million, and $345 million for 2015, 2014, and 2013, respectively.

Cumulative construction-period interest of $163 million and $162 million, reduced by accumulated depreciation of $107 million and $103 million, is included in net properties at December 31, 2015 and 2014, respectively.



Interest capitalized during 2015, 2014, and 2013 was $7 million, $7 million, and $4 million, respectively.

## 5. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill follow:

<table><tr><td>(Dollars in millions)</td><td>Additives &amp; Functional Products</td><td>Adhesives &amp; Plasticizers</td><td>Advanced Materials</td><td>Specialty Fluids &amp; Intermediates</td><td>Other Segments</td><td>Total</td></tr><tr><td>As of December 31, 2013</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Goodwill</td><td>$ 948</td><td>$ 167</td><td>$ 1,040</td><td>$ 514</td><td>$ 14</td><td>$ 2,683</td></tr><tr><td>Accumulated impairment losses</td><td>—</td><td>(35)</td><td>—</td><td>—</td><td>(11)</td><td>(46)</td></tr><tr><td>Goodwill, net</td><td>$ 948</td><td>$ 132</td><td>$ 1,040</td><td>$ 514</td><td>$ 3</td><td>$ 2,637</td></tr><tr><td>Additions</td><td>908</td><td>—</td><td>274</td><td>693</td><td>7</td><td>1,882</td></tr><tr><td>Adjustments resulting from reorganizations</td><td>15</td><td>(9)</td><td>(9)</td><td>—</td><td>3</td><td>—</td></tr><tr><td>Currency translation adjustments</td><td>(13)</td><td>(5)</td><td>(8)</td><td>(7)</td><td>—</td><td>(33)</td></tr><tr><td>As of December 31, 2014</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Goodwill</td><td>$ 1,858</td><td>$ 153</td><td>$ 1,297</td><td>$ 1,200</td><td>$ 24</td><td>$ 4,532</td></tr><tr><td>Accumulated impairment losses</td><td>—</td><td>(35)</td><td>—</td><td>—</td><td>(11)</td><td>(46)</td></tr><tr><td>Goodwill, net</td><td>$ 1,858</td><td>$ 118</td><td>$ 1,297</td><td>$ 1,200</td><td>$ 13</td><td>$ 4,486</td></tr><tr><td>Impairments</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(3)</td><td>(3)</td></tr><tr><td>Adjustments resulting from the finalization of fair values related to the Taminco acquisition</td><td>8</td><td>—</td><td>—</td><td>38</td><td>—</td><td>46</td></tr><tr><td>Currency translation adjustments and other</td><td>(1)</td><td>(7)</td><td>(4)</td><td>1</td><td>—</td><td>(11)</td></tr><tr><td>As of December 31, 2015</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Goodwill</td><td>$ 1,865</td><td>$ 146</td><td>$ 1,293</td><td>$ 1,239</td><td>$ 24</td><td>$ 4,567</td></tr><tr><td>Accumulated impairment losses</td><td>—</td><td>(35)</td><td>—</td><td>—</td><td>(14)</td><td>(49)</td></tr><tr><td>Goodwill, net</td><td>$ 1,865</td><td>$ 111</td><td>$ 1,293</td><td>$ 1,239</td><td>$ 10</td><td>$ 4,518</td></tr></table>

As a result of the purchases of Taminco, Commonwealth, the aviation turbine oil business, and Knowlton during 2014, the Company recorded goodwill of $1,555 million, $274 million, $92 million, and $7 million, respectively.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td rowspan="2"></td><td rowspan="2">Estimated Useful Life in Years</td><td rowspan="2">Gross Carrying Value</td><td colspan="3">December 31, 2015</td><td colspan="3">December 31, 2014</td></tr><tr><td>Accumulated Amortization</td><td>Net Carrying Value</td><td>Gross Carrying Value</td><td>Accumulated Amortization</td><td>Net Carrying Value</td><td></td></tr><tr><td>(Dollars in millions)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Amortizable intangible assets:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Customer relationships</td><td>15 - 25</td><td>$ 1,547</td><td>$ 187</td><td>$ 1,360</td><td>$ 1,575</td><td>$ 114</td><td>$ 1,461</td><td></td></tr><tr><td>Technology</td><td>7 - 20</td><td>680</td><td>146</td><td>534</td><td>705</td><td>96</td><td>609</td><td></td></tr><tr><td>Contracts</td><td>5</td><td>180</td><td>39</td><td>141</td><td>179</td><td>3</td><td>176</td><td></td></tr><tr><td>Other</td><td>5 - 37</td><td>99</td><td>10</td><td>89</td><td>114</td><td>6</td><td>108</td><td></td></tr><tr><td>Indefinite-lived intangible assets:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Tradenames</td><td></td><td>526</td><td>—</td><td>526</td><td>551</td><td>—</td><td>551</td><td></td></tr><tr><td>Total identified intangible assets</td><td></td><td>$ 3,032</td><td>$ 382</td><td>$ 2,650</td><td>$ 3,124</td><td>$ 219</td><td>$ 2,905</td><td></td></tr></table>

As a result of the purchases of Taminco, Commonwealth, the aviation turbine oil business, and Knowlton during 2014, the Company recorded intangible assets of $985 million, $125 million, $139 million, and $6 million, respectively, primarily for customer relationships, developed technology, and tradenames.

Amortization expense of definite-lived intangible assets related to continuing operations was $163 million, $90 million, and $80 million for 2015, 2014, and 2013, respectively. Estimated amortization expense for future periods is $170 million in each year for 2016 through 2020.

As a result of the annual impairment testing of indefinite-lived intangible assets in 2015, the Company recognized intangible asset impairments of $18 million on tradenames. See Note 16, "Asset Impairments and Restructuring Charges, Net", for additional information regarding impairments of tradenames.

See Note 2, "Acquisitions", for further details regarding the acquisitions of Taminco, Commonwealth, the aviation turbine oil business, and Knowlton.

## 6. EQUITY INVESTMENTS

Eastman has a 50 percent interest in and serves as the operating partner in Primester, a joint venture which manufactures cellulose acetate at Eastman's Kingsport, Tennessee plant. This investment is accounted for under the equity method. Eastman's net investment in the joint venture at December 31, 2015 and 2014 was approximately $22 million and $19 million, respectively, which was comprised of the recognized portion of the venture's accumulated deficits, long-term amounts owed to Primester, and a long-term notes receivable from Primester to Eastman. Such amounts are included in other noncurrent assets.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Eastman owns 50 percent or less interest in other joint ventures which are accounted for under the equity method and included in other noncurrent assets. These include a 50 percent interest in a joint venture that has a manufacturing facility in Nanjing, China. The Nanjing facility produces Eastotac \( ^{®} \)  hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and sealants. These also include a joint venture with a 50 percent interest for the manufacture of compounded cellulose diacetate ("CDA") in Shenzhen, China. CDA is a bio-derived material, which is used in various injection molded applications, including but not limited to ophthalmic frames, tool handles and other end use products. In third quarter 2013, the Company completed construction of a 30,000 metric ton acetate tow manufacturing facility in Hefei, China, in a joint venture with China National Tobacco Corporation in which the Company has 45 percent ownership. The Company began supplying 100 percent of the acetate flake raw material to the joint venture in third quarter 2013 from the Company's manufacturing facility in Kingsport. In 2012, the Company entered into an agreement to form a joint venture to build a hydrogenated hydrocarbon resin plant in Nanjing, China. Eastman also acquired in the Taminco acquisition, a 50 percent interest in a joint venture with Mitsubishi Gas Chemical Company in Nanjing, China which manufactures amines and amine derivatives. At December 31, 2015 and 2014, the Company's investment in these joint ventures was approximately $97 million and $102 million, respectively.

## 7. PAYABLES AND OTHER CURRENT LIABILITIES

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">December 31,</td></tr><tr><td>2015</td><td>2014</td><td></td></tr><tr><td>Trade creditors</td><td>$ 699</td><td>$ 827</td><td></td></tr><tr><td>Derivative hedging liability</td><td>218</td><td>227</td><td></td></tr><tr><td>Accrued payrolls, vacation, and variable-incentive compensation</td><td>211</td><td>191</td><td></td></tr><tr><td>Other</td><td>497</td><td>476</td><td></td></tr><tr><td>Total payables and other current liabilities</td><td>$ 1,625</td><td>$ 1,721</td><td></td></tr></table>

"Other" consists primarily of accruals for interest payable, dividends payable, post-employment obligations, payroll deductions and employee benefits, and the current portion of environmental liabilities.



## 8. PROVISION FOR INCOME TAXES

Components of earnings from continuing operations before income taxes and the provision (benefit) for U.S. and other income taxes from continuing operations follow:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Earnings from continuing operations before income taxes</td><td></td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$     618</td><td>$     627</td><td>$     1,437</td><td></td></tr><tr><td>Outside the United States</td><td>511</td><td>363</td><td>242</td><td></td></tr><tr><td>Total</td><td>$     1,129</td><td>$     990</td><td>$     1,679</td><td></td></tr><tr><td>Provision (benefit) for income taxes on earnings from continuing operations</td><td></td><td></td><td></td><td></td></tr><tr><td>United States Federal</td><td></td><td></td><td></td><td></td></tr><tr><td>Current</td><td>$     87</td><td>$     64</td><td>$     143</td><td></td></tr><tr><td>Deferred</td><td>119</td><td>135</td><td>300</td><td></td></tr><tr><td>Outside the United States</td><td></td><td></td><td></td><td></td></tr><tr><td>Current</td><td>59</td><td>66</td><td>3</td><td></td></tr><tr><td>Deferred</td><td>16</td><td>(35)</td><td>15</td><td></td></tr><tr><td>State and other</td><td></td><td></td><td></td><td></td></tr><tr><td>Current</td><td>22</td><td>6</td><td>30</td><td></td></tr><tr><td>Deferred</td><td>(28)</td><td>(1)</td><td>16</td><td></td></tr><tr><td>Total</td><td>$     275</td><td>$     235</td><td>$     507</td><td></td></tr></table>

The following represents the deferred tax charge (benefit) recorded as a component of accumulated other comprehensive loss in stockholders' equity.

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Unrecognized losses and prior service credits for benefit plans</td><td>$     42</td><td>$      (11)</td><td>$     8</td><td></td></tr><tr><td>Cumulative translation adjustment</td><td>—</td><td>—</td><td>(1)</td><td></td></tr><tr><td>Unrealized gains (losses) on cash flow hedges</td><td>21</td><td>(141)</td><td>5</td><td></td></tr><tr><td>Total</td><td>$     63</td><td>$      (152)</td><td>$     12</td><td></td></tr></table>

Total income tax expense (benefit) included in the consolidated financial statements was composed of the following:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Continuing operations</td><td>$     275</td><td>$     235</td><td>$     507</td><td></td></tr><tr><td>Discontinued operations</td><td>—</td><td>2</td><td>—</td><td></td></tr><tr><td>Other comprehensive income</td><td>63</td><td>(152)</td><td>12</td><td></td></tr><tr><td>Total</td><td>$     338</td><td>$     85</td><td>$     519</td><td></td></tr></table>



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Differences between the provision for income taxes on earnings from continuing operations and income taxes computed using the U.S. Federal statutory income tax rate follow:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Amount computed using the statutory rate</td><td>$ 393</td><td>$ 345</td><td>$ 587</td><td></td></tr><tr><td>State income taxes, net</td><td>(3)</td><td>4</td><td>30</td><td></td></tr><tr><td>Foreign rate variance</td><td>(93)</td><td>(105)</td><td>(55)</td><td></td></tr><tr><td>Domestic manufacturing deduction</td><td>(12)</td><td>(6)</td><td>(17)</td><td></td></tr><tr><td>Change in reserves for tax contingencies</td><td>(7)</td><td>(6)</td><td>(16)</td><td></td></tr><tr><td>General business credits</td><td>(15)</td><td>(8)</td><td>(6)</td><td></td></tr><tr><td>Other</td><td>12</td><td>11</td><td>(16)</td><td></td></tr><tr><td>Provision for income taxes</td><td>$ 275</td><td>$ 235</td><td>$ 507</td><td></td></tr><tr><td>Effective income tax rate</td><td>24%</td><td>24%</td><td>30%</td><td></td></tr></table>

The effective tax rate was 24 percent for both 2015 and 2014. The 2015 effective tax rate reflected a benefit from both the U.S. federal tax manufacturing deduction, due to an increase in domestic taxable income, and increased U.S. federal tax credits compared to 2014. This was offset by a reduction in the foreign rate variance as a result of an unfavorable shift in foreign income to higher tax jurisdictions and limited benefit from the asset impairment of the Workington, UK acetate tow manufacturing facility. Both years reflect a benefit from the extension of favorable U.S. federal tax provisions, which resulted in a net benefit of approximately $15 million primarily related to research and development credits and deferral of certain earnings of foreign subsidiaries from U.S. income taxes.

The 2014 effective tax rate of 24 percent reflected incremental benefit of approximately 6 percent over the 2013 effective tax rate of 30 percent. The primary items benefiting the Company’s effective tax rate were the impact of the annual pension and other postretirement benefit MTM accounting and incremental foreign rate benefit from the integration of the Solutia acquisition. The Company recognized a MTM loss of $304 million in 2014 and a MTM gain of $383 million in 2013, which were primarily recognized in U.S. legal entities. The $687 million reduction in U.S. earnings accounted for an approximately 5 percent benefit to the 2014 effective tax rate compared to 2013. The 2014 effective tax rate also benefited 3 percent compared to 2013 due to an incremental $50 million foreign rate variance. The incremental benefit was the result of the Company’s integration of Eastman and Solutia business operations and legal entity structures, including relocating certain of the Company’s global business headquarters, which are primarily international, to Europe to better serve customers, and implementing an integrated entity financing structure allowing more efficient redeployment of cash for subsidiaries outside the U.S. These 2014 incremental benefits over 2013 were partially offset by a 2013 $14 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of the 2012 consolidated U.S. Federal income tax return and a 2013 $14 million benefit for the finalization of foreign tax audits.



## NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The significant components of deferred tax assets and liabilities follow:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="2">December 31,</td></tr><tr><td>2015</td><td>2014</td></tr><tr><td>Deferred tax assets</td><td></td><td></td></tr><tr><td>Post-employment obligations</td><td>$     471</td><td>$     529</td></tr><tr><td>Net operating loss carryforwards</td><td>349</td><td>470</td></tr><tr><td>Tax credit carryforwards</td><td>276</td><td>239</td></tr><tr><td>Environmental reserves</td><td>122</td><td>123</td></tr><tr><td>Unrealized derivative loss</td><td>162</td><td>165</td></tr><tr><td>Other</td><td>193</td><td>294</td></tr><tr><td>Total deferred tax assets</td><td>1,573</td><td>1,820</td></tr><tr><td>Less valuation allowance</td><td>254</td><td>264</td></tr><tr><td>Deferred tax assets less valuation allowance</td><td>$     1,319</td><td>$     1,556</td></tr><tr><td>Deferred tax liabilities</td><td></td><td></td></tr><tr><td>Depreciation</td><td>$      (1,176)</td><td>$      (1,144)</td></tr><tr><td>Amortization</td><td>(902)</td><td>(1,001)</td></tr><tr><td>Other</td><td>(142)</td><td>(158)</td></tr><tr><td>Total deferred tax liabilities</td><td>$      (2,220)</td><td>$      (2,303)</td></tr><tr><td>Net deferred tax liabilities</td><td>$      (901)</td><td>$      (747)</td></tr><tr><td>As recorded in the Consolidated Statements of Financial Position:</td><td></td><td></td></tr><tr><td>Other current assets</td><td>$      —</td><td>$     177</td></tr><tr><td>Other noncurrent assets</td><td>27</td><td>28</td></tr><tr><td>Payables and other current liabilities</td><td>—</td><td>(6)</td></tr><tr><td>Deferred income tax liabilities</td><td>(928)</td><td>(946)</td></tr><tr><td>Net deferred tax liabilities</td><td>$      (901)</td><td>$      (747)</td></tr></table>

Unremitted earnings of subsidiaries outside the United States, considered to be reinvested indefinitely, totaled approximately $1.9 billion at December 31, 2015. It is not practicable to determine the deferred tax liability for temporary differences related to those unremitted earnings.

For certain consolidated foreign subsidiaries, income and losses directly flow through to taxable income in the United States. These entities are also subject to taxation in the foreign tax jurisdictions. Net operating loss carryforwards exist to offset future taxable income in foreign tax jurisdictions and valuation allowances are provided to reduce deferred related tax assets if it is more likely than not that this benefit will not be realized. Changes in the estimated realizable amount of deferred tax assets associated with net operating losses for these entities could result in changes in the deferred tax asset valuation allowance in the foreign tax jurisdiction. At the same time, because these entities are also subject to tax in the United States, a deferred tax liability for the expected future taxable income will be established concurrently. Therefore, the impact of any reversal of valuation allowances on consolidated income tax expense will be only to the extent that there are differences between the United States statutory tax rate and the tax rate in the foreign jurisdiction. A valuation allowance of $23 million at December 31, 2015, has been provided against the deferred tax asset resulting from these operating loss carryforwards.

At December 31, 2015, foreign net operating loss carryforwards totaled $779 million. Of this total, $86 million will expire in 3 to 20 years and $693 million have no expiration date. A valuation allowance of approximately $171 million has been provided against such net operating loss carryforwards.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2015, federal net operating loss carryforwards of $243 million were available to offset future taxable income, which expire from 2025 to 2030. At December 31, 2015, foreign tax credit carryforwards of approximately $180 million were available to reduce possible future U.S. income taxes and which expire from 2017 to 2021.

A partial valuation allowance of $55 million has been provided for Solutia's state net operating loss carryforwards. The valuation allowance will be retained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized or the related statute expires. A full valuation allowance of $50 million had been provided against the U.S. deferred tax assets for Solutia's capital loss carryforward, which expired in 2015.

As a result of the Solutia acquisition transaction, Solutia realized a change of ownership for purposes of Section 382 of the Internal Revenue Code. Management does not currently expect this change to significantly limit the Company's ability to utilize Solutia's U.S. net operating loss or foreign tax credit carryforwards estimated to be approximately $219 million and $180 million, respectively, at December 31, 2015.

Amounts due to and from tax authorities as recorded in the Consolidated Statements of Financial Position:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">December 31,</td></tr><tr><td>2015</td><td>2014</td><td></td></tr><tr><td>Miscellaneous receivables</td><td>$ 92</td><td>$ 97</td><td></td></tr><tr><td>Payables and other current liabilities</td><td>$ 33</td><td>$ 23</td><td></td></tr><tr><td>Other long-term liabilities</td><td>32</td><td>24</td><td></td></tr><tr><td>Total income taxes payable</td><td>$ 65</td><td>$ 47</td><td></td></tr></table>

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

<table><tr><td>(Dollars in millions)</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Balance at January 1</td><td>$ 117</td><td>$ 51</td><td>$ 65</td></tr><tr><td>Additions based on tax positions related to current year</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Additions based on acquisitions</td><td>27</td><td>72</td><td>—</td></tr><tr><td>Lapse of statute of limitations</td><td>(7)</td><td>(6)</td><td>—</td></tr><tr><td>Settlements</td><td>—</td><td>—</td><td>(14)</td></tr><tr><td>Balance at December 31</td><td>$ 137</td><td>$ 117</td><td>$ 51</td></tr></table>

As of December 31, 2015, 2014, and 2013, $137 million, $117 million, and $51 million, respectively, of unrecognized tax benefits would, if recognized, impact the Company's effective tax rate.

Interest, net of tax, related to unrecognized tax benefits is recorded as a component of income tax expense. As of January 1, 2015, the Company had accrued a liability of $4 million for interest, net of tax, and had $3 million for tax penalties, net of tax benefit. During 2015, the Company recognized $2 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $2 million of income for interest, net of tax, and $2 million of penalties, net of tax, associated with expiration of statute of limitations. At December 31, 2015, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties, net of tax benefit.

As of January 1, 2014, the Company had accrued a liability of $4 million for interest, net of tax, and had $3 million for tax penalties, net of tax benefit. During 2014, the Company recognized $1 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, associated with expiration of statute of limitations. At December 31, 2014, the Company had accrued balances of $4 million for interest, net of tax benefit, and $3 million for penalties, net of tax benefit.



As of January 1, 2013, the Company had accrued a liability of approximately $5 million for interest, net of tax, and had $3 million for tax penalties, net of tax benefit. During 2013, the Company recognized $1 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $2 million of income for interest, net of tax, associated with favorable audit settlements. At December 31, 2013, the Company had accrued balances of $4 million for interest, net of tax benefit, and $3 million for penalties, net of tax benefit.

The Company files income tax returns in the United States and various state and foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2011 and 2002 for Eastman and Solutia, respectively. With few exceptions, Eastman is no longer subject to state and local income tax examinations by tax authorities for years before 2010. Solutia, Inc. and related subsidiaries are no longer subject to state and local income tax examinations for years before 2000. With few exceptions, the Company is no longer subject to foreign income tax examinations by tax authorities for tax years before 2007.

It is reasonably possible that, within the next twelve months, as a result of the resolution of federal, state, and foreign examinations and appeals, and the expiration of various statutes of limitation, unrecognized tax benefits will decrease by a range of $0 to $10 million.

## 9. BORROWINGS

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="2">December 31,</td></tr><tr><td>2015</td><td>2014</td></tr><tr><td>Borrowings consisted of:</td><td></td><td></td></tr><tr><td>3% notes due 2015</td><td>$ —</td><td>$ 250</td></tr><tr><td>2.4% notes due 2017</td><td>999</td><td>998</td></tr><tr><td>6.30% notes due 2018</td><td>167</td><td>169</td></tr><tr><td>5.5% notes due 2019</td><td>250</td><td>250</td></tr><tr><td>2.7% notes due 2020</td><td>799</td><td>798</td></tr><tr><td>4.5% notes due 2021</td><td>250</td><td>250</td></tr><tr><td>3.6% notes due 2022</td><td>900</td><td>903</td></tr><tr><td>7 1/4% debentures due 2024</td><td>244</td><td>244</td></tr><tr><td>7 5/8% debentures due 2024</td><td>54</td><td>54</td></tr><tr><td>3.8% notes due 2025</td><td>796</td><td>796</td></tr><tr><td>7.60% debentures due 2027</td><td>222</td><td>222</td></tr><tr><td>4.8% notes due 2042</td><td>497</td><td>497</td></tr><tr><td>4.65% notes due 2044</td><td>877</td><td>877</td></tr><tr><td>Credit facility borrowings and commercial paper borrowings</td><td>980</td><td>1,235</td></tr><tr><td>Capital leases</td><td>4</td><td>6</td></tr><tr><td>Total borrowings</td><td>7,039</td><td>7,549</td></tr><tr><td>Borrowings due within one year</td><td>431</td><td>301</td></tr><tr><td>Long-term borrowings</td><td>$ 6,608</td><td>$ 7,248</td></tr></table>

In December 2015, the Company repaid the $250 million principal amount of the 3% notes due 2015 using available cash and other borrowings.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

On November 20, 2014, the Company issued public debt securities consisting of 2.7% notes due 2020 in the principal amount of $800 million, 3.8% notes due 2025 in the principal amount of $800 million, and 4.65% notes due 2044 in the principal amount of $400 million. Proceeds from these borrowings were used to pay a part of the purchase price for the acquisition of Taminco, including the repayment of outstanding Taminco borrowings and a portion of acquisition fees and expenses. Proceeds from the sale of the notes, net of original issue discounts, issuance costs, and the monetization of interest rate swaps, was $2.0 billion.

On May 15, 2014, the Company issued public debt securities consisting of 4.65% notes due 2044 in the principal amount of $500 million. Proceeds from the sale of the notes, net of transaction costs, were $490 million.

## Credit Facility and Commercial Paper Borrowings

In connection with the acquisition of Taminco, Eastman entered into a $1.0 billion five-year Term Loan Agreement. As of December 31, 2015, the Term Loan Agreement balance outstanding was $350 million with an interest rate of 1.67 percent. In 2015, $650 million of the Term Loan Agreement balance was repaid using available cash and other borrowings. As of December 31, 2014, the Term Loan Agreement balance outstanding was $1.0 billion with an interest rate of 1.41 percent. Borrowings under the Term Loan Agreement are subject to interest at varying spreads above quoted market rates.

The Company has access to a $1.25 billion revolving credit agreement (the "Credit Facility") that was amended in October 2015 to extend the maturity to October 2020. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce capacity for borrowings available under the Credit Facility. Beginning in fourth quarter 2015, commercial paper borrowings were classified as short-term. At December 31, 2015 and December 31, 2014, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2015, the Company's commercial paper borrowings were $430 million with a weighted average interest rate of 0.80 percent. At December 31, 2014, the Company's commercial paper borrowings were $235 million with a weighted average interest rate of 0.47 percent.

In July 2015, the Company amended its $250 million accounts receivable securitization agreement (the "A/R Facility") to extend the maturity to April 2018. 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. At December 31, 2015, the Company's borrowings under the A/R Facility were $200 million supported by trade receivables with an interest rate of 1.11 percent. In 2015, $50 million of the Company's borrowings under the A/R Facility were repaid using available cash. At December 31, 2014, the Company had no outstanding borrowings under the A/R Facility.

The Term Loan Agreement, Credit Facility, and the A/R Facility contain a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. Total available borrowings under the Credit Facility and A/R Facility were $842 million and $1,265 million as of December 31, 2015 and December 31, 2014, respectively. Changes in available borrowings were due primarily to increases in commercial paper borrowings and borrowings under the A/R Facility. The Company would not have violated applicable covenants for these periods if the total available amounts of the facilities had been borrowed.

## Fair Value of Borrowings

The Company has classified its long-term borrowings at December 31, 2015 and December 31, 2014 under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies". The fair value for fixed-rate borrowings is based on current market prices and is classified in Level 1. The fair value for the Company's floating-rate borrowings, which relate to the Term Loan Agreement, the A/R Facility, and capital leases, equals the carrying value and is classified within Level 2.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td rowspan="2"></td><td rowspan="2">Recorded Amount December 31, 2015</td><td colspan="5">Fair Value Measurements at December 31, 2015</td></tr><tr><td>Total Fair Value</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td><td></td></tr><tr><td>(Dollars in millions)</td><td>$ 6,608</td><td>$ 6,647</td><td>$ 6,094</td><td>$ 553</td><td>$</td><td>—</td></tr></table>

<table><tr><td rowspan="2"></td><td rowspan="2">Recorded Amount December 31, 2014</td><td colspan="5">Fair Value Measurements at December 31, 2014</td></tr><tr><td>Total Fair Value</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td><td></td></tr><tr><td>(Dollars in millions)</td><td>$ 7,248</td><td>$ 7,557</td><td>$ 6,366</td><td>$ 1,191</td><td>$</td><td>—</td></tr><tr><td>Long-term borrowings</td><td>$ 7,248</td><td>$ 7,557</td><td>$ 6,366</td><td>$ 1,191</td><td>$</td><td>—</td></tr></table>

## 10. DERIVATIVES

## Hedging Programs

The Company is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transaction, the Company uses various derivative financial instruments when appropriate in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The Company does not enter into derivative transactions for speculative purposes.

The Company hedges commodity price risks using derivative financial instruments over a maximum of five years beyond its current fiscal year. The Company weights its hedge portfolio more heavily in the first year with declining coverage over the remaining periods.

## Fair Value Hedges

Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. In 2015, the Company unwound the notional amount of $275 million associated with the interest rate swaps on the 3.6% notes due 2022. As of December 31, 2015, there are no outstanding interest rate swap hedges. As of December 31, 2014, the total notional amount of the Company's interest rate swaps was $275 million.

Fair Value Measurement of Derivatives Designated as Fair Value Hedging Instruments

<table><tr><td rowspan="2">(Dollars in millions)</td><td rowspan="2">Statement of Financial Position Location</td><td colspan="2">Fair Value Measurement</td></tr><tr><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Derivative Assets</td><td>Other noncurrent assets</td><td>$ —</td><td>$ 5</td></tr><tr><td>Interest rate swap</td><td></td><td></td><td></td></tr></table>



## Derivatives' Fair Value Hedging Relationships

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">Twelve Months Ended</td></tr><tr><td rowspan="2">Consolidated Statement of Earnings Location of Gain/(Loss) Recognized in Income on Derivatives</td><td colspan="2">Amount of Gain/ (Loss) Recognized in Income on Derivatives</td></tr><tr><td>Derivatives in Fair Value Hedging Relationships</td><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Interest rate swaps</td><td>Net interest expense</td><td>$ 13</td><td>$ 6</td></tr></table>

## 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.

## Foreign Currency Exchange Rate Hedging

The Company manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, the Company enters into currency options and forwards from time to time to hedge probable anticipated, but not yet committed, export sales and purchase transactions expected within no longer than five years and denominated in foreign currencies (principally the euro and Japanese yen) and forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. These contracts are designated as cash flow hedges. The MTM gains or losses on qualifying hedges are included in accumulated other comprehensive income (loss) to the extent effective, and reclassified into sales in the period during which the hedged transaction affects earnings.

## Commodity Hedging

Certain raw material and energy sources used by the Company, as well as sales of certain commodity products by the Company, are subject to price volatility caused by weather, supply and demand conditions, economic variables and other unpredictable factors. These commodity and energy costs are primarily related to propane, ethane, natural gas, paraxylene, ethylene, and benzene. From time to time to mitigate expected fluctuations in market prices, the Company enters into option and forward contracts. These contracts are designated as cash flow hedges. The MTM gains or losses on qualifying hedges are included in accumulated other comprehensive income (loss) to the extent effective, and reclassified into cost of sales (for commodity purchases) and sales (for commodity sales) in the period during which the hedged transaction affects earnings.

## Interest Rate Hedging

The Company's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage this mix effectively, the Company from time to time enters into interest rate swaps in which the Company agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. These swaps are designated as hedges of the fair value of the underlying debt obligations and the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. As these instruments are 100 percent effective, there is no impact on earnings due to hedge ineffectiveness.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

From time to time, the Company also utilizes interest rate derivative instruments, primarily forward starting swaps and Treasury locks, to hedge the Company's exposure to movements in interest rates prior to anticipated debt offerings. These instruments are designated as cash flow hedges and are typically 100 percent effective. As a result, there is no current impact on earnings due to hedge ineffectiveness.

The MTM gains or losses on these hedges are included in accumulated other comprehensive income (loss) to the extent effective, and are reclassified into interest expense over the term of the related debt instruments.

<table><tr><td>Total notional amounts:</td><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Foreign Exchange Forward and Option Contracts (in millions)</td><td></td><td></td></tr><tr><td>EUR/USD (in EUR)</td><td>€618</td><td>€810</td></tr><tr><td>EUR/USD (in approximate USD equivalent)</td><td>$689</td><td>$1,000</td></tr><tr><td>JPY/USD (in JPY)</td><td>¥2,400</td><td>¥4,800</td></tr><tr><td>JPY/USD (in approximate USD equivalent)</td><td>$20</td><td>$40</td></tr><tr><td>Commodity Forward and Collar Contracts</td><td></td><td></td></tr><tr><td>Contract ethylene sales (in thousand metric tons)</td><td>—</td><td>14</td></tr><tr><td>Feedstock (in million barrels)</td><td>22</td><td>33</td></tr><tr><td>Feedstock (in thousand metric tons)</td><td>—</td><td>30</td></tr><tr><td>Energy (in million million british thermal units)</td><td>32</td><td>25</td></tr><tr><td>Interest rate swaps for the future issuance of debt (in millions)</td><td>$500</td><td>$500</td></tr></table>

## Fair Value Measurement of Derivatives Designated as Cash Flow Hedging Instruments

<table><tr><td rowspan="2">(Dollars in millions)</td><td rowspan="2">Statement of Financial Position Location</td><td colspan="2">Fair Value Measurements</td></tr><tr><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Commodity contracts</td><td>Other current assets</td><td>$</td><td>—</td></tr><tr><td>Foreign exchange contracts</td><td>Other current assets</td><td>65</td><td>61</td></tr><tr><td>Foreign exchange contracts</td><td>Other noncurrent assets</td><td>79</td><td>71</td></tr><tr><td></td><td></td><td>$144</td><td>$134</td></tr></table>

<table><tr><td rowspan="2">(Dollars in millions)</td><td rowspan="2">Statement of Financial Position Location</td><td colspan="2">Fair Value Measurements</td></tr><tr><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Commodity contracts</td><td>Payables and other current liabilities</td><td>$ 194</td><td>$ 193</td></tr><tr><td>Commodity contracts</td><td>Other long-term liabilities</td><td>242</td><td>289</td></tr><tr><td>Foreign exchange contracts</td><td>Payables and other current liabilities</td><td>—</td><td>10</td></tr><tr><td>Forward starting interest rate swap contracts</td><td>Other long-term liabilities</td><td>30</td><td>16</td></tr><tr><td></td><td></td><td>$ 466</td><td>$ 508</td></tr></table>



## Derivatives' Hedging Relationships

<table><tr><td>(Dollars in millions)</td><td colspan="2">Change in amount of after tax gain/ (loss) recognized in Other Comprehensive Income on Derivatives (effective portion)</td><td rowspan="2">Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into Income (effective portion)</td><td rowspan="2">Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into Income (effective portion)</td></tr><tr><td>Derivatives&#x27; Cash Flow Hedging Relationships</td><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Commodity contracts</td><td>$ 26</td><td>$ (312)</td><td>Sales</td><td>$ 4</td></tr><tr><td>Foreign exchange contracts</td><td>13</td><td>85</td><td>Cost of sales</td><td>(217)</td></tr><tr><td>Forward starting interest rate swap contracts</td><td>(4)</td><td>(3)</td><td>Sales</td><td>86</td></tr><tr><td></td><td>$ 35</td><td>$ (230)</td><td>Interest Expense</td><td>(7)</td></tr><tr><td></td><td></td><td></td><td></td><td>(134)</td></tr></table>

## Hedging Summary

At December 31, 2015 and 2014, pre-tax monetized positions and MTM gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in accumulated other comprehensive income totaled approximately $376 million in losses and $432 million in losses, respectively. If realized, approximately $135 million in pre-tax losses will be reclassified into earnings during the next 12 months. Ineffective portions of hedges are immediately recognized in cost of sales or other (income) charges, net. In 2014, the Company recognized $6 million in pre-tax losses for ineffectiveness on the commodity hedging portfolio.

The gains or losses on nonqualifying derivatives or derivatives that are not designated as hedges are marked to market in the line item "Other (income) charges, net" of the Consolidated Statements of Earnings, and, in all periods presented, represent foreign exchange derivatives denominated in multiple currencies and are transacted and settled in the same quarter. The Company recognized approximately $28 million net loss and $3 million net loss on nonqualifying derivatives during 2015 and 2014, respectively. The Company had no nonqualifying derivatives or derivatives that are not designated as hedges as of December 31, 2015 and December 31, 2014.

## Fair Value Measurements

For additional information on fair value measurement, see Note 1, "Significant Accounting Policies".

The following chart shows the financial assets and liabilities valued on a recurring basis and a gross basis.

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">Fair Value Measurements at December 31, 2015</td></tr><tr><td>Description</td><td>December 31, 2015</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td></tr><tr><td>Derivative Assets</td><td>$ 144</td><td>$ —</td><td>$ 144</td><td>$ —</td></tr><tr><td>Derivative Liabilities</td><td>(466)</td><td>—</td><td>(466)</td><td>—</td></tr><tr><td></td><td>$ (322)</td><td>$ —</td><td>$ (322)</td><td>$ —</td></tr></table>



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="5">Fair Value Measurements at December 31, 2014</td></tr><tr><td>December 31, 2014</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td><td></td></tr><tr><td>Description</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Derivative Assets</td><td>$ 139</td><td>—</td><td>$ 137</td><td>$ 2</td><td></td></tr><tr><td>Derivative Liabilities</td><td>(508)</td><td>—</td><td>(508)</td><td>—</td><td></td></tr><tr><td></td><td>$ (369)</td><td>$ —</td><td>(371)</td><td>$ 2</td><td></td></tr></table>

The majority of the Company's derivative assets are classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. The fair value of commodity contracts is derived using forward curves supplied by an industry recognized and unrelated third party. In addition, on an ongoing basis, the Company tests a subset of its valuations against valuations received from the transaction's counterparty to validate the accuracy of its standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance.

From time to time, the Company holds Level 3 assets for commodity hedges. The fair values of Level 3 instruments are determined using pricing data similar to that used in Level 2 financial instruments described above, and reflect adjustments for less liquid markets or longer contractual terms. Level 3 hedges typically will mature within one year or less. The Company determines the fair value of Level 3 ethylene derivative forward contracts using an average of unadjusted forward ethylene prices provided by industry recognized experts to value its ethylene positions.

The table below presents a rollforward of activity for these assets for the period ended December 31, 2015 and December 31, 2014:

<table><tr><td colspan="3">Fair Value Measurements Using Level 3 Inputs</td></tr><tr><td colspan="2">Commodity Contracts</td><td rowspan="2">December 31, 2014</td></tr><tr><td>(Dollars in millions)</td><td></td></tr><tr><td>Beginning balance at January 1</td><td>$ 2</td><td>$ —</td></tr><tr><td>Realized gain (loss) in sales revenue</td><td>4</td><td>1</td></tr><tr><td>Change in unrealized gain (loss) in Other Comprehensive Income</td><td>(2)</td><td>2</td></tr><tr><td>Purchases, sales and settlements</td><td>(4)</td><td>(1)</td></tr><tr><td>Transfers (out) in of Level 3</td><td>—</td><td>—</td></tr><tr><td>Ending balance at December 31</td><td>$ —</td><td>$ 2</td></tr></table>

All of the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company has elected to present the derivative contracts on a gross basis in the Consolidated Statements of Financial Position. Had it chosen to present the derivatives contracts on a net basis, it would have a derivative in a net asset position of $144 million and a derivative in a net liability position of $466 million as of December 31, 2015. The Company does not have any cash collateral due under such agreements.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## 11. RETIREMENT PLANS

As described in more detail below, Eastman offers various postretirement benefits to its employees.

## Defined Contribution Plans

The Company sponsors a defined contribution employee stock ownership plan (the "ESOP"), which is a component of the Eastman Investment Plan and Employee Stock Ownership Plan ("EIP/ESOP"), a plan under Section 401(a) of the Internal Revenue Code. Eastman made a contribution in February 2016 to the EIP/ESOP for substantially all U.S. employees equal to 5 percent of their eligible compensation for the 2015 plan year. Employees may allocate contributions to other investment funds within the EIP from the ESOP at any time without restrictions. Allocated shares in the ESOP totaled 2,199,000; 2,197,740; and 2,289,618 shares as of December 31, 2015, 2014, and 2013, respectively. Dividends on shares held by the EIP/ESOP are charged to retained earnings. All shares held by the EIP/ESOP are treated as outstanding in computing earnings per share.

In 2006, the Company amended its EIP/ESOP to provide a Company match of 50 percent of the first 7 percent of an employee's compensation contributed to the plan for employees who are hired on or after January 1, 2007. Employees who are hired on or after January 1, 2007, are also eligible for the contribution to the ESOP as described above.

Charges for domestic contributions to the EIP/ESOP were $62 million, $56 million, and $43 million for 2015, 2014, and 2013, respectively.

## Defined Benefit Pension Plans and Other Postretirement Benefit Plans

## Pension Plans

Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits.

Effective January 1, 2000, the Company's Eastman Retirement Assistance Plan, a U.S. defined benefit pension plan, was amended. Employees' accrued pension benefits earned prior to January 1, 2000 are calculated based on previous plan provisions using the employee's age, years of service, and final average compensation as defined in the plans. The amended plan uses a pension equity formula to calculate an employee's retirement benefits from January 1, 2000 forward. Benefits payable will be the combined pre-2000 and post-1999 benefits. Employees hired on or after January 1, 2007 are not eligible to participate in Eastman's U.S. defined benefit pension plans.

In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's non-U.S. defined benefit pension plans in Belgium and Finland. For more information on this acquisition, see Note 2, "Acquisitions".

Benefits are paid to employees from trust funds. Contributions to the trust funds are made as permitted by laws and regulations. The pension trust funds do not directly own any of the Company's common stock.

Pension coverage for employees of Eastman's non-U.S. operations is provided, to the extent deemed appropriate, through separate plans. The Company systematically provides for obligations under such plans by depositing funds with trustees, under insurance policies, or by book reserves.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## Other Postretirement Benefit Plans

Under its other postretirement benefit plans, Eastman provides a subsidy for life insurance, health care, and dental benefits to eligible retirees hired prior to January 1, 2007, and a subsidy for health care and dental benefits to retirees' eligible survivors. 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 ammunition plant.

Employees in the U.S. hired on or after January 1, 2007 do not have access to postretirement health care benefits. 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.

In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's U.S. postretirement benefit plan. For more information on this acquisition, see Note 2, "Acquisitions".



## NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Below is a summary balance sheet of the change in plan assets during 2015 and 2014, the funded status of the plans, amounts recognized in the Consolidated Statements of Financial Position, and a summary of amounts recognized in accumulated other comprehensive income.

<table><tr><td rowspan="3">Summary of Changes</td><td colspan="4">Pension Plans</td><td colspan="3">Postretirement Benefit Plans</td></tr><tr><td colspan="2">2015</td><td colspan="2">2014</td><td>2015</td><td colspan="2">2014</td></tr><tr><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>Non-U.S.</td><td></td><td></td><td></td></tr><tr><td>(Dollars in millions)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Change in projected benefit obligation:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Benefit obligation, beginning of year</td><td>$ 2,356</td><td>$ 867</td><td>$ 2,236</td><td>$ 736</td><td>$ 1,014</td><td>$ 962</td><td></td></tr><tr><td>Service cost</td><td>39</td><td>15</td><td>40</td><td>14</td><td>8</td><td>8</td><td></td></tr><tr><td>Interest cost</td><td>87</td><td>26</td><td>100</td><td>31</td><td>39</td><td>45</td><td></td></tr><tr><td>Actuarial (gain) loss</td><td>(31)</td><td>(50)</td><td>174</td><td>149</td><td>(13)</td><td>49</td><td></td></tr><tr><td>Curtailment gain</td><td>—</td><td>(4)</td><td>—</td><td>—</td><td>(2)</td><td>—</td><td></td></tr><tr><td>Settlement</td><td>—</td><td>—</td><td>—</td><td>(18)</td><td>—</td><td>—</td><td></td></tr><tr><td>Acquisitions</td><td>—</td><td>(10)</td><td>—</td><td>48</td><td>—</td><td>4</td><td></td></tr><tr><td>Plan amendments and other</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(140)</td><td>1</td><td></td></tr><tr><td>Plan participants&#x27; contributions</td><td>—</td><td>2</td><td>—</td><td>2</td><td>15</td><td>18</td><td></td></tr><tr><td>Effect of currency exchange</td><td>—</td><td>(61)</td><td>—</td><td>(73)</td><td>(2)</td><td>—</td><td></td></tr><tr><td>Federal subsidy on benefits paid</td><td>—</td><td>—</td><td>—</td><td>—</td><td>1</td><td>1</td><td></td></tr><tr><td>Benefits paid</td><td>(189)</td><td>(22)</td><td>(194)</td><td>(22)</td><td>(67)</td><td>(74)</td><td></td></tr><tr><td>Benefit obligation, end of year</td><td>$ 2,262</td><td>$ 763</td><td>$ 2,356</td><td>$ 867</td><td>$ 853</td><td>$ 1,014</td><td></td></tr><tr><td>Change in plan assets:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Fair value of plan assets, beginning of year</td><td>$ 1,968</td><td>$ 699</td><td>$ 1,887</td><td>$ 658</td><td>$ 176</td><td>$ 179</td><td></td></tr><tr><td>Actual return on plan assets</td><td>(23)</td><td>7</td><td>151</td><td>92</td><td>(1)</td><td>16</td><td></td></tr><tr><td>Effect of currency exchange</td><td>—</td><td>(48)</td><td>—</td><td>(60)</td><td>—</td><td>—</td><td></td></tr><tr><td>Company contributions</td><td>131</td><td>21</td><td>124</td><td>22</td><td>34</td><td>38</td><td></td></tr><tr><td>Reserve for third party contributions</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(1)</td><td>(3)</td><td></td></tr><tr><td>Plan participants&#x27; contributions</td><td>—</td><td>2</td><td>—</td><td>2</td><td>15</td><td>18</td><td></td></tr><tr><td>Benefits paid</td><td>(189)</td><td>(22)</td><td>(194)</td><td>(22)</td><td>(67)</td><td>(74)</td><td></td></tr><tr><td>Federal subsidy on benefits paid</td><td>—</td><td>—</td><td>—</td><td>—</td><td>1</td><td>1</td><td></td></tr><tr><td>Settlements</td><td>—</td><td>—</td><td>—</td><td>(18)</td><td>—</td><td>—</td><td></td></tr><tr><td>Other</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>1</td><td></td></tr><tr><td>Acquisitions</td><td>—</td><td>(9)</td><td>—</td><td>25</td><td>—</td><td>—</td><td></td></tr><tr><td>Fair value of plan assets, end of year</td><td>$ 1,887</td><td>$ 650</td><td>$ 1,968</td><td>$ 699</td><td>$ 157</td><td>$ 176</td><td></td></tr><tr><td>Funded status at end of year</td><td>$ (375)</td><td>$ (113)</td><td>$ (388)</td><td>$ (168)</td><td>$ (696)</td><td>$ (838)</td><td></td></tr><tr><td>Amounts recognized in the Consolidated Statements of Financial Position consist of:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Other noncurrent assets</td><td>$ —</td><td>$ 7</td><td>$ 4</td><td>$ 4</td><td>$ 19</td><td>$ 13</td><td></td></tr><tr><td>Current liabilities</td><td>(3)</td><td>—</td><td>(2)</td><td>(1)</td><td>(43)</td><td>(41)</td><td></td></tr><tr><td>Post-employment obligations</td><td>(372)</td><td>(120)</td><td>(390)</td><td>(171)</td><td>(672)</td><td>(810)</td><td></td></tr><tr><td>Net amount recognized, end of year</td><td>$ (375)</td><td>$ (113)</td><td>$ (388)</td><td>$ (168)</td><td>$ (696)</td><td>$ (838)</td><td></td></tr><tr><td>Accumulated benefit obligation</td><td>$ 2,146</td><td>$ 721</td><td>$ 2,254</td><td>$ 781</td><td></td><td></td><td></td></tr><tr><td>Amounts recognized in accumulated other comprehensive income consist of:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Prior service (credit) cost</td><td>$ (10)</td><td>$ 2</td><td>$ (14)</td><td>$ (1)</td><td>$ (200)</td><td>$ (84)</td><td></td></tr></table>



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The change in projected benefit obligation and change in net assets in 2014 reflect the impact of the defined benefit pension plans and the other postretirement benefit plan assumed in the Tamino acquisition, described in Note 2, "Acquisitions".

Information for pension plans with projected benefit obligations in excess of plan assets:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015</td><td colspan="3">2014</td></tr><tr><td>U.S.</td><td colspan="2">Non-U.S.</td><td>U.S.</td><td colspan="2">Non-U.S.</td></tr><tr><td>Projected benefit obligation</td><td>$ 2,262</td><td>$ 622</td><td>$ 1,973</td><td>$ 745</td><td></td><td></td></tr><tr><td>Fair value of plan assets</td><td>1,887</td><td>501</td><td>1,581</td><td>573</td><td></td><td></td></tr></table>

Information for pension plans with accumulated benefit obligation in excess of plan assets:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">2015</td><td colspan="3">2014</td></tr><tr><td>U.S.</td><td colspan="2">Non-U.S.</td><td>U.S.</td><td colspan="2">Non-U.S.</td></tr><tr><td>Projected benefit obligation</td><td>$ 2,262</td><td>$ 622</td><td>$ 1,973</td><td>$ 711</td><td></td><td></td></tr><tr><td>Accumulated benefit obligation</td><td>2,146</td><td>584</td><td>1,870</td><td>640</td><td></td><td></td></tr><tr><td>Fair value of plan assets</td><td>1,887</td><td>501</td><td>1,581</td><td>541</td><td></td><td></td></tr></table>

Components of net periodic benefit (credit) cost were as follows:

Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income

<table><tr><td rowspan="2"></td><td colspan="6">Pension Plans</td><td colspan="4">Postretirement Benefit Plans</td></tr><tr><td colspan="2">2015</td><td colspan="2">2014</td><td colspan="2">2013</td><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>(Dollars in millions)</td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>NonU.S.</td><td></td><td></td><td></td><td></td></tr><tr><td>Components of net periodic benefit (credit) cost:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Service cost</td><td>$ 39</td><td>$ 15</td><td>$ 40</td><td>$ 14</td><td>$ 43</td><td>$ 14</td><td>$ 8</td><td>$ 8</td><td>$ 8</td><td>11</td></tr><tr><td>Interest cost</td><td>87</td><td>26</td><td>100</td><td>31</td><td>89</td><td>27</td><td>39</td><td>45</td><td>44</td><td></td></tr><tr><td>Expected return on assets</td><td>(148)</td><td>(37)</td><td>(143)</td><td>(38)</td><td>(129)</td><td>(35)</td><td>(6)</td><td>(7)</td><td>(7)</td><td></td></tr><tr><td>Curtailment gain (1)</td><td>—</td><td>(7)</td><td>—</td><td>—</td><td>—</td><td>(1)</td><td>(2)</td><td>—</td><td>—</td><td></td></tr><tr><td>Amortization of:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Prior service cost (credit)</td><td>(4)</td><td>1</td><td>(4)</td><td>—</td><td>(4)</td><td>—</td><td>(24)</td><td>(24)</td><td>(22)</td><td></td></tr><tr><td>Mark-to-market pension and other postretirement benefits (gain) loss</td><td>140</td><td>(20)</td><td>166</td><td>95</td><td>(294)</td><td>18</td><td>(5)</td><td>43</td><td>(107)</td><td></td></tr><tr><td>Net periodic benefit (credit) cost</td><td>$ 114</td><td>$ (22)</td><td>$ 159</td><td>$ 102</td><td>$ (295)</td><td>$ 23</td><td>$ 10</td><td>$ 65</td><td>$ (81)</td><td></td></tr><tr><td>Other changes in plan assets and benefit obligations recognized in other comprehensive income:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Curtailment gain</td><td>$ —</td><td>$ (3)</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$</td><td>—</td></tr><tr><td>Current year prior service credit</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>140</td><td>—</td><td>47</td><td></td></tr><tr><td>Amortization of:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Prior service cost (credit)</td><td>(4)</td><td>1</td><td>(4)</td><td>—</td><td>(4)</td><td>—</td><td>(24)</td><td>(24)</td><td>(22)</td><td></td></tr><tr><td>Total</td><td>$ (4)</td><td>$ (2)</td><td>$ (4)</td><td>$ —</td><td>$ (4)</td><td>$ —</td><td>$ 116</td><td>$ (24)</td><td>$ 25</td><td></td></tr></table>

(1) Gain of $7 million in 2015 in the Fibers segment related to the remeasurement of the Workington, UK pension plan, triggered by the closure of the Workington, UK acetate tow manufacturing facility.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

In fourth quarter 2015, the Company changed benefits provided to retirees by the Eastman other postretirement benefit plan which triggered a remeasurement of the plan's obligation. The remeasurement resulted in a reduction in the accumulated postretirement benefit obligation of approximately $140 million which will be amortized as a prior service credit from accumulated other comprehensive income over approximately 8 years. The remeasurement was included in the 2015 year end remeasurement process.

In third quarter 2013, the Company changed benefits provided to future retirees by the Eastman other postretirement benefit plan which triggered an interim remeasurement of the plan's obligation. The remeasurement resulted in a reduction in the accumulated postretirement benefit obligation of approximately $47 million which will be amortized as a prior service credit from accumulated other comprehensive income over 8 years. The remeasurement of the plan also resulted in a mark-to-market actuarial gain of $86 million in third quarter 2013. The actuarial gain was primarily due to a higher assumed discount rate of 4.72 percent in third quarter 2013 compared to 4.01 percent at December 31, 2012. The higher assumed discount rate is reflective of changes in global market conditions and interest rates on high-grade corporate bonds.

The estimated prior service credit for the U.S. pension and other postretirement benefit plans that will be amortized from accumulated other comprehensive income into net periodic cost in 2016 is $4 million and $41 million, respectively.

The assumptions used to develop the projected benefit obligation for the Company's significant U.S. and non-U.S. defined benefit pension plans and U.S. postretirement benefit plans are provided in the following tables.

<table><tr><td rowspan="2"></td><td colspan="6">Pension Plans</td><td colspan="3">Postretirement Benefit Plans</td></tr><tr><td colspan="2">2015</td><td colspan="2">2014</td><td colspan="2">2013</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td></td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>Non- U.S.</td><td></td><td></td><td></td></tr><tr><td>Discount rate</td><td>4.13%</td><td>3.26%</td><td>3.80%</td><td>3.10%</td><td>4.59%</td><td>4.18%</td><td>4.17%</td><td>3.91%</td><td>4.75%</td></tr><tr><td>Rate of compensation increase</td><td>3.50%</td><td>3.00%</td><td>3.50%</td><td>3.24%</td><td>3.50%</td><td>3.49%</td><td>3.50%</td><td>3.50%</td><td>3.50%</td></tr><tr><td>Health care cost trend</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Initial</td><td></td><td></td><td></td><td></td><td></td><td></td><td>7.50%</td><td>7.50%</td><td>8.00%</td></tr><tr><td>Decreasing to ultimate trend of</td><td></td><td></td><td></td><td></td><td></td><td></td><td>5.00%</td><td>5.00%</td><td>5.00%</td></tr><tr><td>in year</td><td></td><td></td><td></td><td></td><td></td><td></td><td>2021</td><td>2020</td><td>2020</td></tr><tr><td>Weighted-average assumptions used to determine net periodic cost for years ended December 31:</td><td colspan="2">2015</td><td colspan="2">2014</td><td colspan="2">2013</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td></td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>Non- U.S.</td><td></td><td></td><td></td></tr><tr><td>Discount rate</td><td>3.80%</td><td>3.10%</td><td>4.59%</td><td>4.18%</td><td>3.72%</td><td>4.16%</td><td>3.91%</td><td>4.75%</td><td>3.91%</td></tr><tr><td>Expected return on assets</td><td>7.78%</td><td>5.50%</td><td>7.83%</td><td>5.78%</td><td>7.98%</td><td>5.90%</td><td>3.75%</td><td>3.75%</td><td>3.75%</td></tr><tr><td>Rate of compensation increase</td><td>3.50%</td><td>3.24%</td><td>3.50%</td><td>3.49%</td><td>3.50%</td><td>3.49%</td><td>3.50%</td><td></td><td>3.50%</td></tr><tr><td>Health care cost trend</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Initial</td><td></td><td></td><td></td><td></td><td></td><td></td><td>7.50%</td><td>8.00%</td><td>8.00%</td></tr><tr><td>Decreasing to ultimate trend of</td><td></td><td></td><td></td><td></td><td></td><td></td><td>5.00%</td><td>5.00%</td><td>5.00%</td></tr><tr><td>in year</td><td></td><td></td><td></td><td></td><td></td><td></td><td>2020</td><td>2020</td><td>2019</td></tr></table>



A seven and one-half percent rate of increase in per capita cost of covered health care benefits is assumed for 2016. The rate is assumed to decrease gradually to five percent in 2021 and remain at that level thereafter. A one percent increase or decrease in health care cost trend would have had no material impact on the 2015 service and interest costs or the 2015 benefit obligation, because the Company's contributions for benefits are fixed.

The Company performed a five year experience study on assumptions for the U.S. plans in 2014 which included a review of the mortality tables. As a result of the study, the Company continues to use the RP-2000 table with scale AA static improvement scale and no collar adjustment as it most closely aligns with the Company's experience.

The fair value of plan assets for the U.S. pension plans at December 31, 2015 and 2014 was $1.9 billion and $2.0 billion, respectively, while the fair value of plan assets at December 31, 2015 and 2014 for non-U.S. pension plans was $650 million and $699 million, respectively. At December 31, 2015 and 2014, the expected weighted-average long-term rate of return on U.S. pension plan assets was 7.60% percent and 7.78% percent, respectively. The expected weighted-average long-term rate of return on non-U.S. pension plans assets was 5.11% percent and 5.50% percent at December 31, 2015 and 2014, respectively.

The following charts reflect the fair value of the defined benefit pension plans assets as of December 31, 2015 and 2014.

<table><tr><td rowspan="2">Description</td><td colspan="12">Fair Value Measurements at December 31, 2015</td></tr><tr><td colspan="3">December 31, 2015</td><td colspan="3">Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td colspan="3">Significant Other Observable Inputs (Level 2)</td><td colspan="3">Significant Unobservable Inputs (Level 3)</td></tr><tr><td>Pension Assets:</td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>U.N.S.</td><td>U.S.</td><td>U.N.S.</td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td></tr><tr><td>Cash &amp; Cash Equivalents (1)</td><td>$ 66</td><td>$ 9</td><td>$ 66</td><td>$ 9</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$</td><td>—</td></tr><tr><td>Debt (2):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Fixed Income (U.S.)</td><td>665</td><td>14</td><td>—</td><td>—</td><td>665</td><td>14</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Fixed Income (Non-U.S.)</td><td>—</td><td>250</td><td>—</td><td>—</td><td>—</td><td>—</td><td>250</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Fixed Income (Global)</td><td>—</td><td>26</td><td>—</td><td>—</td><td>—</td><td>—</td><td>26</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>U.S. Treasury Securities</td><td>36</td><td>—</td><td>—</td><td>—</td><td>—</td><td>36</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Public Equity Funds (3):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>United States</td><td>476</td><td>36</td><td>—</td><td>—</td><td>476</td><td>36</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Non-U.S.</td><td>358</td><td>49</td><td>—</td><td>—</td><td>358</td><td>49</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Global</td><td>—</td><td>147</td><td>—</td><td>—</td><td>—</td><td>—</td><td>147</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Other (4):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Private Equity, Real Estate Funds, and Other Alternative Investments</td><td>286</td><td>72</td><td>—</td><td>—</td><td>—</td><td>—</td><td>30</td><td>286</td><td>42</td><td></td><td></td><td></td></tr><tr><td>Multi-Asset Common Collective Trusts</td><td>—</td><td>47</td><td>—</td><td>—</td><td>—</td><td>—</td><td>47</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total</td><td>$ 1,887</td><td>$ 650</td><td>$ 66</td><td>$ 9</td><td>$ 1,535</td><td>$ 599</td><td>$ 286</td><td>$ 42</td><td></td><td></td><td></td><td></td></tr></table>

(1) Cash & Cash Equivalents: The carrying amounts of cash and cash equivalents are valued at $1 per unit, which approximates fair value. Amounts are generally invested in actively managed common trust funds or interest bearing accounts.

(2) Debt: The underlying fixed income investments in this category are generally held in common trust funds, which are either actively or passively managed investment vehicles, that are valued at the net asset value per unit/share multiplied by the number of units/shares held as of the measurement date.

(3) Public Equity Funds: The underlying equity investments in this category are generally held in common trust funds, which are either actively or passively managed investment vehicles, that are valued at the net asset value per unit/share multiplied by the number of units/shares held as of the measurement date.

(4) Other: The underlying investments in this category are held in private investment funds. These investments are valued based on the net asset value provided by the management of each private investment fund, adjusted as appropriate, for any lag between the date of the financial reports and the measurement date.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td rowspan="2">Description</td><td colspan="2">December 31, 2014</td><td colspan="6">Fair Value Measurements at December 31, 2014</td></tr><tr><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>Non-U.S.</td><td>U.S.</td><td>Non-U. S.</td><td>U.S.</td><td>Non-U.S.</td></tr><tr><td>Pension Assets:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash &amp; Cash Equivalents (1)</td><td>$ 77</td><td>$ 19</td><td>$ 77</td><td>$ 19</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ —</td></tr><tr><td>Debt (2):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Fixed Income (U.S.)</td><td>662</td><td>11</td><td>—</td><td>—</td><td>662</td><td>11</td><td>—</td><td>—</td></tr><tr><td>Fixed Income (Non-U.S.)</td><td>—</td><td>278</td><td>—</td><td>—</td><td>—</td><td>278</td><td>—</td><td>—</td></tr><tr><td>Fixed Income (Global)</td><td>—</td><td>28</td><td>—</td><td>—</td><td>—</td><td>28</td><td>—</td><td>—</td></tr><tr><td>U.S. Treasury Securities</td><td>37</td><td>—</td><td>—</td><td>—</td><td>37</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Public Equity Funds (3):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>United States</td><td>509</td><td>31</td><td>—</td><td>—</td><td>509</td><td>31</td><td>—</td><td>—</td></tr><tr><td>Non-U.S.</td><td>348</td><td>48</td><td>—</td><td>—</td><td>348</td><td>48</td><td>—</td><td>—</td></tr><tr><td>Global</td><td>—</td><td>154</td><td>—</td><td>—</td><td>—</td><td>154</td><td>—</td><td>—</td></tr><tr><td>Other (4):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Private Equity, Real Estate Funds, and Other Alternative Investments</td><td>335</td><td>82</td><td>—</td><td>—</td><td>—</td><td>27</td><td>335</td><td>55</td></tr><tr><td>Multi-Asset Common Collective Trusts</td><td>—</td><td>48</td><td>—</td><td>—</td><td>—</td><td>48</td><td>—</td><td>—</td></tr><tr><td>Total</td><td>$ 1,968</td><td>$ 699</td><td>$ 77</td><td>$ 19</td><td>$ 1,556</td><td>$ 625</td><td>$ 335</td><td>$ 55</td></tr></table>

(1) Cash & Cash Equivalents: The carrying amounts of cash and cash equivalents are valued at $1 per unit, which approximates fair value. Amounts are generally invested in actively managed common trust funds or interest bearing accounts.

(2) Debt: The underlying fixed income investments in this category are generally held in common trust funds, which are either actively or passively managed investment vehicles, that are valued at the net asset value per unit/share multiplied by the number of units/shares held as of the measurement date.

(3) Public Equity Funds: The underlying equity investments in this category are generally held in common trust funds, which are either actively or passively managed investment vehicles, that are valued at the net asset value per unit/share multiplied by the number of units/shares held as of the measurement date.

(4) Other: The underlying investments in this category are held in private investment funds. These investments are valued based on the net asset value provided by the management of each private investment fund, adjusted as appropriate, for any lag between the date of the financial reports and the measurement date.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following charts reflect the fair value of the postretirement benefit plan assets as of December 31, 2015 and 2014. The postretirement benefit plan is for the voluntary employees' beneficiary association ("VEBA") trust the Company assumed as part of the Solutia acquisition.

<table><tr><td rowspan="2">(Dollars in millions)</td><td rowspan="2">December 31, 2015</td><td colspan="3">Fair Value Measurements at December 31, 2015</td></tr><tr><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td></tr><tr><td>Description</td><td></td><td></td><td></td><td></td></tr><tr><td>Postretirement Benefit Plan Assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash &amp; Cash Equivalents (1)</td><td>$ —</td><td>$ —</td><td>$ —</td><td>$ —</td></tr><tr><td>Debt (2):</td><td></td><td></td><td></td><td></td></tr><tr><td>Fixed Income (U.S.)</td><td>86</td><td>—</td><td>86</td><td>—</td></tr><tr><td>Fixed Income (Non-U.S.)</td><td>34</td><td>—</td><td>34</td><td>—</td></tr><tr><td>U.S. Treasury Securities</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total</td><td>$ 120</td><td>$ —</td><td>$ 120</td><td>$ —</td></tr></table>

<table><tr><td rowspan="2">(Dollars in millions)</td><td rowspan="2">December 31, 2014</td><td colspan="3">Fair Value Measurements at December 31, 2014</td></tr><tr><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td></tr><tr><td>Description</td><td></td><td></td><td></td><td></td></tr><tr><td>Postretirement Benefit Plan Assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash &amp; Cash Equivalents (1)</td><td>$ 6</td><td>$ 6</td><td>$ —</td><td>$ —</td></tr><tr><td>Debt (2):</td><td></td><td></td><td></td><td></td></tr><tr><td>Fixed Income (U.S.)</td><td>124</td><td>—</td><td>124</td><td>—</td></tr><tr><td>Fixed Income (Non-U.S.)</td><td>2</td><td>—</td><td>2</td><td>—</td></tr><tr><td>U.S. Treasury Securities</td><td>1</td><td>—</td><td>1</td><td>—</td></tr><tr><td>Total</td><td>$ 133</td><td>$ 6</td><td>$ 127</td><td>$ —</td></tr></table>

(1) Cash & Cash Equivalents: The carrying amounts of cash and cash equivalents are valued at $1 per unit, which approximates fair value. Amounts are generally invested in actively managed common trust funds or interest bearing accounts.

(2) Debt: The underlying fixed income investments in this category are generally held in common trust funds, which are either actively or passively managed investment vehicles, that are valued at the net asset value per unit/share multiplied by the number of units/shares held as of the measurement date.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company valued assets with unobservable inputs (Level 3), specifically its alternative investments, investments in private equity and investments in real estate and other funds under the practical expedient method. The practical expedient method allows reporting entities to use the most recently reported net asset value ("NAV") of qualifying investment companies provided it is not probable that the investment will be sold by the reporting entity at an amount different from the most recently reported NAV.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

<table><tr><td rowspan="2"></td><td colspan="5">U.S. Pension Plans</td><td colspan="5">Non-U.S. Pension Plans</td></tr><tr><td>Private Equity</td><td>Real Estate</td><td>Other Alternative Investments \( ^{(1)} \)</td><td>Total</td><td>Real Estate</td><td>Other Alternative Investments \( ^{(1)} \)</td><td>Total</td><td></td><td></td><td></td></tr><tr><td>(Dollars in millions)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Balance at December 31, 2013</td><td>$ 177</td><td>$ 101</td><td>$ 84</td><td>$ 362</td><td>$ 2</td><td>$ 25</td><td>$ 27</td><td></td><td></td><td></td></tr><tr><td>Distributions</td><td>(40)</td><td>(29)</td><td>(17)</td><td>(86)</td><td>—</td><td>—</td><td>—</td><td></td><td></td><td></td></tr><tr><td>Unrealized gains</td><td>18</td><td>9</td><td>4</td><td>31</td><td>—</td><td>4</td><td>4</td><td></td><td></td><td></td></tr><tr><td>Purchases, contributions, and other</td><td>21</td><td>2</td><td>5</td><td>28</td><td>(2)</td><td>26</td><td>24</td><td></td><td></td><td></td></tr><tr><td>Balance at December 31, 2014</td><td>176</td><td>83</td><td>76</td><td>335</td><td>—</td><td>55</td><td>55</td><td></td><td></td><td></td></tr><tr><td>Distributions</td><td>(56)</td><td>(28)</td><td>(15)</td><td>(99)</td><td>—</td><td>—</td><td>—</td><td></td><td></td><td></td></tr><tr><td>Unrealized gains</td><td>23</td><td>10</td><td>(16)</td><td>17</td><td>—</td><td>(5)</td><td>(5)</td><td></td><td></td><td></td></tr><tr><td>Purchases, contributions, and other</td><td>24</td><td>1</td><td>8</td><td>33</td><td>—</td><td>(8)</td><td>(8)</td><td></td><td></td><td></td></tr><tr><td>Balance at December 31, 2015</td><td>$ 167</td><td>$ 66</td><td>$ 53</td><td>$ 286</td><td>$ —</td><td>$ 42</td><td>$ 42</td><td></td><td></td><td></td></tr></table>

(1) U.S. primarily consists of natural resource and energy related limited partnership investments. Non-U.S. primarily consists of annuity contracts.

The following chart reflects the target allocation for the Company's U.S. and non-U.S. pension and postretirement benefit plans assets for 2015 and the asset allocation at December 31, 2015 and 2014, by asset category. The postretirement benefit plan is for the VEBA trust the Company assumed as part of the Solutia acquisition.

<table><tr><td rowspan="2"></td><td colspan="3">U.S. Pension Plans</td><td colspan="3">Non-U.S. Pension Plans</td><td colspan="3">Postretirement Benefit Plan</td></tr><tr><td>Target Allocation</td><td>Plan Assets at December 31, 2015</td><td>Plan Assets at December 31, 2014</td><td>Target Allocation</td><td>Plan Assets at December 31, 2015</td><td>Plan Assets et December 31, 2014</td><td>Target Allocation</td><td>Plan Assets at December 31 2015</td><td>Plan Assets et December 31, 2014</td></tr><tr><td>Asset category</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Equity securities</td><td>48%</td><td>44%</td><td>44%</td><td>31%</td><td>36%</td><td>34%</td><td>—%</td><td>—%</td><td>—%</td></tr><tr><td>Debt securities</td><td>33%</td><td>41%</td><td>39%</td><td>50%</td><td>46%</td><td>48%</td><td>100%</td><td>100%</td><td>100%</td></tr><tr><td>Real estate</td><td>5%</td><td>4%</td><td>4%</td><td>2%</td><td>2%</td><td>2%</td><td>—%</td><td>—%</td><td>—%</td></tr><tr><td>Other investments (1)</td><td>14%</td><td>11%</td><td>13%</td><td>17%</td><td>16%</td><td>16%</td><td>—%</td><td>—%</td><td>—%</td></tr><tr><td>Total</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100</td><td>100%</td><td>100%</td><td>100%</td></tr></table>

(1) U.S. primarily consists of private equity and natural resource and energy related limited partnership investments. Non-U.S. primarily consists of annuity contracts and alternative investments.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company's investment strategy for its defined benefit pension plans is to maximize the long-term rate of return on plan assets within an acceptable level of risk in order to meet or exceed the plan's actuarially assumed long-term rate of return and to minimize the cost of providing pension benefits. A periodic asset/liability study is conducted in order to assist in the determination and, if necessary, modification of the appropriate long-term investment policy for the plan. The investment policy establishes a target allocation range for each asset class and the fund is managed within those ranges. The plans use a number of investment approaches including investments in equity, real estate, and fixed income funds in which the underlying securities are marketable in order to achieve this target allocation. The plans also invest in private equity and other funds. Diversification is created through investment across various asset classes, geographies, fund managers, and individual securities. This investment process is designed to provide for a well-diversified portfolio with no significant concentration of risk. The investment process is monitored by an investment committee comprised of various senior executives from within Eastman.

In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's non-U.S. defined benefit pension plans in Belgium and Finland. The pension plans' assets consist of guaranteed investment contracts with an insurance company. The Company also assumed Taminco's U.S. postretirement benefit plan which has no plan assets.

In July 2012, as part of its acquisition of Solutia, the Company assumed Solutia's defined benefit pension and other postretirement benefit plans. The Solutia defined benefit pension plans adhere to the Company's defined benefit plan investment strategy. The Solutia defined benefit pension plans also utilize a dynamic de-risking strategy to shift from growth assets to liability matching assets as the plan's funded status improves. The investment strategy with respect to Solutia's other postretirement benefits plan is to invest in an intermediate-term, well diversified, high quality investment instruments, with a primary objective of capital preservation.

The expected rate of return for all plans was determined primarily by modeling the expected long-term rates of return for the categories of investments held by the plans and the targeted allocation percentage against various potential economic scenarios.

The Company funded its U.S. defined benefit pension plans in the amount of $125 million in 2015 and $120 million in 2014. For 2016, there are no minimum required cash contributions for the U.S. defined benefit pension plans under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended.

The estimated future benefit payments, reflecting expected future service, as appropriate, are as follows:

<table><tr><td rowspan="2"></td><td colspan="2">Pension Plans</td><td rowspan="2">Postretirement Benefit Plans</td></tr><tr><td>U.S.</td><td>Non-U.S.</td></tr><tr><td>(Dollars in millions)</td><td>$ 227</td><td>$ 22</td><td>$ 60</td></tr><tr><td>2016</td><td>200</td><td>22</td><td>60</td></tr><tr><td>2017</td><td>199</td><td>23</td><td>59</td></tr><tr><td>2018</td><td>197</td><td>25</td><td>60</td></tr><tr><td>2019</td><td>195</td><td>26</td><td>60</td></tr><tr><td>2020</td><td>879</td><td>147</td><td>296</td></tr><tr><td>2021-2025</td><td></td><td></td><td></td></tr></table>



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## 12. COMMITMENTS

## Purchase Obligations and Lease Commitments

The Company had various purchase obligations at December 31, 2015 totaling $1.4 billion over a period of approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business. The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling approximately $273 million over a period of approximately 40 years. Of the total lease commitments, approximately 50 percent relate to real property, including office space, storage facilities, and land; approximately 45 percent relate to railcars; and approximately 5 percent relate to machinery and equipment, including computer and communications equipment and production equipment. Rental expense, net of sublease income, was $91 million, $80 million, and $73 million in 2015, 2014, and 2013, respectively.

The obligations described above, debt repayment obligations, and credit facilities and commercial paper borrowings, are summarized in the following table:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="8">Payments Due For</td></tr><tr><td>Debt Securities</td><td>Credit Facilities and Other</td><td>Interest Payable</td><td>Purchase Obligations</td><td>Operating Leases</td><td>Total</td><td></td><td></td></tr><tr><td>Period</td><td>$ —</td><td>$ 431</td><td>$ 265</td><td>$ 145</td><td>$ 63</td><td>$ 904</td><td></td><td></td></tr><tr><td>2016</td><td>999</td><td>1</td><td>283</td><td>164</td><td>50</td><td>1,497</td><td></td><td></td></tr><tr><td>2017</td><td>167</td><td>326</td><td>238</td><td>161</td><td>38</td><td>930</td><td></td><td></td></tr><tr><td>2018</td><td>250</td><td>226</td><td>218</td><td>148</td><td>28</td><td>870</td><td></td><td></td></tr><tr><td>2020</td><td>799</td><td>—</td><td>190</td><td>134</td><td>22</td><td>1,145</td><td></td><td></td></tr><tr><td>2021 and beyond</td><td>3,840</td><td>—</td><td>1,926</td><td>673</td><td>72</td><td>6,511</td><td></td><td></td></tr><tr><td>Total</td><td>$ 6,055</td><td>$ 984</td><td>$ 3,120</td><td>$ 1,425</td><td>$ 273</td><td>$ 11,857</td><td></td><td></td></tr></table>

## Guarantees

The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease as well as other guarantees. Disclosures about each group of similar guarantees are provided below.

## Residual Value Guarantees

The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease. These residual value guarantees at December 31, 2015 totaled $120 million and consisted primarily of leases for railcars and Company aircraft and will expire beginning in 2016. Management believes, based on current facts and circumstances, that the likelihood of material residual guarantee payments is remote.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## Other Guarantees

Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, and other parties when the Company undertakes an obligation to guarantee the performance of others, if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating primarily to intellectual property, environmental matters, and other indemnifications and have arisen through the normal course of business. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims, if they were to occur. These other guarantees have terms up to 30 years with maximum potential future payments of approximately $35 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. The Company's current expectation is that future payment or performance related to non-performance under other guarantees is considered remote.

## 13. ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS

Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure and post-closure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies". The Company's total reserve for environmental contingencies was $336 million and $345 million at December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, this reserve included $8 million and $10 million, respectively, related to sites previously closed and impaired by Eastman and sites that have been divested by Eastman but for which the Company retains the environmental liability related to these sites.

The Company's total environmental reserve for environmental contingencies, including remediation costs and asset retirement obligations, is reflected in the Consolidated Statements of Financial Position as follows:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">December 31,</td></tr><tr><td>2015</td><td>2014</td><td></td></tr><tr><td>Environmental contingent liabilities, current</td><td>$     35</td><td>$     35</td><td></td></tr><tr><td>Environmental contingent liabilities, long-term</td><td>301</td><td>310</td><td></td></tr><tr><td>Total</td><td>$     336</td><td>$     345</td><td></td></tr></table>

## Remediation

Estimated future environmental expenditures for remediation costs ranged from the undiscounted minimum or best estimate of $308 million to the maximum of $516 million and from the minimum or best estimate of $324 million to the maximum of $548 million at December 31, 2015 and 2014, respectively. The maximum estimated future costs are considered to be reasonably possible and include the amounts accrued at both December 31, 2015 and 2014.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Costs of certain remediation projects included in the environmental reserve are subject to a cost-sharing arrangement with Monsanto Company ("Monsanto") under the provisions of the Amended and Restated Settlement Agreement effective February 28, 2008 (the "Effective Date"), into which Solutia entered with Monsanto upon its emergence from bankruptcy (the "Monsanto Settlement Agreement"). Under the provisions of the Monsanto Settlement Agreement, the Company shares responsibility with Monsanto for remediation at certain locations outside of the boundaries of plant sites in Anniston, Alabama and Sauget, Illinois (the "Shared Sites"). The Company is responsible for the funding of environmental liabilities at the Shared Sites up to a total of $325 million from the Effective Date. If remediation costs for the Shared Sites exceed this amount, such costs will thereafter be shared equally between the Company and Monsanto. Including payments by Solutia prior to its acquisition by Eastman, $71 million had been paid for costs at the Shared Sites as of December 31, 2015. As of December 31, 2015, an additional $205 million has been accrued for estimated future remediation costs at the Shared Sites, over a period of thirty years.

Reserves for environmental remediation that management believes to be probable and estimable are recognized as current and long-term liabilities in the Consolidated Statements of Financial Position. The amounts charged to pre-tax earnings for environmental remediation and related charges are included in cost of sales and other (income) charges, net, and are summarized below:

<table><tr><td>(Dollars in millions)</td><td>Environmental Remediation Liabilities</td></tr><tr><td>Balance at December 31, 2014</td><td>$ 324</td></tr><tr><td>Changes in estimates recorded to earnings and other</td><td>12</td></tr><tr><td>Cash reductions</td><td>(28)</td></tr><tr><td>Balance at December 31, 2015</td><td>$ 308</td></tr></table>

## Closure/Post-Closure

An asset retirement obligation is an obligation for the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying value of the long-lived assets and depreciated over their useful life. Environmental asset retirement obligations consist of primarily closure and post-closure costs. For facilities that have environmental asset retirement obligations, the best estimate accrued to date over the facilities' estimated useful lives for these asset retirement obligation costs were $28 million and $21 million at December 31, 2015 and 2014, respectively.

## Other

Environmental costs are capitalized if they extend the life of the related property, increase its capacity, and/or mitigate or prevent future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred. The amounts charged to earnings related to environmental protection and improvement were $290 million, $319 million, and $285 million in 2015, 2014, and 2013, respectively. These amounts were primarily for operating costs associated with environmental protection equipment and facilities, but also included $61 million and $79 million in expenditures for engineering and construction in 2015 and 2014, respectively.

The Company also has contractual obligations that include asset retirement obligations not associated with environmental liabilities. Eastman's non-environmental asset retirement obligations are primarily associated with the future closure of leased manufacturing assets at Pace, Florida and Oulu, Finland acquired from Taminco. These accrued non-environmental asset retirement obligations were $46 million and $44 million as of December 31, 2015 and December 31, 2014, respectively.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## 14. LEGAL MATTERS

## 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.



## 15. STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders' equity for 2015, 2014, and 2013 is provided below:

<table><tr><td></td><td>Common Stock at Par Value</td><td>Paid-in Capital</td><td>Retained Earnings</td><td>Accumulated Other Comprehensive Income (Loss)</td><td>Treasury Stock at Cost</td><td>Total Stockholders&#x27; Equity Attributed to Eastman</td><td>Noncontrolling Interest</td><td>Total Stockholders&#x27; Equity</td></tr><tr><td>(Dollars in millions)</td><td>$</td><td>$</td><td>$</td><td>$</td><td>$</td><td>$</td><td>$</td><td>$</td></tr><tr><td>Balance at December 31, 2012</td><td>2</td><td>1,709</td><td>3,038</td><td>123</td><td>(1,929)</td><td>2,943</td><td>85</td><td>3,028</td></tr><tr><td>Net Earnings</td><td>—</td><td>—</td><td>1,165</td><td>—</td><td>—</td><td>1,165</td><td>7</td><td>1,172</td></tr><tr><td>Cash Dividends (1)</td><td>—</td><td>—</td><td>(191)</td><td>—</td><td>—</td><td>(191)</td><td>—</td><td>(191)</td></tr><tr><td>Other Comprehensive Income</td><td>—</td><td>—</td><td>—</td><td>48</td><td>—</td><td>48</td><td>—</td><td>48</td></tr><tr><td>Share-Based Compensation Expense (2)</td><td>—</td><td>39</td><td>—</td><td>—</td><td>—</td><td>39</td><td>—</td><td>39</td></tr><tr><td>Stock Option Exercises</td><td>—</td><td>12</td><td>—</td><td>—</td><td>—</td><td>12</td><td>—</td><td>12</td></tr><tr><td>Shares Issued for Business Combination</td><td>—</td><td>16</td><td>—</td><td>—</td><td>—</td><td>16</td><td>—</td><td>16</td></tr><tr><td>Other (3)</td><td>—</td><td>2</td><td>—</td><td>—</td><td>—</td><td>2</td><td>—</td><td>2</td></tr><tr><td>Share Repurchase</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(238)</td><td>(238)</td><td>—</td><td>(238)</td></tr><tr><td>Distributions to noncontrolling interest</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(13)</td><td>(13)</td></tr><tr><td>Balance at December 31, 2013</td><td>2</td><td>1,778</td><td>4,012</td><td>171</td><td>(2,167)</td><td>3,796</td><td>79</td><td>3,875</td></tr><tr><td>Net Earnings</td><td>—</td><td>—</td><td>751</td><td>—</td><td>—</td><td>751</td><td>6</td><td>757</td></tr><tr><td>Cash Dividends (1)</td><td>—</td><td>—</td><td>(218)</td><td>—</td><td>—</td><td>(218)</td><td>—</td><td>(218)</td></tr><tr><td>Other Comprehensive Loss</td><td>—</td><td>—</td><td>—</td><td>(448)</td><td>—</td><td>(448)</td><td>—</td><td>(448)</td></tr><tr><td>Share-Based Compensation Expense (2)</td><td>—</td><td>28</td><td>—</td><td>—</td><td>—</td><td>28</td><td>—</td><td>28</td></tr><tr><td>Stock Option Exercises</td><td>—</td><td>13</td><td>—</td><td>—</td><td>—</td><td>13</td><td>—</td><td>13</td></tr><tr><td>Other (3)</td><td>—</td><td>(2)</td><td>—</td><td>—</td><td>—</td><td>(2)</td><td>(1)</td><td>(3)</td></tr><tr><td>Share Repurchase</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(410)</td><td>(410)</td><td>—</td><td>(410)</td></tr><tr><td>Distributions to noncontrolling interest</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(4)</td><td>(4)</td></tr><tr><td>Balance at December 31, 2014</td><td>2</td><td>1,817</td><td>4,545</td><td>(277)</td><td>(2,577)</td><td>3,510</td><td>80</td><td>3,590</td></tr><tr><td>Net Earnings</td><td>—</td><td>—</td><td>848</td><td>—</td><td>—</td><td>848</td><td>6</td><td>854</td></tr><tr><td>Cash Dividends (1)</td><td>—</td><td>—</td><td>(247)</td><td>—</td><td>—</td><td>(247)</td><td>—</td><td>(247)</td></tr><tr><td>Other Comprehensive Loss</td><td>—</td><td>—</td><td>—</td><td>(113)</td><td>—</td><td>(113)</td><td>—</td><td>(113)</td></tr><tr><td>Share-Based Compensation Expense (2)</td><td>—</td><td>37</td><td>—</td><td>—</td><td>—</td><td>37</td><td>—</td><td>37</td></tr><tr><td>Stock Option Exercises</td><td>—</td><td>8</td><td>—</td><td>—</td><td>—</td><td>8</td><td>—</td><td>8</td></tr><tr><td>Other (3)</td><td>—</td><td>1</td><td>—</td><td>—</td><td>—</td><td>1</td><td>—</td><td>1</td></tr><tr><td>Share Repurchase</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(103)</td><td>(103)</td><td>—</td><td>(103)</td></tr><tr><td>Distributions to noncontrolling interest</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(6)</td><td>(6)</td></tr><tr><td>Balance at December 31, 2015</td><td>2</td><td>1,863</td><td>5,146</td><td>(390)</td><td>(2,680)</td><td>3,941</td><td>80</td><td>4,021</td></tr></table>

(1) Includes cash dividends paid and dividends declared, but unpaid.

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

(3) Paid in capital includes tax benefits/charges relating to the difference between the amounts deductible for federal income taxes over the amounts charged to income for book value purposes have been adjusted to paid-in capital and other items. Equity attributable to noncontrolling interest includes adjustments for currency revaluation.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company is authorized to issue 400 million shares of all classes of stock, of which 50 million may be preferred stock, par value $0.01 per share, and 350 million may be common stock, par value $0.01 per share. The Company declared dividends per share of $1.66 in 2015, $1.45 in 2014, and $1.25 in 2013.

The Company established a benefit security trust in 1997 to provide a degree of financial security for unfunded obligations under certain unfunded plans and contributed to the trust a warrant to purchase up to 6 million shares of common stock of the Company for par value. The warrant, which remains outstanding, is exercisable by the trustee if the Company does not meet certain funding obligations, which obligations would be triggered by certain occurrences, including a change in control or potential change in control, as defined, or failure by the Company to meet its payment obligations under certain covered unfunded plans. Such warrant is excluded from the computation of diluted earnings per share because the conditions upon which the warrant becomes exercisable have not been met.

The additions to paid-in capital in 2015, 2014, and 2013 are primarily for compensation expense of equity awards and employee stock option exercises.

In February 2011, the Company's Board of Directors authorized repurchase of up to $300 million of the Company's outstanding common stock. The Company completed the $300 million repurchase authorization in August 2013, acquiring a total of 6,141,999 shares. In May 2013, the Company's Board of Directors authorized repurchase of up to $300 million of the Company's outstanding common stock. The Company completed the $300 million repurchase authorization in March 2014, acquiring a total of 3,840,949 shares. In February 2014, the Company's Board of Directors authorized repurchase of up to an additional $1 billion 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. As of December 31, 2015, a total of 4,410,689 shares have been repurchased under this authorization for a total of $353 million. During 2015, the Company repurchased 1,477,660 shares of common stock for a cost of approximately $103 million. During 2014, the Company repurchased 4,945,452 shares of common stock for a cost of approximately $410 million. During 2013, the Company repurchased 3,212,886 shares of common stock for a cost of approximately $238 million.

The Company's charitable foundation held 50,798 shares of the Company's common stock at December 31, 2015, 2014, and 2013 which are included in treasury stock.

The following table sets forth the computation of basic and diluted earnings per share ("EPS") for continuing operations:

<table><tr><td rowspan="2">(In millions, except per share amounts)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Numerator</td><td></td><td></td><td></td></tr><tr><td>Earnings attributable to Eastman stockholders:</td><td></td><td></td><td></td></tr><tr><td>Earnings from continuing operations, net of tax</td><td>$     848</td><td>$     749</td><td>$     1,165</td></tr><tr><td>Denominator</td><td></td><td></td><td></td></tr><tr><td>Weighted average shares used for basic EPS</td><td>148.6</td><td>149.5</td><td>154.0</td></tr><tr><td>Dilutive effect of stock options and other award plans</td><td>1.2</td><td>1.6</td><td>2.5</td></tr><tr><td>Weighted average shares used for diluted EPS</td><td>149.8</td><td>151.1</td><td>156.5</td></tr><tr><td>EPS from continuing operations \( ^{(1)} \)</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$     5.71</td><td>$     5.01</td><td>$     7.57</td></tr><tr><td>Diluted</td><td>$     5.66</td><td>$     4.95</td><td>$     7.44</td></tr></table>

(1) Earnings per share are calculated using whole dollars and shares.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Stock options excluded from the 2015 calculation of diluted earnings per share were 768,134 because the market value of option exercises for these awards was less than the cash proceeds that would be received from these exercises. Stock options excluded from the 2014 calculation of diluted earnings per share were 272,143 because the market value of option exercises for these awards was less than the cash proceeds that would be received from these exercises. There were no stock options excluded from the 2013 calculation of diluted earnings per share.

<table><tr><td rowspan="2">Shares of common stock issued (1)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Balance at beginning of year</td><td>216,256,971</td><td>215,131,237</td><td>213,406,523</td></tr><tr><td>Issued for employee compensation and benefit plans</td><td>642,993</td><td>1,125,734</td><td>1,455,030</td></tr><tr><td>Issued for Solutia acquisition and related warrants</td><td>—</td><td>—</td><td>269,684</td></tr><tr><td>Balance at end of year</td><td>216,899,964</td><td>216,256,971</td><td>215,131,237</td></tr></table>

(1) Includes shares held in treasury.

Accumulated Other Comprehensive Income (Loss), Net of Tax

<table><tr><td></td><td>Cumulative Translation Adjustment</td><td>Benefit Plans Unrecognized Prior Service Credits</td><td>Unrealized Gains (Losses) on Cash Flow Hedges</td><td>Unrealized Losses on Investments</td><td>Accumulated Other Comprehensive Income (Loss)</td></tr><tr><td>(Dollars in millions)</td><td>$</td><td>$</td><td>$</td><td>$</td><td>$</td></tr><tr><td>Balance at December 31, 2013</td><td>133</td><td>78</td><td>(39)</td><td>(1)</td><td>171</td></tr><tr><td>Period change</td><td>(201)</td><td>(17)</td><td>(230)</td><td>—</td><td>(448)</td></tr><tr><td>Balance at December 31, 2014</td><td>(68)</td><td>61</td><td>(269)</td><td>(1)</td><td>(277)</td></tr><tr><td>Period change</td><td>(216)</td><td>68</td><td>35</td><td>—</td><td>(113)</td></tr><tr><td>Balance at December 31, 2015</td><td>(284)</td><td>129</td><td>(234)</td><td>(1)</td><td>(390)</td></tr></table>

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 indefinitely invested, unremitted earnings of these foreign subsidiaries.



Components of other comprehensive income recorded in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings are presented below, before tax and net of tax effects:

<table><tr><td rowspan="2"></td><td colspan="8">For years ended December 31,</td></tr><tr><td colspan="2">2015</td><td colspan="2">2014</td><td colspan="2">2013</td><td></td><td></td></tr><tr><td></td><td>Before Tax</td><td>Net of Tax</td><td>Before Tax</td><td>Net of Tax</td><td>Before Tax</td><td>Net of Tax</td><td></td><td></td></tr><tr><td>(Dollars in millions)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Other comprehensive income (loss)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>

For additional information regarding the impact of reclassifications into earnings, refer to Note 10, "Derivatives" and Note 11, "Retirement Plans".

## 16. ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET

Components of asset impairments and restructuring charges, net, are presented below:

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Fixed asset impairments</td><td>$     85</td><td>$     28</td><td>$     28</td><td></td></tr><tr><td>Gain on sale</td><td>(1)</td><td>(7)</td><td>—</td><td></td></tr><tr><td>Intangible asset and goodwill impairments</td><td>22</td><td>24</td><td>—</td><td></td></tr><tr><td>Severance charges</td><td>68</td><td>13</td><td>27</td><td></td></tr><tr><td>Site closure and restructuring charges</td><td>9</td><td>19</td><td>21</td><td></td></tr><tr><td>Total</td><td>$     183</td><td>$     77</td><td>$     76</td><td></td></tr></table>

## 2015

In 2015, there were net asset impairments and restructuring charges of $183 million.

The Company took actions during fourth quarter 2015 to reduce non-operations workforce resulting in restructuring charges of $51 million for severance. These actions were taken to offset the impacts of low oil prices, a strengthened U.S. dollar, and the continued weak worldwide economic and business conditions.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

As a result of the annual impairment testing of indefinite-lived intangible assets in 2015, the Company recognized intangible asset impairments of $18 million in the Advanced Materials segment primarily to reduce the carrying value of the V-KOOL \( ^{\circledR} \)  window films products tradename to the estimated fair value. The estimated fair value was determined using an income approach, specifically, the relief from royalty method. The impairment resulted from a decrease in projected revenues since the tradename was acquired. The decrease in projected revenues was primarily due to the Asian economic downturn impacting car sales growth in those geographic markets.

In 2015, net asset impairments and restructuring charges included $81 million of asset impairments and $17 million of restructuring charges, including severance, in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing facility which was substantially completed in 2015. Additionally, in 2015, management decided not to continue a growth initiative that was reported in "Other". This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $3 million.

Additionally, during 2015, net asset impairments and restructuring charges included $4 million of restructuring charges primarily for severance associated with the integration of Taminco.

## 2014

In 2014, there were net asset impairments and restructuring charges of $77 million.

In 2014, asset impairments of $18 million and restructuring charges, including severance, of $24 million were recognized in the AFP segment for costs of the closure of a Crystex \( ^{\circledR} \)  R&D facility in France.

As a result of the annual impairment testing of indefinite-lived intangible assets, in third quarter 2014 the Company recognized an intangible asset impairment of $22 million in the AFP segment to adjust the carrying value of the Crystex \( ^{\circledR} \)  tradename to the estimated fair value. This impairment resulted from a decrease in projected revenue since the tradename was acquired as part of the 2012 Solutia acquisition. The estimated fair value was determined using an income approach, specifically the relief from royalty method.

In addition, during 2014, a change in estimate of certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site resulted in a restructuring charge of $5 million to previously recognized asset impairments and restructuring charges.

During 2014, the Company recognized gains from the sales of previously impaired assets at the former Photovoltaics production facility in Germany and a former polymers production facility in China of $5 million and $2 million, respectively.

In 2014, charges in the AM segment included $10 million of asset impairments, including intangible assets, and $2 million of restructuring charges primarily due to the closure of a production facility in Taiwan for the Flexvue \( ^{\circledR} \)  product line. 2014 also included $5 million of restructuring charges for severance associated with the integration of Solutia.

## 2013

In 2013, there were $76 million in asset impairments and restructuring charges and gains, net, including $23 million of restructuring charges primarily for severance associated with the integration of Solutia.

During 2013, management decided not to continue its Perennial Wood \( ^{™} \)  growth initiative. This resulted in asset impairment charges of 16 million and restructuring charges of 14 million primarily for inventory and contract termination costs. Also during fourth quarter 2013, management decided to terminate efforts to develop a continuous resin process in Kuantan, Malaysia and Antwerp, Belgium. This resulted in asset impairment charges of 4 million.



During 2013, management decided to shut-down the Photovoltaics product line, including the primary production facility in Germany. This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $6 million including charges for severance.

During 2013, management also approved and recorded severance charges of $6 million primarily for a voluntary separation plan for certain employees.

In addition, during 2013, a change in estimate for certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site resulted in a reduction of $4 million to previously recorded asset impairments and restructuring charges.

<table><tr><td></td><td>Balance at January 1, 2015</td><td>Provision/ Adjustments</td><td>Non-cash Reductions/ Additions</td><td>Cash Reductions</td><td>Balance at December 31, 2015</td></tr><tr><td>Noncash charges</td><td>$ —</td><td>107</td><td>(107)</td><td>$ —</td><td>$ —</td></tr><tr><td>Severance costs</td><td>13</td><td>67</td><td>1</td><td>(26)</td><td>55</td></tr><tr><td>Site closure &amp; restructuring costs</td><td>15</td><td>9</td><td>3</td><td>(16)</td><td>11</td></tr><tr><td>Total</td><td>$ 28</td><td>183</td><td>(103)</td><td>(42)</td><td>$ 66</td></tr><tr><td></td><td>Balance at January 1, 2014</td><td>Provision/ Adjustments</td><td>Non-cash Reductions/ Additions</td><td>Cash Reductions</td><td>Balance at December 31, 2014</td></tr><tr><td>Noncash charges</td><td>$ —</td><td>52</td><td>(52)</td><td>$ —</td><td>$ —</td></tr><tr><td>Severance costs</td><td>22</td><td>13</td><td>—</td><td>(22)</td><td>13</td></tr><tr><td>Site closure &amp; restructuring costs</td><td>14</td><td>12</td><td>(4)</td><td>(7)</td><td>15</td></tr><tr><td>Total</td><td>$ 36</td><td>77</td><td>(56)</td><td>(29)</td><td>$ 28</td></tr><tr><td></td><td>Balance at January 1, 2013</td><td>Provision/ Adjustments</td><td>Non-cash Reductions/ Additions</td><td>Cash Reductions</td><td>Balance at December 31, 2013</td></tr><tr><td>Noncash charges</td><td>$ —</td><td>28</td><td>(28)</td><td>$ —</td><td>$ —</td></tr><tr><td>Severance costs</td><td>4</td><td>27</td><td>2</td><td>(11)</td><td>22</td></tr><tr><td>Site closure &amp; restructuring costs</td><td>21</td><td>21</td><td>(16)</td><td>(12)</td><td>14</td></tr><tr><td>Total</td><td>$ 25</td><td>76</td><td>(42)</td><td>(23)</td><td>$ 36</td></tr></table>

Substantially all costs remaining for severance are expected to be applied to the reserves within one year.



## 17. OTHER (INCOME) CHARGES, NET

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Foreign exchange transaction (gains) losses, net</td><td>$ 6</td><td>$ (7)</td><td>$ 7</td><td></td></tr><tr><td>Financing costs related to the acquisition of Taminco</td><td>—</td><td>10</td><td>—</td><td></td></tr><tr><td>(Income) loss from equity investments and other investment (gains) losses, net</td><td>(15)</td><td>(13)</td><td>(5)</td><td></td></tr><tr><td>Other, net</td><td>1</td><td>(5)</td><td>1</td><td></td></tr><tr><td>Other (income) charges, net</td><td>$ (8)</td><td>$ (15)</td><td>$ 3</td><td></td></tr></table>

Included in other (income) charges, net are gains or losses on foreign exchange transactions, equity investments, business venture investments, non-operating assets, and certain litigation costs and earnings.

## 18. SHARE-BASED COMPENSATION PLANS AND AWARDS

## 2012 Omnibus Stock Compensation Plan

Eastman's 2012 Omnibus Stock Compensation Plan ("2012 Omnibus Plan") was approved by stockholders at the May 3, 2012 Annual Meeting of Stockholders and shall remain in effect until its fifth anniversary. The 2012 Omnibus Plan authorizes the Compensation and Management Development Committee of the Board of Directors to: grant awards, designate participants, determine the types and numbers of awards, determine the terms and conditions of awards and determine the form of award settlement. Under the 2012 Omnibus Plan, the aggregate number of shares reserved and available for issuance is 10 million, which consist of shares not previously authorized for issuance under any other plan. The number of shares covered by an award is counted against this share reserve as of the grant date of the award. Shares covered by full value awards (e.g. performance shares and restricted stock awards) are counted against the total number of shares available for issuance or delivery under the plan as 2.5 shares for every one share covered by the award. Any stock distributed pursuant to an award may consist of, in whole or in part, authorized and unissued stock, treasury stock, or stock purchased on the open market. Under the 2012 Omnibus Plan and previous plans, the forms of awards have included: restricted stock and restricted stock units, stock options, stock appreciation rights ("SARs"), and performance shares. The 2012 Omnibus Plan is flexible as to the number of specific forms of awards, but provides that stock options and SARs are to be granted at an exercise price not less than 100 percent of the per share fair market value on the date of the grant.

## Director Stock Compensation Subplan

Eastman's 2015 Director Stock Compensation Subplan ("Directors' Subplan"), a component of the 2012 Omnibus Plan, remains in effect until terminated by the Board of Directors or the earlier termination of the 2012 Omnibus Plan. The Directors' Subplan provides for structured awards of restricted shares to non-employee members of the Board of Directors. Restricted shares awarded under the Directors' Subplan are subject to the same terms and conditions of the 2012 Omnibus Plan. The Directors' Subplan does not constitute a separate source of shares for grant of equity awards and all shares awarded are part of the 10 million shares authorized under the 2012 Omnibus Plan. Shares of restricted stock are granted on the first day of a non-employee director's initial term of service and shares of restricted stock are granted each year to each non-employee director on the date of the annual meeting of stockholders.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## General

The Company is authorized by the Board of Directors under the 2012 Omnibus Plan to provide grants to employees and non-employee members of the Board of Directors. It has been the Company's practice to issue new shares rather than treasury shares for equity awards that require settlement by the issuance of common stock and to withhold or accept back shares awarded to cover the related income tax obligations of employee participants. Shares of unrestricted common stock owned by non-employee directors are not eligible to be withheld or acquired to satisfy the withholding obligation related to their income taxes. Shares of unrestricted common stock owned by specified senior management level employees are accepted by the Company to pay the exercise price of stock options in accordance with the terms and conditions of their awards.

For 2015, 2014, and 2013, total share-based compensation expense (before tax) of approximately $36 million, $28 million, and $40 million, respectively, was recognized in selling, general and administrative expense in the Consolidated Statements of Earnings for all share-based awards of which approximately $7 million, $4 million, and $5 million, respectively, related to stock options. The compensation expense is recognized over the substantive vesting period, which may be a shorter time period than the stated vesting period for qualifying termination eligible employees as defined in the forms of award notice. For 2015, 2014, and 2013, approximately $2 million, $1 million, and $3 million, respectively, of stock option compensation expense was recognized due to qualifying termination eligibility preceding the requisite vesting period.

## Stock Option Awards

Options have been granted on an annual basis to non-employee directors under the Directors' Subplan and predecessor plans and by the Compensation and Management Development Committee of the Board of Directors under the 2012 Omnibus Plan and predecessor plans to employees. Option awards have an exercise price equal to the closing price of the Company's stock on the date of grant. The term of options is 10 years with vesting periods that vary up to three years. Vesting usually occurs ratably over the vesting period or at the end of the vesting period. The Company utilizes the Black Scholes Merton option valuation model which relies on certain assumptions to estimate an option's fair value.

The weighted average assumptions used in the determination of fair value for stock options awarded in 2015, 2014, and 2013 are provided in the table below.

<table><tr><td>Assumptions</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Expected volatility rate</td><td>24.11%</td><td>25.82%</td><td>34.90%</td></tr><tr><td>Expected dividend yield</td><td>1.75%</td><td>1.70%</td><td>1.97%</td></tr><tr><td>Average risk-free interest rate</td><td>1.45%</td><td>1.44%</td><td>0.77%</td></tr><tr><td>Expected forfeiture rate</td><td>0.75%</td><td>0.75%</td><td>0.75%</td></tr><tr><td>Expected term years</td><td>4.8</td><td>4.7</td><td>5.0</td></tr></table>

The volatility rate of grants is derived from historical Company common stock price volatility over the same time period as the expected term of each stock option award. The volatility rate is derived by mathematical formula utilizing the weekly high closing stock price data over the expected term.

The expected dividend yield is calculated using the Company's average of the last four quarterly dividend yields.

The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.

GAAP specifies only share-based awards expected to vest be included in share-based compensation expense. Estimated forfeiture rates are determined using historical forfeiture experience for each type of award and are excluded from the quantity of awards included in share-based compensation expense.



The weighted average expected term reflects the analysis of historical share-based award transactions and includes option swap and reload grants which may have much shorter remaining expected terms than new option grants.

A summary of the activity of the Company's stock option awards for 2015, 2014, and 2013 is presented below:

<table><tr><td rowspan="2"></td><td colspan="2">2015</td><td colspan="2">2014</td><td colspan="2">2013</td></tr><tr><td>Options</td><td>Weighted-Average Exercise Price</td><td>Options</td><td>Weighted-Average Exercise Price</td><td>Options</td><td>Weighted-Average Price</td></tr><tr><td>Outstanding at beginning of year</td><td>2,209,800</td><td>$ 46</td><td>2,359,100</td><td>$ 39</td><td>2,480,100</td><td>$ 33</td></tr><tr><td>Granted</td><td>512,700</td><td>74</td><td>272,100</td><td>86</td><td>317,900</td><td>70</td></tr><tr><td>Exercised</td><td>(271,200)</td><td>30</td><td>(419,300)</td><td>31</td><td>(436,500)</td><td>28</td></tr><tr><td>Cancelled, forfeited, or expired</td><td>(16,700)</td><td>77</td><td>(2,100)</td><td>55</td><td>(2,400)</td><td>15</td></tr><tr><td>Outstanding at end of year</td><td>2,434,600</td><td>$ 53</td><td>2,209,800</td><td>$ 46</td><td>2,359,100</td><td>$ 39</td></tr><tr><td>Options exercisable at year-end</td><td>1,643,100</td><td></td><td>1,726,800</td><td></td><td>1,862,000</td><td></td></tr><tr><td>Available for grant at end of year</td><td>5,413,250</td><td></td><td>7,271,093</td><td></td><td>8,454,854</td><td></td></tr></table>

The following table provides the remaining contractual term and weighted average exercise prices of stock options outstanding and exercisable at December 31, 2015:

<table><tr><td rowspan="2"></td><td colspan="3">Options Outstanding</td><td colspan="2">Options Exercisable</td></tr><tr><td>Number Outstanding at December 31, 2015</td><td>Weighted-Average Remaining Contractual Life (Years)</td><td>Weighted-Average Exercise Price</td><td>Number Exercisable at December 31, 2015</td><td>Weighted-Average Exercise Price</td></tr><tr><td>Range of Exercise Prices</td><td>272,100</td><td>3.7</td><td>27</td><td>272,100</td><td>27</td></tr><tr><td>$30-$34</td><td>211,700</td><td>1.2</td><td>32</td><td>211,700</td><td>32</td></tr><tr><td>$35-$40</td><td>868,000</td><td>5.3</td><td>39</td><td>868,000</td><td>39</td></tr><tr><td>$41-$87</td><td>1,082,800</td><td>8.4</td><td>76</td><td>291,300</td><td>74</td></tr><tr><td></td><td>2,434,600</td><td>6.1</td><td>53</td><td>1,643,100</td><td>42</td></tr></table>

The range of exercise prices of options outstanding at December 31, 2015 is approximately $18 to $87 per share. The aggregate intrinsic value of both total options outstanding and total options exercisable at December 31, 2015 is $43 million. Intrinsic value is the amount by which the closing market price of the stock at December 31, 2015 exceeds the exercise price of the option grants.

The weighted average remaining contractual life of all exercisable options at December 31, 2015 is 4.9 years.

The weighted average fair value of options granted during 2015, 2014, and 2013 was $13.89, $17.12, and $17.92, respectively. The total intrinsic value of options exercised during the years ended December 31, 2015, 2014, and 2013, was $13 million, $22 million, and $21 million, respectively. Cash proceeds received by the Company from option exercises and the related tax benefit totaled $8 million and $4 million, respectively, for 2015, $13 million and $7 million, respectively, for 2014, and $12 million and $6 million, respectively, for 2013. The total fair value of shares vested during the years ended December 31, 2015, 2014, and 2013 was $3 million, $4 million, and $3 million, respectively.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the Company's nonvested options as of December 31, 2015 and changes during the year then ended is presented below:

<table><tr><td>Nonvested Options</td><td>Number of Options</td><td>Weighted-Average Grant Date Fair Value</td></tr><tr><td>Nonvested at January 1, 2015</td><td>483,000</td><td>$17.47</td></tr><tr><td>Granted</td><td>512,700</td><td>13.89</td></tr><tr><td>Vested</td><td>(187,400)</td><td>17.66</td></tr><tr><td>Forfeited</td><td>(16,800)</td><td>14.55</td></tr><tr><td>Nonvested options at December 31, 2015</td><td>791,500</td><td>$15.17</td></tr></table>

For nonvested options at December 31, 2015, approximately $3 million in compensation expense will be recognized over the next three years.

## Other Share-Based Compensation Awards

In addition to stock option awards, the Company has awarded long-term performance share awards, restricted stock awards, and SARs. The long-term performance share awards are based upon actual return on capital compared to a target return on capital and total stockholder return compared to a peer group ranking by total stockholder return over a three year performance period. The awards are valued using a Monte Carlo Simulation based model and vest pro-rata over the three year performance period. The number of long-term performance award target shares granted for the 2015-2017, 2014-2016, and 2013-2015 periods were 347 thousand, 285 thousand, and 270 thousand, respectively. The target shares granted are assumed to be 100 percent. At the end of the three-year performance period, the actual number of shares awarded can range from zero percent to 250 percent of the target shares granted based on the award notice. The number of restricted stock awards granted during 2015, 2014, and 2013 were 233 thousand, 144 thousand, and 146 thousand, respectively. The fair value of a restricted stock award is equal to the closing stock price of the Company's stock on the date of grant and normally vests over a period of three years. The recognized compensation expense before tax for these other share-based awards in the years ended December 31, 2015, 2014, and 2013 was approximately $29 million, $24 million, and $35 million, respectively. The unrecognized compensation expense before tax for these same type awards at December 31, 2015 was approximately $40 million and will be recognized primarily over a period of two years.

## 19. SUPPLEMENTAL CASH FLOW INFORMATION

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

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Current assets</td><td>$ 5</td><td>$ (12)</td><td>$ (56)</td><td></td></tr><tr><td>Other assets</td><td>44</td><td>45</td><td>102</td><td></td></tr><tr><td>Current liabilities</td><td>22</td><td>(88)</td><td>(26)</td><td></td></tr><tr><td>Long-term liabilities</td><td>(11)</td><td>16</td><td>(191)</td><td></td></tr><tr><td>Total</td><td>$ 60</td><td>$ (39)</td><td>$ (171)</td><td></td></tr></table>

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



Cash flows from derivative financial instruments accounted for as hedges are classified in the same category as the item being hedged.

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Cash paid for interest and income taxes is as follows:</td><td></td><td></td><td></td></tr><tr><td>Interest, net of amounts capitalized</td><td>$     265</td><td>$     184</td><td>$     186</td></tr><tr><td>Income taxes</td><td>124</td><td>152</td><td>224</td></tr><tr><td>Non-cash investing and financing activities:</td><td></td><td></td><td></td></tr><tr><td>Outstanding trade payables related to capital expenditures</td><td>10</td><td>19</td><td>28</td></tr><tr><td>(Gain) loss from equity investments</td><td>(15)</td><td>(13)</td><td>(4)</td></tr></table>

## 20. SEGMENT INFORMATION

For the periods reported, the Company's products and operations were managed and reported in five reporting segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids & Intermediates ("SFI").

In the AFP segment, the Company manufactures chemicals for products in the coatings, tires, consumables, animal nutrition, crop protection, and energy markets. The products Eastman manufactures for the coatings industry can be broadly classified as solvents, which include specialty coalescents and ketones and esters, glycol ethers, and alcohol solvents; and polymers, which include cellulose and polyester-based specialty polymers and paint additives. Products for the tires industry are classified into three main product groups: insoluble sulfur products, which are vulcanizing agents principally marketed under the Crystex \( ^{\circledR} \)  brand; antidegradants, principally marketed under the Santoflex \( ^{\circledR} \)  brand; and hydrocarbon resins. The specialty amines business includes product lines that consist of specialty intermediates, performance products, and formic acid. The crop protection business consists of alkylamine derivatives product lines. Coatings and other formulated products sales accounted for 46 percent, 66 percent, and 66 percent of the AFP segment's total sales for 2015, 2014, and 2013, respectively. Tires sales accounted for 22 percent, 31 percent, and 34 percent of the AFP segment's total sales for 2015, 2014, and 2013, respectively. The specialty amines and crop protection businesses are included in 2015 and December 2014 sales revenue and account for approximately 32 percent and 3 percent of total sales in 2015 and 2014, respectively.

In the adhesives resins and plasticizers businesses, the Company manufactures products which are sold into the consumables, building and construction, health and wellness, industrial chemicals and processing, and durable goods markets. The adhesives resins product line consists of hydrocarbon resins such as Regalite \( ^{\circledR} \)  and Eastotac \( ^{\circledR} \) ; non-hydrogenated hydrocarbons resins such as Piccotac \( ^{\circledR} \) ; and rosins such as Eastoflex \( ^{\circledR} \) . The plasticizers product line consists of a unique set of primary non-phthalate plasticizers such as Eastman 168 \( ^{\circledR} \) , and a range of niche non-phthalate plasticizers such as Benzoflex \( ^{\circledR} \) , Eastman TXIB \( ^{\circledR} \) , and Effusion \( ^{™} \) . Adhesives resins accounted for 54 percent, 53 percent, and 52 percent of the A&P segment's total sales for 2015, 2014, and 2013, respectively. Plasticizers accounted for 46 percent, 47 percent, and 48 percent of the A&P segment's total sales for 2015, 2014, and 2013, respectively.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

In the AM segment, the Company produces and markets its polymers, films, and plastics with differentiated performance properties for value-added end uses in transportation, consumables, building and construction, durable goods, and health and wellness products. The specialty plastics product line consists of two primary products: specialty copolyesters and cellulose esters. The interlayers product line includes specialty intermediate polyvinyl butyral ("PVB") sheet and resins. PVB is a specialty resin used in the production of laminated safety glass sheet used in automotive and architectural applications. The performance films product line primarily consists of window film products, which are aftermarket applied films to enhance the characteristics and functional performance of automotive and architectural glass. Eastman's specialty plastics product line accounted for 51 percent, 54 percent, and 53 percent of the AM segment's total sales for 2015, 2014, and 2013, respectively. The interlayers product line accounted for 33 percent, 34 percent, and 34 percent of the AM segment's total sales for 2015, 2014, and 2013, respectively. The performance films product line accounted for 16 percent, 12 percent, and 13 percent of the AM segment's total sales for 2015, 2014, and 2013, respectively. The performance films product line includes Commonwealth in 2015 and December 2014 total sales.

In the Fibers segment, the Company manufactures Estron \( ^{®} \)  acetate tow and Estrobond \( ^{®} \)  triacetin plasticizers for use primarily in manufacture of cigarette filters; Estron \( ^{®} \)  natural (undyed) and Chromspun \( ^{®} \)  solution-dyed acetate yarns for use in apparel, home furnishings, and industrial fabrics; and cellulose acetate flake and acetyl raw materials for other acetate fiber producers. Acetate tow accounted for 78 percent, 79 percent, and 83 percent of the Fibers segment total sales revenue in 2015, 2014, and 2013, respectively, with the remainder of sales from other product lines, including acetate yarn and acetyl chemical products.

The SFI segment leverages large scale and vertical integration from the acetyl, olefins, and alkylamine streams and proprietary manufacturing technology for specialty fluids to manufacture diversified products that are sold externally for use in markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals. Certain SFI products are also used internally by other segments of the Company. In the chemical intermediates product line, the Company produces oxo alcohols and derivatives, acetic acid and derivatives and acetic anhydride. In the other intermediate product line, the Company produces olefin, chemical intermediates, and polymer intermediates. The functional amines product lines include methylamines and salts, and higher amines and solvents. In the specialty fluids product line, the Company produces Therminol \( ^{®} \)  heat transfer fluids, Eastman Turbo Oils, Eastman Skydrol \( ^{®} \)  aviation hydraulic fluids, and Eastman SkyKleen \( ^{®} \)  aviation solvents. Chemical intermediates accounted for 42 percent, 50 percent, and 48 percent of the SFI segment's total sales for 2015, 2014, and 2013, respectively. Sales for other intermediate products accounted for 27 percent, 35 percent, and 39 percent of the SFI segment's total sales for 2015, 2014, and 2013, respectively. The functional amines business is included in 2015 and December 2014 sales revenue and account for approximately 18 percent and 1 percent of total sales in 2015 and 2014, respectively. Specialty fluids accounted for 13 percent, 14 percent, and 13 percent of the SFI segment's total sales for 2015, 2014, and 2013, respectively.

The Company continues to explore and invest in R&D initiatives that are aligned with macro trends in sustainability, consumerism, and energy efficiency such as high performance materials, advanced cellulosics, and reduced environmental impact. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company's core competency in polyesters, spinning capability, and in-house application expertise, for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles. The acquisition of Knowlton accelerates the innovation cycle for the Eastman microfiber's technology platform.

Sales revenue and expense for the Eastman microfiber technology platform growth initiative are shown in the tables below as "other" sales revenue and operating loss. R&D, pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are shown in the tables below as "other" operating earnings (loss).

Included in 2015 and 2014 "other" was sales revenue from the acquired Knowlton business, part of the Eastman microfiber's technology platform. Included in 2013 "other" sales revenue were the Perennial Wood \( ^{™} \)  growth initiative and the Photovoltaics product line acquired from Solutia in 2012. There was no sales revenue related to Perennial Wood \( ^{™} \)  included in 2014 as a result of decisions made by management in 2013 not to continue its Perennial Wood \( ^{™} \)  growth initiative.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Sales by Segment</td><td></td><td></td><td></td></tr><tr><td>Additives &amp; Functional Products</td><td>$ 2,368</td><td>$ 1,821</td><td>$ 1,719</td></tr><tr><td>Adhesives &amp; Plasticizers</td><td>1,214</td><td>1,363</td><td>1,326</td></tr><tr><td>Advanced Materials</td><td>2,414</td><td>2,378</td><td>2,349</td></tr><tr><td>Fibers</td><td>1,219</td><td>1,457</td><td>1,441</td></tr><tr><td>Specialty Fluids &amp; Intermediates</td><td>2,388</td><td>2,490</td><td>2,497</td></tr><tr><td>Total Sales by Segment</td><td>$ 9,603</td><td>$ 9,509</td><td>$ 9,332</td></tr><tr><td>Other</td><td>45</td><td>18</td><td>18</td></tr><tr><td>Total sales</td><td>$ 9,648</td><td>$ 9,527</td><td>$ 9,350</td></tr></table>

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Operating Earnings (Loss)</td><td></td><td></td><td></td></tr><tr><td>Additives &amp; Functional Products</td><td>$ 462</td><td>$ 329</td><td>$ 405</td></tr><tr><td>Adhesives &amp; Plasticizers</td><td>239</td><td>196</td><td>172</td></tr><tr><td>Advanced Materials</td><td>384</td><td>276</td><td>257</td></tr><tr><td>Fibers</td><td>292</td><td>474</td><td>462</td></tr><tr><td>Specialty Fluids &amp; Intermediates</td><td>253</td><td>289</td><td>363</td></tr><tr><td>Total Operating Earnings by Segment</td><td>1,630</td><td>1,564</td><td>1,659</td></tr><tr><td>Other</td><td></td><td></td><td></td></tr><tr><td>Growth initiatives and businesses not allocated to segments</td><td>(87)</td><td>(58)</td><td>(132)</td></tr><tr><td>Pension and other postretirement benefit income (expense), net not allocated to operating segments</td><td>(76)</td><td>(293)</td><td>394</td></tr><tr><td>Acquisition integration, transaction, and restructuring costs</td><td>(83)</td><td>(51)</td><td>(59)</td></tr><tr><td>Total Operating Earnings</td><td>$ 1,384</td><td>$ 1,162</td><td>$ 1,862</td></tr></table>



## NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="2">December 31,</td></tr><tr><td>2015</td><td>2014</td></tr><tr><td>Assets by Segment (1)</td><td></td><td></td></tr><tr><td>Additives &amp; Functional Products</td><td>$ 4,812</td><td>$ 4,900</td></tr><tr><td>Adhesives &amp; Plasticizers</td><td>902</td><td>1,011</td></tr><tr><td>Advanced Materials</td><td>4,227</td><td>4,235</td></tr><tr><td>Fibers</td><td>969</td><td>986</td></tr><tr><td>Specialty Fluids &amp; Intermediates</td><td>3,586</td><td>3,710</td></tr><tr><td>Total Assets by Segment</td><td>14,496</td><td>14,842</td></tr><tr><td>Corporate Assets</td><td>1,115</td><td>1,230</td></tr><tr><td>Total Assets</td><td>$ 15,611</td><td>$ 16,072</td></tr></table>

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

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Depreciation and Amortization Expense by Segment</td><td></td><td></td><td></td></tr><tr><td>Additives &amp; Functional Products</td><td>$ 163</td><td>$ 104</td><td>$ 95</td></tr><tr><td>Adhesives &amp; Plasticizers</td><td>43</td><td>43</td><td>45</td></tr><tr><td>Advanced Materials</td><td>161</td><td>143</td><td>144</td></tr><tr><td>Fibers</td><td>55</td><td>66</td><td>65</td></tr><tr><td>Specialty Fluids &amp; Intermediates</td><td>146</td><td>92</td><td>80</td></tr><tr><td>Total Depreciation and Amortization Expense by Segment</td><td>568</td><td>448</td><td>429</td></tr><tr><td>Other</td><td>3</td><td>2</td><td>4</td></tr><tr><td>Total Depreciation and Amortization Expense</td><td>$ 571</td><td>$ 450</td><td>$ 433</td></tr></table>

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="3">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Capital Expenditures by Segment</td><td></td><td></td><td></td></tr><tr><td>Additives &amp; Functional Products</td><td>$ 171</td><td>$ 111</td><td>$ 74</td></tr><tr><td>Adhesives &amp; Plasticizers</td><td>43</td><td>57</td><td>56</td></tr><tr><td>Advanced Materials</td><td>225</td><td>176</td><td>170</td></tr><tr><td>Fibers</td><td>57</td><td>53</td><td>65</td></tr><tr><td>Specialty Fluids &amp; Intermediates</td><td>152</td><td>188</td><td>113</td></tr><tr><td>Total Capital Expenditures by Segment</td><td>648</td><td>585</td><td>478</td></tr><tr><td>Other</td><td>4</td><td>8</td><td>5</td></tr><tr><td>Total Capital Expenditures</td><td>$ 652</td><td>$ 593</td><td>$ 483</td></tr></table>

Sales are attributed to geographic areas based on customer location; long-lived assets are attributed to geographic areas based on asset location.



## EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="4">For years ended December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td></td></tr><tr><td>Geographic Information</td><td></td><td></td><td></td><td></td></tr><tr><td>Sales</td><td></td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 4,096</td><td>$ 4,162</td><td>$ 4,140</td><td></td></tr><tr><td>All foreign countries</td><td>5,552</td><td>5,365</td><td>5,210</td><td></td></tr><tr><td>Total</td><td>$ 9,648</td><td>$ 9,527</td><td>$ 9,350</td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net properties</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 3,939</td><td>$ 3,753</td><td>$ 3,247</td><td></td></tr><tr><td>All foreign countries</td><td>1,191</td><td>1,334</td><td>1,043</td><td></td></tr><tr><td>Total</td><td>$ 5,130</td><td>$ 5,087</td><td>$ 4,290</td><td></td></tr></table>

## 21. QUARTERLY SALES AND EARNINGS DATA – UNAUDITED

<table><tr><td>(Dollars in millions, except per share amounts)</td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>2015</td><td></td><td></td><td></td><td></td></tr><tr><td>Sales</td><td>$ 2,443</td><td>$ 2,533</td><td>$ 2,447</td><td>$ 2,225</td></tr><tr><td>Gross profit</td><td>656</td><td>720</td><td>695</td><td>509</td></tr><tr><td>Asset impairments and restructuring charges, net</td><td>109</td><td>—</td><td>21</td><td>53</td></tr><tr><td>Net earnings attributable to Eastman</td><td>171</td><td>297</td><td>256</td><td>124</td></tr><tr><td>Net earnings per share attributable to Eastman \( ^{(1)} \)</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 1.15</td><td>$ 2.00</td><td>$ 1.73</td><td>$ 0.83</td></tr><tr><td>Diluted</td><td>1.14</td><td>1.98</td><td>1.71</td><td>0.83</td></tr></table>

(1) Each quarter is calculated as a discrete period; the sum of the four quarters may not equal the calculated full year amount.

<table><tr><td>(Dollars in millions, except per share amounts)</td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>2014</td><td></td><td></td><td></td><td></td></tr><tr><td>Sales</td><td>$ 2,305</td><td>$ 2,460</td><td>$ 2,413</td><td>$ 2,349</td></tr><tr><td>Gross profit</td><td>595</td><td>657</td><td>636</td><td>333</td></tr><tr><td>Asset impairments and restructuring charges (gains), net</td><td>13</td><td>(7)</td><td>71</td><td>—</td></tr><tr><td>Net earnings attributable to Eastman</td><td>233</td><td>292</td><td>210</td><td>16</td></tr><tr><td>Net earnings per share attributable to Eastman \( ^{(1)} \)</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 1.54</td><td>$ 1.96</td><td>$ 1.41</td><td>$ 0.11</td></tr><tr><td>Diluted</td><td>1.52</td><td>1.93</td><td>1.39</td><td>0.11</td></tr></table>

(1) Each quarter is calculated as a discrete period; the sum of the four quarters may not equal the calculated full year amount.



## 22. RESERVE ROLLFORWARDS

## Valuation and Qualifying Accounts

(Dollars in millions)

<table><tr><td rowspan="2">(Dollars in millions)</td><td colspan="5">Additions</td><td rowspan="2">Balance at December 31, 2015</td></tr><tr><td>Balance at January 1, 2015</td><td>Charges (Credits) to Cost and Expense</td><td>Other Accounts</td><td>Deductions</td><td></td></tr><tr><td>Reserve for:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Doubtful accounts and returns</td><td>$ 10</td><td>$ 1</td><td>$ 2</td><td>$ —</td><td>$ 13</td><td></td></tr><tr><td>LIFO inventory</td><td>462</td><td>(166)</td><td>—</td><td>—</td><td>296</td><td></td></tr><tr><td>Non-environmental asset retirement obligations</td><td>44</td><td>4</td><td>—</td><td>2</td><td>46</td><td></td></tr><tr><td>Environmental contingencies</td><td>345</td><td>9</td><td>11</td><td>29</td><td>336</td><td></td></tr><tr><td>Deferred tax valuation allowance</td><td>264</td><td>2</td><td>38</td><td>50</td><td>254</td><td></td></tr><tr><td></td><td>$ 1,125</td><td>$ (150)</td><td>$ 51</td><td>$ 81</td><td>$ 945</td><td></td></tr><tr><td>(Dollars in millions)</td><td colspan="5">Additions</td><td></td></tr><tr><td></td><td>Balance at January 1, 2014</td><td>Charges (Credits) to Cost and Expense</td><td>Other Accounts</td><td>Deductions</td><td>Balance at December 31, 2014</td><td></td></tr><tr><td>Reserve for:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Doubtful accounts and returns</td><td>$ 12</td><td>$ 1</td><td>$ —</td><td>$ 3</td><td>$ 10</td><td></td></tr><tr><td>LIFO inventory</td><td>506</td><td>(44)</td><td>—</td><td>—</td><td>462</td><td></td></tr><tr><td>Non-environmental asset retirement obligations</td><td>—</td><td>—</td><td>44</td><td>—</td><td>44</td><td></td></tr><tr><td>Environmental contingencies</td><td>368</td><td>2</td><td>2</td><td>27</td><td>345</td><td></td></tr><tr><td>Deferred tax valuation allowance</td><td>204</td><td>(6)</td><td>66</td><td>—</td><td>264</td><td></td></tr><tr><td></td><td>$ 1,090</td><td>$ (47)</td><td>$ 112</td><td>$ 30</td><td>$ 1,125</td><td></td></tr><tr><td>(Dollars in millions)</td><td colspan="5">Additions</td><td></td></tr><tr><td></td><td>Balance at January 1, 2013</td><td>Charges (Credits) to Cost and Expense</td><td>Other Accounts</td><td>Deductions</td><td>Balance at December 31, 2013</td><td></td></tr><tr><td>Reserve for:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Doubtful accounts and returns</td><td>$ 8</td><td>$ 5</td><td>$ —</td><td>$ 1</td><td>$ 12</td><td></td></tr><tr><td>LIFO inventory</td><td>505</td><td>1</td><td>—</td><td>—</td><td>506</td><td></td></tr><tr><td>Environmental contingencies</td><td>394</td><td>4</td><td>1</td><td>31</td><td>368</td><td></td></tr><tr><td>Deferred tax valuation allowance</td><td>215</td><td>—</td><td>—</td><td>11</td><td>204</td><td></td></tr><tr><td></td><td>$ 1,122</td><td>$ 10</td><td>$ 1</td><td>$ 43</td><td>$ 1,090</td><td></td></tr></table>



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

## 23. RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board ("FASB") and International Accounting Standards Board jointly issued new principles-based accounting guidance for revenue recognition that will supersede virtually all existing revenue guidance. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve the core principle, the guidance establishes the following five steps: 1) identify the contract(s) with a customer, 2) identify the performance obligation in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also details the accounting treatment for costs to obtain or fulfill a contract. Lastly, disclosure requirements have been enhanced to provide sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued new guidance to delay the effective date of the new revenue standard by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted under the original effective date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently evaluating the impact on the Company's financial position and results of operations and related disclosures.

In April 2015, the FASB issued new guidance for debt issuance costs as a part of the simplification and productivity initiative. Under this guidance debt issuance costs will be presented as a direct reduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The amortization of debt issuance costs will be reported as interest expense. The recognition and measurement guidance for debt issuance costs is not affected by the amendment. In August 2015, the FASB released clarifying guidance for debt issuance costs related to line-of-credit arrangements which may be deferred and for presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The new guidance is to be applied on a retrospective basis and reported as a change in an accounting principle. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company has concluded that changes in its accounting required by this new guidance will not materially impact the Company's financial position or results of operations and related disclosures.

In April 2015, the FASB issued new guidance for cloud computing arrangement fees, also as a part of the simplification and productivity initiative. The guidance establishes a new requirement to determine if cloud computing arrangements include a software license. If an arrangement is deemed to include a software license then the customer would account for the license as any other purchased software, capitalized and depreciated over the life of the contract. If an arrangement is deemed not to include a license, the agreement would be accounted for as a service contract. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period and early adoption is permitted. The Company has concluded that changes in its accounting required by this new guidance will not materially impact the Company's financial position or results of operations and related disclosures.

In July 2015, the FASB issued new guidance to simplify the measurement of inventory under the simplification and productivity initiative. The final standard changes the subsequent inventory measurement from lower of cost or market to lower of cost and net realizable value ("NRV"). NRV is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The subsequent method of estimating the cost of inventory under GAAP (i.e., LIFO or FIFO) is not being changed. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early adoption is permitted. The new guidance is to be applied prospectively as of the beginning of an interim or annual reporting period. The Company has concluded that changes in its accounting required by this new guidance will not materially impact the Company's financial position or results of operations and related disclosures.



# EASTMAN
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

In September 2015, the FASB issued guidance under the simplification and productivity initiative for business combination accounting. The new guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Under this guidance the acquirer recognizes, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. New disclosures are required to present separately on the face of the income statement or disclose in the notes the portion of the amount recognized in current-period earnings by line item that would have been recognized in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. At adoption, the new guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company has elected to early adopt the new guidance beginning in third quarter 2015 for acquisitions in which the initial purchase price allocation was incomplete. At December 31, 2015, there have been no material changes or effect on earnings for any acquisitions as disclosed in Note 2, Acquisitions.

In November 2015, the FASB issued guidance under the simplification and productivity initiative for presentation of deferred income tax liabilities and assets. This guidance simplifies the presentation of deferred income taxes such that deferred tax liabilities and assets are to be classified as noncurrent in a classified balance sheet. The update does not amend the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted as of the beginning of an interim or annual reporting period and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company has elected to early adopt, prospectively, the new guidance as of the balance sheet date. At December 31, 2015, the adoption resulted in a reclassification from current to noncurrent deferred tax assets and deferred tax liabilities of $240 million and $12 million, respectively. Prior periods are not retrospectively adjusted under the prospective adoption.



## Performance Graph

The following graph compares the cumulative total return on Eastman Chemical Company common stock from December 31, 2010 through December 31, 2015 to that of the Standard & Poor’s ("S&P") 500 Stock Index and a group of peer issuers in the chemical industry. The peer group consists of the eight chemical companies which meet three objective criteria: (i) common shares traded on a major trading market; (ii) similar lines of business to those of the Company; and (iii) more than $3 billion in annual sales. Cumulative total return represents the change in stock price and the amount of dividends received during the indicated period, assuming reinvestment of dividends. The graph assumes an investment of $100 on December 31, 2010. All data in the graph have been provided by S&P Capital IQ. The stock performance shown in the graph is included in response to Securities and Exchange Commission ("SEC") requirements and is not intended to forecast or to be indicative of future performance.



<table><tr><td>Company Name / Index</td><td>12/31/10</td><td>12/31/11</td><td>12/31/12</td><td>12/31/13</td><td>12/31/14</td><td>12/31/15</td></tr><tr><td>Eastman Chemical Company</td><td>100</td><td>95.12</td><td>168.92</td><td>203.70</td><td>194.89</td><td>177.58</td></tr><tr><td>S&amp;P 500 Index</td><td>100</td><td>102.11</td><td>118.45</td><td>156.82</td><td>178.29</td><td>180.75</td></tr><tr><td>Peer Group  \( {}^{(1)} \)</td><td>100</td><td>100.88</td><td>121.54</td><td>170.45</td><td>190.53</td><td>187.10</td></tr></table>

(1) The peer group for 2015 consists of the following issuers: Albemarle Corporation; Ashland Inc.; Celanese Corporation; E.I. du Pont de Nemours and Company; Ecolab Inc.; FMC Corporation; International Flavors & Fragrances Inc.; and PPG Industries Inc. Celanese Corporation, which was not in the peer group in the Company’s 2014 Annual Report, has been included in the peer comparison group because it meets the three objective criteria described above, and Cytec Industries, Inc., which was included in the peer group in the Company’s 2014 Annual Report has been excluded from the peer comparison group because it no longer has shares traded on a major trading market. In accordance with SEC requirements, the return for each issuer has been weighted according to the respective issuer’s stock market capitalization at the beginning of each period for which a return is indicated.



# Stockholder Information

## Corporate Offices

Eastman Chemical Company
200 S. Wilcox Drive
P. O. Box 431
Kingsport, TN 37662-5280 U.S.A.
http://www.eastman.com

## Stock Transfer Agent and Registrar

Inquiries and changes to stockholder accounts should be directed to our transfer agent:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
In the United States: 800-937-5449
Outside the United States: (1) 212-936-5100 or (1) 718-921-8200
http://www.amstock.com

## Annual Meeting

Cumberland Amphitheatre
MeadowView Marriott Conference Resort and Convention Center
1901 Meadowview Parkway
Kingsport, Tennessee
Thursday, May 5, 2016
11:30 a.m.

## Eastman Stockholder Information

877-EMN-INFO (877-366-4636)

http://www.eastman.com

## Annual Report on Form 10-K

Eastman's Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission, is available upon written request of any stockholder to Eastman Chemical Company, P.O. Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor Relations. This information is also available via the Internet at Eastman's Web site (www.eastman.com) in the investor information section, and on the SEC's website (www.sec.gov).

## Stock Exchange Listing

Eastman Chemical Company common stock is listed and traded on the New York Stock Exchange under the ticker symbol EMN.

## Dividends

Quarterly dividends on common stock, if declared by the Board of Directors, are usually paid on or about the first business day of the month following the end of each quarter. Dividends declared were $1.66 per share in 2015, $1.45 per share in 2014, and $1.25 per share in 2013.

Stockholders of record at year-end 2015: 18,244
Shares outstanding at year-end 2015: 147,812,789
Employees at year-end 2015: approximately 15,000

<table><tr><td>NYSE Common Stock Sales Prices</td><td>High</td><td>Low</td><td>Cash Dividends Declared</td></tr><tr><td>2015</td><td></td><td></td><td></td></tr><tr><td>First Quarter</td><td>$76.67</td><td>$67.13</td><td>$0.40</td></tr><tr><td>Second Quarter</td><td>$83.90</td><td>$67.74</td><td>$0.40</td></tr><tr><td>Third Quarter</td><td>$82.79</td><td>$62.84</td><td>$0.40</td></tr><tr><td>Fourth Quarter</td><td>$73.82</td><td>$63.84</td><td>$0.46</td></tr><tr><td>2014</td><td></td><td></td><td></td></tr><tr><td>First Quarter</td><td>$88.90</td><td>$73.00</td><td>$0.35</td></tr><tr><td>Second Quarter</td><td>$90.55</td><td>$82.49</td><td>$0.35</td></tr><tr><td>Third Quarter</td><td>$89.02</td><td>$78.21</td><td>$0.35</td></tr><tr><td>Fourth Quarter</td><td>$88.93</td><td>$70.38</td><td>$0.40</td></tr></table>



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Pictured from left to right: David Raisbeck, James O'Brien, Robert Hernandez, Stephen Demeritt, Humberto Alfonso, Mark Costa, Julie Holder, Brett Begemann, Renée Hornbaker, Lewis Kling, Michael Connors, and Gary Anderson

## Board of Directors

Humberto P. Alfonso
Retired President, International
The Hershey Company

Gary E. Anderson
Retired Chairman of the Board,
President, and Chief Executive Officer
Dow Corning Corporation

Brett D. Begemann
President and Chief Operating Officer
Monsanto Company

Michael P. Connors
Chairman of the Board and
Chief Executive Officer
Information Services Group, Inc.

## Executive Officers

Mark J. Costa
Chairman of the Board and Chief Executive Officer

Ronald C. Lindsay
Chief Operating Officer

Curtis E. Espeland
Executive Vice President and Chief Financial Officer

Brad A. Lich
Executive Vice President

Mark J. Costa
Chairman of the Board and
Chief Executive Officer
Eastman Chemical Company

Stephen R. Demeritt
Retired Vice Chairman of the Board
General Mills, Inc.

Robert M. Hernandez
Retired Vice Chairman of the Board and
Chief Financial Officer
USX Corporation

Julie F. Holder
Retired Senior Vice President
The Dow Chemical Company

Michael H. K. Chung
Senior Vice President and
Chief International Ventures Officer

Mark K. Cox
Senior Vice President, Chief Manufacturing,
Supply Chain, and Engineering Officer

Stephen G. Crawford
Senior Vice President and Chief Technology Officer
Renée J. Hornbaker
Executive Vice President and
Chief Financial Officer
Stream Energy

Lewis M. Kling
Retired Executive Vice Chairman of the Board,
President, and Chief Executive Officer
Flowserve Corporation

James J. O'Brien
Retired Chairman of the Board and
Chief Executive Officer
Ashland Inc.

David W. Raisbeck
Retired Vice Chairman of the Board
Cargill, Incorporated

David A. Golden
Senior Vice President, Chief Legal and
Sustainability Officer, and Corporate Secretary

Perry Stuckey, III
Senior Vice President and
Chief Human Resources Officer

Scott V. King
Vice President, Corporate Controller and
Chief Accounting Officer




## EASTMAN
The results of insight \( ^{™} \) 

Eastman Chemical Company
P.O. Box 431
Kingsport, Tennessee 37662-5280 U.S.A.
(1) 423-229-2000 | www.eastman.com

© 2016 Eastman Chemical Company. Eastman brands referenced herein are trademarks of Eastman Chemical Company or one of its subsidiaries. The ® used on Eastman brands denotes registered trademark status in the U.S.; marks may also be registered internationally. Other Non-Eastman brands referenced herein are trademarks of their respective owners.