EIDP, Inc. (formerly E. I. du Pont de Nemours and Company) — FY2015 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2015. DuPont operated six reportable segments: Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials, and Safety & Protection. The company employed approximately 52,000 people, operated in about 90 countries, and generated 60% of consolidated sales outside the U.S.
Performance Chemicals was spun off to shareholders as The Chemours Company on July 1, 2015. Its results are presented as discontinued operations for all periods. DuPont and Dow Chemical announced an all-stock merger of equals on December 11, 2015, expected to close in the second half of 2016, subject to shareholder and regulatory approvals.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $25.13 billion | $28.41 billion | Down 12% |
| Income from continuing operations after tax | $1.895 billion | $3.145 billion | Down 40% |
| Net income attributable to DuPont | $1.953 billion | $3.625 billion | Down 46% |
| Diluted EPS from continuing operations | $2.09 | $3.39 | Down 38% |
| Segment operating earnings | $4.243 billion | $5.032 billion | Down 16% |
| Cash provided by operations | $2.316 billion | $3.712 billion | Down $1.396 billion |
| Free cash flow | $687 million | $1.692 billion | Down $1.005 billion |
| Cash, cash equivalents and marketable securities | $6.206 billion | $7.034 billion | Down $828 million |
| Total debt | $8.807 billion | $10.655 billion | Down $1.848 billion |
Reported continuing-operations margin was approximately 7.5% of sales, compared with approximately 11.1% in 2014. Cost of goods sold remained 60% of sales; selling, general and administrative expense increased to 18% of sales from 17%, while research and development expense increased to 8% of sales from 7%.
Year-end working capital was $7.402 billion, total assets were $41.166 billion, and total equity was $10.200 billion. The company had approximately $4.9 billion of unused credit lines, including a $4 billion revolving facility supporting its commercial paper program. Credit ratings remained investment grade but carried negative outlook or watch status following 2015 downgrades and the planned merger.
Material changes versus the prior comparable period
- Sales declined primarily from a 7% currency headwind, 3% lower volume, and 2% portfolio-related decline. Agriculture volume fell 6%, and Electronics & Communications volume fell 7%.
- Segment operating earnings declined principally because of approximately $785 million of currency pressure and weaker Agriculture volumes, partly offset by productivity and cost savings.
- 2015 included a $798 million pre-tax charge for the 2016 global restructuring plan, including $656 million of severance and related benefits, $109 million of asset charges, and $33 million of contract termination costs. Fourth-quarter 2015 pre-tax restructuring charges were also reported at approximately $798 million, with approximately $680 million of related future cash expenditures expected.
- Other income declined to $697 million from $1.277 billion, primarily because 2014 included significant gains on business and asset sales, including the $391 million GLS/Vinyls gain and a $240 million Agriculture gain.
- The company completed a $2 billion accelerated share repurchase, receiving and retiring 35 million shares at an average price of $57.16. Total 2015 common-stock repurchases were $2.353 billion.
- Quarterly results were highly uneven: fourth-quarter 2015 net sales were $5.299 billion and income from continuing operations before tax was a loss of $421 million, reflecting the restructuring charge and other unusual items.
Segment results and outlook
| Segment | 2015 sales | 2015 operating earnings | 2015 margin |
|---|---|---|---|
| Agriculture | $9.798 billion | $1.646 billion | 17% |
| Electronics & Communications | $2.070 billion | $359 million | 17% |
| Industrial Biosciences | $1.171 billion | $203 million | 17% |
| Nutrition & Health | $3.256 billion | $373 million | 11% |
| Performance Materials | $5.305 billion | $1.216 billion | 23% |
| Safety & Protection | $3.527 billion | $704 million | 20% |
Management expected 2016 sales growth to remain challenged by weak Agriculture markets, slower emerging-market growth, and continued dollar strength. The company expected $730 million of 2016 cost reductions, weighted toward the second half of the year, with approximately $1 billion of run-rate operating-cost reduction by year-end. Transaction costs related to the Dow merger were expected to continue.
Segment guidance called for Agriculture sales down mid-single digits and earnings approximately flat for full year 2016; Electronics & Communications sales approximately flat and earnings up in the low-twenty-percent range; Industrial Biosciences sales up low single digits and earnings approximately flat; Nutrition & Health sales down low single digits and earnings up high teens; Performance Materials sales down low single digits and earnings down approximately 10%; and Safety & Protection sales up low single digits and earnings up mid teens.
Risks, contingencies and unusual items
- The Dow merger required shareholder and competition-law approvals, tax opinions, SEC registration effectiveness, and other conditions. Failure to close could result in termination fees of up to $1.9 billion under specified circumstances and prevent anticipated synergies and business separations.
- DuPont recorded $492 million of environmental remediation liabilities. Management stated that adverse circumstances could increase exposure by up to approximately $1.0 billion above the accrued amount. Chemours indemnifies DuPont for certain matters, including $291 million of the environmental accrual, but the related indemnification assets depend on Chemours' ability to perform.
- PFOA matters included approximately 3,500 lawsuits at year-end, with additional liabilities not reasonably estimable. DuPont recorded a $20 million PFOA accrual and corresponding Chemours indemnification asset; Chemours indemnification and litigation outcomes remain material factors.
- The company recorded a $41 million Imprelis herbicide claims accrual after a $130 million reduction in estimated liability and recognized $185 million of related insurance recoveries in 2015.
- The company deferred further testing and deployment of its enterprise resource planning system. Approximately $435 million of ERP costs had been capitalized but were not yet placed in service.
- Pension and other long-term employee benefit obligations remained significant, with a combined funded-status deficit of approximately $11.4 billion at year-end. Expected 2016 contributions included $230 million to the principal U.S. pension plan.
- Key operating risks include foreign-exchange volatility, agricultural weather and seasonality, raw-material and energy prices, cybersecurity and business disruptions, biotechnology regulation and acceptance, intellectual-property protection, product stewardship, environmental liabilities, and litigation.
Most important facts for investors to verify
- Whether the Dow merger closed on the expected timeline, received required regulatory approvals, and produced the intended business separations and synergies.
- Whether the planned $730 million of 2016 cost savings and approximately $1 billion run-rate savings were achieved without additional material restructuring charges.
- 2016 Agriculture volumes, particularly Brazil and North America seed and crop-protection demand, and the continuing impact of the LaPorte facility shutdown.
- The sufficiency of operating cash flow and liquidity amid seasonal Agriculture working-capital needs, debt maturities, dividends, share repurchases, and merger-related costs.
- The collectability of Chemours indemnification assets and developments in environmental, PFOA, Imprelis, and other litigation exposures.
- The treatment and recoverability of the $435 million of deferred ERP costs and the effect of pension assumptions and funding requirements on future earnings and cash flow.