E. I. du Pont de Nemours and Company (DuPont) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business context
DuPont operates diversified agriculture, materials, industrial biosciences, nutrition and health, electronics and communications, and safety and protection businesses. Performance Coatings was classified as a discontinued operation following an agreement to sell the business to affiliates of The Carlyle Group for approximately $4.9 billion in cash plus assumed liabilities, including approximately $250 million of unfunded pension liabilities. Closing was expected in the first quarter of 2013.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $7,390 million | $8,138 million | $27,487 million | $26,338 million |
| Income from continuing operations after tax | $(40) million | $376 million | $2,474 million | $2,862 million |
| Net income attributable to DuPont | $10 million | $452 million | $2,677 million | $3,101 million |
| Diluted EPS from continuing operations | $(0.05) | $0.39 | $2.59 | $2.99 |
| Diluted EPS | $0.01 | $0.48 | $2.83 | $3.28 |
| Segment PTOI | $356 million | $778 million | $4,402 million | $4,708 million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(426) million | $431 million |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $1,139 million | $1,211 million |
| Free cash flow | Not provided for the quarter | Not provided for the quarter | $(1,565) million | $(780) million |
Third-quarter sales declined 9%, reflecting 5% lower volume, a 4% currency headwind, a 1% portfolio-related decline, and 1% higher local prices. Nine-month sales increased 4%, supported by pricing and the Danisco acquisition, despite lower volume and currency effects.
Third-quarter cost of goods sold was $5.7 billion, or approximately 77% of sales, versus approximately 78% in the prior-year quarter. Nine-month cost of goods sold was $19.6 billion, or approximately 71% of sales, versus approximately 72% in 2011. Third-quarter R&D was $506 million, or approximately 7% of sales; nine-month R&D was $1.5 billion, or approximately 6% of sales.
At September 30, 2012, cash, cash equivalents and marketable securities were $3.5 billion, compared with $4.0 billion at year-end 2011. Total debt was $15.1 billion, up from $12.6 billion. Cash and cash equivalents were $3.4 billion. The company reported approximately $4.3 billion of unused credit lines and investment-grade ratings with stable outlooks from Standard & Poor’s, Moody’s and Fitch.
Cash used in operations and capital expenditures resulted in negative nine-month free cash flow. Financing activities provided $1.0 billion, including a net increase in borrowings of $2.5 billion. Dividends paid were $1.2 billion, and the company paid $400 million for share repurchases.
Material changes versus the prior comparable period
- Q3 continuing-operations results declined to a $40 million loss after tax from $376 million of income, primarily due to lower sales volumes, unfavorable currency, legal and environmental charges, restructuring, impairments, and lower other income.
- Q3 segment PTOI fell 54% to $356 million. Performance Chemicals, Electronics & Communications, and Safety & Protection experienced notable declines.
- Q3 included $394 million of employee separation and asset-related charges, comprising $152 million for restructuring and $242 million of impairments. The impairments included $150 million for thin-film photovoltaic assets and $92 million for an industrial polymer asset group.
- Imprelis herbicide claims generated $125 million of Q3 charges and $440 million of year-to-date charges. Cumulative recorded charges reached $615 million, with total charges potentially reaching approximately $700 million.
- The company recorded a $609 million pre-tax increase in pension underfunding and net loss from plan remeasurement associated with the planned Performance Coatings sale. A retiree medical plan amendment reduced the related benefit obligation by $700 million and was expected to reduce full-year 2012 benefit expense by approximately $46 million.
- Nine-month operating cash flow deteriorated from $431 million provided in 2011 to $426 million used in 2012, primarily due to a $0.5 billion U.S. pension contribution and working-capital changes.
- A $122 million gain on the sale of an equity-method investment partially offset weaker other income. Pharmaceutical earnings declined following expiration of certain Cozaar/Hyzaar patents.
Guidance, outlook, risks and unusual items
- Management expected the 2012 restructuring program to require approximately $210 million of pre-tax charges, with $152 million recorded in Q3 and the remainder expected in Q4. The program was expected to generate approximately $300 million of pre-tax savings in 2013 and approximately $450 million annually thereafter; completion was expected by December 31, 2013.
- Management stated that liquidity and access to capital markets were adequate for working capital, capital spending, dividends, debt maturities, and other requirements. No formal earnings guidance is provided in the filing text.
- The Performance Coatings transaction was subject to customary closing conditions and regulatory approvals. Management estimated approximately $4.0 billion of after-tax proceeds.
- Material contingencies include Imprelis claims, PFOA-related environmental and litigation matters, environmental remediation, and intellectual-property litigation. A Missouri jury awarded Monsanto $1.0 billion in August 2012; DuPont intended to appeal and had accrued no amount for the matter.
- PFOA accruals were $16 million, while environmental remediation liabilities were $434 million. Management stated that potential environmental liabilities could be as high as three times the accrued amount under adverse circumstances.
- In October 2012, DuPont completed the sale of certain Professional Products assets and expected to record an after-tax gain of approximately $75 million in Agriculture.
- Key operating risks identified by management include raw-material and energy prices, global economic and currency conditions, regulatory and environmental matters, litigation, product stewardship, supply or business disruptions, intellectual-property protection, and execution of acquisitions and divestitures.
Most important facts for investors to verify
- Completion timing, regulatory approval, proceeds, pension liability transfer, and final accounting for the Performance Coatings divestiture.
- Actual Imprelis claim costs and insurance recoveries relative to the filing’s potential total-charge range of approximately $700 million.
- Outcome and financial exposure from the Monsanto patent dispute and other PFOA, environmental, and litigation matters.
- Whether the restructuring delivers the projected $300 million of 2013 savings and approximately $450 million of subsequent annual savings.
- Debt reduction and liquidity following the planned divestiture, given total debt of $15.1 billion and negative nine-month free cash flow.
- Recovery in weak markets, particularly photovoltaic materials, titanium dioxide, fluoropolymers, industrial polymers, and European and Asian end markets.