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DD > SEC Filings for DD > Form 10-Q on 22-Apr-2014All Recent SEC Filings

Show all filings for DUPONT E I DE NEMOURS & CO

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


22-Apr-2014

Quarterly Report


Item 2. 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 United States of America (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 additional information on these and other risks and factors that could affect our forward-looking statements, see the company's Risk Factors set forth under Part I, Item 1A of the company's 2013 Annual Report.

Recent Developments
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. As part of the separation, DuPont incurred $16 million in transaction costs in the first quarter 2014, which were recorded in Other operating charges. For full-year 2014, costs associated with the separation are expected to be about $170 million ($0.13 per share). The company expects to incur additional costs related to the separation in 2015. These transaction costs primarily relate to professional fees associated with preparation of regulatory filings and separation activities within finance, legal and information system functions.

Venezuelan Foreign Currency Translation
During the first quarter 2014, the Venezuelan government enacted certain changes to the country's foreign exchange systems including the expansion of the use of the Complementary System of Foreign Currency Acquirement ("SICAD 1") auction rate and introduction of the SICAD 2 auction process. The official exchange rate continues to be set through the National Center for Foreign Commerce (CENCOEX, previously CADIVI) at 6.3 Bolivar Fuerte (BsF) to U.S. dollar (USD). The SICAD 1 and SICAD 2 exchange rates were 10.70 BsF and 50.85 BsF, respectively, at March 31, 2014. The company is evaluating the Venezuelan government's recent actions affecting foreign exchange systems including restrictions, limitations and ability to obtain USD at a particular rate or through a specific exchange mechanism in relation to DuPont's in-country operations. Due to the limited period in which these exchanges have existed, the company believes there is considerable uncertainty regarding the company's ability and intent to settle transactions through either SICAD 1 or SICAD 2. At March 31, 2014, the company continues to use the official CENCOEX rate to re-measure its Venezuelan net monetary assets. If the company had re-measured its Venezuelan net monetary assets using either the SICAD 1 or SICAD 2 rate as of March 31, 2014, the company would have recorded a charge to Other income, net of approximately $30 million ($20 million after tax) or approximately $60 million ($50 million after tax), respectively. See Note 1 to the interim Consolidated Financial Statements for additional information.


Table of Contents

Results of Operations
Overview
The following is a summary of the results of continuing operations for the three months ended March 31, 2014:

• Net Sales were $10.1 billion, 3 percent below prior year, reflecting 1 percent lower volume, 1 percent lower selling prices, and a 1 percent adverse currency impact.

• Total segment pre-tax operating income (PTOI) of $2.2 billion was essentially flat with prior year. PTOI increased in 5 of the 7 segments primarily driven by increased sales volumes. Agriculture PTOI of $1.4 billion decreased 3 percent on lower volumes due to differences in timing of seed shipments and planted area, partly offset by the absence of prior-year charges related to Imprelis® herbicide claims. Performance Chemicals PTOI declined 20 percent due to lower selling prices.

• Income from continuing operations after income taxes was $1.4 billion, an increase of 4 percent from the same period last year.

• Management believes the adverse weather conditions in the first quarter 2014 impacted results by an estimated $0.07 per share reflecting increased operating costs and lost sales.

Net Sales
Net sales for the first quarter were $10.1 billion versus $10.4 billion in the prior year reflecting 1 percent lower selling prices, 1 percent lower volume, and a 1 percent adverse currency impact. Higher Agriculture selling prices were more than offset by lower prices in Performance Chemicals and Electronics & Communications. Volume reflects the earlier timing of seed shipments and lower corn planted area in the Agriculture segment and the impact of harsh winter weather conditions in North America. This was partially offset by worldwide volume increases in 5 segments, supported by 6 percent volume growth in EMEA and Asia Pacific. Negative currency impact principally reflects a weaker Japanese Yen, Brazilian Real, and Indian Rupee, partly offset by a stronger Euro and Chinese Yuan.

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

                                     Three Months Ended March 31, 2014                 Percent Change Due to:
                                                             Percent
                                          Net Sales         Change vs.    Local     Currency
                                         ($ Billions)          2013       Price      Effect      Volume    Portfolio/Other
Worldwide                           $               10.1         (3 )        (1 )       (1 )        (1 )             -
U.S. & Canada                                        4.4         (8 )         -          -          (7 )            (1 )
Europe, Middle East & Africa (EMEA)                  3.0          8           1          1           6               -
Asia Pacific                                         1.7          -          (3 )       (3 )         6               -
Latin America                                        1.0        (10 )        (1 )       (4 )        (5 )             -

Other Income, Net
Other income, net, totaled $17 million for the first quarter 2014, a decrease of $75 million compared to $92 million in the prior year. The decrease was due primarily to $107 million higher pre-tax exchange losses partially offset by $20 million higher income related to equity method investments.

Additional information related to the company's other income, net, is included in Note 3 to the interim Consolidated Financial Statements.

Cost of Goods Sold (COGS)
COGS totaled $6.0 billion in the first quarter 2014 versus $6.2 billion in the prior year, a 3 percent decrease, principally due to decreases in pension and other postretirement employee benefit (OPEB) costs and lower raw material costs. COGS was approximately 59 percent of net sales for the first quarter 2014 and 2013.


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Other Operating Charges
Other operating charges totaled $797 million in the first quarter 2014 versus $912 million in the prior year, a 13 percent decrease, primarily due to lower manufacturing and corporate overhead costs, and reduced costs for pension and OPEB. Other operating charges includes $16 million of costs associated with the separation of the Performance Chemicals Segment. See Note 2 to the interim Consolidated Financial Statements for more information related to this matter.

Selling, General and Administrative Expenses (SG&A) SG&A totaled $925 million for the first quarter 2014 versus $983 million in the prior year. The decrease was primarily due to reduced sales commissions within the Agriculture segment, cost savings in administrative functions as a result of the 2012 restructuring program as well as reduced pension and OPEB costs. SG&A was 9 percent of net sales for the first quarter 2014 and 2013.

Research and Development Expense (R&D)
R&D totaled $518 million and $521 million for the first quarter 2014 and 2013, respectively. The decrease was primarily due to lower pension and OPEB costs. R&D was approximately 5 percent of net sales for the first quarter 2014 and 2013.

Interest Expense
Interest expense totaled $103 million in the first quarter 2014, compared to $117 million in 2013. The decrease was due to lower average borrowings.

Provision for Income Taxes on Continuing Operations The company's effective tax rate for the first quarter 2014 was 19.8 percent on pre-tax income from continuing operations as compared to 21.8 percent on pre-tax income from continuing operations in 2013. The lower effective tax rate principally relates to a favorable settlement in the first quarter 2014 in addition to geographic mix of earnings.

See Note 4 to the interim Consolidated Financial Statements for additional information.

Income from Continuing Operations after Income Taxes Income from continuing operations after income taxes for first quarter 2014 of $1,445 million, increased 4 percent versus $1,387 million in the same period last year principally due to lower income taxes, lower pension and OPEB related costs, and lower interest expense, in addition to the reasons noted above.

Recent Accounting Pronouncements
See Note 1 to the interim Consolidated Financial Statements for a description of recent accounting pronouncements.


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Segment Reviews
Summarized below are comments on individual segment sales and PTOI for the three month period ended March 31, 2014 compared with the same period in 2013. 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. 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 the three month period ended March 31, 2014 and 2013 is included in Note 12 to the interim Consolidated Financial Statements.

The following table summarizes first quarter 2014 segment sales and related variances versus first quarter 2013:

                                              Three Months Ended
                                                March 31, 2014              Percentage Change Due to:
                                             Segment       Percent
                                              Sales       Change vs.                            Portfolio
                                          ($ Billions)       2013        Price       Volume     and Other
Agriculture                              $         4.4        (6 )           1          (7 )          -
Electronics & Communications                       0.6        (6 )         (12 )         6            -
Industrial Biosciences                             0.3         4            (1 )         5            -
Nutrition & Health                                 0.9        (1 )          (1 )         -            -
Performance Chemicals                              1.5        (3 )          (7 )         6           (2 )
Performance Materials                              1.6         2             -           2            -
Safety & Protection                                0.9         4            (1 )         5            -

Agriculture - Segment sales of $4,394 million declined $275 million, or 6 percent, on lower volumes due to earlier timing of seed shipments, lower corn planted area in Brazil's Safrinha season and in North America, and lower herbicide volumes in North America, partially offset by higher insecticide volumes in Latin America. Price increased 1 percent, despite a 2 percent negative currency impact. PTOI of $1,442 million declined $39 million, or 3 percent, due to lower volumes partially offset by higher seed pricing, lower seed input costs, and the absence of a prior year charge of $35 million related to Imprelis® claims. The earlier timing of seed shipments caused approximately $100 million of PTOI to be realized in the fourth quarter 2013 rather than first quarter this year. See Note 8 to the interim Consolidated Financial Statements for more information related to the Imprelis® matter.

Electronics & Communications - Segment sales of $580 million declined $36 million, or 6 percent, largely due to the pass-through of substantially lower metals prices, partially offset by higher sales volumes, mainly in photovoltaic markets. PTOI of $75 million increased $26 million, or 53 percent, largely due to higher sales volumes.

Industrial Biosciences - Segment sales of $301 million increased $12 million, or 4 percent, on increased enzyme demand for ethanol production. PTOI of $56 million increased $15 million, or 37 percent, from increased enzyme demand and lower costs.

Nutrition & Health - Segment sales of $861 million decreased $7 million, or 1 percent, as price gains were more than offset by unfavorable currency. PTOI of $93 million increased $17 million, or 22 percent, driven by improved product mix, productivity gains and lower raw material costs.

Performance Chemicals - Segment sales of $1,532 million decreased $53 million, or 3 percent, as increased volumes, primarily for titanium dioxide and fluoroproducts, were more than offset by lower prices. PTOI of $200 million decreased $51 million, or 20 percent, due primarily to lower prices in fluoroproducts, principally refrigerants. Higher raw material and energy costs as a result of the adverse weather and lower titanium dioxide prices were also contributors to the decline in PTOI. This was partially offset by higher volumes and productivity improvements.

Performance Materials - Segment sales of $1,593 million increased $34 million, or 2 percent on higher sales into automotive markets. Volumes increased in all regions outside of North America, as North America volumes were constrained in preparation for a second quarter scheduled ethylene production unit outage. PTOI of $299 million increased $7 million, or 2 percent, reflecting stronger volumes in automotive markets, largely offset by higher ethane and natural gas costs due primarily to weather related factors.

Safety & Protection - Segment sales of $947 million increased $40 million, or 4 percent, on higher volumes driven by sales of building materials and aramids products. PTOI of $175 million increased $37 million, or 27 percent, primarily due to productivity gains and higher volumes.


Table of Contents

Liquidity & Capital Resources
Information related to the company's liquidity and capital resources can be found on page 28 of the company's 2013 Annual Report. Discussion below provides the updates to this information for the three months ended March 31, 2014.
(Dollars in millions) March 31, 2014 December 31, 2013 Cash, cash equivalents and marketable securities $ 3,849 $ 9,086 Total debt 11,317 12,462

Total debt at March 31, 2014 was $11.3 billion, a decrease of $1.1 billion from $12.5 billion at December 31, 2013. The decrease was primarily due to debt maturities during the three months ended March 31, 2014.

Summary of Cash Flows
Cash used for operating activities was $2.4 billion for the three months ended March 31, 2014 compared to cash used for operating activities of $2.7 billion during the same period last year. The $0.3 billion change was primarily due to lower year-over-year income tax payments.

The change in other operating charges and credits - net for the three months ended March 31, 2014 totaled $0.3 billion, an increase of $0.3 billion from the same period last year. The increase is due to year-over-year changes in fair value of derivative instruments and absence of costs associated with the sale of the Performance Coatings business in 2013. Other operating charges and credits - net primarily consists of expenses related to pension plans as well as reclassifications of items whose cash effects are investing or financing activities.

Cash used for investing activities was $0.2 billion for the three months ended March 31, 2014 compared to cash provided by investing activities of $4.6 billion for the same period last year. The $4.8 billion change was primarily due to the proceeds received from the sale of the Performance Coatings business in 2013.

Purchases of property, plant and equipment for the three months ended March 31, 2014 totaled $0.3 billion, about the same as last year.

Cash used for financing activities was $2.5 billion for the three months ended March 31, 2014 compared to cash provided by financing activities of $0.3 billion for the same period last year. The $2.8 billion decrease was due primarily to a decrease in borrowings in 2014 versus an increase in 2013.

Dividends paid to shareholders during the three months ended March 31, 2014 totaled $0.4 billion. In January 2014, the Board of Directors declared a first quarter common stock dividend of $0.45 per share. This dividend is the same as what was paid in the fourth quarter 2013. With the first quarter dividend, the company has paid quarterly consecutive dividends since the company's first dividend in the fourth quarter 1904.

In January 2014, the company's Board of Directors authorized a $5 billion share buyback plan that replaced the 2011 plan. The company expects to repurchase $2 billion in 2014 with the remainder to be repurchased over time. There is no required completion date for purchases under the 2014 plan. In February 2014, the company entered into a $1 billion accelerated share repurchase (ASR) agreement with a financial institution and received and retired an initial delivery of 12.5 million shares, which represents 80 percent of the $1 billion notional amount of the ASR agreement. This ASR will be completed in the second quarter 2014. See Part II, Item 2 and Note 9 to the interim Consolidated Financial Statements for additional information regarding the ASR. In February 2014, the company also repurchased 1.0 million shares in the open market at an average price of $61.32 per share for a total of $61 million. These shares were retired upon repurchase.

In December 2012, the company's Board of Directors authorized a $1 billion share buyback plan. In February 2013, the company entered into an accelerated share repurchase (ASR) agreement with a financial institution under which the company used $1 billion of the proceeds from the sale of Performance Coatings for the purchase of shares of common stock. The 2012 $1 billion share buyback plan was completed in the second quarter 2013 through the ASR agreement, under which the company purchased and retired 20.4 million shares. See Note 9 to the interim Consolidated Financial Statements for additional information.

Guarantees and Off-Balance Sheet Arrangements For detailed information related to Guarantees, Indemnifications, and Obligations for Equity Affiliates and Others, see page 33 of the company's 2013 Annual Report, and Note 8 to the interim Consolidated Financial Statements.


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Contractual Obligations
Information related to the company's contractual obligations at December 31, 2013 can be found on page 33 of the company's 2013 Annual Report. The company's long-term debt obligations at March 31, 2014 decreased by $1.3 billion versus prior year-end primarily due to $1.2 billion of debt principal maturities.

PFOA
See discussion under "PFOA" on page 37 of the company's 2013 Annual Report and Note 8 to the interim Consolidated Financial Statements.

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