EIDP, Inc. 2016 Form 10-K Summary
Business context and reporting period
E. I. du Pont de Nemours and Company (DuPont) reported for the fiscal year ended December 31, 2016. The science and technology company operated in approximately 90 countries, employed about 46,000 people, and generated 61% of consolidated sales outside the United States. Reportable segments were Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials, and Protection Solutions.
The filing presents continuing operations excluding the Performance Chemicals business, which was spun off to The Chemours Company in July 2015. DuPont and Dow Chemical stockholders approved the proposed all-stock merger in July 2016; closing was expected in the first half of 2017, subject to regulatory approvals and other conditions.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $24.594 billion | $25.130 billion | Down 2% |
| Income from continuing operations before taxes | $3.265 billion | $2.591 billion | Up 26% |
| Income from continuing operations after taxes | $2.521 billion | $1.895 billion | Up 33% |
| Net income attributable to DuPont | $2.513 billion | $1.953 billion | Up 29% |
| Diluted EPS from continuing operations | $2.85 | $2.09 | Up 36% |
| Cash provided by operating activities | $3.300 billion | $2.316 billion | Up $984 million |
| Free cash flow | $2.281 billion | $687 million | Up $1.594 billion |
| Capital expenditures | $1.019 billion | $1.629 billion | Down $610 million |
Consolidated cost of goods sold declined to 59% of sales from 60%, while selling, general and administrative expense remained 18% of sales and research and development expense declined to 7% from 8%. The continuing-operations effective tax rate was 22.8%, compared with 26.9% in 2015.
At year-end, cash, cash equivalents and marketable securities totaled $5.967 billion, total debt was $8.536 billion, working capital was $8.220 billion, and total equity was $10.196 billion. DuPont had approximately $7.9 billion of unused credit lines, including $4.0 billion under a term loan facility and a $3.0 billion revolving credit facility. Credit ratings remained investment grade, although the rating agencies had negative outlooks or watch designations.
DuPont paid $1.335 billion in dividends to common and preferred shareholders and repurchased $916 million of common stock during 2016. The common dividend was $1.52 per share for the year.
Segment results
| Segment | 2016 sales | 2016 operating earnings | Operating margin |
|---|---|---|---|
| Agriculture | $9.516 billion | $1.758 billion | 18% |
| Electronics & Communications | $1.960 billion | $358 million | 18% |
| Industrial Biosciences | $1.500 billion | $270 million | 18% |
| Nutrition & Health | $3.268 billion | $504 million | 15% |
| Performance Materials | $5.249 billion | $1.297 billion | 25% |
| Protection Solutions | $2.954 billion | $668 million | 23% |
Sales growth in Performance Materials, Nutrition & Health, and Industrial Biosciences was offset by declines in Agriculture, Electronics & Communications, and Protection Solutions. The strongest operating earnings improvement came from Agriculture, Nutrition & Health, Performance Materials, and Protection Solutions, reflecting cost savings, lower product costs, and improved productivity.
Material changes and unusual items
- Sales declined because of unfavorable currency effects and lower prices and product mix; worldwide volume was approximately flat.
- The 2016 cost savings and restructuring plan delivered its targeted $730 million reduction in operating costs versus 2015 and approximately $1.0 billion of run-rate savings by year-end. The plan affected approximately 10% of the workforce and was substantially complete.
- Employee separation and asset-related charges were $552 million, including a $435 million impairment of an uncompleted enterprise resource planning system, a $158 million impairment of Industrial Biosciences trade names, and a $68 million charge related to not restarting the La Porte insecticide facility. These charges were partly offset by restructuring benefits.
- DuPont recognized a $369 million pretax gain on the sale of DuPont (Shenzhen) Manufacturing Limited.
- Changes to U.S. pension and other post-employment benefits generated a $382 million pretax fourth-quarter curtailment gain. Management expects 2017 continuing-operations benefit expense to increase by approximately $340 million because this gain will not recur.
- Fourth-quarter 2016 sales were $5.211 billion, pretax income from continuing operations was $353 million, net income was $263 million, and diluted continuing-operations EPS was $0.29.
- R&D expense was $1.641 billion, down from $1.898 billion, while DuPont continued investing in agriculture, bio-based materials, probiotics, and other technology platforms.
Guidance, outlook, risks, and contingencies
Management expected 2017 global GDP and industrial production growth of approximately 2.7% and 2.4%, respectively, but cited difficult agricultural conditions, U.S. economic uncertainty, political and economic uncertainty in Europe, slower Chinese industrial growth, and continued U.S. dollar strength. Agriculture faced pressure from low commodity prices, record crop yields, high crop-protection inventories, and an expected shift toward soybeans over corn in North America. The company also expected transaction, integration, and separation costs related to the Dow merger in 2017. Planned capital expenditures for 2017 were approximately $1.1 billion.
Completion of the Dow merger depended on regulatory approvals in the United States, European Union, China, Brazil, and Canada, as well as other customary conditions. The merger agreement included a potential $1.9 billion termination fee under specified circumstances. The proposed separations of agriculture, specialty products, and material science businesses were not assured and required approval by the future DowDuPont board.
Environmental remediation liabilities totaled $457 million at year-end, with potential exposure of up to $900 million above the accrued amount under adverse developments. Chemours indemnified DuPont for certain pre-spin-off environmental, litigation, workers' compensation, and other liabilities; DuPont recorded related indemnification assets, but recovery could be affected by disputes or Chemours' solvency.
Key litigation included approximately 3,550 PFOA-related lawsuits, with an accrual of $100 million and an upper range of possible loss that could not be reasonably estimated. The company also faced investigations and proceedings related to the 2014 La Porte plant release, product liability, patent, antitrust, environmental, and other matters. Other principal risks included foreign exchange, commodity and energy costs, agricultural weather conditions, biotechnology regulation and acceptance, cybersecurity, intellectual property protection, process safety, and access to debt markets.
Most important facts for an investor to verify
- Regulatory approval, closing timing, and final terms of the Dow merger, including any required divestitures or remedies.
- Whether the intended post-merger business separations occur, their timing, capital structures, and allocation of liabilities.
- Sustainability of 2016 earnings improvement after excluding the $382 million pension/OPEB curtailment gain, restructuring benefits, and the $369 million asset-sale gain.
- 2017 operating performance in Agriculture, including crop prices, inventories, weather, seed timing, and crop-protection demand.
- Cash generation, debt maturities, credit ratings, and availability of committed liquidity facilities.
- Potential changes in environmental, PFOA, La Porte, and other litigation liabilities, together with the collectability of Chemours indemnification assets.
- Execution risk associated with the ERP replacement, restructuring program, probiotics expansion, and other capital projects.