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Mixed Bag from Eastman Chemical

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Eastman Chemical Company (EMN - Free Report) reported second-quarter 2012 earnings (from continuing operation) of $1.26 per share, down roughly 17% from $1.51 per share posted a year ago. Excluding costs related to its acquisition of Solutia Inc. and a one-time gain, the Tennessee-based chemicals maker earned $1.40 a share, which outperformed the Zacks Consensus estimate of $1.34.

Eastman Chemical wrapped up its purchase of Missouri-based chemical company Solutia earlier this month under a cash and stock deal worth roughly $4.8 billion (including Solutia debt). The acquisition is expected to significantly accelerate the company’s growth efforts and offer lucrative opportunities in Asia-Pacific.

However, hefty costs associated with the takeover dragged down the company’s profit in the second quarter. Profit (as reported) from continuing operation clipped roughly 19% year over year to $177 million.

Revenues and Margins

Revenues dipped 2% year over year to $1,853 million, lagging behind the Zacks Consensus Estimate of $1,948 million. The company witnessed weakness across its business segments in the quarter. Its Specialty Plastics division, in particular, was hit by weak demand.

Geographically, sales from the U.S. and Canada fell 2% year over year to $987 million. Revenues from Asia Pacific rose 5% to $455 million. Sales in Europe, the Middle East and Africa slid 11% to $330 million while Latin American revenues rose 5% to $81 million.

Operating earnings fell 5% year over year to $317 million. Adjusted operating earnings inched up 2% year over year to $323 million.

Segment Highlights

Revenues from the Coatings, Adhesives, Specialty Polymers and Inks segment edged down 1% year over year to $486 million in the second quarter.

Sales from the Fibers segment fell 4% to $318 million due to unfavorable mix shift, which more than offset an increase in selling prices. The unfavorable shift in product mix was mainly due to lower acetate tow sales volume in Asia-Pacific. The company raised selling prices to counter higher raw material and energy costs, especially for wood pulp.

Revenues from the Performance Chemicals and Intermediates division were essentially flat year over year at $732 million as higher sales volumes and favorable mix shift were masked by a decline in selling prices. Volume and mix benefited from higher domestic sales volume of acetyl products.

Specialty Plastics segment sales declined 6% to $315 million in the quarter on account of a decline in volume, partially offset by a favorable shift and better pricing. Lower sales volume was attributable to soft demand for copolyester product lines across consumer and durable goods markets in the U.S. and Europe.


Eastman Chemical ended the quarter with cash and cash equivalents of $3 billion, a nearly five-fold year-over-year increase. As part of the financing of Solutia acquisition and repayment of certain Solutia debt, the company received $2.3 billion net proceeds from the public offering of notes in June 2012.

Total debt increased nearly two-and-a-half fold year over year to roughly $3.8 billion, primarily due to the assumption of Solutia debt. The company generated operating cash flows of $316 million during the quarter.

Outlook and Recommendation

Moving ahead, Eastman Chemical continues to expect double-digit earnings growth in 2012, boosted by the Solutia acquisition. The company retained its adjusted earnings forecast for the year at $5.30 a share, higher than the current Zacks Consensus Estimate of $5.20.

We believe that Eastman Chemical is well placed to benefit from the synergies of its Solutia acquisition in second-half 2012. The company also stands to benefit from business restructuring, cost-cutting measures and increased capacity additions.

We currently have an Outperform recommendation on Eastman Chemicals. The company, which competes with The Dow Chemical Company and E. I. du Pont de Nemours and Company , holds a short-term Zacks #2 Rank (Buy).

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