Dupont Q4 Earnings: Company Positive On Dow Merger & Cost Saving Plan, But Weak Agro Sales And Currency Headwinds Continue To Hurt Operations

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DuPont (NYSE:DD) released its 2015 fourth quarter and full year earnings report recently. [1] The company’s operating earnings declined for the quarter as well as the full year, with most of the decline coming from weak agricultural products sales and the negative currency translation effect induced by the strong U.S. Dollar. With regards to the proposed merger with The Dow Chemical Company (NYSE:DOW), Dupont management is confident the companies will get the required clearances without major asset sales and the deal will be completed in the second half of 2016. Additionally, the cost reductions from an ongoing operational redesign initiative undertaken by the company continue to boost earnings. Dupont is pleased with the progress of the initiative so far, and now believes that it can achieve $730 million in cost savings in 2016.

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Dupont’s Dow Merger Plans & Cost Saving Initiative On Track, But Currency Fluctuations Hurting Current Performance

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Dupont management is confident the merger with Dow Chemicals will be completed in the second half of 2016. [2] Chief Executive Edward Breen believes that there is “very little” which would concern regulators about the two companies’ pending merger. [3] He also stated that it was unlikely that the merger would require any significant asset sales. Once the merger is completed, the combined company subsequently plans to split into three businesses which would each be individually focused on agriculture products, materials, and specialty products. Dupont is also in the midst of an ongoing redesign initiative. The cost reductions stemming from operational redesign contributed an incremental $0.10 per share to fourth quarter operating earnings and $0.40 per share in incremental savings for the full year. [1] The company is pleased with its progress so far and has revised its 2016 cost savings target from $700 million to $730 million. Dupont also plans to cut close to 5,000 jobs in an effort to improve profits and hasten integration with Dow Chemical.

However, Dupont’s performance continues to be plagued by currency headwinds. Negative currency fluctuations reduced the company’s sales by 7%, and pre-tax operating earnings  by 15% for the full year 2015. [4] DuPont has operations in more than 90 countries worldwide and about 57% of its consolidated net sales revenue comes from international markets. Since the company operates primarily in local currency in these markets, a strong U.S. Dollar negatively impacts its financial results. Dupont expects its 2016 operating EPS to be in the range of $2.95-3.10 per share. [4] Based on the average basket of exchange rates for its business, the company currently expects the strengthening U.S. dollar to drag down its 2016 full-year earnings by $0.30 per share.

Continued Challenges In Agricultural Products Division

DuPont’s Agricultural Products division continues to operate in a challenging environment as seed prices remain low – mostly because of the current commodity downturn and a continued oversupply situation driven by yield improvements and favorable weather conditions. In addition, farmers have shown a tendency to move away from planting corn because of better returns on other crops. [5] During the full year 2015, the company’s Agricultural Products sales dropped by 13% while operating earnings from the division declined by 30% year over year. [6] DuPont’s Agricultural Products division’s growth prospects have remained stagnant since 2014’s decline in seed prices and a shift away from corn planting. In 2014, DuPont’s agricultural products sales revenue declined by 3.7% and margins shrunk by almost 50 basis points year over year, according to our estimates. The decline had a significant impact on the company’s overall earnings growth during the period because agricultural products make up close to 40% of the company’s total consolidated sales revenue. This was in stark contrast to 2013, when the division posted the highest revenue growth (13% y-o-y) within the company’s diversified portfolio, buoyed by robust demand for its AQUAmax and AcreMax seed products and Rynaxypyr insecticide. Going forward, DuPont expects the division to continue operating in a challenging environment in the short term, suffering from lower volumes and currency headwinds. The company has guided for a 10% decline in the division’s sales and a low twenty percent drop in operating income for the first quarter of 2016. [1]

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Notes:
  1. DuPont Fourth-Quarter and Full-Year 2015 Earnings Conference Call, Dupont Investor Relations [] [] []
  2. DuPont’s (DD) CEO Ed Breen on Q4 2015 Results – Earnings Call Transcript, January 26, 2016, Seeking Alpha []
  3. DuPont CEO sees ‘very little’ to concern regulators in Dow merger, January 26, 2016, Reuters []
  4. DUPONT REPORTS 4Q AND FULL-YEAR OPERATING EPS OF $0.27 AND $2.77, January 26, 2016, Dupont Investor Relations [] []
  5. DuPont Annual SEC Filings, sec.gov []
  6. Dupont’s SEC Filings []