EIDP, Inc. (E. I. du Pont de Nemours and Company) — 2016 Q2 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Results exclude the Performance Chemicals segment, spun off as Chemours on July 1, 2015, which is presented as discontinued operations. Continuing operations comprise Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials, Protection Solutions and Other.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $7,061 million | $7,121 million | $14,466 million | $14,958 million |
| Income from continuing operations after tax | $1,027 million | $974 million | $2,256 million | $1,995 million |
| Net income attributable to DuPont | $1,020 million | $940 million | $2,246 million | $1,971 million |
| Diluted EPS | $1.16 | $1.03 | $2.55 | $2.15 |
| Cash used in operating activities | Not separately provided for the quarter | $(1,503) million | $(2,045) million |
- Q2 sales declined 1%; six-month sales declined 3%. Q2 volume increased 2%, but price, currency and portfolio effects reduced sales by 3% in aggregate. The six-month sales decline was primarily attributable to a 3% negative currency impact.
- Q2 income from continuing operations after tax increased 5%; six-month income increased 13%. Diluted EPS increased 13% in Q2 and 19% for the six months.
- Q2 gross margin, calculated from reported sales and cost of goods sold, was approximately 43.5% versus 42.4% in 2015. Six-month gross margin was approximately 43.1% versus 42.4%.
- Q2 net margin attributable to DuPont was approximately 14.4%; six-month net margin was approximately 15.5%.
- Segment operating earnings increased to $1,613 million in Q2 from $1,447 million and to $3,330 million for the six months from $3,257 million. All reportable segments expanded Q2 operating margins.
- Cash, cash equivalents and marketable securities totaled $5,153 million at June 30, 2016, down from $6,206 million at December 31, 2015, principally due to seasonal agricultural working-capital needs.
- Total debt was $10,414 million at June 30, 2016, up from $8,807 million at year-end 2015. The company reported approximately $7.9 billion of unused credit lines and compliance with its 0.6667 total-indebtedness-to-total-capitalization covenant.
- Six-month investing cash outflow was $418 million, while financing activities provided $1,037 million. Dividends paid were $669 million, or $0.76 per share.
Material changes versus the prior comparable period
- Cost reductions improved profitability: Q2 cost of goods sold declined 3%, SG&A declined 5%, and R&D declined 13%. Six-month SG&A declined 6% and R&D declined 13%.
- The 2016 global cost savings and restructuring plan produced a net pre-tax benefit of $90 million in Q2 and $88 million for the six months. Management stated that the plan remained on track for $730 million of 2016 cost reductions and an approximately $1.0 billion annualized run-rate reduction by year-end.
- Six-month results benefited from a $369 million pre-tax gain on the sale of DuPont (Shenzhen) Manufacturing Limited, or $214 million after tax.
- Q2 other income declined to $51 million from $255 million, primarily because the prior-year period included a $112 million legal-settlement gain and because of higher foreign-exchange losses. Six-month other income was $423 million versus $454 million.
- A $75 million restructuring charge was recorded for the decision not to restart the La Porte, Texas, insecticide facility.
- Operating performance improved in Agriculture, Industrial Biosciences, Nutrition & Health and Protection Solutions in both Q2 and the six-month period. Electronics & Communications declined for the six months, while Performance Materials declined for the six months despite Q2 improvement.
- The principal U.S. pension plan was remeasured at June 30, increasing its underfunded status by $2,352 million and contributing to a $1,361 million after-tax decline in comprehensive income for the six months.
Guidance, outlook, commentary and unusual items
- DuPont and Dow planned an all-stock merger of equals to form DowDuPont, anticipated to close in the second half of 2016 subject to regulatory approvals and customary conditions. DuPont shareholders subsequently approved the merger on July 20, 2016, after the quarter-end.
- Management expected approximately $445 million of 2016 merger-related transaction costs, including $100 million incurred in the first six months.
- Following the merger, the companies intended to pursue tax-efficient separations of the agriculture, specialty products and material science businesses, potentially within 18–24 months after closing. Timing and completion remained subject to approvals and other conditions.
- No share repurchases occurred in the first half of 2016. Management stated that completing the remaining $2 billion under the Chemours-related buyback authorization by year-end was unlikely.
- Cash flow was affected by seasonal working-capital requirements, including higher agricultural receivables. The company also prepaid $190 million to Chemours for goods and services, with $132 million remaining at June 30, 2016.
- PFOA matters remained significant. DuPont accrued $19 million for related obligations and recorded a corresponding Chemours indemnification asset. Approximately 3,500 PFOA-related lawsuits remained pending; the filing states that potential losses beyond recorded amounts could not reasonably be estimated.
- Environmental liabilities totaled $499 million, with potential exposure up to $1,012 million above the accrued amount under adverse circumstances. Chemours indemnified DuPont for certain matters, including $287 million of accrued environmental liabilities.
- The company reported approximately $311 million of guaranteed obligations to customers, suppliers, equity affiliates and Chemours. Litigation and environmental outcomes remain uncertain, although management did not expect existing proceedings collectively to have a material adverse effect on overall operations, financial position or liquidity.
- Management identified currency, raw-material and energy prices, regulatory approvals for agricultural products, product development, supply disruption, cybersecurity, environmental matters, litigation and merger execution as principal risks. No material changes to the risk factors in the 2015 Form 10-K were reported.
Investor verification checklist
- Verify the final timing, regulatory status, financing terms and integration costs of the Dow merger and subsequent business separations.
- Assess the sustainability of earnings growth excluding the $369 million Shenzhen gain, restructuring benefits and other unusual items.
- Monitor agricultural receivables, seasonal working capital, cash conversion and the maturity of the $1.0 billion receivable repurchase facility on November 30, 2016.
- Reconcile the increase in debt with liquidity needs, the $4.5 billion term-loan facility, credit-line availability and post-merger covenant restrictions.
- Track PFOA litigation, scheduled trials, mediation, environmental liabilities and the enforceability and collectability of Chemours indemnification assets.
- Evaluate the impact of pension remeasurement losses and future pension contributions on equity, comprehensive income and cash flow.
- Confirm the pace and realized benefits of the $730 million cost-reduction plan and the status of the remaining $2 billion share-repurchase authorization.