Eastman shatters Wall Street expectations with 3rd quarter earnings

KINGSPORT, Tenn. – Eastman Chemical Company (NYSE:EMN) today announced earnings per diluted share of $1.38 for third quarter 2009 versus $1.33 for third quarter 2008. Earnings per diluted share for third quarter 2009 were reduced $0.16 per share by the reversal of a previously recognized investment tax credit for the company’s Beaumont, Texas, industrial gasification project as discussed below.

"We continued to make solid progress improving our profitability during what remains a challenging economic environment," said Jim Rogers, president and CEO. "Cash generation also continues to be a priority, and we did a great job during the quarter generating well over $200 million in free cash flow."

Sales revenue in third quarter 2009 was $1.3 billion compared with $1.8 billion in third quarter 2008. Sales revenue for third quarter 2008 included contract ethylene sales resulting from the fourth-quarter 2006 divestiture of the polyethylene business. Also included in third-quarter 2008 sales revenue were contract polymer intermediates sales resulting from the fourth-quarter 2007 divestiture of PET polymers manufacturing facilities and related businesses in Mexico and Argentina. Excluding these items, sales revenue declined by 21 percent due to lower selling prices in response to lower raw material and energy costs and a decline in sales volume of 4 percent. For reconciliations to reported company and segment sales revenue, see Table 4 in the accompanying third-quarter 2009 financial tables.

Operating earnings in third quarter 2009 were $191 million compared with operating earnings of $174 million in third quarter 2008. Excluding accelerated depreciation costs and asset impairments and restructuring charges, net, operating earnings were $179 million in third quarter 2008. Operating earnings increased as lower raw material and energy costs and cost reduction actions were partially offset by lower selling prices and lower sales volume. The increased operating margin was attributed to a favorable shift in company product mix due to a higher percentage of overall sales revenue from the Fibers, CASPI, and Specialty Plastics segments compared to the PCI and Performance Polymers segments.

Segment Results 3Q 2009 versus 3Q 2008

Coatings, Adhesives, Specialty Polymers and Inks – Sales revenue declined by 18 percent primarily due to lower selling prices and lower sales volume. The lower selling prices were in response to lower raw material and energy costs. The lower sales volume was due to reduced customer demand attributed to the global recession, particularly for products sold into the automotive, building and construction, and packaging markets. Operating earnings were $84 million in third quarter 2009 compared to $55 million in third quarter 2008. Operating earnings increased primarily due to lower raw material and energy costs and cost reduction actions, which more than offset lower selling prices and lower sales volume.

Fibers – Sales revenue declined by 5 percent as lower sales volume more than offset higher selling prices. The lower sales volume was primarily for acetyl chemical products. The higher selling prices were in response to higher raw material costs, particularly for wood pulp. Operating earnings increased to $79 million in third quarter 2009 compared with $65 million in third quarter 2008 due to higher selling prices and cost reduction actions partially offset by lower sales volume.

Performance Chemicals and Intermediates – Sales revenue declined by 40 percent, and excluding contract ethylene sales resulting from the divestiture of the polyethylene business, declined by 30 percent due to lower selling prices. The lower selling prices were primarily due to lower raw material and energy costs. Operating earnings were $33 million in third quarter 2009 compared with $65 million in third quarter 2008 excluding asset impairments and restructuring charges and accelerated depreciation costs in third quarter 2008. The decline was due to lower selling prices partially offset by lower raw material and energy costs and cost reduction actions.

Performance Polymers – Sales revenue declined by 36 percent, and excluding contract polymer intermediates sales to divested manufacturing facilities in second quarter 2008 declined by 27 percent due to lower selling prices while sales volume was unchanged. The lower selling prices were attributed to a decline in raw material and energy costs, particularly for paraxylene. Operating results were a loss of $10 million in third quarter 2009, compared with earnings of $1 million in third quarter 2008 excluding asset impairments and restructuring charges and accelerated depreciation costs. Operating results declined due to lower selling prices and the impact on sales revenue and manufacturing costs of continuing operational challenges with the IntegRex™-based PET manufacturing facility partially offset by lower raw material and energy costs and cost reduction actions.

Specialty Plastics – Sales revenue declined by 21 percent due to lower sales volume and lower selling prices. The decline in sales volume was attributed to the global recession which has weakened demand for plastic resins, including copolyester products sold into the consumer and durable goods markets, and for cellulosic plastics sold into various markets. Operating earnings increased to $13 million in third quarter 2009 from $6 million in third quarter 2008. The increase was due to lower raw material and energy costs and cost reduction actions partially offset by lower sales volume, lower capacity utilization resulting in higher unit costs, and an unfavorable shift in product mix with less cellulosic plastics sold into various markets.

Income Taxes

During third quarter 2009, the company reversed a previously recognized $12 million investment tax credit for the Beaumont, Texas, industrial gasification project because of a later estimated project completion date based on completed front-end engineering and design, and continuing legislative and other uncertainties. Including the investment tax credit reversal, the effective tax rate for the third quarter was 40 percent.

Cash Flow

Eastman generated $331 million in cash from operating activities during third quarter 2009, which included solid net earnings, a continued reduction in working capital, and approximately $100 million from a combination of a refund of previously paid taxes and lower estimated tax payments. The company generated $304 million of positive free cash flow (cash from operations less capital expenditures and dividends) through the first nine months of 2009.

Outlook

Commenting on the outlook for fourth quarter 2009, Rogers said: “We expect to continue to benefit from a favorable shift in company product mix and cost reduction actions we have taken. However, we also expect volatility in raw material and energy costs and a decline in sales volume due to normal seasonality to negatively impact our fourth quarter results. We therefore expect fourth-quarter 2009 earnings per share to decline sequentially, but to be slightly above the high end of analysts’ estimates on First Call, which is $0.85 per share.”

Eastman will host a conference call with industry analysts on October 23 at 8:00 a.m. EDT.
**To listen to the live webcast of the conference call and view the accompanying slides, go to www.investors.eastman.com, Presentations.
**To listen via telephone, the dial-in number is (913) 981-5564, passcode number 2194056.
**A web replay and the accompanying slides will be available at www.investors.eastman.com, Presentations.
**A telephone replay will be available continuously from 11:00 a.m. Eastern time October 23 to 12:00 midnight Eastern time, November 2, at (719) 457-0820, passcode number 2194056.

Eastman’s chemicals, fibers and plastics are used as key ingredients in products that people use every day. Approximately 10,000 Eastman employees around the world blend technical expertise and innovation to deliver practical solutions. The company is committed to finding sustainable business opportunities within the diverse markets it serves. A global company headquartered in Kingsport, Tennessee, USA, Eastman had 2008 sales of $6.7 billion. For more information, visit www.eastman.com.