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DD > SEC Filings for DD > Form 10-K on 5-Feb-2014All Recent SEC Filings

Show all filings for DUPONT E I DE NEMOURS & CO

Form 10-K for DUPONT E I DE NEMOURS & CO


5-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may be identified by their use of words like "plans," "expects," "will," "anticipates," "believes," "intends," "projects," "estimates" or other words of similar meaning. All statements that address expectations or projections about the future, including statements about the company's strategy for growth, product development, regulatory approval, market position, anticipated benefits of recent acquisitions, outcome of contingencies, such as litigation and environmental matters, expenditures and financial results, are forward-looking statements.

Forward-looking statements are based on certain assumptions and expectations of future events which may not be accurate or realized. Forward-looking statements also involve risks and uncertainties, many of which are beyond the company's control. Some of the important factors that could cause the company's actual results to differ materially from those projected in any such forward-looking statements are:

• Fluctuations in energy and raw material prices;

• Failure to develop and market new products and optimally manage product life cycles;

• Outcome of significant litigation and environmental matters, including those related to divested businesses;

• Failure to appropriately manage process safety and product stewardship issues;

• Effect of changes in tax, environmental and other laws and regulations or political conditions in the U.S. and other countries in which the company operates;

• Conditions in the global economy and global capital markets, including economic factors, such as inflation, deflation and fluctuations in currency exchange rates, interest rates and commodity prices, as well as regulatory requirements;

• Impact of business disruptions, including supply disruptions, and security threats, regardless of cause, including acts of sabotage, cyber-attacks, terrorism or war, weather events and natural disasters;

• Ability to protect and enforce the company's intellectual property rights; and

• Successful integration of acquired businesses and separation of underperforming or non-strategic assets or businesses, including proposed spin-off of the Performance Chemicals segment.

For some of the important factors that could cause the company's actual results to differ materially from those projected in any such forward-looking statements, see the Risk Factors discussion set forth under Part I, Item 1A beginning on page 8.

Overview
Purpose DuPont's businesses serve markets where the increasing demand for more and healthier food, renewably sourced materials and fuels, and advanced industrial materials is creating substantial growth opportunities. The company's unique combination of sciences, proven R&D engine, broad global reach, and deep market penetration are distinctive competitive advantages that position the company to continue capitalizing on this enormous potential.

Strategy Position DuPont as a higher growth, higher value company, well equipped to drive revenue and profit growth through science-based innovation and the company's significant competitive advantages with three priorities:

• Agriculture & Nutrition - extend DuPont's leadership across the high-value, science-driven segments of the Agriculture and Food value chain;

• Advanced Materials - strengthen the company's lead as a provider of differentiated, high-value advanced industrial materials;

• Industrial Biosciences - build transformational new bio-based businesses by combining DuPont's world leading science with expertise and resources from the Advanced Materials and Agriculture & Nutrition businesses.

The company is committed to maintain a strong balance sheet and to return excess cash to shareholders unless there is a compelling opportunity to invest for growth.

Results Income from continuing operations after taxes increased 16 percent to $2.9 billion. Net sales of $35.7 billion increased 3 percent driven by 5 percent higher volume. Sales grew 6 percent in developing markets, which include China, India, and the countries located in Latin America, Eastern and Central Europe, Middle East, Africa, and Southeast Asia. Sales of new products introduced in the last four years also contributed to sales growth.


Part II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued

Analysis of Operations
Separation of Performance Chemicals On October 24, 2013, DuPont announced that it intends to separate its Performance Chemicals segment through a U.S. tax-free spin-off to shareholders, subject to customary closing conditions. The company expects to complete the separation about mid-2015.

Divestiture of Performance Coatings On August 30, 2012, the company entered into a definitive agreement with Flash Bermuda Co. Ltd., a Bermuda exempted limited liability company formed by affiliates of The Carlyle Group (collectively referred to as "Carlyle") in which Carlyle agreed to purchase certain subsidiaries and assets comprising the company's Performance Coatings business. In February 2013, the sale was completed resulting in a pre-tax gain of approximately $2.7 billion ($2.0 billion net of tax). The gain was recorded in income from discontinued operations after income taxes in the Consolidated Income Statement for the year ended December 31, 2013.

In accordance with GAAP, the results of Performance Coatings are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. See Note 2 to the Consolidated Financial Statements for additional information.

Acquisition of Danisco In 2011, the company acquired Danisco in a transaction valued at $6.4 billion, plus net debt assumed of $0.6 billion. As part of this acquisition, DuPont incurred $85 million in transaction related costs during 2011, which were recorded in other operating charges. In 2011, the businesses acquired from Danisco contributed net sales of $1.7 billion and net income attributable to DuPont of $(7) million, which excludes $30 million after-tax ($39 million pre-tax) of additional interest expense related to the debt issued to finance the acquisition. Danisco's contributions included a $125 million after-tax ($175 million pre-tax) charge related to the fair value step-up of inventories acquired and sold during 2011. See Note 4 to the Consolidated Financial Statements for additional information.

(Dollars in millions) 2013 2012 2011 NET SALES $ 35,734 $ 34,812 $ 33,681

2013 versus 2012 The table below shows a regional breakdown of 2013 consolidated net sales based on location of customers and percentage variances from prior year:

                                                                 Percent Change Due to:
                                       Percent
                          2013        Change vs.       Local       Currency                Portfolio /
(Dollars in billions)   Net Sales        2012          Price        Effect       Volume       Other
Worldwide             $      35.7           3             (1 )          (1 )           5           -
U.S. & Canada                14.8           4              1             -             3           -
EMEA                          8.4           4             (2 )           1             4           1
Asia Pacific                  7.7          (3 )           (6 )          (3 )           6           -
Latin America                 4.8           6              -            (3 )           9           -

Sales increased 3 percent, reflecting a 5 percent increase in worldwide sales volume with growth in all segments. Local prices were 1 percent lower principally due to a 12 percent decline in Performance Chemicals prices and a pass through of lower precious metals prices for Electronics & Communications. Negative currency impact reflects a weaker Brazilian Real and Indian Rupee, partly offset by a stronger Euro. Sales in developing markets of $11.9 billion improved 7 percent on 10 percent higher volume, and the percentage of total company sales in these markets increased to 33 percent from 32 percent in 2012.


                                    Part II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued

2012 versus 2011 The table below shows a regional breakdown of 2012 consolidated
net sales based on location of customers and percentage variances from 2011:

                                                                  Percent Change Due to:
                                       Percent
                          2012        Change vs.       Local       Currency                 Portfolio /
(Dollars in billions)   Net Sales        2011          Price        Effect        Volume       Other
Worldwide             $      34.8           3              4            (2 )          (2 )          3
U.S. & Canada                14.2           8              6             -             -            2
EMEA                          8.1          (1 )            3            (6 )          (4 )          6
Asia Pacific                  8.0          (4 )           (1 )          (1 )          (5 )          3
Latin America                 4.5          11              9            (5 )           5            2

Sales increased 3 percent, reflecting a 3 percent net increase from portfolio changes, principally the Danisco acquisition, and 4 percent higher local prices, partly offset by 2 percent lower volume and a 2 percent negative currency impact. The 2 percent decline in worldwide sales volume principally reflects higher Agriculture, Nutrition & Health, and Industrial Biosciences volume, more than offset by lower volume for the other segments combined, particularly Performance Chemicals. Higher local prices were driven principally by increases for seeds, titanium dioxide, and specialty polymers. Currency effect primarily reflects the weaker Euro and Brazilian Real. Sales in developing markets of $11.1 billion improved 6 percent from 2011, and the percentage of total company sales in these markets increased to 32 percent from 31 percent in 2011.

(Dollars in millions) 2013 2012 2011
OTHER INCOME, NET $ 410 $ 498 $ 742

2013 versus 2012 The $88 million decrease was largely attributable to the absence of a $122 million gain related to the 2012 sale of the company's interest in an equity method investment, the absence of a $117 million gain related to the 2012 sale of a business within the Agriculture segment, partially offset by $87 million lower net pre-tax exchange losses, $27 million increase in interest income, and a $26 million re-measurement gain on an equity investment.

2012 versus 2011 The $244 million decrease was largely attributable to a $228 million reduction of Cozaar®/Hyzaar® income, a decrease of $92 million in equity in earnings of affiliates, and an increase of $69 million in net pre-tax exchange losses, partially offset by a $122 million gain related to the sale of the company's interest in an equity method investment.

Additional information related to the company's other income, net is included in Note 5 to the Consolidated Financial Statements.

(Dollars in millions)        2013       2012       2011
COST OF GOODS SOLD        $ 22,548   $ 21,538   $ 21,264
As a percent of net sales       63 %       62 %       63 %

2013 versus 2012 Cost of goods sold (COGS) increased 5 percent to $22.5 billion, with 4 percent driven by higher sales volume and 1 percent driven by higher product costs. COGS as a percentage of net sales was 63 percent, a 1 percent increase from 2012. The increase in COGS as a percentage of net sales principally reflects the impact of increased costs for raw materials and agriculture inputs versus lower selling prices, coupled with adverse currency impact.

2012 versus 2011 COGS increased 1 percent to $21.5 billion. COGS as a percentage of net sales was 62 percent, a 1 percent decrease from 2011, principally reflecting selling price increases in excess of raw material cost increases.

(Dollars in millions)       2013      2012      2011
OTHER OPERATING CHARGES   $ 3,838   $ 4,077   $ 3,510
As a percent of net sales      11 %      12 %      10 %


Part II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued

2013 versus 2012 Other operating charges decreased 6 percent to $3.8 billion, principally due to lower Imprelis® herbicide claims, net of insurance recoveries, and other litigation charges. See Note 16 for additional information related to the Imprelis® matter.

2012 versus 2011 Other operating charges increased 16 percent to $4.1 billion. This reflects increased charges of $537 million related to Imprelis® and other litigation matters, partly offset by the absence of prior year charges related to the acquisition of Danisco . See Note 16 for additional information related to the Imprelis® matter.

(Dollars in millions)                          2013      2012      2011
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 3,554   $ 3,527   $ 3,310
As a percent of net sales                         10 %      10 %      10 %

2013 versus 2012 The 2013 increase of $27 million was largely attributable to increased global commissions and selling and marketing investments, primarily in the Agriculture segment, partially offset by cost savings in administrative functions as a result of the 2012 restructuring program.

2012 versus 2011 The 2012 increase of $217 million was due to increased global commissions and selling and marketing investments, primarily in the Agriculture segment, and a full year of selling expense of acquired companies.

(Dollars in millions)              2013      2012      2011
RESEARCH AND DEVELOPMENT EXPENSE $ 2,153   $ 2,123   $ 1,960
As a percent of net sales              6 %       6 %       6 %

2013 versus 2012 The $30 million increase was primarily attributable to continued growth investments in the Agriculture segment and increases in pre-commercial investment.

2012 versus 2011 The $163 million increase was primarily attributable to a full year of research and development expense from acquired companies and continued growth investments in the Agriculture segment offset by the absence of a $50 million charge for a payment related to a Pioneer licensing agreement in 2011.

(Dollars in millions) 2013 2012 2011
INTEREST EXPENSE $ 448 $ 464 $ 447

The $16 million decrease in 2013 was due to lower average borrowings. The $17 million increase in 2012 was due primarily to higher average borrowings and lower capitalized interest partially offset by a lower average borrowing rate.

(Dollars in millions) 2013 2012 2011
EMPLOYEE SEPARATION/ASSET RELATED CHARGES, NET $ 114 $ 493 $ 53

The $114 million in charges recorded during 2013 in employee separation / asset related charges, net consisted of a a net $15 million restructuring benefit and a $129 million asset impairment charge discussed below. The net $15 million restructuring benefit consisted of a $24 million benefit associated with prior year restructuring programs offset by a $9 million charge resulting from restructuring actions related to a joint venture within the Performance Materials segment. The majority of the $24 million benefit was due to the achievement of work force reductions through non-severance programs associated with the 2012 restructuring program.


Part II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued

The $493 million in charges recorded during 2012 in employee separation / asset related charges, net consisted of $234 million in charges related to the 2012 restructuring program, a $16 million net reduction in the estimated costs associated with 2011 and prior years restructuring programs, and $275 million in asset impairment charges, as discussed below.

2012 Restructuring Program
In 2012, the company commenced a restructuring plan to increase productivity, enhance competitiveness and accelerate growth. The plan is designed to eliminate corporate costs previously allocated to the Performance Coatings business as well as utilize additional cost-cutting actions to improve competitiveness. As a result, pre-tax charges of $234 million were recorded in employee separation / asset related charges, net. The 2012 restructuring program charges consist of $157 million of employee separation costs, $8 million of other non-personnel charges, and $69 million of asset related charges, which includes $30 million of asset impairments and $39 million of asset shut downs.

The actions related to this plan achieved pre-tax cost savings of more than $300 million in 2013, and is expected to increase to approximately $450 million per year in subsequent years.

2011 Restructuring Program
In 2011, the company initiated a series of actions to achieve the expected cost synergies associated with the Danisco acquisition. As a result, the company recorded a $53 million charge in employee separation/asset related charges, net, primarily for employee separation costs in the U.S. and Europe.

In the fourth quarter 2012, the company recorded a net reduction of $15 million in the estimated costs associated with the 2011 restructuring program. This net reduction was primarily due to workforce reductions through non-severance programs and lower than estimated individual severance costs.

Asset Impairments
During 2013, the company recorded an asset impairment charge of $129 million to write-down the carrying value of an asset group, within the Electronics & Communications segment, to fair value.

During 2012, the company recorded asset impairment charges of $275 million to write-down the carrying value of certain asset groups to fair value. These asset impairment charges resulted in a $150 million charge within the Electronics & Communications segment, a $92 million charge within the Performance Materials segment and a $33 million charge within the Performance Chemicals segment.

Additional details related to the restructuring programs and asset impairments discussed above can be found in Note 3 to the Consolidated Financial Statements.

Below is a summary of the net impact related to items recorded in employee separation / asset related charges, net:

                                                  2013 (Charges) and   2012 (Charges) and    2011 (Charges) and
 (Dollars in millions)                                 Credits              Credits               Credits
Agriculture                                      $            1       $          (11 )     $             -
Electronics & Communications                               (131 )               (159 )                   -
Industrial Biosciences                                        1                   (3 )                  (9 )
Nutrition & Health                                            6                  (49 )                 (14 )
Performance Chemicals                                        (2 )                (36 )                   -
Performance Materials                                        (6 )               (104 )                  (2 )
Safety & Protection                                           4                  (58 )                   -
Other                                                         5                   11                   (28 )
Corporate expenses                                            8                  (84 )                   -
Total (Charges) Credits                          $         (114 )     $         (493 )     $           (53 )


                                    Part II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued

(Dollars in millions)                                2013    2012    2011
PROVISION FOR INCOME TAXES ON CONTINUING OPERATIONS $ 626   $ 616   $ 647
Effective income tax rate                            17.9 %  19.9 %  16.7 %

In 2013, the company recorded a tax provision on continuing operations of $626 million, reflecting a marginal increase from 2012. The decrease in the 2013 effective tax rate compared to 2012 was primarily due to geographic mix of earnings, in addition to benefits associated with certain U.S. business tax provisions in 2013.

In 2012, the company recorded a tax provision on continuing operations of $616 million, reflecting a marginal decrease from 2011. The increase in the 2012 effective tax rate compared to 2011 was primarily due to geographic mix of earnings, in addition to benefits associated with certain U.S. business tax provisions in 2011.

See Note 6 to the Consolidated Financial Statements for additional details related to the provision for income taxes on continuing operations, as well as items that significantly impact the company's effective income tax rate.

(Dollars in millions) 2013 2012 2011
INCOME FROM CONTINUING OPERATIONS AFTER INCOME TAXES $ 2,863 $ 2,472 $ 3,232

Income from continuing operations after income taxes for 2013 was $2.9 billion compared to $2.5 billion in 2012 and $3.2 billion in 2011. The changes between periods were due to the reasons noted above.

Corporate Outlook
The company expects 2014 sales and earnings will reflect continuing improvement in global industrial production, lower agricultural input costs, and a slightly stronger average exchange value for the U.S. dollar. In addition, the company's market position and results will continue to benefit from market driven innovation and productivity.

Segment Reviews
Segment sales include transfers to another business segment. Products are transferred between segments on a basis intended to reflect, as nearly as practicable, the market value of the products. Effective January 1, 2013, to better indicate operating performance, the company eliminated the allocation of non-operating pension and other postretirement employee benefit costs from segment pre-tax operating income (loss) (PTOI). Segment PTOI is defined as income (loss) from continuing operations before income taxes excluding non-operating pension and other postretirement employee benefit costs, exchange gains (losses), corporate expenses and interest. Certain reclassifications of prior year data have been made to conform to current year classifications. All references to prices are on a U.S. dollar (USD) basis, including the impact of currency.

A reconciliation of segment sales to consolidated net sales and segment PTOI to income from continuing operations before income taxes for 2013, 2012 and 2011 is included in Note 22 to the Consolidated Financial Statements. Segment PTOI and PTOI margins include certain items which management believes are significant to understanding the segment results discussed below. See Note 22 to the Consolidated Financial Statements for details related to these items.


                                    Part II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued

AGRICULTURE
(Dollars in millions)    2013       2012      2011
Segment sales         $ 11,739   $ 10,426   $ 9,166
PTOI                  $  2,132   $  1,669   $ 1,566
PTOI margin                 18 %       16 %      17 %


                                                  2013  2012
Change in segment sales from prior period due to:
Price                                               5 %   6 %
Volume                                              7 %   8 %
Portfolio / Other                                   1 %   - %
Total change                                       13 %  14 %

2013 versus 2012 Sales growth was principally driven by higher global seed prices and volumes, increased global insecticide and fungicide volumes, and the benefit of increased ownership in Pannar Seed (Pty) Ltd, slightly offset by negative currency. Growth in seeds reflects strong corn sales in North America and Brazil. Increased insecticide volumes were driven by demand for Rynaxypyr®, particularly in Latin America to combat heavy insect pressure, while fungicide volume increases were led by demand for picoxytstrobin in North America and Latin America.

2013 PTOI and PTOI margin increased on sales growth, lower charges incurred related to Imprelis® herbicide claims, and earlier seed shipments, partially offset by higher seed input costs of about $350 million, $108 million of negative currency impact, and the absence of a $117 million gain on the sale of a business recorded in 2012. As a result of the earlier timing of seed shipments, representing earlier seed shipments for the Brazil safrinha corn season enabled by recent investments and earlier direct seed shipments to North American farmers, approximately $100 million of PTOI was realized in 2013 versus 2014.

2013 PTOI included net charges of $352 million ($425 million in charges offset by $73 million of insurance recoveries) related to Imprelis® herbicide claims compared charges of $575 million in 2012. See Note 16 to the Consolidated Financial Statements for more information related to the Imprelis® matter.

2012 versus 2011 Pioneer seed sales reflect growth primarily in corn and soybean seeds. Volume increases in all regions reflect increased planted area. Global pricing gains reflect continued penetration of new genetics and trait packages, including the Optimum® AcreMax® Family of integrated and reduced refuge corn hybrids and Optimum® AQUAmaxTM products for improved drought tolerance. Crop Protection sales grew in all regions reflecting volume and price gains from herbicides, insect control products and fungicides, particularly continued strong demand for Rynaxypyr®.

2012 PTOI increased as strong sales and a $117 million gain on the sale of a business more than offset $575 million of charges related to Imprelis®, higher input costs in seeds of about $275 million, $156 million of negative currency, and higher investments in commercial and R&D activities to support growth. 2012 PTOI margin decreased due to increased charges related to Imprelis®. See Note 16 to the Consolidated Financial Statements for more information related to the Imprelis® matter.

Outlook Sales are expected to be up modestly driven by continued demand and pricing gains. Growth in seeds is anticipated to be driven by pricing gains, largely in North America, and higher global volumes, offset slightly by the earlier timing of seed shipments discussed above. In Crop Protection, the company anticipates demand for Rynaxypyr® to continue, along with launches of Cyazypyr® insecticide and the continued expansion and growth of the fungicide . . .

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