Eastman Misses EPS, Matches Rev. - Analyst Blog

Eastman Chemical Company (EMN) reported solid fourth quarter 2010 results. Excluding one-time charges, the chemical producer earned $1.41 per share versus $1.35 in the prior-year quarter on stronger demand for its coatings, adhesives and plastics. However, the results missed the Zacks Consensus Estimate of $0.11 per share on account of non-deductibility of early distributions under the executive deferred compensation plan.

Earnings from continuing operations were 23 cents per diluted share in the fourth quarter versus a loss of 21 cents in fourth quarter 2009. In fiscal 2010, earnings per share were $5.75 ($6.96 excluding one-time charges).

Eastman shares rose $1.01, to close at $92.86 in after market trading yesterday.

Revenues

With sales improving across all product lines, revenues climbed 23.4% year over year to $1.5 billion, driven by higher sales volume and increased selling prices. The higher sales volume was attributed primarily to strengthened end-use demand in packaging, durable goods, and other markets and the positive impact of growth initiatives. The increase in selling prices was in response to higher raw material and energy costs. However, revenue was in line with the Zacks Consensus Estimate.

In fiscal 2010, revenue was $5.8 billion, up 33% year over year.

Costs and Income

Operating earnings in the fourth quarter 2010 were $161 million compared to an operating loss of $4 million in fourth quarter 2009. The increase was primarily due to higher sales volume and capacity utilization, which led to lower unit costs and higher selling prices, mostly offset by steeper 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 31% to $526 million on higher volumes and prices. Operating earnings, excluding asset impairments and restructuring charges, were $51 million compared with $25 million in the year-earlier quarter. The year-over-year growth was primarily driven by higher selling prices, more than offsetting increased raw material and energy costs and sales volume.

Coatings, Adhesives, Specialty Polymers and Inks: The segment's revenues were $379 million, up 16% year on year driven by a growth in volumes and a rise in prices. Operating earnings were $53 million versus $76 million in the prior-year quarter. The decline in operating earnings was due to higher costs for raw material and energy as well as growth and business development initiatives, partially offset by increased selling prices and sales volume.

Fibers: Sales from the segment grew 18% to $300 million on an increase in volumes partially offset by a modest decline in prices. Fourth-quarter 2010 operating earnings, excluding asset impairments and restructuring costs, were $78 million compared with $73 million in fourth quarter 2009. The increase was primarily due to higher sales volume and a favorable shift in product mix.

Specialty Plastics: Revenues jumped 26% to $258 million on a growth in demand for core copolyesters and Eastman Tritan copolyester product lines and higher volumes of cellulosic plastics sold in the LCD market.

Operating earnings in fourth quarter 2010, excluding asset impairments and restructuring charges, were $24 million compared with $9 million in fourth quarter 2009. Operating earnings increased on higher sales volume and capacity utilization, which led to lower unit costs, and higher selling prices. These were partially offset by higher raw material and energy costs.

Regional Sales

Regionally, fourth quarter revenues grew 18% in the United States and Canada and 32% in the Asia Pacific. Europe, Middle East, and Africa revenues 30% and Latin American revenues increased 8%.

Liquidity

Eastman generated operating cash flow of $278 million in fourth quarter 2010 versus $90 million in fourth quarter 2009. Free cash flow was $137 million versus $16 million in the year-earlier quarter. Long-term debt was $1.6 billion.

During fiscal 2010, share repurchases totaled $280 million of which $212 million was for repurchases in the fourth quarter.

Discontinued Operations

The company completed the sale of the polyethylene terephthalate (PET) business, related assets at the Columbia, South Carolina, site, and technology of its Performance Polymers segment on January 31, 2011. The divested assets and technology of the PET business were all part of the Performance Polymers segment.  

Operating results from the Performance Polymers segment are presented as discontinued operations and are therefore not included in results from continuing operations under generally accepted accounting principles.

Outlook

The company predicts first quarter 2011 earnings in the range of $1.75 to $1.85 per share. Full year 2011 earnings are guided to be slightly more than 10% year over year. 

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.

A strengthening global economy, expansion in Korea and lower interest expenses after debt restructuring in 2010 will likely boost results going forward. The company, however, faces volatility in raw material and energy costs, higher pension expenses and other growth-related costs.

Moreover, 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 #2 (Buy) Rank and a long-term (6 months and higher) Outperform recommendation.

 
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