Eastman Chemical Turns to Red in 4Q

Eastman Chemical Company ( EMN - Analyst Report ) posted fourth-quarter 2012 adjusted earnings (from continuing operations) of $1.19 per share, in line with the Zacks Consensus estimate and above the year-ago earnings of 78 cents. The adjusted earnings exclude losses related to mark-to-market pension and other post-retirement benefits (MTM), costs related to the acquisition of Solutia Inc. as well as restructuring and impairment charges.

On a reported basis, the Tenn.-based chemicals maker posted a loss (from continuing operation) of $54 million or 35 cents a share versus a profit of $12 million or 9 cents a share recorded a year ago. The bottom line was hit by MTM losses of $276 million and restructuring and impairment charges of $83 million, which offset healthy double-digit growth in sales.

For full year 2012, the company reported adjusted earnings (from continuing operation) of $5.38 per share, also meeting the Zacks Consensus Estimate. Earnings, as reported, were $2.92 per share, down from $4.24 a share posted a year ago.

The company’s shares, which fell 36 cents (or 0.5%) to $71.15 in regular trading yesterday, further slipped 65 cents in after-hours trading.

Revenues and Margins

Revenues surged roughly 26% year over year to $2,169 million, but missed the Zacks Consensus Estimate of $2,262 million. Strong gains across the Additives and Functional Products and Advanced Materials divisions together with the contributions of the Solutia acquisition boosted the top line.

Higher sales were registered across all geographic regions in the quarter. Sales from the U.S. and Canada rose roughly 5% year over year to $969 million. Revenues from Asia-Pacific jumped 48% to $618 million. Sales in Europe, the Middle East and Africa increased 52% to $462 million while Latin American revenues shot up 54% to $120 million.

The company recorded an operating loss of $44 million in the quarter compared with operating earnings of $19 million a year ago. Adjusted operating earnings climbed 83% year over year to $326 million.

For the full year, revenues climbed 13% year over year to $8,102 million, but missed the Zacks Consensus Estimate of $8,189 million.

Segment Highlights

Revenues from the Additives and Functional Products segment soared 57% year over year to $384 million in the reported quarter, driven by the acquisition of Solutia’s rubber materials product lines.

Sales from the Adhesives & Plasticizers segment went up 5% to $338 million on sales volume gains stemming from the substitution of phthalate plasticizers with non-phthalate plasticizers.

Revenues from the Advanced Materials division zoomed 91% to $528 million, boosted by the addition of Solutia’s PVB sheet and resins and performance films product lines.

Revenues from the Fibers segment were essentially flat year over year at $325 million. Higher selling prices as a result of an increase in raw material and energy costs were masked by a decline in sales volume in the acetate yarn product line.

Specialty Fluids and Intermediates segment sales rose 6% to $590 million, supported by the addition of Solutia’s specialty fluids product lines.

Financial Position

Eastman Chemical ended 2012 with cash and cash equivalents of $249 million, down 57% year over year. Total debt increased roughly three-fold year over year to nearly $4.8 billion, primarily due to the assumption of Solutia debt.

The company generated operating cash flows of $1.1 billion during the year, up 80% year over year. Free cash flow increased more than three-fold year over year to $471 million (including $187 million in the fourth quarter).

Outlook

Looking ahead, Eastman Chemical feels that the Solutia acquisition, capacity expansions and its strong foothold in the growing end markets will help the company deliver strong earnings growth this year. However, uncertainty regarding the timing of a recovery in Europe remains as overhang.

The company raised its adjusted earnings (from continuing operations) forecast for 2013 to a band of $6.30 to $6.40 a share from its earlier view of $6.25. The current Zacks Consensus Estimate of $6.32 is within the forecast range.

Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses remains its strength. The company should continue to benefit from the synergies of its Solutia acquisition going forward. It also stands to gain from business restructuring, cost-cutting measures and increased capacity additions.

Eastman Chemical currently holds a Zacks Rank #2 (Buy).

Other companies in the chemical industry worth considering are Arkema S.A. ( ARKAY ) , BASF SE ( BASFY ) and Air Products ( APD - Analyst Report ) . While Arkema retains a Zacks Rank #1 (Strong Buy), both BASF and Air Products hold a Zacks Rank #2 (Buy).