DuPont Tops Estimates as Premerger Cost Cuts Boost Margins

July 26, 2016 12:12 PM

DuPont Co. posted second-quarter earnings that surpassed analysts’ estimates as cost cuts ahead of a historic merger with Dow Chemical Co. helped boost profit in every business segment.

DuPont also raised the low end of its forecast for full-year earnings by 10 cents a share, according to a statement Tuesday. Chief Executive Officer Ed Breen is cutting 10 percent of the workforce ahead of the $60 billion tie-up with Dow, the biggest ever in the chemical industry.

Breen also got a boost from the agriculture business, which posted higher second-quarter earnings for the first time since 2013 even as rival Monsanto Co. continued to struggle. Earnings in the unit, DuPont’s biggest, climbed 12 percent as demand for corn seed and insecticide more than compensated for lower North American volume in soybean seeds.

“The cut costs more than we expected,” said Jonas Oxgaard, a New York-based analyst at Sanford C. Bernstein & Co. whose earnings estimate of $1.18 a share was the highest compiled by Bloomberg. “They seem to be running the ag business better than they used to.”

DuPont rose 0.8 percent to $69.40 at 11:49 a.m. in New York. The shares had gained 3.4 percent this year through Monday.

Raising Forecast

DuPont raised its full-year forecast for operating earnings excluding restructuring costs and other items to a range of $3.15 to $3.20 a share, up from an April forecast of $3.05 to $3.20 a share. Analysts on average had estimated $3.14.

Second-quarter adjusted earnings rose to $1.24 a share, exceeding the average estimate by 14 cents a share. Revenue fell 0.8 percent to $7.06 billion as a stronger dollar, lower prices and portfolio changes outweighed a 2 percent increase in sales volumes. Analysts on average had estimated revenue of $7.01 billion.

Shareholders of DuPont and Dow last week approved the 50-50 merger of the two largest U.S. chemical makers. The all-stock transaction was announced Dec. 11 and is scheduled to close later this year. The creation of DowDuPont Inc. is to be followed in 2018 by a split into three publicly traded companies focused on agriculture, specialty products and materials science.

The companies are considering which of the three new companies will be responsible for specific bonds and legal liabilities, including health claims linked to DuPont’s Teflon manufacturing, Breen said in a telephone interview. Those decisions, however, will be left to the board of DowDuPont after the deal closes, he said.

Antitrust Clearance

Breen will serve as CEO of DowDuPont with his counterpart at Dow, Andrew Liveris, taking the role of chairman. Both companies are eliminating thousands of jobs as they cut billions of dollars in expenses, with another $3 billion of cost reductions promised after the deal closes. The companies’ combined spending of $37 billion presents “a big opportunity” for savings to exceed plans, Breen said.

“My gut is, from having done this stuff in the past, that could be where some of the upside comes from,” the CEO said. “We will literally look at every line item.”

The companies are now focused on winning antitrust clearance. The U.S. Justice Department in February issued a second request for information on the combination, launching an in-depth probe. Dow and DuPont notified China’s competition agency of the deal in May and they filed with the European Commission last month. Breen said the companies are “deep in conversations” with those three regulators as well as those in Brazil.

“We did offer up some concessions just the other day” to the European Commission, Breen said, declining to be more specific. “Hopefully that will help us with the timelines and getting approvals.”

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