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Eastman Chemical Company

We are downgrading our recommendation on Eastman Chemical to Neutral following its mixed third quarter results. Adjusted earnings outpaced the Zacks Consensus Estimate while profit slipped on hefty charges. Revenues rose at a double-digit clip riding on the contributions of Solutia acquisition, but missed the Zacks Consensus Estimate.Eastman Chemical’sdiversified chemical portfolio, along with its integrated and diverse downstream businesses, is driving its earnings. It also benefits from business restructuring, cost-cutting measures and increased capacity additions. However, the company is expected to witness a sluggish fourth quarter and higher raw material and energy costs towards the end of 2012. Lower pricing represents another concern.
/ Equity Research / EMN | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 11/15/2012
Current Price (11/15/12) / $55.05
Target Price / $58.00


/ Equity Research / EMN | Page 1


52-Week High / $60.64
52-Week Low / $35.47
One-Year Return (%) / 39.96
Beta / 2.01
Average Daily Volume (sh) / 1,613,821
Shares Outstanding (mil) / 153
Market Capitalization ($mil) / $8,423
Short Interest Ratio (days) / 2.10
Institutional Ownership (%) / 62
Insider Ownership (%) / 1
Annual Cash Dividend / $1.04
Dividend Yield (%) / 1.89
5-Yr. Historical Growth Rates
Sales (%) / 1.9
Earnings Per Share (%) / 22.6
Dividend (%) / 4.3
P/E using TTM EPS / 11.2
P/E using 2012 Estimate / 10.3
P/E using 2013 Estimate / 8.8
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / Large-Blend
Industry / Chem-Diversifd
Zacks Industry Rank * / 208 out of 267


Eastman Chemical Company manufactures and sells chemicals, plastics and fibers. Based in Kingsport, Tennessee, the company has 16 manufacturing sites in the U.S., Europe and Asia-Pacific, supplying products throughout the world. The company has 5 operating segments: Coatings, Adhesives, Specialty Polymers, and Inks (CASPI); Fibers; Performance Chemicals and Intermediates (PCI); and Specialty Plastics (SP).

  • The PCI segment manufactures intermediates based on acetyl and oxo chemistries such as acetic anhydride, acetaldehyde, oxo aldehydes and other intermediate products including plasticizers and glycols. It also produces performance chemicals, which are complex organic molecules such as diketene derivatives, specialty ketones and specialty anhydrides for pharmaceuticals, fiber, food and beverage ingredients, which are typically used in specialty market applications. Eastman's major competitors in this segment include large multinational companies such as BASF, Celanese, Dow, and Exxon Mobil Corporation.
  • The CASPI segment manufactures additives, specialty polymers and other raw materials that are integral to the production of paints and coatings, inks, adhesives and other formulated products. The segment is focusing on Asia. Eastman Chemical is acquiring small polymer producers in China to cash in on the improving industrial growth in the country. The segment has also recently expanded its hydrogenated hydrocarbon resins manufacturing capacity in Middelburg, Netherlands by 30%, driven by an increasing demand. Eastman’s hydrogenated hydrocarbon resins are used as raw materials in hot-melt and pressure sensitive adhesives, and as binders in non-woven products such as disposable diapers, feminine products, and pre-saturated wipes.They are also used in a wide range of applications including plastics and rubber modification.The CASPI segment principally competes in a number of products and its major competitors include larger companies such as BASF SE (BASF), Dow Chemical Company (Dow) and Exxon Mobil Corporation.
  • The Specialty Plastics (SP) segment manufactures highly specialized copolyesters and cellulosic plastics that possess differentiated performance properties for value-added end uses, such as manufacturing liquid crystal displays and photographic equipment. The addition of Tritan copolyester to Eastman's SP product offering has created new opportunities for Eastman Chemical reflected in the company’s increasing market share in the end markets including food contact applications such as water bottles and other consumer houseware applications. Besides, Eastman Chemical produces copolyester cellulosic based products solutions, the key raw material for LCDs, which is yet another area of growth for the company. Eastman's primary competitors for copolyester products include Bayer AG, Dow, Evonvik Industries, Saudi Basic Industries Corporation and SK Chemical Industries.Competition for cellulosic plastics is primarily from other producers of cellulose ester polymers such as Acetati SpA and Daicel.
  • The Fibers 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, besides cellulose acetate flake and acetyl raw materials for other acetate fiber producers. Eastman Chemical is the second largest acetate tow manufacturer in the world. The company recently acquired the Korean tow facility, which is expected to be fully integrated into the segment's production and sales processes in 2011. Competitors in the fibers market for acetate tow include Celanese Corporation, Daicel Chemical Industries Ltd, Mitsubishi Rayon Co., Ltd. and Rhodia S.A.
  • The Performance Polymers 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, besides various polymer intermediate derivatives. On January 31, 2011, Eastman Chemical completed the sale of the polyethylene terephthalate ("PET") business, with its related assets at the Columbia, South Carolina site, and technology of its Performance Polymers segment. The PET business comprised substantially the entire Performance Polymers segment. Performance Polymers segment’s operating results are presented as discontinued operations for all periods presented.

Stock Split

On August 5, 2011, the board of directors of Eastman Chemical declared a two-for-one split of the company’s common stock and increased the quarterly cash dividend on the common stock by 11% to $0.52 per share on a pre-split basis.

The stock split will be in the form of a 100% stock dividend to be distributed on October 3, 2011, to stockholders of record as of September 15, 2011. Stockholders will be issued one additional share of common stock for each share held. Eastman’s common stock will begin trading on a split-adjusted basis on October 4, 2011.

Solutia Acquisition and Reclassification of Segments

Eastman Chemical, in July 2012, completed its acquisition of and Solutia Inc.,a global leader in performance materials and specialty chemicals,following the approval of the deal by Solutia's shareholders and satisfaction of all regulatory and other conditions. With the deal closure, Solutia has now become a wholly owned subsidiary of the company. Pursuant to the terms of the cash and stock deal worth roughly $4.8 billion (including assumption of Solutia’s debt), Solutia stockholders received $22.00 in cash and 0.12 shares of Eastman Chemicalcommon stock for each Solutia share. Eastman Chemicalissued 14,686,067 shares to Solutia shareholders in connection with the acquisition. The company financed the cash portion of the purchase consideration with cash on hand and debt.With the completion of the Solutia acquisition, Eastman Chemicalnow employs roughly 13,500 people across the globe.

EastmanChemical has realigned its reporting segments following the closure of the acquisition. The company will report its third-quarter 2012 results under the new structure which has five reporting segments, namely, Additives and Functional Products, Adhesives and Plasticizers, Advanced Materials, Fibers, and Specialty Fluids and Intermediates. EastmanChemical has also announced certain changes in executive leadership positions in conjunction with the restructuring of its reporting segments.


Eastman Chemicalbenefits from business restructuring initiatives that have reduced cyclicality by 40%. As part of the restructuring, the company sold unprofitable units and closed businesses that could not be sold. The company closed its PET polymer operations in Cosoleacaque, Mexico and Zarate, Argentina. It has also exited the PET business in Europe by selling the PET manufacturing sites in Spain, the Netherlands and the U.K.

In the first half of 2011, Eastman Chemical made progress in its growth initiatives by entering into a joint venture in China for a 30,000-ton acetate tow manufacturing facility, which is expected to be operational in mid-2013. The facility enabled test-marketing beginning in 2012. The company, in July 2012,entered into a joint venture with Sinopec Yangzi Petrochemical Company Limited to build a hydrogenated hydrocarbon resin plant in Nanjing, China. The facility, which is expected come online by end-2014, will expand Eastman Chemical’s total capacity for hydrogenated resins by 50%, making it the largest supplier of hydrogenated hydrocarbon resins globally.

The acquisition of Solutia represents a significant step in the company’s strategy to boost its presence in the emerging markets. In particular, it should significantly accelerate Eastman Chemical’s growth efforts and offer excellent growth opportunities in Asia Pacific. By leveraging infrastructure in the region, Eastman Chemical expects to have a compound annual growth rate in Asia Pacific approaching 10% for the next several years. Eastman Chemical expects the transaction to be accretive to earnings, excluding acquisition-related costs and charges. After giving effect to the Solutiaacquisition, including expected cost synergies, Eastman Chemical expects earningsper share for 2012 to be roughly $5.30 to $5.40 a share.Annual cost synergies are expected to be roughly $100 million by 2013. Moreover, Eastman Chemicalexpects to realize significant tax benefits from the acquisition. It also recognizes the potential for meaningful revenue synergies by leveraging technology and business capabilities and overlapping end-markets, particularly in automotive and architecture, of both companies.

The company, in April 2012,announced the startup of its non-phthalate plasticizer manufacturing facility in Texas City. The facility, which Eastman Chemicalbought in mid-2011, will produce Eastman Chemical 168, non-phthalate plasticizer, thereby increasing its capacity by about 60%. With the capacity expansion, the company will be able to serve the growing needs of non-phthalate plasticizers worldwide.Non-phthalate plasticizers are not only used to provide flexibility to polyvinyl chloride (PVC) in a wide variety of applications, but are also used in products, such as toys, food contact materials and medical devices. The plasticizers also cater to end-markets, such as building and construction, health and wellness and infant care.


Eastman Chemical's business and operating results have been affected by the impact of the global recession, including the credit market crisis, declining consumer confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that affected the global economy. If the global economy or financial markets again deteriorate or experience significant new disruptions, the company's operations, financial condition, and cash flows could be adversely affected and its ability to access the credit and capital markets under favorable conditions and terms could be inhibited, which may affect its liquidity or ability to pursue growth initiatives.

Eastman Chemical relies on certain strategic raw material and energy commodities for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate short-term market fluctuations in raw material and energy costs. These risk mitigation measures cannot eliminate all exposure to market fluctuations. Raw material and energy costs are expected to rise in the fourth quarter of 2012. Especially, the price of propane is expected to rise towards the end of 2012, thereby impacting the margins in the company’s Specialty Fluids and Intermediates segment.

A challenging condition in Europe coupled with low capacity utilization is affecting the profitability of the company’sAdvanced Materials segment. The company expects earnings in this division to decline in fourth-quarter 2012, partly due to weak demand across Europe and Asia. Moreover, lower pricing is impacting the results across most of the company’s reporting segments.


Mixed 3Q for Eastman Chemical– October25, 2012

Eastman Chemical posted third-quarter 2012 adjusted earnings (from continuing operation) of $1.57 per share, outstripping the Zacks Consensus estimate of $1.42. 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 company earned $0.99 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 realigned its reporting segments following the closure of the Solutia 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.


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.

Mixed Bag from Eastman Chemical– July30, 2012

Eastman Chemicalreported 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 company earned $1.40 a share, which outperformed the Zacks Consensus estimate of $1.34.

However, hefty costs associated with Solutia 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.