EIDP, Inc. (DuPont) 2014 Form 10-K Summary
Business context and reporting period
DuPont reported for the fiscal year ended December 31, 2014; the filing also provides unaudited fourth-quarter data. The company operated through seven reportable segments: Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, and Safety & Protection. DuPont had approximately 63,000 employees, operations in about 90 countries, and 62% of consolidated net sales from customers outside the United States.
Management’s strategic priorities were Agriculture & Nutrition, Advanced Materials, and Bio-Based Industrials. DuPont also continued preparations to separate Performance Chemicals through a tax-free spin-off into The Chemours Company, expected around mid-2015.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $34.723 billion | $35.734 billion | Down 3% |
| Income from continuing operations after tax | $3.621 billion | $2.863 billion | Up 26% |
| Net income attributable to DuPont | $3.625 billion | $4.848 billion | Down 25% |
| Diluted EPS from continuing operations | $3.90 | $3.04 | Up 28% |
| Diluted total EPS | $3.92 | $5.18 | Down 24% |
| Cash provided by operating activities | $3.712 billion | $3.179 billion | Up $533 million |
| Free cash flow | $1.692 billion | $1.297 billion | Up $395 million |
| Capital expenditures | $2.020 billion | $1.882 billion | Up $138 million |
| Cash, equivalents and marketable securities | $7.034 billion | $9.086 billion | Down $2.052 billion |
| Total debt | $10.694 billion | $12.462 billion | Down $1.768 billion |
Cost of goods sold was 63% of sales, compared with 63% in 2013. Selling, general and administrative expense declined to 15% of sales from 16%, while research and development expense remained approximately 6% of sales. The continuing-operations effective tax rate increased to 27.4% from 17.9%, principally because of foreign-exchange-related items and gains on asset sales.
Fourth-quarter 2014 net sales were $7.378 billion, compared with $7.747 billion in the fourth quarter of 2013. Fourth-quarter income from continuing operations before taxes was $963 million, compared with $122 million in the prior-year quarter, which included significant litigation and impairment charges.
Segment performance and material changes
- Agriculture: Sales declined 4% to $11.304 billion, primarily because of lower corn-seed volumes in Brazil and North America and currency effects. PTOI increased 25% to $2.668 billion, aided by the absence of prior-year Imprelis charges, insurance recoveries, a $240 million business-sale gain, lower compensation costs, and lower seed-input costs.
- Electronics & Communications: Sales fell 6% to $2.393 billion due to lower metals prices and competitive pressure in photovoltaic paste. PTOI rose to $271 million from $203 million, helped by productivity and the absence of a $129 million impairment charge recorded in 2013.
- Industrial Biosciences: Sales increased 3% to $1.258 billion and PTOI increased 16% to $198 million, driven by enzyme demand, volume, and product mix.
- Nutrition & Health: Sales increased 2% to $3.529 billion and PTOI increased 20% to $365 million, reflecting volume growth, mix, productivity, and an $18 million gain related to termination of a distribution agreement.
- Performance Chemicals: Sales decreased 6% to $6.497 billion because of lower prices and portfolio changes. PTOI declined to $913 million from $941 million, with lower prices partly offset by volume growth, lower compensation expense, and the absence of a prior-year antitrust charge.
- Performance Materials: Sales declined 2% to $6.129 billion, primarily because of the GLS/Vinyls divestiture and an ethylene-unit outage. PTOI increased 26% to $1.590 billion, largely due to the $391 million pre-tax gain on the GLS/Vinyls sale.
- Safety & Protection: Sales were essentially flat at $3.896 billion, while PTOI increased 7% to $742 million on higher volumes, productivity, and lower product costs.
Total segment PTOI increased 18% to $6.356 billion. The improvement was partly offset at the consolidated level by $999 million of corporate expenses, $377 million of interest expense, and other non-operating items.
Cash flow, liquidity, debt and capital allocation
Operating cash flow increased to $3.712 billion, primarily due to lower income-tax payments, higher insurance recoveries, and lower Imprelis-related claims payments. Investing activities used $337 million, including $2.020 billion of capital expenditures and $1.058 billion of proceeds from business sales. Financing activities used $5.074 billion, including $2.000 billion of share repurchases and approximately $1.696 billion of dividends.
DuPont completed $2.0 billion of repurchases under its $5.0 billion 2014 authorization, including 25.5 million shares acquired through two accelerated share repurchase agreements and 4.7 million shares repurchased in the open market. The common dividend increased to $1.84 per share from $1.78.
Year-end total debt was $10.694 billion, consisting of $1.423 billion of short-term borrowings and $9.271 billion of long-term borrowings and capital leases. The company reported approximately $4.9 billion of unused credit lines and stated that operating cash flow, cash balances, capital-market access, credit facilities, and asset sales should provide adequate liquidity.
Guidance, outlook and unusual items
- Management expected 2015 sales and income to be negatively affected by the stronger U.S. dollar, particularly in the first half because of Agriculture seasonality.
- The 2015 outlook excluded the planned Performance Chemicals separation and the expected return of separation-related capital to shareholders.
- The 2014 restructuring and organizational redesign generated $562 million of pre-tax charges, including $497 million of employee separation and asset-related charges and $65 million in other income. Management expected approximately $500 million of pre-tax savings in 2015 and approximately $625 million in subsequent years, with run-rate savings of about $1 billion by the end of 2015 and $1.3 billion by 2017.
- Performance Chemicals separation costs were $175 million in 2014, with approximately $350 million of additional costs expected in 2015. Completion remained subject to regulatory, tax, SEC filing, and other customary conditions.
- Management expected 2015 Agriculture sales to decline in the low-single digits and PTOI to decline in the high-single digits, primarily because of currency and lower corn-planting expectations. Excluding currency, Agriculture PTOI was expected to increase in the mid- to high-single digits.
- Management expected 2015 capital expenditures of approximately $1.8 billion.
- Long-term employee-benefit expense was expected to increase by approximately $190 million in 2015 because of lower discount rates and adoption of new U.S. mortality tables.
- Fourth-quarter 2014 included restructuring charges, a $210 million Imprelis insurance recovery, a $240 million Agriculture business-sale gain, and a $70 million reduction in performance-based compensation expense.
Risks, contingencies and other matters
- Environmental remediation liabilities were $478 million at year-end; management stated that adverse developments could increase potential liability by up to approximately $1.1 billion above the accrued amount.
- PFOA matters included approximately 2,900 personal-injury lawsuits, 27 alleged wrongful-death lawsuits, medical-monitoring obligations of up to $235 million, and an existing $14 million accrual. The filing stated that potential losses beyond disclosed amounts could not be reasonably estimated.
- Imprelis accruals were $261 million at year-end, with approximately 40 lawsuits pending and remaining insurance coverage of $300 million above a $100 million deductible.
- The November 2014 methyl mercaptan release at the La Porte, Texas facility resulted in four employee fatalities. Government investigations and the company’s investigation were ongoing.
- Key operating risks include raw-material and energy prices, foreign exchange, global economic conditions, biotechnology regulation and market acceptance, product stewardship, process safety, cybersecurity, intellectual-property protection, litigation, environmental regulation, and execution of acquisitions, divestitures, restructuring, and the Chemours separation.
- Pension obligations increased materially: the funded status deficit for pension benefits rose to $9.223 billion from $5.675 billion, primarily because of lower discount rates and actuarial losses.
Most important facts for investors to verify
- Whether the Chemours separation closed as planned, including final transaction costs, tax treatment, liabilities transferred, and capital returned to DuPont shareholders.
- Actual realization of the projected restructuring savings and the amount of additional restructuring charges and cash payments.
- Performance of Agriculture, especially corn-seed volumes, crop-protection inventories, pricing, currency, and farmer income trends.
- Developments in PFOA, Imprelis, environmental, product-liability, and other litigation matters, including insurance recoveries and potential unaccrued exposure.
- 2015 pension expense, funding requirements, and the effect of discount rates and mortality assumptions on equity and cash flow.
- Cash deployment, remaining share-repurchase authorization, dividend sustainability, debt maturities, and liquidity after separation-related payments.
- Progress toward replacing legacy PFOA-related products and compliance with environmental, process-safety, and cybersecurity requirements.