EIDP, Inc. quarterly report, Q3 FY2013

EIDP, Inc. (E. I. du Pont de Nemours and Company) — Form 10-Q Summary

Business context and reporting period

Unaudited quarterly report for the three and nine months ended September 30, 2013. 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 key metrics

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Net sales	$7,735 million	$7,390 million	$27,987 million	$27,487 million
Income from continuing operations after tax	$263 million	$(40) million	$2,680 million	$2,468 million
Net income attributable to DuPont	$285 million	$5 million	$4,663 million	$2,663 million
Diluted EPS from continuing operations	$0.28	$(0.05)	$2.85	$2.58
Diluted EPS	$0.30	—	$4.99	$2.82
Dividends per share	$0.45	$0.43	$1.33	$1.27

Q3 sales increased 5%, driven by 9% higher volume, partly offset by 3% lower local prices and 1% unfavorable currency. Nine-month sales increased 2%, with volume up 4%.
Q3 segment pre-tax operating income increased to $741 million from $461 million. Nine-month segment PTOI declined to $4,759 million from $4,845 million, primarily because of weaker Performance Chemicals results.
Q3 income from continuing operations margin was approximately 3.4%; the nine-month margin was approximately 9.6%. COGS represented approximately 67% of Q3 sales and 62% of nine-month sales, each about two percentage points higher than the comparable 2012 periods.
Q3 COGS rose 8% to $5.2 billion, mainly due to higher agricultural-input and titanium-ore costs. SG&A was $774 million and R&D was $540 million in Q3.
Nine-month cash used in operating activities was $2,333 million versus cash used of $426 million in 2012. Capital expenditures were $1,223 million, producing reported free cash flow of negative $3,556 million, a non-GAAP measure defined by the company as operating cash flow less capital spending.
Cash, cash equivalents and marketable securities totaled $7,189 million at September 30, 2013, compared with $4,407 million at December 31, 2012. The company reported approximately $4.4 billion of unused credit lines.
Total debt increased to $14,959 million from $11,740 million at year-end 2012. The increase primarily reflected $2.0 billion of long-term notes issued in Q1 and higher short-term borrowings. Reported long-term and short-term credit ratings were investment grade with stable outlooks.
Cash increased by $2,626 million to $7,005 million during the first nine months, supported by $4,816 million of proceeds from the Performance Coatings sale and $3,204 million of net borrowings, partly offset by operating cash use, capital spending, dividends of $1,242 million and $1,000 million of share repurchases.

Material changes versus the prior comparable period

Profitability improved sharply in Q3 because 2012 included $394 million of employee separation and asset-related charges, including $150 million of Electronics & Communications impairment and $92 million of Performance Materials impairment. Q3 2013 had no such charge.
Performance Chemicals PTOI fell $228 million in Q3 and $878 million year to date, primarily because of lower titanium dioxide, refrigerant and fluoropolymer prices and higher raw-material costs. The segment also recorded a $72 million titanium dioxide antitrust litigation charge.
Agriculture Q3 PTOI loss narrowed to $102 million from $198 million, and nine-month PTOI rose 26% to $2.2 billion. The improvement reflected volume and pricing, Pannar ownership, and lower Imprelis claims.
Performance Materials Q3 PTOI increased $144 million to $374 million, largely because the prior year included a $92 million impairment charge. Electronics & Communications improved to $97 million from a $99 million loss, primarily due to the absence of its prior-year impairment charge.
Performance Coatings contributed $1,997 million of nine-month discontinued-operation income, including a $1,964 million after-tax gain on sale. This substantially increased total net income and EPS but is not indicative of recurring operating performance.
DuPont changed inventory valuation from LIFO to average cost effective January 1, 2013 and retrospectively adjusted prior periods. The change increased nine-month 2013 income from continuing operations after tax by $23 million and had no cash-flow impact.
DuPont acquired a controlling interest in Pannar Seed on July 31, 2013. Its minority interest was recorded as redeemable noncontrolling interest; minority holders exercised their put option in October 2013, with the transaction expected to be accounted for as an equity transaction in Q4.

Guidance, outlook, commentary and risks

The filing does not provide a specific consolidated earnings or revenue forecast. Management stated that cost-productivity gains and restructuring savings were on track to meet full-year targets and expected operating cash generation, capital-market access and available liquidity to fund working capital, capital spending, dividends and debt maturities.

DuPont announced it was exploring strategic alternatives for Performance Chemicals, including a possible spin-off, sale or other separation of the titanium dioxide and chemicals and fluoroproducts businesses.
Management expected year-end 2013 pension obligations to decrease by approximately $2–3 billion from year-end 2012 if interest rates rose as anticipated, although actual results could differ.
Contractual obligations increased approximately $3.4 billion from year-end 2012, primarily due to new debt and Monsanto technology-license commitments. The license agreements contemplate $2,171 million of payments, including $802 million of fixed royalties in 2014–2017 and $950 million of minimum payments through 2023 beginning in 2018.
Imprelis herbicide claims had generated cumulative charges of $930 million at September 30. DuPont estimated total charges could reach approximately $1.2 billion, but emphasized substantial uncertainty. The company also had insurance coverage subject to a $100 million deductible and stated that recovery timing and amount were uncertain.
PFOA-related accruals were $15 million. DuPont could be obligated to fund up to $235 million for medical monitoring, but the related loss could not yet be reasonably estimated. Additional personal-injury, wrongful-death and environmental actions remained pending.
Environmental remediation liabilities were $456 million. Management stated that potential liability could be as much as three times the accrued amount under adverse circumstances, with payments potentially extending 15–20 years.
The company had $502 million of directly guaranteed obligations for customers, suppliers and equity affiliates. Certain indemnifications related to acquisitions and divestitures were generally unlimited.
Other key risks included raw-material and energy costs, product development, litigation and environmental matters, currency and interest-rate volatility, global economic conditions, supply or plant disruptions, regulatory changes, intellectual-property protection, acquisitions and cybersecurity incidents.

Investor verification checklist

Separate recurring operating earnings from the $1,964 million after-tax Performance Coatings sale gain and other unusual items.
Monitor Performance Chemicals pricing, titanium dioxide demand and the potential strategic separation of the segment.
Reconcile negative operating and free cash flow with reported earnings, particularly Agriculture working-capital seasonality and receivables growth.
Verify debt maturities, short-term borrowing levels, interest costs and the availability of unused credit lines.
Track ultimate Imprelis costs and insurance recoveries, PFOA medical-monitoring obligations, environmental remediation exposure and other litigation outcomes.
Assess the cash and earnings impact of Monsanto license payments, Pannar’s minority-interest put exercise and future share repurchases.