DuPont To Take Additional Restructuring Charge Related To Performance Chemicals Spin-off

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DuPont (NYSE:DD) recently announced that it will record a $315 million pre-tax charge during the fourth quarter as a part of its ongoing redesign program, which primarily aims at delivering near-term savings from the movement and elimination of costs related to the separation of its Performance Chemicals division. In addition, the company also announced that the planned spin-off of the division is on target to be completed by mid-next year. It plans to name the new public company created by this transaction as the Chemours Co. [1]

DuPont generates annual sales revenue of around $36 billion by supplying high-performance materials and chemicals, electronic materials, high-performance coatings, and agricultural products to industries and consumers worldwide. Most products manufactured by DuPont are used as raw materials by other industries, making it a predominantly B2B (business-to-business) based company with the exception of the agriculture and nutrition divisions. Its consolidated adjusted EBITDA margin stood at around 20% last year.

We currently have a $70/share price estimate for DuPont, which is 17.3x our 2014 full-year adjusted diluted EPS estimate of $4.04 for the company.

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The Redesign Program

DuPont announced the redesign program in June this year, when it announced that it will be taking a pre-tax charge of $270 million during the second quarter. The company revealed later on that in addition to delivering near-term savings through the movement and elimination of costs related to the separation of its Performance Chemicals business, the redesign program is also aimed at driving significant long-term cost savings through productivity improvements across all businesses. The company plans to carry out an extensive redesign of its infrastructure as a part of this program, which will be primarily focused on automation and standardization of its transactional processes across the globe that will improve its overall cost structure. Altogether, these efforts are expected to yield at least $1 billion in cost savings by the end of 2019 from a 2013 baseline – two-thirds by the end of 2015 on a run-rate basis, and the final third occurring between 2016 and 2019. DuPont has already announced a total pre-tax charge of $585 million related to this redesign program so far, which comes out to be around $0.43 per share, after tax. [2]

Performance Chemicals Spin-off

DuPont’s Performance Chemicals division has been under-performing the company’s overall portfolio for the last several quarters. According to our estimates, the division, which primarily deals in titanium dioxide (TiO2) and fluorochemicals, contributes around 15% to the company’s total value. TiO2 is primarily used as whitening pigment and is a key raw material of the paint manufacturing industry. On the other hand, fluorochemicals are widely used as refrigerants among other applications. Last year, the Performance Chemicals division’s performance was severely impacted by lower TiO2 prices. However, this year weak refrigerant prices are weighing on the company’s results. DuPont sells HCFC 22 and Isceon refrigerants, which have been under a significant pricing pressure recently due to oversupply in the U.S. market. During the first nine months of this year, DuPont’s chemical prices declined by around 4% y-o-y, which led to an almost 9% decline in the segment’s adjusted operating income. [3]

In order to reduce the impact of cyclical volatility in chemical prices on its portfolio, DuPont decided to spin-off the Performance Chemicals division into a separate company in October last year. Recently, company officials announced that the spin-off process is on-track and is expected to complete by mid-next year. The company plans to name the new public entity created by this transaction as the Chemours Co. [1]

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Notes:
  1. DuPont Announces Filing of Form 10 Registration Statement for Performance Chemicals Spinoff, dupont.com [] []
  2. DuPont Lowers Operating Earnings Outlook for 2Q and 2014, dupont.com []
  3. DuPont Reports 3Q Operating Earnings Per Share of $0.54, Up 20 Percent from Last Year, dupont.com []