EIDP, Inc. (DuPont) — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015. The unaudited interim statements cover DuPont and its consolidated subsidiaries. On July 1, 2015, DuPont completed the spin-off of Performance Chemicals into The Chemours Company; beginning in the third quarter, Chemours is reported as a discontinued operation.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $8,595 million | $9,706 million | $17,767 million | $19,834 million |
| Net income attributable to DuPont | $940 million | $1,070 million | $1,971 million | $2,509 million |
| Diluted EPS | $1.03 | $1.15 | $2.15 | $2.70 |
| Income before income taxes | $1,175 million | $1,440 million | $2,776 million | $3,242 million |
| Effective tax rate | 19.6% | 25.4% | 28.7% | 22.3% |
| Cash used in operating activities | Not separately presented for the quarter | $(2,045) million | $(2,071) million |
- Q2 diluted net margin was approximately 10.9%, compared with approximately 11.0% in the prior-year quarter. Six-month diluted net margin was approximately 11.1%, compared with approximately 12.7% in 2014.
- Q2 cost of goods sold was $5.3 billion, or approximately 61% of sales, versus 62% in the prior year. Six-month cost of goods sold was approximately 61% of sales versus 60% in 2014.
- Q2 segment pre-tax operating income declined 16% to $1.6 billion. Six-month segment pre-tax operating income declined 15% to $3.6 billion.
- Cash and marketable securities totaled $5.3 billion at June 30, 2015, down from $7.0 billion at December 31, 2014. Cash and cash equivalents were $4.7 billion.
- Total debt was $12.7 billion at June 30, 2015, up from $10.7 billion at year-end 2014. The increase primarily reflected debt issued by Chemours while it remained consolidated.
- Six-month investing cash outflow was $983 million, including $938 million of capital expenditures. Financing activities provided $1.0 billion, principally due to Chemours borrowings.
- Dividends paid during the first six months were $875 million. The quarterly dividend was $0.49 per share in Q2, and a third-quarter dividend of $0.38 per share was declared in July.
Material Changes Versus the Prior Comparable Period
- Q2 sales decreased 11%, and six-month sales decreased 10%. The principal drivers were a stronger U.S. dollar, lower volumes and local prices, portfolio changes and divestitures.
- Q2 net income attributable to DuPont fell 12%; six-month net income fell 21%. Diluted EPS declined 10% in Q2 and 20% for the six-month period.
- Currency reduced Q2 sales by approximately 5% and six-month sales by approximately 5%. Developing-market sales declined 11% in Q2 and 13% year to date.
- Performance Chemicals Q2 PTOI declined 77% to $54 million, primarily due to lower titanium dioxide prices, currency effects and a $61 million Chemours restructuring charge.
- Performance Materials Q2 PTOI declined 54%, largely because 2014 included a $391 million gain on the sale of Glass Laminating Solutions/Vinyls.
- Safety & Protection PTOI increased 73% in Q2, benefiting from a $112 million pre-tax legal settlement gain and the absence of prior-year restructuring charges.
- Q2 transaction costs related to the Performance Chemicals separation were $119 million. A $20 million premium for early retirement of DuPont debt was recorded in interest expense.
- The company purchased and retired 4.6 million shares during the first six months. A separate plan authorizes approximately $4.0 billion of repurchases using Chemours distribution proceeds, including $2.0 billion targeted by December 31, 2015.
Outlook, Commentary, Risks and Unusual Items
- Management revised its 2015 outlook in July to exclude full-year earnings from Performance Chemicals and reduced Agriculture expectations because of weak global agricultural markets, lower expected Latin American corn area and weaker North American soybean volumes.
- The operating-model redesign generated estimated earnings benefits of $0.10 per share in Q2 and $0.20 per share for the first six months. Management expects approximately $0.40 per share of benefit for 2015, approximately $1.0 billion of run-rate savings by Q4 2015 and $1.3 billion by 2017.
- Management expects approximately $130 million of additional Chemours separation costs after June 30, 2015, primarily for professional fees and separation activities.
- DuPont expects a third-quarter curtailment gain of approximately $230 million to $240 million related to employees transferring to Chemours; the gain is expected in discontinued operations.
- Key risks include foreign-exchange volatility, energy and raw-material prices, global economic conditions, market demand, product development, regulatory changes, process safety, cyber and business disruptions, intellectual-property matters, environmental liabilities and litigation.
- Environmental liabilities totaled $477 million at June 30, 2015. Management estimates that adverse changes could increase the potential liability by up to $1.1 billion above the accrued amount.
- PFOA matters included approximately 3,500 pending personal-injury lawsuits, an accrual of $14 million and a medical-monitoring obligation of up to $235 million, excluding administrative costs. The company stated that potential losses beyond recorded amounts could not be reasonably estimated.
- Imprelis-related claims had an accrual of $216 million and insurance receivables of $15 million. Approximately 30 opt-out actions remained pending, and the remaining insurance coverage was $300 million, subject to uncertainty.
- The company had $409 million of directly guaranteed obligations related to equity affiliates, customers and suppliers. Many acquisition and divestiture indemnifications have generally unlimited potential payments.
- Management concluded that disclosure controls were effective as of June 30, 2015 and reported no material change in internal control over financial reporting.
Most Important Facts to Verify
- Reconcile post-spin-off continuing-operations results with the preliminary pro forma figures: Q2 continuing-operations net sales were estimated at $7.1 billion and six-month sales at $15.0 billion.
- Confirm the third-quarter accounting treatment and balance-sheet removal of Chemours assets and liabilities, including approximately $4.0 billion of Chemours debt.
- Track execution of the approximately $4.0 billion share-repurchase authorization and its effect on share count, cash and leverage.
- Assess whether currency pressure, agricultural weakness and Performance Chemicals separation effects are consistent with the revised 2015 outlook.
- Monitor PFOA litigation, medical-monitoring costs, environmental contingencies and Imprelis insurance recoveries, none of which have fully estimable ultimate exposure in the filing.
- Evaluate cash generation and liquidity given six-month operating cash usage of $2.0 billion, capital expenditures of $938 million and total debt of $12.7 billion.