E. I. du Pont de Nemours and Company — Q1 2013 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with March 31, 2012. DuPont operated across Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, Safety & Protection and Pharmaceuticals. Performance Coatings was sold in February 2013 and is presented as discontinued operations for all periods.
Financial performance and position
- Net sales: $10.408 billion, up 2% from $10.180 billion. Volume increased 2% and local prices increased 1%, partly offset by a 1% currency effect.
- Continuing-operations earnings: Income before taxes was $1.774 billion versus $1.801 billion; income after taxes was $1.387 billion versus $1.409 billion. Diluted EPS from continuing operations was $1.47 versus $1.48.
- Net income: $3.355 billion versus $1.504 billion; diluted EPS was $3.58 versus $1.58. The increase was primarily due to the $1.942 billion after-tax gain from the Performance Coatings sale.
- Margins and costs: Cost of goods sold and other operating charges rose 4% to $7.105 billion and represented 68% of sales, up approximately one percentage point. SG&A was $983 million, R&D was $521 million, and interest expense was $117 million.
- Tax rate: The effective tax rate on continuing operations was 21.8%, described as consistent with the prior-year quarter.
- Cash flow: Operating cash flow was negative $2.667 billion versus negative $1.877 billion. Capital expenditures were $321 million, producing negative free cash flow of $2.988 billion versus negative $2.178 billion. Investing cash flow was positive $4.608 billion, including $4.815 billion of net proceeds from the divestiture.
- Liquidity: Cash, cash equivalents and marketable securities totaled $6.581 billion at March 31, 2013, compared with $4.407 billion at year-end 2012. The company reported approximately $4.2 billion of unused credit lines.
- Debt: Total debt increased to $13.285 billion from $11.740 billion, primarily after issuing $1.25 billion of 2.80% notes due 2023 and $750 million of 4.15% notes due 2043. Credit ratings were investment grade with stable outlooks.
- Capital returns: DuPont paid $405 million of dividends and initiated a $1 billion accelerated share repurchase, receiving and retiring an initial 16.9 million shares. The company declared a second-quarter dividend of $0.45 per share, up 5% from the first-quarter dividend.
Material changes versus the prior comparable period
- Agriculture sales increased 14% and segment PTOI increased 15% to $1.481 billion, driven by higher seed and crop-protection volumes and pricing.
- Performance Chemicals PTOI declined $320 million to $251 million due primarily to titanium dioxide price declines and weak fluoropolymer demand.
- Performance Materials PTOI increased 5% to $292 million, while Safety & Protection PTOI declined $21 million to $138 million.
- Total segment PTOI declined 8% to $2.241 billion, reflecting weakness in Performance Chemicals and other markets despite Agriculture growth.
- The company changed inventory valuation from LIFO to average cost, retrospectively. The change increased first-quarter 2013 income from continuing operations after tax by $8 million, or approximately $0.01 per diluted share.
- Pension and other benefit accounting included $153 million of settlement and curtailment charges associated with the Performance Coatings sale, partially offset by a $154 million curtailment gain in other benefit plans.
- Common stockholders’ equity increased to $12.253 billion from $10.208 billion, primarily reflecting retained earnings and the divestiture-related gain, partly offset by the share repurchase and other comprehensive losses.
Guidance, outlook, commentary and risks
Management stated that cost-productivity gains and restructuring savings were on track to meet or exceed full-year targets. Management expected titanium dioxide demand to stabilize as the year progressed, while noting that demand patterns remained dynamic. The filing does not provide a clear quantitative full-year earnings or sales guidance figure.
- Imprelis claims: DuPont had recorded $785 million of charges through March 31, 2013, including $35 million in the quarter. Total charges could reach up to $900 million; insurance coverage has a $100 million deductible and limits of $725 million above the deductible, with recovery uncertain.
- PFOA: Accrued liabilities were $15 million. Medical monitoring obligations under the settlement are capped at $235 million, while additional losses related to personal-injury litigation cannot currently be estimated.
- Environmental matters: Environmental liabilities totaled $443 million. Management estimated that potential liability under adverse circumstances could be up to three times the accrued amount, with payments potentially extending over 15–20 years.
- Litigation: Titanium dioxide antitrust litigation and multiple environmental and regulatory proceedings remain unresolved. The filing states that potential losses in certain matters cannot reasonably be estimated.
- License commitments: Monsanto technology agreements created $2.253 billion of contractual license obligations, including $802 million of fixed annual royalty payments contemplated for 2014–2017 and $950 million of minimum payments from 2018 through 2023.
- Operating risks: Key risks include raw-material and energy costs, currency and commodity volatility, global economic conditions, product development, regulatory changes, litigation, environmental liabilities, business disruption, cybersecurity, intellectual property protection and integration or divestiture execution.
Most important facts for investors to verify
- Separate recurring continuing-operations performance from the $1.942 billion after-tax divestiture gain.
- Assess whether Agriculture growth can offset continuing weakness in Performance Chemicals, Electronics & Communications and Safety & Protection.
- Reconcile negative operating cash flow and free cash flow with reported earnings and the temporary benefit from divestiture proceeds.
- Monitor debt growth, refinancing requirements and the effect of the $1 billion share repurchase on leverage and liquidity.
- Track the ultimate cost and insurance recovery for Imprelis claims, including the potential exposure up to $900 million.
- Evaluate PFOA, environmental, antitrust and other litigation exposures, for which the filing states that additional losses may be material or cannot be estimated.
- Review the timing and conditions of the Monsanto license payments and the related impact on Agriculture economics.