Business Context and Reporting Period
E. I. du Pont de Nemours and Company (DuPont) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. Results exclude the Performance Coatings business from continuing operations following its February 2013 sale to affiliates of The Carlyle Group.
DuPont operates diversified agriculture, specialty materials, industrial biosciences, nutrition and health, electronics, safety and protection, and pharmaceutical businesses. The filing states that interim results are not necessarily indicative of full-year results.
Financial Highlights
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Net sales | $9,844 million | $9,917 million | $20,252 million | $20,097 million |
| Income from continuing operations | $1,030 million | $1,099 million | $2,417 million | $2,508 million |
| Net income attributable to DuPont | $1,030 million | $1,166 million | $4,378 million | $2,658 million |
| Diluted EPS | $1.11 | $1.23 | $4.69 | $2.81 |
| Dividends per share | $0.45 | $0.43 | $0.88 | $0.84 |
- Second-quarter sales declined 1%; six-month sales increased 1%. Second-quarter volume rose 1%, while six-month volume rose 2%.
- Continuing-operations net margin was approximately 10.5% in Q2 2013 versus 11.1% in Q2 2012, and approximately 11.9% for the first six months versus 12.5% previously.
- Income from continuing operations fell 6% in the quarter and 4% year to date, principally due to lower Performance Chemicals profitability, higher costs, and lower other income.
- Six-month net income benefited from the $1,943 million after-tax gain on the Performance Coatings sale. This gain increased reported diluted EPS by approximately $2.12.
- Other income declined to $159 million in Q2 from $291 million, primarily because Q2 2012 included a $122 million gain on an equity-method investment sale.
- Cost of goods sold increased 4% in both the quarter and six-month period. COGS represented approximately 62% of sales in Q2 and 60% year to date, versus 59% and 59%, respectively, in the comparable periods.
- Segment pre-tax operating income was $1,777 million in Q2, down 9%, and $4,018 million year to date, down 8%.
Cash Flow, Balance Sheet, Debt and Liquidity
| Metric | June 30, 2013 | December 31, 2012 |
|---|---|---|
| Cash, cash equivalents and marketable securities | $6,896 million | $4,407 million |
| Total debt | $14,080 million | $11,740 million |
| Total assets | $51,349 million | $49,859 million |
| Total equity | $13,355 million | $10,299 million |
- Operating activities used $2,631 million in the first six months, compared with $1,117 million used in 2012. The deterioration primarily reflected higher working capital, especially seasonal Agriculture receivables, and lower cash earnings.
- Capital expenditures were $757 million, producing negative free cash flow of $3,388 million. Free cash flow is a non-GAAP measure defined by DuPont as operating cash flow less capital expenditures.
- Investing activities provided $4,082 million, including $4,815 million of net proceeds from the Performance Coatings sale.
- Financing activities provided $1,004 million, including $2,369 million of net borrowing, $823 million of dividends, and a $1,000 million share repurchase.
- Debt increased primarily from the issuance of $1,250 million of 2.80% notes due 2023 and $750 million of 4.15% notes due 2043, together with higher short-term borrowings.
- DuPont reported approximately $4.3 billion of unused credit lines and stated that available liquidity, operating cash generation, capital-market access, and asset-sale capacity should meet anticipated requirements. Reported credit ratings were investment grade with stable outlooks.
Material Changes and Segment Performance
- Agriculture: Q2 sales increased 7% and PTOI increased 26% to $861 million; six-month PTOI increased approximately $0.4 billion to $2,342 million. Benefits from pricing, volume, and lower Imprelis charges were partly offset by higher seed inputs and weather-related costs.
- Performance Chemicals: Q2 sales declined 9% and PTOI fell $330 million to $264 million; six-month PTOI declined $650 million to $515 million. Titanium dioxide price deterioration was the principal driver.
- Electronics & Communications: Q2 sales fell 18% and PTOI declined to $95 million, partly because the prior year included a $122 million investment-sale gain. A $20 million OLED licensing benefit partly offset the decline.
- Nutrition & Health: Q2 PTOI declined $44 million to $61 million, primarily due to higher guar inventory costs, weaker volumes, systems harmonization costs, and growth investments.
- Performance Materials: Q2 PTOI decreased 2% to $336 million; six-month PTOI increased 1% to $628 million.
- Safety & Protection: Q2 PTOI declined to $172 million and six-month PTOI declined to $310 million, reflecting mix and currency pressure despite higher volumes.
- Effective January 1, 2013, DuPont changed inventory accounting from LIFO to average cost for most foreign and certain U.S. locations. The change increased six-month 2013 net income by $15 million and was applied retrospectively to prior periods.
Outlook, Commentary, Risks and Unusual Items
- Management stated that cost-productivity gains and restructuring savings were on track to meet or exceed full-year targets. No specific consolidated earnings or sales guidance is provided in the filing.
- DuPont expected currency effects to continue negatively affecting second-half 2013 results.
- On July 23, 2013, DuPont announced that it was exploring strategic alternatives for Performance Chemicals, including a possible spin-off, sale, or other separation of its titanium dioxide and chemicals and fluoroproducts businesses.
- Imprelis claims resulted in cumulative charges of $865 million through June 30, 2013, including $80 million in Q2 and $115 million year to date. DuPont estimated total charges of approximately $900 million but emphasized substantial uncertainty. Insurance coverage has a $100 million deductible and limits of $725 million above the deductible. Final court approval of the settlement was scheduled for September 27, 2013.
- PFOA-related accruals were $15 million. DuPont may be required to fund up to $235 million for medical monitoring, although the related loss could not yet be reasonably estimated. Additional personal-injury and wrongful-death actions remained pending.
- Environmental remediation liabilities were $436 million, with estimated payment periods of 15 to 20 years. Management stated that potential liability could be as much as three times the accrued amount under adverse circumstances.
- DuPont entered technology-license agreements with Monsanto requiring $2,235 million of contractual payments, including $802 million of fixed annual royalties expected during 2014–2017 and $950 million of minimum payments through 2023 beginning in 2018.
- Other risks include energy and raw-material volatility, global economic and currency conditions, litigation and environmental matters, product stewardship, supply and business disruptions, cybersecurity, intellectual-property protection, regulation, and execution of acquisitions and divestitures.
Investor Verification Priorities
- Verify the sustainability of Agriculture growth and whether Performance Chemicals pricing pressure has stabilized.
- Reconcile reported earnings and cash flow for the one-time Performance Coatings gain, seasonal working-capital use, and the $1 billion share repurchase.
- Monitor debt growth, short-term borrowings, negative free cash flow, and the location and repatriation constraints of cash held by foreign subsidiaries.
- Track Imprelis settlement approval, claims development, insurance recoveries, and the potential cost of the extended warranty.
- Assess PFOA, environmental, antitrust, product-liability, and other litigation exposures, including matters for which the filing cannot estimate a loss range.
- Follow the strategic review of Performance Chemicals and the financial and operational effects of any separation or divestiture.