Eastman Chemical Company (EMN) reported third-quarter earnings of $1.19 per share, compared with $1.11 per share, a year earlier and beat the Zacks Consensus estimate of $1.11 per share. This excludes $7 million of restructuring charges primarily for severance associated with the acquisition and integration of Sterling Chemicals, Inc.
After including the charges, earnings from continuing operations were $1.16 per diluted share in the third quarter of 2011 versus $1.11 per diluted share in the year ago quarter.
Revenues climbed 20% year over year to $1.8 billion, driven by increased selling prices.
Costs and Income
Operating earnings in the third quarter 2011 decreased by $3 million year over year to $263 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 39% to $740 million on higher prices and favorable product mix.
The favorable shift in product mix was due to increased sales revenue from plasticizer product lines, $8 million from an acetyl technology license, and $15 million of sales revenue from the recently acquired Sterling Chemicals business.
Selling prices increased due to higher raw material and energy costs. Operating earnings were $78 million compared with $74 million in the year-earlier quarter. Third-quarter 2011 operating earnings included $8 million of costs from the unplanned outage of an olefin cracking unit and $8 million from an acetyl technology license.The year-over-year growth was primarily driven by higher selling prices, and favorable shift in product mix more than offsetting increased raw material and energy costs.
Coatings, Adhesives, Specialty Polymers and Inks: The segment’s revenues were $461 million, up 14% year on year driven by a rise in prices due to higher raw material and energy costs. Operating earnings in the reported quarter were $82 million compared with $89 million in the previous year quarter. Higher selling prices contributed to the operating earnings which were partially offset by higher raw material and energy costs.
Fibers: Sales from the segment grew 11% to $334 million on 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 acetate tow manufacturing facility in Korea. The higher selling prices were in response to higher raw material and energy costs, particularly for wood pulp.
Third-quarter 2011 operating earnings, were $92 million compared with $89 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 4% to $227 million on increased selling price partially offset by lower sales volume. The lower sales volume was attributable to weakened demand for copolyester product lines, particularly in packaging, consumer durable goods and LCD end markets, customer inventory destocking, and some customer shift to other plastic materials that do not use paraxylene as a raw material.
Operating earnings in third quarter 2011 were $29 million flat versus the year ago period.
Regional Sales
Regionally, first quarter revenues grew 27% in the United States and Canada to $978 million and 17% to $433 million in the Asia-Pacific. Europe, Middle East and Africa revenues increased 11% to $323 million and Latin American revenues increased 4% to $78 million.
Liquidity
Cash and cash equivalents stood at $448 million at the end of the third quarter of 2011 versus $642 million at the end of the comparable quarter of 2010.
Eastman generated $212 million in cash from operating activities during third quarter 2011 driven by strong net earnings. Inventories increased during the quarter primarily due to preparation for planned manufacturing maintenance in the fourth quarter. Third-quarter 2011 cash flows included $28 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 third quarter 2011, share repurchases totaled $115 million.
Outlook
For the remainder of the year, the company expects sales volume to decline due to normal seasonality and customer inventory destocking. The company also expects continued volatility in raw material and energy costs. As a result, it forecasts fourth-quarter 2011 earnings per share to be higher than fourth quarter 2010 and for full-year 2011 earnings per share to be approximately $4.62, excluding asset impairments and restructuring charges and gain.
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) Neutral recommendation.
