EIDP, Inc. (E. I. du Pont de Nemours and Company) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The filing presents continuing operations after the February 2013 sale of Performance Coatings, which is reported as discontinued operations for prior periods. DuPont operated through Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, and Safety & Protection. Management expected to separate Performance Chemicals through a tax-free spin-off around mid-2015.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $9,706 million | $9,844 million | $19,834 million | $20,252 million |
| Income from continuing operations | $1,074 million | $1,030 million | $2,519 million | $2,417 million |
| Net income attributable to DuPont | $1,070 million | $1,030 million | $2,509 million | $4,378 million |
| Diluted EPS from continuing operations | $1.15 | $1.10 | $2.70 | $2.58 |
| Diluted EPS | $1.15 | $1.11 | $2.70 | $4.69 |
| Operating cash flow | Not separately provided | Not separately provided | $(2,071) million | $(2,631) million |
Margins: Income from continuing operations after tax was approximately 11.1% of sales in Q2 2014 versus 10.5% in Q2 2013, and approximately 12.7% for the first six months versus 11.9% in the prior-year period. Cost of goods sold was 62% of sales in Q2 and approximately 61% year to date in both periods. The effective tax rate was 25.4% in Q2 and 22.3% year to date, compared with 24.5% and 23.0%, respectively.
- Segment profitability: Q2 segment PTOI increased 10% to $1,955 million; six-month PTOI increased 5% to $4,203 million. The results included the $391 million pre-tax gain on the sale of GLS/Vinyls and $263 million of restructuring charges.
- Cash flow and capital spending: Six-month operating cash use was $2,071 million, investing cash use was $232 million, and financing cash use was $2,390 million. Capital expenditures were $781 million.
- Liquidity: Cash, cash equivalents, and marketable securities totaled $4,347 million at June 30, 2014, down from $9,086 million at year-end 2013. The company had approximately $4.9 billion of unused credit lines.
- Debt: Total debt was $11,798 million, down from $12,462 million at December 31, 2013. The balance sheet reported short-term borrowings and capital lease obligations of $2,506 million and long-term borrowings and capital lease obligations of $9,292 million.
- Shareholder returns: Six-month dividends paid were $836 million. DuPont completed a $1 billion accelerated share repurchase, retiring 15.1 million shares, and repurchased an additional $97 million of shares in the open market. The board authorized a $5 billion repurchase program and expected to repurchase $2 billion during 2014.
Material changes versus the prior comparable period
- Sales declined 1% in Q2 and 2% year to date. Volume growth in Nutrition & Health, crop protection, and industrial businesses was offset by lower corn seed volumes, portfolio changes, a scheduled ethylene plant shutdown, and weaker Performance Chemicals pricing.
- Continuing-operations income increased 4% in both Q2 and the first six months, while prior-year six-month net income included $1,972 million from discontinued operations, principally the $2,682 million pre-tax gain on the Performance Coatings sale.
- Q2 included a $391 million pre-tax gain from selling Glass Laminating Solutions/Vinyls to Kuraray. The gain was partially offset by a $263 million restructuring charge and a $58 million pre-tax Venezuelan currency devaluation charge.
- The 2014 restructuring plan included $166 million of employee separation costs, $3 million of other personnel-related charges, and $94 million of asset shutdown costs. Actions were expected to be substantially complete by December 31, 2015.
- Performance Materials benefited substantially from the GLS/Vinyls gain and automotive volume growth. Agriculture, Electronics & Communications, and Performance Chemicals experienced year-over-year PTOI declines.
- Interest expense declined to $94 million in Q2 and $197 million year to date, primarily because of lower average borrowings and borrowing rates.
Guidance, outlook, risks, and unusual items
- In June 2014, management revised its 2014 earnings outlook downward because of lower-than-expected corn seed volumes, higher seed inventory write-downs, and lower refrigerant prices, partly offset by stronger North American soybean volumes. The filing does not provide a clear revised full-year earnings-per-share target.
- Management expected approximately $170 million of Performance Chemicals separation costs in 2014, with additional costs in 2015. The redesign initiative was expected to produce approximately $250 million of pre-tax savings in 2015 and approximately $300 million annually thereafter; another disclosure cited estimated annual savings of $375 million from broader functional-cost changes.
- The company announced a third-quarter dividend of $0.47 per share, a 4% increase from $0.45 per share.
- Imprelis claims resulted in cumulative recorded charges of $1,175 million, with $364 million accrued at June 30, 2014. DuPont had received $73 million of insurance recoveries and continued to pursue additional recovery. Opt-out litigation remained outstanding.
- PFOA matters included approximately 2,290 filed lawsuits, about 400 served lawsuits, an accrued liability of $14 million, and a commitment to fund up to $235 million for medical monitoring. The potential cost of other PFOA matters could not be reasonably estimated.
- Environmental remediation liabilities totaled $474 million. Management stated that potential liability could reach up to three times the accrued amount under adverse changes in circumstances, with payments potentially extending 15–20 years.
- Other risks include raw-material and energy prices, foreign exchange volatility, global economic conditions, regulatory and environmental matters, litigation, product stewardship, business disruptions, cybersecurity, intellectual property, and execution of the Performance Chemicals separation.
- Management concluded that disclosure controls were effective as of June 30, 2014 and reported no material change in internal control over financial reporting.
Facts investors should verify
- Whether the Performance Chemicals separation remains on schedule and whether actual separation costs and realized savings align with management’s estimates.
- The sustainability of earnings excluding the $391 million GLS/Vinyls gain, restructuring charges, and currency-related losses.
- Cash conversion, working-capital requirements, and the effect of seasonality, particularly in Agriculture, given negative operating cash flow for the first six months.
- Progress on the $5 billion share repurchase authorization, debt maturities, and liquidity after dividends and repurchases.
- Developments in PFOA, Imprelis, environmental, and other litigation matters, including insurance recoveries and possible unrecorded exposure.
- Actual 2014 earnings performance relative to the downwardly revised outlook, including corn seed volumes, seed inventory write-downs, refrigerant pricing, and soybean demand.