EIDP, Inc. (E. I. du Pont de Nemours and Company) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing identifies the registrant as E. I. du Pont de Nemours and Company. Results are presented after the July 1, 2015 spin-off of Performance Chemicals into The Chemours Company, with that business classified as discontinued operations.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $4,873 million | $5,905 million | $19,831 million | $22,557 million |
| Income from continuing operations after tax | $131 million | $331 million | $2,126 million | $2,568 million |
| Net income attributable to DuPont | $235 million | $433 million | $2,206 million | $2,942 million |
| Diluted EPS | $0.26 | $0.47 | $2.43 | $3.17 |
| Cash used in operating activities | Not separately provided | Not separately provided | $1,845 million | $1,802 million |
| Capital expenditures | Not separately provided | Not separately provided | $1,291 million | $1,311 million |
- Q3 net sales declined 17%, primarily from an 8% unfavorable currency impact and 7% lower volume. Nine-month sales declined 12%, reflecting 7% currency pressure, 3% lower volume and 2% portfolio effects.
- Q3 income from continuing operations after tax was $131 million, compared with $331 million. The nine-month effective tax rate was 29.4%, versus 26.4% in the prior-year period; the Q3 rate was 42.3%, versus 47.8%.
- Cost of goods sold was 63% of sales in Q3 and 59% for the nine months, both unchanged from the comparable periods. SG&A increased to approximately 21% of sales in Q3 and 18% year to date, partly because of higher pension and other postretirement costs.
- Segment pre-tax operating income was $580 million in Q3, down from $686 million, and $3,945 million for nine months, down from $4,448 million. Currency reduced segment PTOI by approximately $187 million in Q3 and $613 million year to date.
- Cash, cash equivalents and marketable securities were $3.7 billion at September 30, 2015, down from $7.0 billion at December 31, 2014. Total debt was $9.9 billion, down from $10.7 billion.
- Cash used in operating activities was $1.8 billion for the nine months, while investing and financing activities used $1.0 billion and $0.4 billion, respectively. Cash and cash equivalents ended at $3.3 billion.
- Dividends paid were $1.2 billion for the nine months. Share repurchases totaled $2.4 billion, including a $2.0 billion accelerated share repurchase agreement under which 28.8 million shares were initially retired.
Material changes versus the prior comparable period
- The Chemours spin-off removed Performance Chemicals from continuing operations and transferred related assets, liabilities and accumulated other comprehensive loss. DuPont received $3.9 billion from Chemours, including $3.4 billion in cash and $507 million of Chemours notes, and used the proceeds partly for debt reduction and share repurchases.
- Sales and profitability were pressured by foreign exchange, weaker agricultural markets, emerging-market weakness, lower oil and gas demand, competitive conditions and lower volumes. Electronics & Communications and Industrial Biosciences improved PTOI, but declines in Agriculture, Performance Materials and Safety & Protection outweighed those gains.
- Year-to-date other income declined to $552 million from $749 million, primarily because the prior year included a $391 million gain on the GLS/Vinyls sale. This was partly offset by a $112 million gain related to a legal settlement in 2015.
- Employee separation and asset-related charges declined to $40 million from $244 million, although 2015 included a $38 million impairment of a cost-basis investment.
- Insurance recoveries related to Imprelis claims contributed $150 million in Q3 and $185 million year to date through other operating charges.
Guidance, outlook, risks and unusual items
- In October 2015, management lowered its 2015 outlook because of continued currency strength, particularly against emerging-market currencies, further agricultural weakness in Brazil and broader emerging-market weakness.
- The company reported incremental redesign savings of $0.10 per share in Q3 and $0.30 per share year to date. It expected approximately $0.40 per-share savings for full-year 2015 and targeted run-rate savings of $1.3 billion by the end of 2016 and approximately $1.6 billion by the end of 2017. Additional fourth-quarter 2015 restructuring charges were expected.
- Agriculture fourth-quarter sales were expected to decline by the low teens percentage range, with PTOI expected to be a loss of approximately $100 million.
- Key risks include foreign exchange, energy and raw-material prices, global economic conditions, agricultural demand, regulatory and environmental matters, product liability, litigation, process safety, supply disruptions, cybersecurity, intellectual property and execution of the Chemours separation and operating redesign.
- PFOA matters included approximately 3,500 pending personal-injury lawsuits, a $14 million accrual and a medical-monitoring obligation of up to $235 million whose ultimate cost was not reasonably estimable. DuPont reported a $1.6 million jury award in the first individual trial and expected to appeal.
- Environmental liabilities totaled $505 million, with potential exposure estimated at up to $1.1 billion above the accrued amount under adverse circumstances. Chemours indemnified DuPont for certain PFOA and environmental obligations, but the enforceability and collectibility of indemnities remain important considerations.
- Imprelis-related claims had a $198 million accrual at September 30, 2015, partly offset by expected insurance coverage; approximately 30 opt-out actions remained pending.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Reconcile continuing-operations performance with the Chemours spin-off and confirm the recurring earnings base after removing discontinued operations.
- Assess whether currency, Agriculture weakness and emerging-market conditions continue to offset cost reductions and productivity gains.
- Review the sustainability of liquidity after negative operating cash flow, substantial dividends and share repurchases.
- Evaluate the remaining authorization and settlement mechanics of the $2.0 billion ASR and broader approximately $4.0 billion buyback program.
- Monitor PFOA, environmental, Imprelis and other litigation exposures, including Chemours indemnification terms and potential uninsured amounts.
- Confirm the timing, magnitude and execution risks of the accelerated operating-redesign savings and expected restructuring charges.