E.I. du Pont de Nemours and Company (DuPont) — 2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012; the source is an annual Form 10-K rather than a standalone quarterly filing. DuPont operated in more than 90 countries, employed approximately 70,000 people, and generated about 60% of consolidated sales outside the United States. Its eight reportable segments were Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, Safety & Protection, and Pharmaceuticals.
Performance Coatings was classified as discontinued operations after the company agreed in August 2012 to sell the business to affiliates of Carlyle. The sale closed on February 1, 2013 for approximately $4.9 billion in cash and assumed liabilities, producing approximately $4.0 billion of after-tax proceeds. Its results are excluded from continuing operations for all periods presented.
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $34.812 billion | $33.681 billion | +3% |
| Income from continuing operations before tax | $3.115 billion | $3.781 billion | −18% |
| Income from continuing operations after tax | $2.493 billion | $3.155 billion | −21% |
| Net income attributable to DuPont | $2.788 billion | $3.474 billion | −20% |
| Diluted EPS from continuing operations | $2.61 | $3.30 | −21% |
| Diluted EPS including discontinued operations | $2.95 | $3.68 | −20% |
| Cash provided by operating activities | $4.849 billion | $5.152 billion | −$303 million |
| Free cash flow | $3.056 billion | $3.309 billion | −$253 million |
| Cash, cash equivalents and marketable securities | $4.407 billion | $4.019 billion | +$388 million |
| Total debt | $11.740 billion | $12.553 billion | −$813 million |
Cost of goods sold and other operating charges were $25.604 billion, or 74% of sales, unchanged as a percentage of sales. SG&A was $3.567 billion, or 10% of sales, and research and development expense increased to $2.067 billion, or 6% of sales. The effective tax rate on continuing operations increased to 20.0% from 16.6%.
Year-end total assets were $49.736 billion and total equity was $10.179 billion. Working capital was $7.642 billion, including approximately $2.0 billion of net assets associated with Performance Coatings classified as held for sale. The company had approximately $4.3 billion of unused credit lines and investment-grade ratings of A/A-1 from Standard & Poor’s, A2/P-1 from Moody’s, and A/F1 from Fitch, all with stable outlooks.
Material changes versus the prior comparable period
- Sales increased 3%, driven by a 4% local-price increase and a 3% portfolio benefit, principally from Danisco, partly offset by a 2% volume decline and a 2% unfavorable currency effect.
- Developing-market sales increased 6% to $11.9 billion, representing 34% of total sales versus 33% in 2011.
- Agriculture sales rose 14% to $10.426 billion and PTOI increased to $1.594 billion, although margin declined to 15% from 17% because of Imprelis-related charges, higher seed input costs, currency effects, and growth investments.
- Industrial Biosciences and Nutrition & Health benefited substantially from the full-year contribution of Danisco. Their 2012 sales were $1.180 billion and $3.422 billion, respectively.
- Performance Chemicals sales declined 8% to $7.188 billion and PTOI declined to $1.586 billion as titanium dioxide and fluoropolymer volumes weakened. Management described the business as entering a cyclical downturn.
- Electronics & Communications sales declined 15% and PTOI fell to $135 million, reflecting weaker photovoltaic volumes and a $150 million asset impairment charge.
- 2012 included $493 million of employee separation and asset-related charges, including $234 million for restructuring and $275 million of asset impairments. The 2011 amount was $53 million.
- Imprelis-related charges increased to $575 million in 2012 from $175 million in 2011; cumulative charges reached $750 million at year-end.
- Other income declined to $498 million from $742 million, primarily because Cozaar/Hyzaar income fell by $228 million to $54 million. The Merck agreement expired December 31, 2012.
- DuPont paid $1.6 billion of dividends and repurchased 7.8 million shares for $400 million during 2012. The common dividend increased to $1.70 per share from $1.64.
Cash flow, capital allocation, outlook, and risks
Operating cash flow decreased primarily because of lower earnings and a $500 million contribution to the principal U.S. pension plan. Capital expenditures were $1.793 billion, and management expected approximately $1.9 billion of 2013 capital spending. The company stated that operating cash flow, cash balances, credit facilities, capital-market access, and asset-sale proceeds should be adequate to fund working capital, capital expenditures, dividends, debt maturities, and other requirements.
Management expected modest 2013 sales and earnings benefits from global GDP and industrial production growth, strong Agriculture demand, innovation, and productivity. Expected headwinds included higher seed input and titanium ore costs, weaker titanium dioxide pricing, and continued cyclical pressure in Performance Chemicals. Management expected 2013 earnings from the Merck collaboration to be approximately $20 million, versus $62 million of Pharmaceuticals PTOI in 2012. The restructuring program was expected to generate approximately $300 million of pre-tax savings in 2013 and $450 million annually thereafter.
Key contingencies include Imprelis claims, PFOA-related matters, environmental remediation, the Monsanto patent dispute, product liability, intellectual-property, antitrust, and other litigation. The company accrued $436 million for environmental remediation and stated that potential liability could reach up to three times the accrued amount under adverse circumstances. Monsanto obtained a $1.0 billion jury award; DuPont had not accrued for the matter and intended to appeal. The company also reported $9.780 billion of pension underfunding and $3.532 billion of other long-term employee benefit underfunding at year-end.
Principal ongoing risks include raw-material, energy, commodity, currency, interest-rate, regulatory, environmental, litigation, product-stewardship, biotechnology-approval, intellectual-property, cybersecurity, supply-chain, global economic, and pension-market risks. Management reported effective disclosure controls and internal control over financial reporting, as did the independent auditor.
Most important facts for investors to verify
- Reconcile continuing-operations results with total results, particularly the treatment and post-year-end completion of the Performance Coatings divestiture.
- Review the full exposure and insurance recoveries related to Imprelis claims, including the possibility of total charges reaching approximately $900 million.
- Assess the potential financial impact of the Monsanto verdict, PFOA claims, environmental obligations, and other litigation.
- Evaluate whether Performance Chemicals’ projected margin decline of approximately 7 to 9 percentage points in 2013 is consistent with market conditions and realized pricing.
- Monitor the decline in Cozaar/Hyzaar income and the extent to which Agriculture, Industrial Biosciences, and Nutrition & Health can replace it.
- Verify cash deployment after the Performance Coatings sale, including debt reduction, the planned $1 billion share repurchase, dividends, and capital expenditures.
- Review the 2013 retrospective change from LIFO to average-cost inventory accounting and its stated impact on comparative results.