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Mixed 3Q for Eastman Chemical

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Eastman Chemical Company (EMN - Free Report) posted third-quarter 2012 adjusted earnings (from continuing operation) of $1.57 per share, outstripping the Zacks Consensus estimate of $1.42 and exceeding the year-ago earnings of $1.26. The adjusted earnings exclude costs related to its acquisition of Solutia Inc. as well as restructuring and impairment charges.

Including those one-time items, the Tennessee-based chemicals maker earned 99 cents a share, down from $1.22 per share recorded a year ago. Profit (as reported) from continuing operation dipped roughly 11% year over year to $154 million as a healthy double-digit growth in sales was more than offset by the hefty acquisition and other charges.

Eastman Chemical closed its acquisition of Missouri-based chemical company Solutia in July 2012 under a cash and stock deal worth roughly $4.8 billion (including Solutia debt). The company realigned its reporting segments following the closure of the acquisition and reported its third quarter results under the new structure which has five reporting segments.

Revenues and Margins

Revenues spiked roughly 25% year over year to $2,259 million, yet missed the Zacks Consensus Estimate of $2,368 million. Sales were boosted by strong growth across the Additives and Functional Products and Advanced Materials divisions, supported by the contributions of Solutia acquisition.

The company saw growth across all geographic regions in the quarter. Sales from the U.S. and Canada rose 6% year over year to $1,036 million. Revenues from Asia Pacific soared 45% to $627 million. Sales in Europe, the Middle East and Africa surged 45% to $468 million while Latin American revenues shot up 64% to $128 million.

Operating earnings fell 3% year over year to $263 million. Adjusted operating earnings climbed 43% year over year to $397 million.

Segment Highlights

Revenues from the Additives and Functional Products segment cruised 55% year over year to $406 million in the third quarter, buoyed by the acquisition of Solutia’s rubber materials product lines.

Sales from the Adhesives & Plasticizers segment was essentially flat year over year at $348 million as lower pricing offset an increase in sales volume. The decline in prices was due to lower raw material and energy costs.

Revenues from the Advanced Materials division more than doubled year over year to $559 million, boosted by the addition of Solutia’s advanced interlayers and performance films business.
Revenues from the Fibers segment rose 4% year over year to $349 million. Sales were aided by higher selling prices as a result of an increase in raw material and energy costs, especially for wood pulp.

Specialty Fluids and Intermediates segment sales edged up 1% year over year to $592 million supported by the addition of Solutia’s specialty fluids product lines.

Financial Position

Eastman Chemical ended the third quarter with cash and cash equivalents of $237 million, down 47% year over year. Total debt increased roughly three-fold year over year to nearly $5 billion, primarily due to the assumption of Solutia debt. The company generated operating cash flows of $353 million during the quarter, up 66% year over year.

Outlook and Recommendation

Moving ahead, Eastman Chemical envisions a seasonally slower fourth quarter and expects raw material and energy costs to rise toward the end of the quarter. The company, however, has raised its adjusted earnings forecast for 2012 to a band of $5.30 to $5.40 a share from its earlier view of $5.30. The revised guidance is higher than the current Zacks Consensus Estimate of $5.26.

Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses, is driving its earnings. We believe that the company is well placed to benefit from the synergies of its Solutia acquisition going forward. The company also stands to gain from business restructuring, cost-cutting measures and increased capacity additions.

Eastman Chemicals, which competes with The Dow Chemical Company and E. I. du Pont de Nemours and Company , holds a short-term Zacks #3 Rank (Hold). We currently have a long-term Outperform recommendation on the stock.

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