EIDP, Inc. (E. I. du Pont de Nemours and Company) — 2013 Form 10-K Summary
Business context and reporting period
This filing is an annual report for the fiscal year ended December 31, 2013, rather than a standalone quarterly filing. DuPont operated in more than 90 countries, employed approximately 64,000 people, and generated about 60% of consolidated sales outside the United States. Its eight reportable segments were Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, Safety & Protection, and Pharmaceuticals.
Performance Coatings was sold on February 1, 2013, and is reported as discontinued operations for all periods. DuPont also announced plans to separate Performance Chemicals through a tax-free spin-off, expected around mid-2015, and agreed to sell Glass Laminating Solutions/Vinyls for $543 million plus inventory value, subject to closing conditions.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $35.734 billion | $34.812 billion | Up 3% |
| Income from continuing operations after tax | $2.863 billion | $2.472 billion | Up 16% |
| Net income attributable to DuPont | $4.848 billion | $2.755 billion | Up 76% |
| Diluted EPS from continuing operations | $3.04 | $2.59 | Up 17% |
| Diluted EPS, total | $5.18 | $2.91 | Up 78% |
| Cash provided by operating activities | $3.179 billion | $4.849 billion | Down $1.670 billion |
| Free cash flow | $1.297 billion | $3.056 billion | Down $1.759 billion |
| Capital expenditures | $1.882 billion | $1.793 billion | Up $89 million |
| Cash, cash equivalents and marketable securities | $9.086 billion | $4.407 billion | Up $4.679 billion |
| Total debt | $12.462 billion | $11.740 billion | Up $722 million |
Sales growth reflected 5% higher worldwide volume, partly offset by 1% lower local prices and unfavorable currency effects. Developing-market sales increased 7% to $11.9 billion and represented 33% of total sales. Cost of goods sold increased to $22.548 billion, or 63% of sales versus 62% in 2012, primarily because of higher raw-material and agricultural-input costs and lower selling prices. The effective tax rate on continuing operations declined to 17.9% from 19.9%.
Segment performance was mixed. Agriculture sales rose 13% and PTOI increased to $2.132 billion, while Performance Chemicals sales fell 7% and PTOI declined to $924 million. Performance Materials PTOI increased to $1.281 billion, Safety & Protection PTOI increased to $694 million, and Electronics & Communications sales declined 6% with PTOI declining to $203 million. Pharmaceuticals PTOI declined to $32 million as Cozaar/Hyzaar patent protections expired.
Fourth-quarter 2013 net sales were $7.747 billion, compared with $7.325 billion in the fourth quarter of 2012. Fourth-quarter income from continuing operations before tax was $122 million versus a $34 million loss in the prior-year quarter; diluted EPS from continuing operations was $0.19 versus zero in the prior-year quarter.
Cash flow, liquidity, debt and shareholder returns
- Operating cash flow decreased primarily because of lower earnings, the absence of Performance Coatings results, the Performance Chemicals decline, and increased Agriculture working capital tied to receivables and customer-credit sales.
- Investing activities generated $2.945 billion, principally due to approximately $4.841 billion of net proceeds from the Performance Coatings sale.
- DuPont issued $1.25 billion of 2.80% notes due 2023 and $750 million of 4.15% notes due 2043.
- Unused bank credit lines were approximately $4.4 billion. Credit ratings were investment grade with stable outlooks: S&P A/A-1, Moody’s A2/P-1, and Fitch A/F1.
- Dividends paid were $1.7 billion, with common dividends per share increasing to $1.78 from $1.70. A $1 billion accelerated share repurchase retired 20.4 million shares in 2013.
- In January 2014, the board authorized a new $5 billion share-repurchase plan, with approximately $2 billion expected to be repurchased during 2014.
Material changes versus the prior comparable period
- Continuing-operations earnings improved despite lower pricing and currency headwinds, supported by volume growth, lower Imprelis-related charges, lower restructuring charges, and productivity improvements.
- Performance Coatings contributed a $2.687 billion pretax disposal gain, or $1.962 billion after tax, driving the substantial increase in total net income and EPS.
- Imprelis-related charges declined to $352 million net of insurance recoveries from $575 million in 2012; total accrued charges reached $1.175 billion, with $489 million of claims accruals at year-end.
- Employee separation and asset-related charges decreased to $114 million from $493 million. The 2013 amount included a $129 million impairment charge in Electronics & Communications.
- Performance Chemicals experienced severe margin compression: PTOI margin fell to 14% from 25%, primarily because of lower titanium dioxide, fluoropolymer and refrigerant prices.
- The company changed inventory accounting from LIFO to average cost for certain foreign and U.S. locations, retrospectively adjusting prior periods. The 2013 change increased continuing-operations income after tax by $21 million and diluted EPS by $0.02.
- Accumulated other comprehensive loss improved to $5.441 billion from $8.646 billion, primarily because of pension-related gains.
Guidance, outlook, risks and unusual items
Management expected 2014 sales and earnings to benefit from improving global industrial production, lower agricultural input costs, a slightly stronger U.S. dollar, innovation and productivity. Agriculture sales were expected to increase modestly with improved margins; Electronics & Communications sales were expected to rise slightly; Industrial Biosciences and Nutrition & Health were expected to grow moderately; Performance Chemicals sales were expected to be essentially flat; and Performance Materials sales and earnings were expected to be essentially flat because of the planned GLS/Vinyls divestiture and a scheduled plant outage.
- Environmental remediation liabilities were $458 million at year-end. Management noted that adverse developments could increase potential remediation liability to as much as three times the accrued amount.
- PFOA-related matters included $15 million of accrued liabilities, an obligation to fund up to $235 million of medical monitoring, and 83 pending personal-injury lawsuits. The filing states that potential additional losses could not be reasonably estimated.
- Imprelis claims remained subject to a settlement warranty through May 2015, an appeal, and individual state-court actions. Insurance recoveries remained uncertain.
- DuPont recorded a $72 million charge for titanium dioxide antitrust litigation; the settlement was paid in January 2014.
- The company faced ongoing environmental, product-liability, patent, antitrust, tax and regulatory contingencies, including enforcement discussions involving several manufacturing sites.
- Principal business risks included raw-material and energy costs, global economic and currency volatility, government regulation, biotechnology approvals and market acceptance, cybersecurity and business disruptions, intellectual-property protection, portfolio separations, litigation, environmental liabilities and pension obligations.
- Long-term employee-benefit liabilities totaled $8.429 billion at year-end, including $5.675 billion of pension liability and $2.754 billion of other benefit obligations. Management expected 2014 long-term employee-benefit expense to decrease by approximately $440 million.
Most important facts for investors to verify
- Confirm that comparisons use continuing operations and properly exclude Performance Coatings, while recognizing the large one-time disposal gain.
- Assess the sustainability of Agriculture’s strong 2013 results, including the effect of earlier seed shipments and unusually favorable volume and pricing.
- Monitor Performance Chemicals pricing, titanium dioxide demand, raw-material costs and the planned separation of the segment.
- Review cash conversion: operating cash flow and free cash flow declined materially despite higher reported earnings.
- Evaluate total debt, contractual obligations of $24.071 billion, pension funding requirements and the proposed $5 billion share-repurchase plan.
- Track Imprelis, PFOA, environmental, antitrust and other litigation exposures, including amounts that the filing says cannot currently be estimated.
- Consider the effect of the LIFO-to-average-cost accounting change when comparing reported results across periods.
- Verify the timing and conditions of the GLS/Vinyls sale and the Performance Chemicals spin-off.