EIDP, Inc. (E. I. du Pont de Nemours and Company) — Q1 2012 Form 10-Q
Unaudited results for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. DuPont operated across Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection and Pharmaceuticals.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $11,230 million | $10,034 million | +12% |
| Income before income taxes | $1,941 million | $1,702 million | +14% |
| Net income attributable to DuPont | $1,488 million | $1,431 million | +4% |
| Diluted EPS | $1.57 | $1.52 | +$0.05 |
| Dividends per share | $0.41 | $0.41 | Unchanged |
| Cash used in operating activities | $(1,877) million | $(1,484) million | Higher use of cash |
| Capital expenditures | $301 million | $323 million | Down $22 million |
| Free cash flow | $(2,178) million | $(1,807) million | Higher cash use |
- COGS was $7,527 million, or approximately 67% of sales, versus approximately 68% in the prior-year quarter. Management attributed the improvement to pricing and productivity, which more than offset approximately 7% higher raw material, energy and freight costs.
- SG&A increased to $1,169 million from $1,027 million, while R&D increased to $505 million from $399 million, primarily from acquired businesses and Agriculture growth investments.
- The effective tax rate increased to 22.7% from 15.2%, principally reflecting foreign-currency hedging tax effects and geographic earnings mix.
- Cash, cash equivalents and marketable securities totaled $3,601 million at March 31, 2012, compared with $4,019 million at December 31, 2011.
- Total debt increased to $14,825 million from $12,553 million, primarily reflecting financing associated with the Danisco acquisition. The balance sheet reported $3,593 million of short-term borrowings and $11,232 million of long-term borrowings and capital lease obligations.
- DuPont reported approximately $4.3 billion of unused credit lines and stated that operating cash flow, cash resources and capital-market access were adequate for anticipated needs. Credit ratings were investment grade with stable outlooks from Standard & Poor’s, Moody’s and Fitch.
Material changes versus the prior comparable period
- Sales growth reflected a 7% contribution from portfolio changes, an 8% increase in local prices, a 2% volume decline and a 1% adverse currency effect.
- Segment pre-tax operating income increased $202 million, or 10%, to $2,327 million. Agriculture, Performance Chemicals, Nutrition & Health and Industrial Biosciences were key contributors.
- Agriculture sales increased 16% and segment pre-tax operating income increased 14%, supported by strong global demand and an early North American and European selling season.
- Nutrition & Health and Industrial Biosciences benefited from the Danisco acquisition; related segment results included amortization of acquired intangible-asset fair-value step-ups.
- Electronics & Communications sales declined 17% on weaker photovoltaic demand and lower volume. Performance Materials sales declined 6%, and Safety & Protection sales declined 2%.
- Performance Chemicals sales rose 6% despite a 10% volume decline, as higher pricing offset lower volume and higher input costs. Pharmaceuticals pre-tax operating income declined to $27 million from $50 million following expiration of certain Cozaar/Hyzaar patents.
- Operating cash flow remained negative, primarily because of a $614 million pension contribution versus $105 million in the prior-year quarter.
- DuPont paid $400 million under a share-repurchase agreement, completing the 2001 $2.0 billion authorization and beginning purchases under the April 2011 $2.0 billion authorization. Shares were expected to be received by May 2012.
Outlook, commentary, risks and unusual items
- Management reported sequential improvement in industrial-market volume, including titanium dioxide, and expected positive momentum entering the second quarter. The filing does not provide formal numerical earnings or sales guidance.
- Management stated that productivity initiatives generated approximately $100 million of fixed-cost improvement and $100 million of working-capital improvement in the quarter, and that the company remained on track with these initiatives.
- Imprelis herbicide claims resulted in a $50 million first-quarter charge and $225 million of cumulative recorded charges. Additional charges were reasonably possible, with total charges potentially reaching $575 million. DuPont intended to seek insurance recovery for costs above $100 million.
- PFOA-related accruals totaled $16 million. The C8 Science Panel identified probable links to pregnancy-induced hypertension and, in April 2012, kidney and testicular cancer. Potential medical-monitoring costs remained uncertain, with the company’s total obligation under the settlement capped at $235 million.
- Environmental remediation liabilities totaled $424 million and could reach up to three times the accrued amount under adverse changes in circumstances. Payments may extend over an estimated 15–20 years.
- DuPont reported $105 million of recorded indemnification obligations, including $70 million related to the INVISTA litigation. The maximum obligation for specified representations and warranties in that agreement was $1.4 billion.
- The company guaranteed $546 million of obligations for customers, suppliers, equity affiliates and divested subsidiaries. Approximately 53% of $323 million of customer and supplier guarantees was estimated to be covered by collateral assets, assuming liquidation.
- Other key risks included raw-material and energy-price volatility, global economic and currency conditions, litigation and environmental matters, regulatory changes, process safety, product stewardship, supply disruptions, intellectual-property protection and integration of acquired businesses.
- In April 2012, DuPont completed the sale of an equity-method investment and expected to record an after-tax gain of approximately $75 million.
- Management concluded that disclosure controls were effective as of March 31, 2012, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Agriculture’s early selling-season benefit and industrial-market momentum continued beyond the first quarter.
- The final cost of the Imprelis claims process, including potential insurance recoveries and the maximum estimated exposure.
- Developments in PFOA medical-monitoring obligations, litigation and environmental remediation liabilities.
- The impact of higher debt and interest expense following the Danisco acquisition, including debt maturities and refinancing needs.
- Whether negative first-quarter operating cash flow was seasonal and pension-related or indicated broader working-capital pressure.
- Progress and remaining authorization under the share-repurchase program and the sustainability of the $0.41 quarterly dividend.
- The effect of patent expirations on Pharmaceuticals and continued weakness in photovoltaic, titanium dioxide, electronic and industrial markets.