EIDP, Inc. (formerly E. I. du Pont de Nemours and Company) — 2016 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The interim financial statements are unaudited and present Performance Chemicals as discontinued operations following the July 2015 spin-off of Chemours.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $4,917 million | $4,873 million | $19,383 million | $19,831 million |
| Income from continuing operations | $13 million | $131 million | $2,269 million | $2,126 million |
| Net income attributable to DuPont | $2 million | $235 million | $2,248 million | $2,206 million |
| Diluted EPS | $0.00 | $0.26 | $2.55 | $2.43 |
| Cash used in operating activities | Not separately provided | Not separately provided | $(1,077) million | $(1,845) million |
| Capital expenditures | Not separately provided | Not separately provided | $759 million | $1,291 million |
Q3 continuing-operations revenue increased 1% on 3% volume growth, partly offset by 2% lower local prices. Nine-month revenue declined 2%, reflecting a 2% negative currency impact, a 1% price decline and 1% volume growth. Nine-month income from continuing operations increased 7% despite lower revenue.
Approximate continuing-operations income margin was 0.3% in Q3 and 11.7% for the first nine months, compared with 2.7% and 10.7%, respectively, in the prior-year periods. Q3 results were heavily affected by merger costs, an intangible-asset impairment, foreign-exchange losses and the absence of a prior-year insurance recovery.
At September 30, 2016, cash, cash equivalents and marketable securities totaled $5.532 billion, down from $6.206 billion at December 31, 2015. Total debt was $11.356 billion, up from $8.807 billion, primarily due to seasonal working-capital borrowings. Unused credit lines were approximately $7.9 billion. The company had $500 million outstanding under a $4.5 billion term-loan facility and $1.0 billion outstanding under a receivables repurchase facility expiring November 30, 2016.
Cash decreased by $848 million during the first nine months to $4.452 billion. Financing activities provided $1.280 billion, including increased short-term borrowings, while dividends paid were $1.004 billion and share repurchases totaled $416 million.
Material changes versus the prior comparable period
- Q3 segment operating earnings increased to $607 million from $433 million; all reportable segments improved, primarily from cost savings and higher volumes.
- Nine-month segment operating earnings increased to $3.937 billion from $3.690 billion. Nutrition & Health, Industrial Biosciences and Agriculture showed notable improvement, while Electronics & Communications and Protection Solutions had lower sales.
- Q3 included a $158 million pre-tax impairment of acquired Industrial Biosciences trade names and $122 million of Dow merger-related costs. The prior-year quarter included a $147 million insurance recovery related to Imprelis herbicide claims.
- Other income declined to a $16 million loss in Q3 from $98 million of income, primarily due to higher foreign-exchange losses. For nine months, other income declined to $407 million from $552 million, despite a $369 million gain on the sale of DuPont Shenzhen Manufacturing Limited.
- The company recorded $159 million of employee separation and asset-related charges for the nine months, including the $158 million impairment and a $75 million charge related to the decision not to restart the La Porte, Texas insecticide facility.
- Other comprehensive loss was $1.271 billion for the nine months, mainly due to a $1.769 billion after-tax pension-plan loss and a $230 million after-tax loss on other benefit plans.
Guidance, outlook, risks and unusual items
- Management stated that the 2016 global cost-savings and restructuring plan remained on track to deliver $730 million of cost reductions versus 2015 and approximately $1.0 billion of operating-cost run-rate reduction by year-end. The actions were expected to affect approximately 10% of the workforce and be substantially complete in 2016.
- Full-year 2016 Dow merger-related costs were expected to be approximately $390 million, or $0.37 per share.
- The proposed all-stock merger with Dow was approved by DuPont stockholders but remained subject to regulatory approvals in the United States, European Union, China, Brazil and Canada. The filing indicated that closing could occur in the first quarter of 2017 if regulators used their full review periods. Planned post-merger separations of agriculture, specialty products and material science businesses were anticipated approximately 18 months after closing.
- PFOA matters remained significant. The company accrued $18 million for PFOA-related obligations and had approximately 3,500 pending lawsuits in the multidistrict litigation. Potential liabilities for the remaining lawsuits could not be reasonably estimated; Chemours indemnifies DuPont for specified PFOA liabilities.
- Environmental liabilities totaled $497 million, with potential exposure up to $976 million above the accrued amount under adverse circumstances. Chemours indemnifies certain matters with a $280 million related indemnification asset recorded by DuPont.
- The company had approximately $319 million of guaranteed obligations for customers, suppliers, equity affiliates and Chemours. It also disclosed ongoing environmental, product-liability, regulatory and workplace-safety proceedings, including matters related to the 2014 La Porte release.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify the timing and regulatory status of the Dow merger, including potential remedies, closing conditions, financing effects and planned business separations.
- Assess whether the reported cost savings are recurring and sufficient to offset pricing pressure, currency headwinds and weaker demand in selected markets.
- Reconcile cash generation with seasonal working-capital needs, increased debt, the November 2016 receivables facility maturity and pension contributions.
- Monitor PFOA and environmental litigation, indemnification recoveries from Chemours, and the potential range of unaccrued liabilities.
- Review the valuation assumptions supporting the $158 million intangible impairment and the remaining $28 million carrying value of the affected trade names.
- Consider the effect of pension underfunding, including the $2.352 billion increase in the principal U.S. pension plan’s underfunded status from the 2016 remeasurement.