EIDP, Inc. quarterly report, Q2 FY2012

EIDP, Inc. (formerly E. I. du Pont de Nemours and Company) — Q2 2012 Form 10-Q Summary

Business context and reporting period

The filing covers the quarter and six months ended June 30, 2012. DuPont operated through Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection and Pharmaceuticals. Results include the effects of the 2011 Danisco acquisition.

Key financial metrics

Metric	Three months ended June 30, 2012	Three months ended June 30, 2011	Six months ended June 30, 2012	Six months ended June 30, 2011
Net sales	$11,006 million	$10,264 million	$22,236 million	$20,298 million
Income before taxes	$1,637 million	$1,589 million	$3,578 million	$3,291 million
Net income attributable to DuPont	$1,179 million	$1,218 million	$2,667 million	$2,649 million
Diluted EPS	$1.25	$1.29	$2.82	$2.80
Dividends per share	$0.43	$0.41	$0.84	$0.82

Second-quarter sales increased 7%, driven by 6% higher local prices and a 5% portfolio benefit, partly offset by 1% lower volume and a 3% currency impact. Six-month sales increased 10%.
Second-quarter segment pre-tax operating income declined to $1,898 million from $1,943 million; six-month segment operating income increased 4% to $4,225 million.
Second-quarter operating margin before taxes was approximately 14.9%, compared with 15.5% in the prior-year quarter. Six-month margin was approximately 16.1%, compared with 16.2%.
Second-quarter effective tax rate was 27.4%, compared with 22.7%; the six-month rate was 24.9%, compared with 18.8%, primarily due to geographic earnings mix.
Cash used in operating activities was $1,117 million in the first six months, compared with $644 million used in the prior-year period. Free cash flow, as defined by the company, was negative $1,813 million versus negative $1,385 million.
Capital expenditures were $696 million, compared with $741 million. Cash provided by financing activities was $1,204 million, including a $2,406 million net increase in borrowings.
Cash, cash equivalents and marketable securities totaled $3,556 million at June 30, 2012, compared with $4,019 million at December 31, 2011. Total debt was $14,950 million versus $12,553 million.
The company reported approximately $4.2 billion of unused credit lines and investment-grade ratings with stable outlooks from Standard & Poor’s, Moody’s and Fitch.

Material changes versus the prior comparable period

A $122 million gain from the sale of an equity-method investment increased other income in the second quarter and first half.
Imprelis herbicide claims resulted in charges of $265 million in the second quarter and $315 million year to date. Total recorded charges reached $490 million, with possible total charges estimated as high as $575 million.
Agriculture sales rose 13% in the quarter and 15% year to date, but Agriculture operating income fell 20% in the quarter and was approximately flat year to date because of Imprelis charges, input costs, currency and growth investments.
Danisco-related portfolio effects drove substantial increases in Industrial Biosciences and Nutrition & Health sales and operating income.
Electronics & Communications sales declined 11% in the quarter and 14% year to date because of weaker photovoltaic demand and lower volume.
Performance Chemicals operating income improved despite lower volume, supported by pricing and productivity. Safety & Protection operating income declined because of weaker demand, currency and costs associated with the new Kevlar plant.
Pharmaceuticals operating income declined substantially because of expiration of certain Cozaar/Hyzaar patents.
The company purchased and retired 7.8 million shares for $400 million during the second quarter. The 2001 repurchase program was completed, and $1.7 billion remained available under the 2011 program at June 30.
DuPont paid $447 million to acquire the remaining 28% interest in Solae, LLC, reducing noncontrolling interests.

Guidance, outlook, commentary and risks

Management stated that it was ahead of plan on its 2012 productivity targets of $300 million each for fixed costs and working capital; fixed-cost improvements were approximately $190 million year to date. The filing does not provide a clear consolidated earnings or sales guidance figure.
Management believed cash generation, existing liquidity and capital-market access would be adequate for working capital, capital expenditures, dividends, debt maturities and other needs.
Key operating risks include energy and raw-material costs, global economic conditions, currency and interest-rate movements, demand weakness, product development and life-cycle management, supply or business disruptions, regulatory changes, intellectual-property protection, and acquisition integration.
Imprelis claims remain uncertain. The company continued reviewing claims and seeking insurance reimbursement for costs above $100 million; additional charges were reasonably possible.
PFOA-related accruals were $16 million. Environmental remediation liabilities were $430 million, with potential liability under adverse circumstances described as up to three times the accrued amount. Additional PFOA losses could not be reasonably estimated.
The C8 Science Panel found probable links between PFOA exposure and pregnancy-induced hypertension, kidney cancer and testicular cancer. Potential medical-monitoring obligations remained subject to further determinations, with a contractual maximum of $235 million.
The company carried $485 million of guarantees for customers, suppliers and equity affiliates. Certain acquisition, divestiture, environmental, tax and product indemnifications could require payments that cannot be reasonably capped.
Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Investor verification checklist

Verify the sustainability of reported earnings excluding the $122 million investment gain, Imprelis charges and other litigation-related items.
Assess the ultimate cost and insurance recovery associated with Imprelis claims and related regulatory proceedings.
Reconcile negative operating cash flow and free cash flow with reported net income, particularly the pension contribution and seasonal working-capital increase.
Review the increase in total debt and the maturity schedule, including reliance on commercial paper and unused credit facilities.
Evaluate segment trends: Agriculture growth, Danisco synergies, photovoltaic weakness, Performance Chemicals volume declines and Safety & Protection demand pressure.
Monitor PFOA, environmental remediation, INVISTA litigation and other legal contingencies for changes beyond recorded accruals.
Confirm subsequent-period developments affecting Cozaar/Hyzaar patent-related income, Imprelis claims, portfolio actions and share repurchases.