Eastman Chemical Company (EMN) reported second-quarter earnings of $2.76 per share, compared with $1.95 per share, a year earlier and beat the Zacks Consensus estimate of $2.60 per share.
Including a $15 million gain in second quarter 2011 from the sale of previously impaired methanol assets in Beaumont, Texas, and $3 million of restructuring charges in second quarter 2010, earnings from continuing operations were $2.90 per diluted share in the reported quarter versus $1.92 per diluted share in the year ago quarter.
With sales improving across all product lines, Revenues climbed 26% year over year to $1.9 billion, driven by higher sales volume and increased selling prices and outpaced the Zacks Consensus estimate of $1.8 billion.
The higher sales volume was attributed primarily to growth in plasticizer product lines, increased demand for acetyl chemicals, the fourth quarter 2010 restart of a previously idled olefins cracking unit at the Texas facility, and strengthened end-market demand primarily in the packaging, transportation, and durable goods markets. The increase in selling prices was in response to higher raw material and energy costs.
Costs and Income
Operating earnings in the second quarter 2011 increased by $54 million to $303 million driven by higher selling prices and higher sales volume and offset by higher raw material and energy costs.
Segment Details
Performance Chemicals and Intermediates: Eastman’s core business segment, contributed largely to total revenue and margins. Sales soared 35% to $729 million on higher volumes and prices.
Sales volumes rose in the quarter due to the restart of a previously idled cracking unit at the company’s Texas facility and growth in plasticizer product lines and also to customer buying patterns for acetyl chemicals.
Selling prices increased due to higher raw material and energy costs and also due to strong demand in the U.S. and tight industry supply. Operating earnings were $88 million compared with $71 million in the year-earlier quarter.
The year-over-year growth was primarily driven by higher selling prices, higher sales volumes and the increased benefits from cracking propane to produce low-cost propylene, more than offsetting increased raw material and energy costs.
Coatings, Adhesives, Specialty Polymers and Inks: The segment’s revenues were $491 million, up 18% year on year driven by growth in volumes and a rise in prices. The higher sales volume resulted from strengthened end-use demand in the packaging, transportation, and durable goods markets, particularly in the U.S.
Operating earnings were $99 million versus $92 million in the prior-year quarter. The increase was due to higher selling prices, higher sales volume and increased benefits from cracking propane to produce low-cost propylene, which more than offset higher raw material and energy costs.
Fibers: Sales from the segment grew 21% to $331 million on an increase in volumes, favorable shift in product mix, and higher selling prices. The favorable shift in product mix was mainly due to higher acetate tow sales volume resulting from higher utilization of the recently completed Korean acetate tow manufacturing facility.
Second-quarter 2011 operating earnings, were $93 million compared with $81 million in the prior year quarter. The increase was primarily due to acetate tow sales volume in Asia-Pacific and higher selling prices partially offset by higher raw material and energy costs.
Specialty Plastics: Revenues jumped 23% to $334 million on increased selling price and higher sales volume.
Operating earnings in second quarter 2011, rose 76.2% to $37 million. Operating earnings increased in the Asia Pacific region due to higher selling prices and in the Europe, Middle East and Africa region due to both higher sales volume and higher selling prices.
Regional Sales
Regionally, first quarter revenues grew 26.4% in the United States and Canada to $1004 million and 22.3% to $434 million in the Asia-Pacific. Europe, Middle East and Africa revenues increased 30.3% to $370 million and Latin American revenues increased 6.9% to $77 million.
Liquidity
Cash and cash equivalents stood at $634 million at the end of the second quarter of 2011 versus $435 million at the end of the comparable quarter of 2010. Second-quarter 2011 cash flows included $55 million of a total anticipated $110 million tax payment for the gain on the sale of the PET business completed in first quarter 2011.
During second quarter 2011, share repurchases totaled $103 million.
Outlook
Based on the strong first half 2011 results, the company expects that it will continue to deliver earnings growth in the second half of 2011.
The results of the second quarter were driven by strong sales volumes and higher prices and Eastman expects the trend to continue into the third quarter as well. It expects to incur costs related to planned and unplanned shutdowns that are expected to be approximately $25 million higher in the second half of 2011 compared with the first half.
Even with these higher costs, Eastman anticipates third quarter 2011 earnings per share to be slightly higher than third quarter 2010 earnings per share of $2.22 and expects full-year 2011 earnings per share to be slightly higher than $9.25.
Zacks Recommendation
Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses, is driving earnings. Eastman benefits from business restructuring and cost-cutting measures. The company has sold unprofitable units and closed down poorly performing ones.
The company, however, faces volatility in raw material and energy costs, higher pension expenses and other growth-related costs.
Eastman battles with large multinational companies such as Celanese Corp. (CE) and The Dow Chemical Co. (DOW) and EI DuPont de Nemours & Co. (DD) across its major business segments.
Currently, Eastman has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term (6 months and higher) Outperform recommendation.
