E. I. du Pont de Nemours and Company — 2014 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The filing presents continuing operations after the February 2013 divestiture of Performance Coatings. Dollars are in millions except per-share data.
Business Context and Financial Overview
DuPont operates through Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, and Safety & Protection. Management is preparing to separate Performance Chemicals through a U.S. tax-free spin-off, expected around mid-2015.
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $7,511 | $7,735 | $27,345 | $27,987 |
| Income from continuing operations | $434 | $263 | $2,953 | $2,680 |
| Net income attributable to DuPont | $433 | $285 | $2,942 | $4,663 |
| Diluted EPS from continuing operations | $0.47 | $0.28 | $3.17 | $2.85 |
| Diluted EPS | $0.47 | $0.30 | $3.17 | $4.99 |
| Dividends per share | $0.47 | $0.45 | $1.37 | $1.33 |
Continuing-operations net margins were approximately 5.8% in Q3 and 10.8% for the first nine months. Segment pre-tax operating income was $923 in Q3, up 25%, and $5,126 for nine months, up 8%.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash used in operating activities was $1,802 for the first nine months, compared with $2,333 used in the prior-year period.
- Capital expenditures were $1,311; dividends paid were $1,268; and share repurchases totaled $2,000.
- Cash used in investing activities was $720, compared with $3,578 of cash provided in the prior year, which benefited from Performance Coatings sale proceeds.
- Cash and cash equivalents were $3,982 at September 30, down from $8,941 at December 31, 2013. Cash, cash equivalents and marketable securities totaled $4,548.
- Total debt was $13,168, up from $12,462 at year-end 2013; short-term borrowings increased substantially while long-term borrowings declined.
- DuPont reported approximately $4.9 billion of unused credit lines, including a new five-year $4.0 billion credit facility.
- Total assets were $47,911 and total equity was $15,982 at September 30, 2014.
Material Changes Versus Prior Comparable Period
- Q3 sales declined 3%, primarily from portfolio changes, while volume increased 1% and local selling prices declined 1%.
- Nine-month sales declined 2%, reflecting 1% lower prices and a 1% portfolio impact; worldwide volume was flat.
- Q3 continuing-operations income increased 65%, supported by lower product costs, productivity improvements, higher segment earnings, and the absence of significant prior-year Imprelis and titanium dioxide litigation charges.
- Nine-month continuing-operations income increased 10%, despite a $263 restructuring charge and lower sales.
- Other income increased to $357 in Q3 from $70, primarily because of foreign-exchange gains. Nine-month other income included a $391 pre-tax gain on the sale of Glass Laminating Solutions/Vinyls.
- The effective tax rate was 44.8% in Q3 versus a 15.4% benefit in Q3 2013, and 26.7% for nine months versus 20.4% in the prior year.
- Performance Materials nine-month PTOI increased 35%, primarily due to the GLS/Vinyls sale gain. Nutrition & Health, Industrial Biosciences, and Safety & Protection also improved, while Agriculture, Electronics & Communications, and Performance Chemicals declined year to date.
Guidance, Outlook, Risks and Unusual Items
- Full-year 2014 Performance Chemicals separation costs are expected to be approximately $210, or $0.16 per share, with additional costs expected in 2015.
- The restructuring program is expected to generate pre-tax savings of approximately $80 in 2014, $250 in 2015, and approximately $300 annually thereafter. Actions are expected to be substantially complete by December 31, 2015, but additional charges cannot yet be reasonably estimated.
- The August 2014 accelerated share repurchase is expected to be completed in Q4 2014. The $5 billion 2014 buyback authorization has no required completion date.
- Risks include raw-material and energy costs, currency and commodity volatility, global economic conditions, product development, regulatory changes, business disruptions and cyber threats, intellectual-property matters, litigation, environmental liabilities, and execution of the Performance Chemicals separation.
- Imprelis claims had approximately $312 of accrued liabilities at September 30, with about 35 lawsuits remaining. Recorded charges totaled $1,175, and insurance recoveries recognized and received totaled $73.
- PFOA accruals were $14. Approximately 2,545 personal-injury lawsuits were pending, including 18 wrongful-death lawsuits; initial MDL trials were scheduled for September and November 2015. Potential losses beyond recorded amounts could not be reasonably estimated.
- Environmental remediation liabilities were $479. Management stated that potential liability could be as much as three times the accrued amount under adverse circumstances.
- The Venezuelan currency remeasurement and related exchange losses reduced results; the nine-month period included a $58 charge associated with the Venezuelan bolivar.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor Verification Priorities
- Verify the timing, regulatory approvals, costs and liabilities associated with the planned Performance Chemicals separation.
- Assess whether operating cash flow remains negative because of seasonal working-capital needs and whether liquidity supports debt maturities, dividends and repurchases.
- Review the sustainability of earnings excluding the $391 GLS/Vinyls gain, foreign-exchange gains and the absence of prior-year litigation charges.
- Monitor PFOA, Imprelis, environmental and other litigation exposure, including possible liabilities beyond recorded accruals.
- Evaluate Agriculture volume and market-share trends, particularly corn seed, and pricing pressure in Performance Chemicals and Electronics & Communications.
- Reconcile debt increases, short-term borrowing needs and available credit facilities with the company’s capital-allocation plans.