Shares of Eastman Chemical Company (EMN) advanced 14 cents to $59.76 per share post solid second quarter 2010 results. The chemical producer earned $2.05 per share (excluding one-time charges) in the second quarter of 2010 outperforming the Zacks Consensus Estimate of $1.66. Results substantially surpassed Eastman’s own guidance of $1.60 per share. Earnings nearly doubled from 86 cents in the year-ago quarter. The robust growth in bottom line came from a healthy top line.
Revenues
With sales improving across all product lines, quarterly revenues climbed 38% to $1.7 billion, outshining the Zacks Consensus Estimate of $1.6 billion. Eastman recorded higher volumes with improving demand while pricing gains negated the negative impact of higher raw material and energy costs.
Costs and Income
Ramping up capacities based on this demand uptake lowered costs per unit. Operating earnings of $260 million reflected a two-fold increase over $128 million in second quarter of 2009. Operating margins came in at 15% versus last year’s 10%.
Segment Details
Performance Chemicals and Intermediates – The segment that forms Eastman’s core business, contributed largely to revenues and margins. Sales soared 72% to $541 million on higher volumes (39%) and prices (28%). The acquisition of Genovique Specialties Corporation, a major global producer of benzoate plasticizers that serve as intermediate chemicals for adhesives and sealants, coatings and PVC markets, added new plasticizer product lines to Eastman’s product portfolio. Higher demand for olefin derivatives products and other newly added products boosted sales in the segment. Operating income was considerably high at $72 million versus $1 million in the year-ago period.
Coatings, Adhesives, Specialty Polymers and Inks (CASPI) – CASPI was the second best performer with revenues of $416 million, up 37% year on year driven by a 16% jump in volumes and a 14% rise in prices. The segment saw higher demand for specialty chemicals, prices for commodity solvent products and a favorable product mix. Demand for specialty polymers and specialty coalescent products recovered in the Asia Pacific and European coatings markets. Operating income almost doubled to $94 million from $48 million in the corresponding quarter of the previous year.
Fibers – Sales inched up 4% to $274 million on a 5% increase in volumes partially offset by a modest decline in prices. The segment saw higher demand for acetate yarn products. Operating earnings improved 12% to $83 million. The segment manufactures and sells acetate tow and triacetin plasticizers under the brands Estron and Estrobond, respectively, for use in the manufacturing of cigarette filters. It also produces natural and solution-dyed acetate yarns under the brands Estron and Chromspun for use in apparel, home furnishings and industrial fabrics.
Specialty Plastics – Revenues jumped 44% to $271 million with higher demand for core copolyesters and Eastman Tritan™ copolyester product lines and higher volumes of cellulosic plastics sold in the LCD market. Sales volumes increased 36% accompanied by a 2% rise in prices. Operating earnings increased to $21 million in the second quarter 2010 compared with $7 million. The segment manufactures highly specialized copolyesters and cellulosic plastics used in the manufacturing of liquid crystal displays and photographic equipment.
Performance Polymers – The segment primarily comprises the polyethylene terephthalate (PET) lines, which are used in beverage, food packaging and other applications such as personal care, health care, pharmaceutical, household products and industrial packaging. The company is restructuring all its plants to produce PET products using its proprietary IntegRex technology. This improved sales by 20% to $222 million, primarily due to a 14% hike in selling prices whiles volumes improved 7%. However, higher raw material and energy costs negatively affected profitability in the segment. Operating income remained flat at $6 million.
Regional Sales
Regionally, revenues in the United States and Canada increased 40% and in the Asia Pacific grew 28%. Europe, Middle East, and Africa revenues increased to $276 million from $178 million, representing a growth of 38% year over year and Latin American revenues increased 50%.
Liquidity
Eastman generated operating cash flow of $206 million. Cash and cash equivalent amounted to $35 million against total debt of $1.6 billion. We are wary of Eastman’s’ higher leverage with debt to capital hovering around 50% in the last three quarters.
Outlook
After a record first half of 2009, Eastman anticipates stronger second half results bolstered by a recovering global economy and growth initiatives. However, Eastman expects profits to narrow in the upcoming quarter affected by seasonal decline in volumes. The company predicts third quarter earnings to be in the range of $1.65 to $1.75 per share. Full year 2010 earnings are guided in the range of $6.20 to $6.40 per share. The company expects to generate free cash flow of approximately $300 million for full year 2010.
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. Eastman Chemical’s Fibers business continues to outperform and strong Specialty margins look increasingly credible.
However, Eastman is facing weak demand in its Performance Polymer segment, which has led to lower sales volume and continued under-utilization of capacity, resulting in higher unit costs. Production disruptions on power outages are also pressuring volumes. The company is planning to divest its PET business under the segment. Besides, Eastman battles with large multinational companies such as Celanese Corp. (CE) and the Dow Chemical Co. (DOW) across its major business segments.
Currently, Eastman has a short-term (1 to 3 months) Zacks #3 Rank and a long-term (6 months and higher) Neutral recommendation.
EASTMAN CHEM CO (EMN): Free Stock Analysis Report
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