Byline: Scott Malone

NEW YORK — Citing continuing pressures on margins due to rising costs of raw materials, DuPont reported a 25 percent drop in second-quarter net income, despite a 12 percent increase in sales. The firm also warned that it expects a possible softening of U.S. demand in the second half of the year.
Still, its results were slightly stronger than Wall Street
had expected.
On the fibers front, rising costs lead to a 15.4 percent drop in earnings at DuPont’s nylon enterprise and slowed income growth at the specialty fibers business, which includes Lycra spandex, to 4.2 percent. Polyester, on the other hand, swung back to profitability after several quarters of losses.
Noting that its average selling prices, excluding the effects of currency fluctuations, were up 2 percent, senior vice president and chief financial officer Gary Pfeiffer said, “This is the first significant absolute increase in local-currency prices since the first quarter of 1998.”
Speaking in a conference call with financial analysts and reporters, he said the Wilmington, Del.-based company expects overall raw material costs to continue to rise through the third quarter, with some possible abatement beginning in the fourth.
“Our outlook for the second half is that volume growth will continue to be robust, but not quite as strong as the first half,” he said. “In the U.S., we do expect the economy to begin to slow somewhat.”
The nylon enterprise reported aftertax operating income of $88 million, down from $104 million a year ago. That came despite a 2 percent rise in sales, to $1.17 billion, from $1.15 billion.
Vice president of investor relations Ann Gualtieri said the margin erosion reflects “the prevailing impact of raw materials, despite higher prices and strong demand.”
Bob Pruyn, business director for DuPont’s nylon apparel operations in North America, put it more succinctly: “I’m getting killed by ingredient costs.
“Price pressure is huge. Costs are going up at a higher rate than we’re able to get price increases.”
Gualtieri said that, for nylon, raw material costs are about 40 percent higher than they were a year ago. In contrast, DuPont’s nylon prices are up 4 percent.
“We expect further escalation” in nylon prices, she said. DuPont plans to again hike its prices on nylon by 8 to 10 percent, effective Aug. 1.
Pruyn said that sales of nylon into the warp-knit fabrics business have been relatively strong, given the ongoing strength of the intimate apparel market. They’re also getting a boost from surging demand for U.S.-made fabric in anticipation of Caribbean Basin Initiative trade parity.
Circular knits are a strong point, driven by demand for seamless garments.
At the specialty fibers operation, aftertax operating income was $175 million, up from $168 million. Sales were $892 million, up from $857 million.
Gualtieri noted that earnings for the Lycra spandex operation slowed in the quarter as a result of higher raw material prices and an increase in global capacity, which she said is “outpacing the 15 percent increase in world demand.
“The premium markets for stretch are expected to grow 10 to 12 percent per year, but even at that rate, it will take some quarters for things to even out,” in terms of supply and demand, Gualtieri added. She noted that prices for spandex are under pressure and added that a weak euro hurt demand in fiber during the quarter, as well.
Steve McCracken, president of the Lycra spandex operation, added that in Asia, a number of Korean companies have been building new spandex capacity and that the full effects of that increase on the business are yet to be felt.
The polyester enterprise posted $11 million in aftertax operating income, compared with a $53 million loss a year ago. Sales were at $676 million, up from $643 million.
Gualtieri said, “major raw materials price increases were partially offset by better [fiber] pricing.”
DuPont recently has been moving most of its polyester operations into joint ventures and revealed that a filament venture with Unifi Inc. gave DuPont the option of requiring Unifi to buy its filament unit.
Pfeiffer noted that DuPont’s overall depreciation costs were down in the quarter, “primarily due to a reduced ownership position in polyester.” He also noted that the company’s research spending in polyester was down.
Overall, DuPont’s net income was $688 million, or 65 cents a diluted share, down from $917 million, or 80 cents a diluted share a year ago. Net revenue was $8.13 billion, up from $7.26 billion.

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