Eastman Chemical Co. (EMN) is a global specialty materials company. Initially the company was set up in 1920 to produce chemicals for the Eastman Kodak Co.’s photographic business.
Today, Eastman uses its expertise in cellulose, olefins, polyester and other alkylamine chemicals to operate four different segments: Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI) and Fibers. At present, Eastman has nearly 50 manufacturing facilities across 15 countries.
Under the AFP segment, the company manufactures various chemicals (e.g., cellulose esters, propylene derivatives, etc.) for the transportation, construction, crop protection and home care segments. This is the largest revenue-generating segment for the company, having contributed just over 33% of its revenue in Q3 2020.
The AM segment primarily produces polymers, films and plastics for construction, durable goods, healthcare and wellness end markets. This is the second-largest segment in terms of revenue, bringing in just over 30% of the company’s revenue in Q3 2020.
The CI segment leverages Eastman’s vertically integrated business to sell excess chemical intermediates to end markets including construction, healthcare, wellness and agrochemicals. This is Eastman’s third-largest segment, bringing in nearly 22% of its revenue in Q3 2020.
Under the Fibre segment, the company offers various types of acetate tow and plasticizers for use in filtration media (e.g., cigarette filters), cellulose-based fibres for use in apparel, home furnishings, etc. In fact, Eastman is one of the world’s two largest suppliers of acetate tow and continues to be the world’s largest producer of acetate yarn. The remaining 10-15% of the company’s revenues are generated by this segment.
Eastman draws the majority of its revenue from outside of the U.S., with non-U.S. revenue contributing nearly 60% of overall revenue in FY 2019.
Selective Recovery in Key End Markets
Just like a few other industrial names, Eastman witnessed a decent recovery during Q3 2020 followed by a depressed Q2 2020.
Demand for COVID-19-impacted end users, including automobile, construction and consumer durables, improved during Q3 2020. Due to better business visibility, Eastman’s management expects its volume and product mix during Q4 2020 to improve and match the levels seen in Q4 2019.
Management has also been careful in managing its inventories and working capital requirements throughout the pandemic this year. As a result, Eastman’s nine-month free cash flows have been record-breaking, and the company seems to be on track to record more than $1 billion in annual free cash flows for the fourth consecutive year.
No wonder, management felt comfortable in raising its quarterly payout from 66 cents per share to 69 cents per share payable to shareholders of record as of December 15, 2020. This was the company’s 11th consecutive year of raising its annual dividend payout.
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