Bad Weather Hits DuPont's Earnings - Analyst Blog

DuPont's DD earnings for the first quarter of 2014 fell short of expectations and its sales slipped as harsh winter weather coupled with a shift in timing of seed shipments and lower corn planted area in the Americas hit its core agriculture business in the quarter. It also saw continued weakness in its struggling performance chemicals business.

The Delaware-based chemical giant posted adjusted earnings of $1.58 per share in the reported quarter that trailed the Zacks Consensus Estimate by a couple of cents but were ahead of $1.56 posted a year ago.

Adjusted earnings exclude charges associated with the separation of the performance chemicals business and pension costs. Unfavorable weather conditions reduced earnings in the reported quarter by an estimated 7 cents per share.

Including one-time items, DuPont registered earnings from continuing operations of $1.54 per share in the quarter compared with $1.47 per share in the prior-year quarter. Consolidated net income, as reported, slid 57% year over year to $1.4 billion, affected by the sale of the company's performance coatings business to private equity firm Carlyle Group.

Net sales for the reported quarter slipped around 3% year over year to $10,128 million as the agriculture business saw lower sales due to shifts in timing and planted area as well as bad weather conditions. Unfavorable currency swings and lower selling prices also reduced sales. Revenues also missed the Zacks Consensus Estimate of $10,602 million.

DuPont saw margin gains across all segments barring performance chemicals and agriculture in the quarter. Operating earnings from the electronics business, which supplies materials for solar panels in the photovoltaic industry, jumped 53% in the quarter. The industrial biosciences unit recorded a 37% rise while safety and protection posted a 27% gain. Nutrition and health raked in a 22% gain, but agriculture saw a 5% decline.

DuPont's cyclical performance chemicals division (includes the paint pigment business) remains a chink in its armor. Lower pricing for titanium dioxide (TiO2) continues to batter the division, resulting in a 20% fall in operating profit in the quarter. Separation of the unit remains on track.

DuPont backed its earnings expectations for 2014. Its shares, which are up roughly 41% over a year, were inactive in pre-market trading.

Segment Highlights

Agriculture: Lower volumes due to earlier seed shipments along with reduced planted area led to a 6% year over year decline in revenues to $4.4 billion in the reported quarter. These offset favourable seed pricing and increased insecticide volumes in Latin America.

Electronics & Communications: Sales fell 6% to $580 million in the quarter. However, volume gains in photovoltaic markets contributed to a healthy double-digit rise in operating earnings.

Industrial Biosciences: Sales rose 4% to $301 million on higher demand for enzymes for ethanol production.

Nutrition & Health: Sales edged down 1% to $861 million. Productivity improvement, better product mix and lower input costs led to a rise in the division's operating earnings.

Performance Chemicals: Sales fell 3% to around $1.5 billion. Operating earnings fell as lower TiO2 and fluoroproducts prices coupled with higher raw material and energy costs offset higher volumes.

Performance Materials: Sales moved up 2% to roughly $1.6 billion on volume gains in the automotive market, partly offset by increased ethane and natural gas costs.

Safety & Protection: Sales rose 4% to $947 million on higher volume and productivity improvements.

Financials

DuPont ended the quarter with cash and cash equivalents of roughly $3.8 billion, down 42% year over year. Total borrowings and capital lease obligations fell roughly 15% year over year to around $11.3 billion.

Outlook

DuPont, a Zacks Rank #3 (Hold) stock, reaffirmed its earnings guidance for this year and continues to see adjusted earnings per share in the band of $4.20 to $4.45, a 8%-15% year-over-year rise. The current corresponding Zacks Consensus Estimate is $4.31.

Moreover, DuPont expects to earn roughly 70% of its full year operating earnings per share in the first half of 2014. The guidance takes into account the expected improvement in global industrial market demand.  

DuPont, last month, outlined its growth strategies for its agricultural seed business – DuPont Pioneer. The company expects around half of the growth in the agriculture business to come from outside of North America over the next five years, mostly in major markets such as Latin America, Eastern Europe, India and China where it has a strong foothold and looking for continued growth.

Moreover, the recent roll out of the Encirca services platform for farmers in the U.S., which marks an expansion to DuPont's whole-farm decision services offerings, is expected to offer meaningful opportunity in the long run and deliver annual peak revenues of more than $500 million.

However, DuPont's TiO2 business remains hobbled by weak pricing. The company is spinning off the performance chemicals unit as it is gradually shifting its focus to high growth, less cyclical businesses, including agriculture.

DuPont's results shed light on end-market scenario and demand trend for chemical products. Its compatriot Dow Chemical DOW, which will report on Apr 23, will offer some key insights on how the chemical industry fared in the first three months of the year.

Among other major chemical names, Celanese CE is slated to come out with its first-quarter results on Apr 21 while Eastman Chemical EMN will report after the close on Apr 24.