EIDP, Inc.: Form 10-Q for the period ended Mar 31, 2015

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, timing of anticipated benefits from restructuring actions, 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, fluctuations in currency rates, interest rates and commodity prices;
• Ability to appropriately respond to market acceptance, government rules, regulations and policies affecting products based on biotechnology;
• 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 discover, develop and protect new technologies 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 the 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 of the company's 2014 Annual Report.

Recent Developments

Separation of Performance Chemicals

In October 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. In April 2015, an amendment to the Form 10 registration statement related to the spin-off will be filed with the SEC. The amended Form 10 will include financial information for the year ended December 31, 2014 and certain pro forma information for the new public company to be created upon completion of the pending separation of DuPont's Performance Chemicals segment. The new public company will be named The Chemours Company (Chemours). The company expects to complete the separation on July 1, 2015, subject to final approval from DuPont's Board of Directors.

As part of the separation, DuPont incurred $81 million and $16 million in transaction costs, which were recorded in other operating charges in the interim Consolidated Income Statements for the three months ended March 31, 2015 and 2014, respectively. The company expects to incur total costs related to the separation in 2015 estimated at about $350 million. These transaction costs primarily relate to professional fees associated with preparation of regulatory filings and separation activities within finance, legal and information system functions.

The company expects to receive dividend proceeds from Chemours prior to separation, the payment of which is anticipated to be financed by debt obtained by Chemours in the second quarter of 2015. DuPont anticipates receiving total dividend proceeds of approximately $4 billion, pending the final credit ratings and underlying business conditions for Chemours. DuPont intends to return an amount equal to all or substantially all of this Chemours dividend to DuPont shareholders via share repurchases over the 12 to 18 month period following the separation, with a portion to be returned in 2015.

As a result of the separation of its Performance Chemicals segment, coupled with the company’s redesign initiative, the functional currency at certain of the company’s foreign entities is being re-evaluated which, in some cases, resulted in a change in the foreign entities’ functional currency.

Redesign Initiative

In June 2014, DuPont announced its global, multi-year initiative to redesign its global organization and operating model to reduce costs and improve productivity and agility across all businesses and functions. DuPont commenced a restructuring plan to realign and rebalance staff function support, enhance operational efficiency, and to reduce residual costs associated with the separation of its Performance Chemicals segment. The Company continues to make significant progress in this effort with total cost savings expected to increase to $0.40 per share for 2015. The Company expects to yield savings of approximately $1 billion on a run-rate basis by the fourth quarter of 2015 and $1.3 billion by 2017.

Results of Operations

Overview

The following is a summary of the results of operations for the three months ended March 31, 2015:

• Net Sales were $9.2 billion, versus $10.1 billion in the same period prior year, a 9 percent decline primarily attributable to a 6 percent negative impact from currency and the absence of sales from portfolio changes in the prior year.
• Total segment pre-tax operating income (PTOI) of $1,941 million was $307 million or 14 percent below last year, reflecting a negative currency impact of about $300 million and a decline in Agriculture and Performance Chemicals PTOI. The company expects the previously estimated negative currency impact to increase from about $0.60 to $0.80, largely impacting the Agriculture segment in the first half of the year. The company is working aggresively to mitigate the stronger currency headwinds including the increased cost savings from the operational redesign and other corporate and business actions.
• Net Income was $1,035 million, 28 percent below the same period last year primarily reflecting lower segment PTOI and higher income taxes.
• Cost savings from the strategic redesign of the company’s operating model improved earnings $0.10 per share versus the first quarter prior year. The Company continues to make significant progress in this effort with total cost savings expected to increase to $0.40 per share for 2015.

Net Sales

Net sales for the first quarter were $9.2 billion versus $10.1 billion in the prior year, principally attributable to a 6 percent negative currency impact, largely from a weakness in the Euro, Russian ruble, Brazilian real and eastern European currencies; a 2 percent impact from the absence of sales from portfolio changes; and 1 percent lower volume. Local prices and product mix were flat as higher prices in Agriculture were offset by lower prices in the other segments. Volume reflects declines in Agriculture and Performance Chemicals, partly offset by increases in Performance Materials, Safety & Protection, Nutrition & Health and Industrial Biosciences. Total company sales in developing markets were $2.6 billion, down 15 percent, reflecting a 10 percent negative currency impact and 5 percent lower volume. Developing markets include China, India and countries located in Latin America, Eastern and Central Europe, Middle East, Africa and Southeast Asia.

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

Other Income, Net

Other income, net, totaled $198 million for the first quarter 2015, an increase of $181 million compared to $17 million in the prior year primarily due to pretax exchange gains on foreign exchange contracts, gains on litigation agreement and sale of assets. The most significant component of the increase in other income was an increase in pre-tax exchange gains, which was driven by gains on foreign currency contracts due to strengthening of the U.S. dollar versus global currencies partially offset by losses on the related foreign currency-denominated monetary assets and liabilities. See Notes 4 and 11 to the interim Consolidated Financial Statements for further discussion of the company's policy of hedging the foreign currency-denominated monetary assets and liabilities.

Additional information related to the company's other income, net, is included in Note 4 to the interim Consolidated Financial Statements.

Cost of Goods Sold (COGS)

COGS totaled $5.6 billion in the first quarter 2015 versus $6.0 billion in the prior year, a 7 percent decrease, principally due to the currency impact of a stronger U.S. dollar and divestitures. COGS as a percent of net sales increased to 61 percent from 59 percent last year primarily reflecting currency impact which decreased sales by 6 percent and COGS by 3 percent.

Other Operating Charges

Other operating charges were $283 million in the first quarter 2015, essentially flat versus $286 million in the prior year, as increased separation transaction costs were offset by insurance recoveries, the stronger U.S. dollar and decreased costs from portfolio changes.

Selling, General and Administrative Expenses (SG&A)

SG&A totaled $1.3 billion for the first quarter 2015 versus $1.4 billion in the prior year. The decrease was primarily due to savings from the company's operational redesign initiative and lower sales commissions. SG&A was 14 percent of net sales for the three months ended March 31, 2015 and 2014.

Research and Development Expense (R&D)

R&D totaled $499 million and $518 million for the first quarter 2015 and 2014, respectively. The decrease was primarily due to lower spending and the impact of currency. R&D was 5 percent of net sales for the first quarter 2015 and 2014.

Interest Expense

Interest expense totaled $84 million in the first quarter 2015, compared to $103 million in 2014. The decrease was primarily due to lower average borrowings.

Employee Separation / Asset Related Charges, Net

Employee separation / asset related charges, net totaled $38 million in the first quarter 2015. During first quarter of 2015, a $38 million pre-tax impairment charge was recorded in employee separation / asset related charges, net within the Other segment. See Note 3 to the interim Consolidated Financial Statements for additional information.

Provision for Income Taxes

The company's effective tax rate for the first quarter 2015 was 35.4 percent as compared to 19.8 percent in 2014. The increase in the effective tax rate is driven by the hedging program gains which are largely taxable in the U.S., where as the offsetting exchange losses on the re-measurement of the net monetary asset positions are often not tax deductible in their local jurisdictions. In addition transaction costs related to the Performance Chemicals segment, the Ukraine hryvnia re-measurement and geographic mix of earnings also contributed to the increase in the effective tax rate.

See Note 5 to the interim Consolidated Financial Statements for additional information.

Recent Accounting Pronouncements

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

Segment Reviews

Summarized below are comments on individual segment sales and PTOI for the three month period ended March 31, 2015 compared with the same period in 2014. Segment PTOI is defined as income (loss) 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 based on local price unless otherwise specified. A reconciliation of segment sales to consolidated net sales and segment PTOI to income before income taxes for the three month periods ended March 31, 2015 and 2014 is included in Note 13 to the interim Consolidated Financial Statements.

Viton® fluoroelastomer products (Viton®) will be included in the Performance Chemicals separation and therefore the results are reported within Performance Chemicals. Viton® was previously reported within Performance Materials. Reclassifications of prior year data have been made to conform to current year classifications.

The following table summarizes first quarter 2015 segment sales and related variances versus prior year:

Agriculture - First quarter 2015 segment sales of $3,937 million decreased $457 million, or 10 percent, driven by the negative impact of currency and decreased volumes, partially offset by increases in pricing due to improved mix of Pioneer’s new corn hybrids and soybean varieties, and pricing actions in Europe and Asia to mitigate the impact of a stronger dollar. Decreased volumes are due to expected reductions in global corn planted area, lower insecticide demand in Latin America due to reduced insect pressure and timing of seed shipments.

The first quarter 2015 PTOI of $1,174 million decreased $268 million, or 19 percent, driven by the negative impact of currency and lower sales, partially offset by productivity improvements, disciplined cost actions and insurance recoveries of $35 million for recovery of costs for customer claims related to the use of the Imprelis® herbicide. In addition, the insect control business has been impacted by the shutdown of the LaPorte manufacturing facility in Texas resulting in a shortfall in the supply of methomyl and oxamyl.

Electronics & Communications - First quarter 2015 segment sales of $521 million decreased $59 million, or 10 percent, as volume growth in consumer electronics was more than offset by pass-through of lower metals prices, competitive pressures impacting Solamet® paste and the negative impact of currency. PTOI of $85 million increased $10 million, or 13 percent, driven by increased demand in consumer electronics and productivity gains which were partially offset by the above mentioned competitive pressures and negative impact of currency.

Industrial Biosciences - First quarter 2015 segment sales of $285 million decreased $16 million, or 5 percent, driven by the negative impact of currency, partially offset by increased volumes. Increased enzyme demand, principally in food markets, was mostly offset by lower biomaterial sales. PTOI of $56 million was even with prior year as the above decrease in sales was offset by improved product mix and lower input costs.

Nutrition & Health - First quarter 2015 segment sales of $813 million decreased $48 million, or 6 percent, driven by an 8 percent negative impact of currency partially offset by volume growth. Volume growth in probiotics, cultures and texturants was partially offset by lower volumes in specialty proteins. PTOI of $89 million decreased $4 million, or 4 percent, as volume gains and improved product mix were more than offset by the negative impact of currency.

Performance Chemicals - First quarter 2015 segment sales of $1,364 million decreased $227 million, or 14 percent, and PTOI of $129 million decreased $77 million, or 37 percent, driven by lower prices and volumes for titanium dioxide, the negative impact of currency and the impact of portfolio changes.

Performance Materials - First quarter 2015 segment sales of $1,411 million decreased $123 million, or 8 percent, driven by the portfolio changes from the sale of Glass Laminating Solutions/Vinyls, the negative impact of currency and decreased ethylene pricing. Partially offsetting the declines are increased volumes of ethylene and increased demand in automotive markets primarily in North America and Asia Pacific. Prior year ethylene sales were constrained in advance of a scheduled outage at the Orange, Texas ethylene unit. PTOI of $327 million increased $34 million, or 12 percent, driven by volume growth for ethylene and improved product mix, partially offset by lower ethylene prices and the negative impact of currency.

Safety & Protection - First quarter 2015 segment sales of $909 million decreased 4 percent due to 6 percent volume growth driven by increased demand for Tyvek® protective material, Kevlar® high strength materials and Nomex® thermal resistant fiber, which was more than offset by the negative impact of currency as well as the portfolio impact of the Sontara® divestiture. PTOI of $184 million increased $9 million, or 5 percent, primarily due to volume growth and productivity improvements partially offset by the negative impact of currency. A benefit in connection with the advancement of an ongoing claim was partially offset by higher costs associated with lower plant utilization at the Chambers Works facility in New Jersey.

Liquidity & Capital Resources

Information related to the company's liquidity and capital resources can be found in the company's 2014 Annual Report, Part II, Item 7. Managment's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources. Discussion below provides the updates to this information for the three months ended March 31, 2015.

(Dollars in millions)

Total debt as of March 31, 2015 was $10.4 billion, a decrease of $0.3 billion from $10.7 billion as of December 31, 2014. The decrease was primarily due to the repayment of long-term debt, partially offset by an increase in commercial paper.

The company's cash, cash equivalents and marketable securities at March 31, 2015 and December 31, 2014 are $3.7 billion and $7.0 billion, respectively. The decrease was primarily due to cash used to fund seasonal working capital needs.

Summary of Cash Flows

Cash used for operating activities was $2.1 billion for the three months ended March 31, 2015 compared to $2.4 billion during the same period last year. The $0.3 billion change was primarily due to lower year-over-year increases in working capital, coupled with lower earnings, and the negative currency impact that offsets cash provided by foreign currency exchange contract settlements is included in investing activities.

Cash used for investing activities was $0.1 billion for the three months ended March 31, 2015 compared to $0.2 billion for the same period last year. The $0.1 billion change was primarily due to cash provided by foreign currency exchange contract settlements offset by an adjustment to properly reflect purchases of property, plant and equipment on a cash basis. The impact of the adjustment was not material to prior periods.

Cash used for financing activities was $0.9 billion for the three months ended March 31, 2015 compared to $2.5 billion for the same period last year. The $1.6 billion decrease was due primarily to an increase in short-term borrowings and lower common stock repurchases offset with higher long-term debt repayments.

Dividends paid to shareholders during the three months ended March 31, 2015 totaled $0.4 billion. In January 2015, the Board of Directors declared a first quarter common stock dividend of $0.47 per share. In April 2015, the Board of Directors declared a second quarter common stock dividend of $0.49 per share, a four percent increase over the January 2015 dividend. With the first and second quarter dividends, the company has paid quarterly consecutive dividends since the company’s first dividend in the fourth quarter 1904. DuPont expects that the sum of DuPont’s and Chemours’ aggregate third quarter dividend will be equivalent to DuPont’s aggregate quarterly dividend immediately prior to separation. Chemours expects to declare a quarterly dividend in the aggregate amount of $100 million in total for the third quarter 2015.

In January 2014, the company's Board of Directors authorized a $5 billion share buyback plan. In March 2015, the company purchased and retired 3.6 million shares in the open market which offset the dilution from employee compensation plans in the first quarter 2015. As of March 31, 2015, the company has purchased 33.7 million shares at a total cost of $2.3 billion under the plan. There is no required completion date for the remaining stock purchases.

The company expects to receive dividend proceeds from Chemours prior to separation, the payment of which is anticipated to be financed by debt obtained by Chemours in the second quarter of 2015. DuPont anticipates receiving total dividend proceeds of approximately $4 billion, pending the final credit ratings and underlying market conditions for Chemours. DuPont intends to return an amount equal to all or substantially all of this Chemours dividend to DuPont shareholders via share repurchases over the 12 to 18 month period following the separation, with a portion to be returned in 2015.

See Part II, Item 2 and Note 10 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 the company's 2014 Annual Report, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Off- Balance Sheet Arrangements, and Note 9 to the interim Consolidated Financial Statements.

Contractual Obligations

Information related to the company's contractual obligations at December 31, 2014 can be found in the company's 2014 Annual Report, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Off-Balance Sheet Arrangements. The company's long-term debt obligations at March 31, 2015 decreased by $1.5 billion versus prior year-end primarily due to $1.4 billion of debt principal maturities.

See Note 11, “Financial Instruments”, to the interim Consolidated Financial Statements. See also Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, of the company's 2014 Annual Report for information on the company's utilization of financial instruments and an analysis of the sensitivity of these instruments.

a) Evaluation of Disclosure Controls and Procedures

The company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the company's reports filed or submitted under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.

As of March 31, 2015, the company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), together with management, conducted an evaluation of the effectiveness of the company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective.

b) Changes in Internal Control over Financial Reporting

There has been no change in the company's internal control over financial reporting that occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.

There have been no material changes in the company's risk factors discussed in Part I, Item 1A, Risk Factors, in the company's 2014 Annual Report.