EIDP, Inc. (E. I. du Pont de Nemours and Company) — 2016 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2016. The interim financial statements are unaudited and reflect continuing operations after the July 1, 2015 spin-off of Performance Chemicals to Chemours.
Business Context and Reporting Period
DuPont operated through Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials and Protection Solutions. The company was pursuing an all-stock merger of equals with The Dow Chemical Company, expected to close in the second half of 2016, followed by potential separations of agriculture, specialty products and material science businesses.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $7,405 million | $7,837 million | Down 6% |
| Income from continuing operations | $1,229 million | $1,021 million | Up 20% |
| Net income attributable to DuPont | $1,226 million | $1,031 million | Up 19% |
| Diluted EPS | $1.39 | $1.13 | Up $0.26 |
| Continuing-operations diluted EPS | $1.39 | $1.11 | Up $0.28 |
| Cash used in operating activities | $(1,844) million | $(2,123) million | Improved $279 million |
| Capital expenditures | $357 million | $565 million | Down $208 million |
| Cash, cash equivalents and marketable securities | $4,789 million | $6,206 million at Dec. 31, 2015 | Down $1,417 million |
| Total debt | $9,751 million | $8,807 million at Dec. 31, 2015 | Up $944 million |
Continuing-operations net income margin was approximately 16.6%, compared with approximately 13.0% in the prior-year quarter. Cost of goods sold was approximately 57% of sales in both periods. The effective tax rate declined to 24.8% from 34.2%.
Segment operating earnings were $1,717 million, down from $1,810 million. Agriculture generated $3,786 million of sales and $1,101 million of operating earnings; Performance Materials generated $1,249 million and $273 million, respectively; and Protection Solutions generated $729 million and $176 million, respectively.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of a 4% negative currency impact and 2% lower volume. Weakness affected most segments, while Nutrition & Health and portions of Agriculture provided offsets.
- Reported earnings benefited from a $369 million pretax gain, or $214 million after tax, on the sale of DuPont (Shenzhen) Manufacturing Limited.
- Other income increased to $372 million from $199 million, despite $121 million of net pretax foreign-exchange losses versus a $79 million gain in Q1 2015.
- SG&A declined 8% and research and development expense declined 13%, primarily from cost savings and currency effects. Q1 included $24 million of Dow merger-related costs.
- Employee separation and asset-related charges increased to $77 million from $38 million, including a $75 million charge related to the decision not to restart the La Porte, Texas insecticide facility.
- Cash used in operations remained negative because of seasonal agricultural working-capital requirements, although it improved from the prior year. Financing activities provided $663 million, primarily from increased borrowings.
- Shares outstanding declined year over year, and no share repurchases occurred in Q1 2016 versus $282 million of repurchases in Q1 2015.
Guidance, Outlook, Risks and Unusual Items
- Management expected the 2016 cost savings and restructuring plan to deliver $730 million of cost reductions versus 2015 and approximately $1 billion of run-rate operating-cost reductions by year-end. The plan was expected to affect approximately 10% of the workforce.
- Full-year Agriculture sales were expected to decline by low-single digits, with operating earnings up by mid-single digits. Other segment outlooks generally anticipated flat to modestly higher sales, except for expected declines in Electronics & Communications; Performance Materials earnings were expected to decline by mid-single digits.
- Management expected approximately $420 million, or $0.40 per share, of 2016 Dow merger-related transaction costs. The merger and subsequent separations remained subject to shareholder, regulatory and other conditions.
- Debt increased with $500 million drawn under a new $4.5 billion term loan facility and $300 million outstanding under a $1 billion agricultural receivables repurchase facility. Unused credit lines totaled approximately $8.6 billion, and the company was in compliance with its debt covenant.
- Environmental liabilities were accrued at $492 million, with potential exposure of up to approximately $1,025 million above the accrued amount under adverse changes in circumstances. Certain liabilities were indemnified by Chemours.
- PFOA matters included approximately 3,500 pending lawsuits, a $14 million accrual and a corresponding Chemours indemnification asset. Potential additional liabilities could not be reasonably estimated.
- The company had $323 million of guaranteed obligations for customers, suppliers, equity affiliates and Chemours. Litigation outcomes could be material in the period recognized, although management did not expect the aggregate matters to have a material adverse effect on overall results, financial position or liquidity.
- Workforce reductions triggered pension and other-benefit plan remeasurements, increasing the pension underfunded status by $1,191 million and producing a $970 million pretax other-comprehensive-loss impact for pension plans.
Most Important Facts for Investors to Verify
- Whether the proposed Dow merger closed on anticipated terms and timing, and the effect of required regulatory approvals and planned business separations.
- Whether the $730 million 2016 cost-reduction target and related workforce actions were achieved without impairing operating performance.
- The sustainability of earnings excluding the $369 million Shenzhen gain and the impact of foreign-exchange losses, restructuring charges and merger expenses.
- Seasonal working-capital needs, cash generation, debt maturities, utilization of the term loan and receivables repurchase facilities, and ongoing covenant compliance.
- Developments in PFOA, environmental, La Porte and other litigation matters, including the availability and collectability of Chemours indemnifications.
- The effect of the La Porte shutdown and alternative sourcing on Agriculture sales, margins and product availability.