Net earnings of chemical giant EI DuPont de Nemours & Company (DD) plunged 11% to $367 million or 40 cents per share in the third quarter of 2010 compared with $409 million or 45 cents in the prior-year period.
The decline in earnings is attributed to the patent expiration in the Pharmaceutical business. DuPont’s Cozaar and Hyzaar drugs patent expired this quarter, which affected profits by 13 cents. Reported earnings, however, were ahead of the Zacks Consensus Estimate of 34 cents.
Quarterly revenues grew 17% to $7.0 billion on a 14% volume gain, driven by higher international sales and a 5% rise in selling prices. Sales exceeded the Zacks Consensus Estimate of $6.7 billion.
DuPont saw sales volumes rising in double digits across all business segments, with the Safety & Protection segment and Electronics & Communications reporting a pronounced 31% and 24% year-over-year volume expansion. DuPont recorded a 19% year-over-year rise in costs to $5.4 billion. Operating margins were minimal at 4% versus last year’s 6.6%.
Regional Sales
Emerging markets sales spiked 22%. Revenues in Asia-Pacific accelerated 31% to $1.9 billion on a 23% increase in volumes, while earnings in Europe, Middle East and Africa shot up 17% to $2.2 billion driven by a 13% increase in volumes.
Sales in Canada and Latin America grew 21% and 11% to $100 million and $110 million, with volumes rising 17% and 9%, respectively. Sales in the North American markets were up 17% to $2.2 billion reflecting a 13% increase in volumes.
Segment Review
Agriculture and Nutrition: Sales inched up 2% to $1.3 billion on a 5% rise in volumes. DuPont divested many businesses in the segment, which led to lower top-line growth. Yet the segment is experiencing higher sales in the North American seed business.
The volumes of crop protection products, especially insecticides and fungicides, increased under the Rynaxypyr brand in Latin America. The segment reported operating losses of $181 million versus $113 million in the same quarter of 2009.
Electronics & Communications: Higher demand for photovoltaics drove revenues in the segment. Revenues soared 30% to $700 million driven by a 24% and 6% rise in volumes and prices respectively. Operating income was up 64% to $126 million.
Performance Chemicals: Revenues in the segment climbed 26% to $1.7 billion on a 15% increase in volumes and a 12% rise in prices. The segment saw strong demand for titanium dioxide, fluoropolymers and refrigerants. Operating income grew 10% to $64 million.
Performance Coatings: A 5% and 1% rise in volumes and prices pushed the segmental revenues by 6% to $900 million. Volumes were driven by improving demand in the automotive OEM markets, particularly in the heavy duty trucks markets, globally. Operating income more than doubled to $75 million.
Performance Materials: A robust 21% jump in revenues to $1.6 billion was on account of a 19% and 4% rise in volumes and prices. Strong demand in automotive, electronic and packaging markets led to growth in all regions. Operating income increased by 51% to $281 million from $230 million in the reported quarter.
Safety and Protection: Sales increase of 30% to $900 million was primarily driven by volume rise of 31% year over year offset by a 1% decline in prices. Volumes were driven by increased demand for aramid and nonwoven products in the consumer markets across all regions. Operating profits more than doubled to $134 million.
Guidance
DuPont anticipates higher production, stronger pricing and demand scenario to drive earnings in the upcoming quarter. The company expects earnings of approximately $3.10 per share (excluding an estimated loss of 13 cents per share related to a debt prepayment) in the fourth quarter of 2010, higher than the initial guidance of $2.90 to $3.05 per share.
The company assumes Pharmaceuticals full-year pre-tax income to be about $480 million. Free cash flow is expected to be about $1.7 billion.
Zacks Recommendation
DuPont has focused on aggressive cost-cutting, and plans to capture $1 billion each by way of fixed costs and working capital productivity gains during 2010-2012. A focus on emerging markets along with a strong performance in the Electronic and Communication as well as in the Performance Material segment is likely to drive revenue growth during 2010–2012.
However, the U.S. housing market slump and weak North American construction market have hurt DuPont’s Coatings business. Pharmaceutical royalties have also declined after the expiration of patents and negatively affected profits in the reported quarter.
Currently, DuPont has a short-term (1 to 3 months) Zacks #2 Rank and a long-term (6 months and longer) Neutral recommendation.
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