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Eastman's profits decline, but still top expectations

Sharon Hayes • Jul 23, 2009 at 12:00 AM

KINGSPORT — Eastman Chemical Co. posted lower profits in the second quarter but beat Wall Street expectations, earning 89 cents per share.

Analysts who track the company estimated Eastman would earn an average of 71 cents per share in the quarter.

“Although economic conditions continue to be challenging, we delivered solid earnings in the second quarter reflecting cost-reduction actions we’ve taken and some improvement in demand as customer destocking appears to be mostly behind us,” said President and Chief Executive Officer Jim Rogers. “In addition, we generated over $100 million of free cash flow during the quarter and remain on track to meet our objective of positive full year 2009 free cash flow.”

Eastman posted earnings of 89 cents per diluted share in the period, compared with $1.48 for the second quarter of 2008.

Excluding one-time items in the 2008 and 2009 second quarters, the Kingsport-based company posted 86 cents per diluted share this year, vs. $1.53 in the 2008 period.

Sales revenue totaled $1.3 billion in the second quarter, down 32 percent from the same time a year ago.

Operating earnings in the quarter were $131 million vs. $172 million in the same period of 2008. Excluding one-time items, operating earnings were $128 million in the 2009 quarter and $178 million in the year-ago period. Operating earnings fell in all segments except fibers due to lower sales volume, lower capacity utilization resulting in higher unit costs, and costs involving the reconfiguration of the company’s Longview, Texas, site.

For reporting purposes, the company is divided into segments. In the coatings, adhesives, specialty polymers and inks segment, sales revenue declined by 27 percent primarily due to lower sales volume and lower selling prices.

In the fibers segment, sales revenue increased by 1 percent, as higher selling prices offset lower sales volume.

In the performance chemicals and intermediates segment, sales revenue fell by 51 percent.

In the performance polymers segment, sales revenue declined by 31 percent.

And in the specialty plastics segment, sales revenue fell by 26 percent.

During the quarter Eastman changed its tax accounting method to accelerate the timing of deductions for manufacturing repairs expense. Eastman expects the change to produce more than $100 million in positive cash flow in the second half of 2009, with lower estimated tax payments and a refund of previously paid taxes. The change also impacted other tax deductions resulting in increased tax expense of $7 million and a 39 percent effective tax rate for the second quarter of 2009. The company expects its effective tax rate to be about 33 percent for the full year 2009.

Eastman generated $255 million in cash from operating activities during the second quarter, primarily due to net earnings and a reduction in working capital. The company continues to expect to generate positive free cash flow (cash from operations less capital expenditures and dividends) for full year 2009.

For the rest of the year, Rogers said the company expects demand to remain similar to current levels and for raw material and energy costs to increase slightly.

He said Eastman expects third-quarter earnings to be about $1.10 per share.

“Although the global economic environment remains challenging with limited visibility, we have taken the necessary cost-reduction actions required to deliver solid results,” Rogers said.

Traded on the New York Stock Exchange, Eastman’s shares closed at $45.18, up $3 or 7.11 percent for the day.

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