EMN

Eastman Chemical Company: Q3 2009 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Eastman Chemical Company for the period ended September 30, 2009. The Company operates in five reportable segments: Coatings, Adhesives, Specialty Polymers, and Inks (CASPI); Fibers; Performance Chemicals and Intermediates (PCI); Performance Polymers; and Specialty Plastics (SP). The reporting period reflects the ongoing impact of the global recession, characterized by lower sales volumes and selling prices, partially offset by reduced raw material and energy costs.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Sales decreased 27% in Q3 and 31% YTD compared to 2008. Excluding contract sales from divested businesses, the decline was 21% in Q3 and 26% YTD. The reduction is attributed to lower selling prices (passing through lower raw material/energy costs) and lower volumes due to the global recession.
• Margin Expansion: Despite lower sales, gross margin improved to 25% in Q3 2009 from 18% in Q3 2008. This was driven by a favorable product mix shift toward higher-margin segments (Fibers, CASPI, SP) and cost reduction actions.
• Operating Earnings: Q3 operating earnings increased 10% to $191 million, driven by cost savings and lower input costs. However, YTD operating earnings fell 32% to $347 million due to sustained weak demand and lower capacity utilization.
• Restructuring: The Company incurred $23 million in net restructuring charges YTD 2009, primarily for severance related to a reduction in force. This compares to $22 million in YTD 2008.
• Cash Flow: Operating cash flow improved significantly to $668 million YTD 2009 from $293 million in 2008, largely due to a decrease in working capital (specifically inventory reductions) and a change in tax accounting method.

Guidance, Outlook, and Risks

• 2009 Outlook: Management expects full-year 2009 free cash flow to exceed $300 million. Capital spending is projected between $300 million and $325 million. The effective tax rate is expected to be approximately 38%.
• Q4 2009 EPS: Earnings per share are expected to decline compared to Q3 2009 but remain slightly above $0.85 per share.
• Segment Specifics: The Performance Polymers segment is expected to report greater operating losses in Q4 due to seasonality, market capacity, and operational challenges with the IntegRex facility. The Specialty Plastics segment continues to progress with the Eastman Tritan copolyester launch.
• Gasification Project: The Beaumont, Texas industrial gasification project has seen higher-than-anticipated capital cost estimates and a later completion date. The Company is evaluating alternatives to lower costs and pursuing government financing.
• Risks: Key risks include the severity and duration of the global recession, volatility in raw material and energy prices, customer creditworthiness, and the ability to secure financing for the gasification project.

Investor Verification Checklist

• Working Capital Management: Verify the sustainability of the inventory reduction that drove the YTD operating cash flow improvement.
• Performance Polymers Segment: Monitor the operational status and cost trajectory of the IntegRex facility, which is a primary driver of losses in this segment.
• Gasification Project Viability: Assess the Company's progress in securing government financing and reducing capital costs for the Beaumont project.
• Tax Rate Volatility: Confirm the impact of the $12 million tax charge related to the recapture of gasification investment tax credits on future effective tax rates.
• Dividend Sustainability: Review the Company's cash flow generation relative to its commitment to maintain the quarterly cash dividend ($0.44 per share).