2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2015 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
____________________________________________________________________________
Commission file number 1-815
E. I. DU PONT DE NEMOURS AND COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE (State or Other Jurisdiction of Incorporation or Organization) | 51-0014090 (I.R.S. Employer Identification No.) | |
974 Centre Road
Wilmington, Delaware 19805
(Address of principal executive offices)
Registrant's telephone number, including area code: 302-774-1000
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the New York Stock Exchange, Inc.):
Title of Each Class
__________________________________________________
Common Stock ($.30 par value)
Preferred Stock
(without par value-cumulative)
$4.50 Series
$3.50 Series
No securities are registered pursuant to Section 12(g) of the Act.
_____________________________________________________
Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes ý No o
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of voting stock held by nonaffiliates of the registrant (excludes outstanding shares beneficially owned by directors and officers and treasury shares) as of June 30, 2015, was approximately $57.8 billion.
As of January 29, 2016, 871,681,000 shares (excludes 87,041,000 shares of treasury stock) of the company's common stock, $0.30 par value, were outstanding.
Documents Incorporated by Reference
(Specific pages incorporated are indicated under the applicable Item herein):
Incorporated By Reference In Part No. | ||
The company's Proxy Statement in connection with the Annual Meeting of Stockholders to be held on April 27, 2016. | III | |
E. I. du Pont de Nemours and Company
Form 10-K
Table of Contents
The terms "DuPont" or the "company" as used herein refer to E. I. du Pont de Nemours and Company and its consolidated subsidiaries, or to E. I. du Pont de Nemours and Company, as the context may indicate.
Page | |||
Note on Incorporation by Reference
Information pertaining to certain Items in Part III of this report is incorporated by reference to portions of the company's definitive 2015 Annual Meeting Proxy Statement to be filed within 120 days after the end of the year covered by this Annual Report on Form 10-K, pursuant to Regulation 14A (the Proxy).
1
Part I
ITEM 1. BUSINESS
DuPont was founded in 1802 and was incorporated in Delaware in 1915. Today, DuPont is creating higher growth and higher value by extending the company’s leadership in agriculture and nutrition, strengthening and growing capabilities in advanced materials and leveraging cross-company skills to develop a world-leading bio-based industrial business. Through these strategic priorities, DuPont helps customers find solutions to capitalize on areas of growing global demand — enabling more, safer, nutritious food; creating high-performance, cost-effective and energy efficient materials for a wide range of industries; and increasingly delivering renewably sourced bio-based materials and fuels. Total worldwide employment at December 31, 2015 was about 52,000 people. The company has operations in about 90 countries worldwide and 60 percent of consolidated net sales are made to customers outside the United States of America (U.S.). See Note 21 to the Consolidated Financial Statements for additional details on the location of the company's sales and property.
Subsidiaries and affiliates of DuPont conduct manufacturing, seed production or selling activities and some are distributors of products manufactured by the company. As a science and technology based company, DuPont competes on a variety of factors such as product quality and performance or specifications, continuity of supply, price, customer service and breadth of product line, depending on the characteristics of the particular market involved and the product or service provided. Most products are marketed primarily through the company's sales force, although in some regions, more emphasis is placed on sales through distributors. The company utilizes numerous suppliers as well as internal sources to supply a wide range of raw materials, energy, supplies, services and equipment. To ensure availability, the company maintains multiple sources for fuels and many raw materials, including hydrocarbon feedstocks. Large volume purchases are generally procured under competitively priced supply contracts.
DuPont Dow Merger of Equals
On December 11, 2015, DuPont and The Dow Chemical Company (Dow) announced entry into an Agreement and Plan of Merger (the Merger Agreement), under which the companies will combine in an all-stock merger of equals. The merger transaction is expected to close and become effective (the Effective Time) in the second half of 2016, subject to customary closing conditions, including regulatory approvals and approvals by both DuPont and Dow shareholders. The combined company will be named DowDuPont.
DuPont and Dow intend to pursue, subject to the receipt of approval by the board of directors of DowDuPont, the separation of the combined company’s agriculture business, specialty products business and material science business through a series of one or more tax-efficient transactions (collectively, the Business Separations.)
Subject to the terms and conditions of the Merger Agreement, each share of common stock, par value $0.30 per share, of DuPont (DuPont Common Stock) issued and outstanding immediately prior to the Effective Time, excluding any shares of DuPont Common Stock that are held in treasury, will be converted into the right to receive 1.2820 shares of common stock, par value $0.01 per share, of DowDuPont (DowDuPont Common Stock), for each share of DuPont Common Stock with cash in lieu of any fractional share of DowDuPont. Each share of DuPont Preferred Stock-$4.50 Series and DuPont Preferred Stock-$3.50 Series, in each case issued and outstanding immediately prior to the Effective Time, shall remain issued and outstanding and be unaffected by the merger.
Subject to the terms and conditions set forth in the Merger Agreement, at the Effective Time, each share of common stock, par value $2.50 per share, of Dow (the Dow Common Stock) issued and outstanding immediately prior to the Effective Time, excluding any shares of Dow Common Stock that are held in treasury, will be converted into the right to receive one share of DowDuPont Common Stock and each share of Cumulative Convertible Perpetual Preferred Stock, Series A, par value $1.00 per share, of Dow (the Dow Preferred) issued and outstanding immediately prior to the Effective Time will be automatically canceled and each holder of shares of Dow Preferred will be deemed to hold the same number of shares of preferred stock of DowDuPont on equivalent terms.
See the discussion entitled Dow DuPont Merger of Equals Part I, Item 1A, Risk Factors, and Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 2 to the Consolidated Financial Statements for further details and a discussion of some of the risks related to the transaction. Additional information about the Merger Agreement is set forth in the company's Current Report on Form 8-K filed with the SEC on December 11, 2015.
2
Part I
ITEM 1. BUSINESS, continued
Spin-off of Performance Chemicals
On July 1, 2015, DuPont completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (Chemours). In accordance with generally accepted accounting principles in the U.S. (GAAP), the financial position and results of operations of the Performance Chemicals segment are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Additional details related to the separation can be found in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 24 of this report and Note 3 to the Consolidated Financial Statements.
Productivity and Cost Savings Initiatives
On December 11, 2015, DuPont announced a 2016 global cost savings and restructuring plan designed to reduce $730 million in costs in 2016 compared with 2015, which represents a reduction of operating costs on a run-rate basis of about $1.0 billion by end of 2016. As part of the plan, the company committed to take structural actions across all businesses and staff functions globally to operate more efficiently by further consolidating businesses and aligning staff functions more closely with them. In connection with the restructuring actions, the company recorded a pre-tax charge to earnings of $798 million in the fourth quarter 2015, comprised of $656 million of severance and related benefit costs, $109 million of asset related charges, and $33 million of contract termination costs. Additional details related to this plan can be found in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 23 of this report and Note 4 to the Consolidated Financial Statements.
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. As a result, during the years ended December 31, 2015 and 2014, pre-tax (benefits) charges of $(21) million and $541 million, respectively, were recorded. Additional details related to this plan can be found in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 24 of this report and Note 4 to the Consolidated Financial Statements.
Business Segments
The company consists of 10 businesses which are aggregated into 6 reportable segments based on similar economic characteristics, the nature of the products and production processes, end-use markets, channels of distribution and regulatory environment. The company's reportable segments are Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials and Safety & Protection. The company includes certain businesses not included in the reportable segments, such as pre-commercial programs, nonaligned businesses and pharmaceuticals in Other. Additional information with respect to business segment results is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 30 of this report and Note 22 to the Consolidated Financial Statements.
In November 2015, DuPont announced the consolidation of the DuPont Packaging & Industrial Polymers business with the DuPont Performance Polymers business within the Performance Materials segment, as well as the consolidation of the DuPont Protection Technologies business with the DuPont Building Innovations business within the Safety & Protection segment. Both consolidations will be effective on January 1, 2016. The consolidations will create greater efficiency and enhanced capabilities in the two segments where these businesses operate, the Performance Materials segment and the Safety & Protection segment, respectively. These changes will not result in a change in reportable segments.
DuPont Sustainable Solutions, within the company's Safety & Protection segment, is comprised of two business units: clean technologies and consulting solutions. Effective January 1, 2016, the clean technologies business unit will become part of the Industrial Biosciences segment with the focus on working with customers to improve the performance, productivity and sustainability of their products and processes. The company will explore a range of options to maximize the growth of the consulting solutions business unit which effective January 1, 2016 will be reported within Other. Sustainable solutions net sales accounted for about 2 percent of the company's total consolidated net sales for the years ended December 31, 2015, 2014 and 2013, respectively.
3
Part I
ITEM 1. BUSINESS, continued
Agriculture
Agriculture businesses, DuPont Pioneer (Pioneer) and DuPont Crop Protection (Crop Protection), leverage the company's technology, customer relationships and industry knowledge to improve the quantity, quality and safety of the global food supply and the global production agriculture industry. Land available for worldwide agricultural production is increasingly limited so production growth will need to be achieved principally through improving crop yields and productivity rather than through increases in planted area. The segment's businesses deliver a broad portfolio of products and services that are specifically targeted to achieve gains in crop yields and productivity, including Pioneer® brand seed products and well-established brands of insecticides, fungicides and herbicides. Research and development focuses on leveraging technology to increase grower productivity and to enhance the value of grains and oilseeds through improved seed traits, superior seed germplasm and effective use of insecticides, herbicides and fungicides. Agriculture accounted for approximately 55 percent of the company's total research and development expense in 2015.
Sales of the company's products in this segment are affected by the seasonality of global agriculture markets and weather patterns. Sales and earnings performance in the Agriculture segment are significantly stronger in the first versus second half of the year reflecting the northern hemisphere planting season. As a result of the seasonal nature of its business, Agriculture's inventory is at its highest level at the end of the calendar year and is sold down in the first and second quarters. Trade receivables in the Agriculture segment are at a low point at year-end and increase through the northern hemisphere selling season to peak at the end of the second quarter.
Pioneer is a world leader in developing, producing and marketing corn hybrids and soybean varieties which improve the productivity and profitability of its customers. Additionally, Pioneer develops, produces and markets canola, sunflower, sorghum, inoculants, wheat and rice. As the world's population grows and the middle class expands, the need for crops for animal feed, food, biofuels and industrial uses continues to increase. The business competes with other seed and plant biotechnology companies. Pioneer seed sales amounted to 27 percent, 27 percent and 28 percent of the company's total consolidated net sales for the years ended December 31, 2015, 2014 and 2013, respectively.
Pioneer's research and development focuses on integrating high yielding germplasm with value added proprietary and/or licensed native and biotechnology traits with local environment and service expertise. Pioneer uniquely develops integrated products for specific regional application based on local product advancement and testing of the product concepts. Research and development in this arena requires long-term commitment of resources, extensive regulatory efforts and collaborations, partnerships and business arrangements to successfully bring products to market. To protect its investment, the business employs the use of patents covering germplasm and native and biotechnology traits in accordance with country laws. Pioneer holds multiple long-term biotechnology trait licenses from third parties as a normal course of business. The biotechnology traits licensed by Pioneer from third parties are contained in a variety of Pioneer crops, including corn hybrids and soybean varieties. The majority of Pioneer’s corn hybrids and soybean varieties sold to customers contain biotechnology traits licensed from third parties under these long term licenses.
Pioneer is actively pursuing the development of innovations for corn hybrids, soybean varieties, canola, sunflower, wheat and rice based on market assessments of the most valuable opportunities. In corn seeds, programs include innovations for drought and nitrogen efficiency and insect protection. In soybean seeds, programs include products with enhanced end-use value and insect protection.
Pioneer has seed production facilities located throughout the world. Seed production is performed directly by the business or contracted with independent growers and conditioners. Pioneer's ability to produce seeds primarily depends upon weather conditions and availability of reliable contract growers.
Pioneer markets and sells seed product primarily under the Pioneer® brand but also sells and distributes products utilizing additional brand names. Pioneer promotes its products through multiple marketing channels around the world. In the corn and soybean markets of the U.S. Corn Belt, Pioneer® brand products are sold primarily through a specialized force of independent sales representatives. Outside of North America, Pioneer's products are marketed through a network of subsidiaries, joint ventures and independent producer-distributors.
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Part I
ITEM 1. BUSINESS, continued
Crop Protection serves the global production agriculture industry with crop protection products for field crops such as wheat, corn, soybean and rice and specialty crops such as fruit, nut, vine and vegetables. Principle crop protection products are weed control, disease control and insect control offerings for foliar application or as a seed treatment. Crop Protection products are marketed and sold to growers and other end users through a network of wholesale distributors and crop input retailers. Sales for the business' insect control portfolio is led by DuPontTM Rynaxypyr® insecticide, a product that is used across a broad range of core agricultural crops.
The major commodities, raw materials and supplies for the Agriculture segment include: benzene derivatives, other aromatics and carbamic acid related intermediates, corn and soybean seeds, insect control products, natural gas and seed treatments.
Agriculture net sales outside the U.S. accounted for 50 percent of the segment's total sales in 2015.
Electronics & Communications
Electronics & Communications (E&C) is a leading supplier of differentiated materials and systems for photovoltaics (PV), consumer electronics, displays and advanced printing that enable superior performance and lower total cost of ownership for customers. The segment leverages the company's strong materials and technology base to target attractive growth opportunities in PV materials, circuit and semiconductor fabrication and packaging materials, display materials, packaging graphics, and ink-jet printing. In the growing PV market, E&C continues to be an industry-leading innovator and supplier of metallization pastes and backsheet materials that improve the efficiency and lifetime of solar cells and solar modules. Solar modules, which are made up of solar cells and other materials, are installed to generate power. DuPont is a leading global supplier of materials to the PV industry.
In the consumer electronics markets, E&C materials add value across multiple devices, with growth driven largely by smart phones and tablets. The segment has a portfolio of materials for semiconductor fabrication and packaging, as well as innovative materials for circuit applications, to address critical needs of electronic component and device manufacturers. In packaging graphics, E&C is a leading supplier of flexographic printing systems, including Cyrel® photopolymer plates and platemaking systems. The segment is investing in new products to strengthen its market leadership position in advanced printing markets. The segment supplies pigmented inks used in digital printing applications for commercial and home office use. In the displays market, E&C has developed solution-process technology, which it licenses, and a growing range of materials for active matrix organic light emitting diode (AMOLED) television displays.
The major commodities, raw materials and supplies for E&C include: acrylic monomers, acetoxystyrene monomer, black and color pigments, styrenic block copolymers, color dyes, copper foil, difluoroethane, diglycolamine, DMAC, hydroxylamine, monomers and polymer resins, oxydianiline, polyester film, polymer films, precious metals and pyromellitic dianhydride.
E&C net sales outside the U.S. accounted for 80 percent of the segment's total sales in 2015.
Industrial Biosciences
Industrial Biosciences is a leader in developing and manufacturing a broad portfolio of bio-based products. The segment's enzymes add value and functionality to processes and products across a broad range of markets such as animal nutrition, detergents, food manufacturing, ethanol production and industrial applications. The result is cost and process benefits, better product performance and improved environmental outcomes. Industrial Biosciences also makes DuPontTM Sorona® PTT renewably sourced polymer for use in carpet and apparel fibers.
The segment includes a joint venture with Tate & Lyle PLC, DuPont Tate & Lyle Bio Products Company, LLC, to produce BioPDOTM 1,3 propanediol using a proprietary fermentation and purification process. BioPDOTM is the key building block for DuPontTM Sorona® PTT polymer.
The major commodities, raw materials and supplies for the Industrial Biosciences segment include: terephthalic acid, processed grains (including dextrose and glucose), and glycols.
Industrial Biosciences net sales outside the U.S. accounted for 57 percent of the segment's total sales in 2015.
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Part I
ITEM 1. BUSINESS, continued
Nutrition & Health
Nutrition & Health offers a wide range of sustainable, bio-based ingredients and advanced molecular diagnostic solutions, providing innovative solutions for specialty food ingredients, food nutrition, health and safety. The segment's product solutions include the wide-range of DuPont™ Danisco® food ingredients such as cultures and probiotics, notably Howaru®, emulsifiers, texturants, natural sweeteners such as Xivia® and Supro®soy-based food ingredients. These ingredients hold leading market positions based on industry leading innovation, knowledge and experience, relevant product portfolios and close-partnering with the world's food manufacturers. Nutrition & Health serves various end markets within the food industry including dairy, bakery, meat and beverage segments. Nutrition & Health has research, production and distribution operations around the world.
Nutrition & Health products are marketed and sold under a variety of brand names and are distributed primarily through its direct route to market. The direct route to market focuses on strong customer collaborations and insights with multinational customers and regional customers alike.
The major commodities, raw materials and supplies for the Nutrition & Health segment include: cellulose, gelatin, glycerol, guar, organic oils, peels, saccharides, seaweed, soybeans, sugars and yeasts.
Nutrition & Health net sales outside the U.S. accounted for 66 percent of the segment's total sales in 2015.
Performance Materials
DuPont Performance Materials (Performance Materials) includes DuPont Performance Polymers (Performance Polymers) and DuPont Packaging & Industrial Polymers (Packaging & Industrial Polymers) and provides its customers with innovative polymer science solutions and expert application development assistance to enhance the performance, reduce the total system cost and optimize the sustainability of their products. Solutions include productive, higher performance polymers, elastomers, films, parts, and systems and solutions which improve the uniqueness, functionality and profitability of its customers' offerings. Key market segments include automotive and transportation, packaging for food and beverages, electrical/electronic components, material handling, healthcare, construction, semiconductor and aerospace. The segment has several large customers, primarily in the motor vehicle OEM industry supply chain. The company has long-standing relationships with these customers and they are considered to be important to the segment's operating results.
Performance Materials product portfolio includes elastomers and thermoplastic and thermoset engineering polymers which are used by customers to fabricate components for mechanical, chemical and electrical systems. The main products include: DuPontTM Zytel® long chain polymers, Zytel® HTN nylon resins, Zytel® nylon resins, Crastin® PBT polymer resins, Rynite® polymer resins, Delrin® acetal resins, Hytrel® polyester thermoplastic elastomer resins, Vespel® parts and shapes, Vamac® ethylene acrylic elastomer and Kalrez® perfluoroelastomer.
Performance Materials also specializes in resins and films used in packaging and industrial polymer applications, sealants and adhesives and sporting goods. Key brands include: DuPontTM Surlyn® ionomer resins, Bynel® coextrudable adhesive resins, Elvax® EVA resins, Nucrel® Elvaloy®polymer modifiers and Elvaloy® copolymer resins. Performance Materials product portfolio also includes the DuPont Teijin Films joint venture, whose primary products are Mylar® and Melinex® polyester films.
In November 2013, DuPont entered into a definitive agreement to sell Glass Laminating Solutions/Vinyls (GLS/Vinyls), a part of Packaging & Industrial Polymers, to Kuraray Co. Ltd. In June 2014, the sale was completed which resulted in a pre-tax gain of $391 million ($273 million net of tax). The gain was recorded in other income, net in the company's Consolidated Income Statements for the year ended December 31, 2014. GLS/Vinyls specializes in interlayers for laminated safety glass and its key brands include SentryGlas® and Butacite® laminate interlayers.
The major commodities, raw materials and supplies for the Performance Materials segment include: acetic acid, acrylic monomers, adipic acid, butanediol, dimethyl terephthalate, dodecanedioic acid, ethane, fiberglass, hexamethylene diamine, methanol, methacrylic acid, methylacrylate, natural gas, paraxylene, perfluoromethylvinyl ether, polytetramethylene glycol, polyethylene, polyolefin resin,purified terephthalic acid, and vinyl acetate monomer.
Performance Materials net sales outside the U.S. accounted for 69 percent of the segment's total sales in 2015.
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Part I
ITEM 1. BUSINESS, continued
Safety & Protection
Safety & Protection businesses, DuPont Protection Technologies (Protection Technologies), DuPont Building Innovations (Building Innovations) and DuPont Sustainable Solutions (Sustainable Solutions), satisfy the growing global needs of businesses, governments and consumers for solutions that make life safer, healthier and more secure. By uniting market-driven science with the strength of highly regarded brands, the segment delivers products and services to a large number of markets, including construction, transportation, communications, industrial chemicals, oil and gas, electric utilities, automotive, manufacturing, defense, homeland security and safety consulting.
Protection Technologies is focused on scientifically engineered products and systems to protect people and the environment. With highly recognized brands like DuPont™ Kevlar® high strength material, Nomex® thermal resistant material and Tyvek® protective material, the business has a broad portfolio with strong positions in many diverse global markets which include: aerospace, life protection, automotive, energy, personal protection, medical, graphics, packaging and other industrial markets.
Building Innovations is committed to the science behind increasing the performance of building systems, helping reduce operating costs and creating more sustainable structures. The business is a market leader of solid surfaces through its DuPontTM Corian® and Montelli® lines of products which offer durable and versatile materials for residential and commercial purposes. DuPont™ Tyvek® offers industry leading solutions for the protection and energy efficiency of buildings and the business also offers Geotextiles for Professional Landscaping applications.
Sustainable Solutions continues to help organizations worldwide reduce workplace injuries and fatalities while improving operating costs, productivity and quality. Sustainable Solutions is a leader in the safety consulting field, selling training products, as well as consulting services. Additionally, Sustainable Solutions is dedicated to clean air, clean fuel and clean water with offerings that help reduce sulfur and other emissions, formulate cleaner fuels, or dispose of liquid waste. Its goal is to help maintain business continuity and environmental compliance for companies in the refining and petrochemical industries, as well as for government entities. In addition, the business is a leading global provider of process technology, proprietary specialty equipment and technical services to the sulfuric acid industry.
The major commodities, raw materials and supplies for the Safety & Protection segment include: alumina trihydrate, benzene, high density polyethylene, isophthaloyl chloride, metaphenylenediamine, methyl methacrylate, paraphenylenediamine, polyester resin, terephthaloyl chloride and quartz.
Safety & Protection net sales outside the U.S. accounted for 59 percent of the segment's total sales in 2015.
Backlog
In general, the company does not manufacture its products against a backlog of orders and does not consider backlog to be a significant indicator of the level of future sales activity. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, the company believes that backlog information is not material to understanding its overall business and should not be considered a reliable indicator of the company's ability to achieve any particular level of revenue or financial performance.
Intellectual Property
As a science and technology based company, DuPont believes that securing intellectual property is an important part of protecting its research. Some DuPont businesses operate in environments in which the availability and protection of intellectual property rights affect competition. (Information on the importance of intellectual property rights to Pioneer is included in Item 1 Agriculture business discussion beginning on page 4 of this report.)
Trade secrets are an important element of the company's intellectual property. Many of the processes used to make DuPont products are kept as trade secrets which, from time to time, may be licensed to third parties. DuPont vigilantly protects all of its intellectual property including its trade secrets. When the company discovers that its trade secrets have been unlawfully taken, it reports the matter to governmental authorities for investigation and potential criminal action, as appropriate. In addition, the company takes measures to mitigate any potential impact, which may include civil actions seeking redress, restitution and/or damages based on loss to the company and/or unjust enrichment.
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Part I
ITEM 1. BUSINESS, continued
Patents & Trademarks: DuPont continually applies for and obtains U.S. and foreign patents and has access to a large patent portfolio, both owned and licensed. DuPont’s rights under these patents and licenses, as well as the products made and sold under them, are important to the company in the aggregate. The protection afforded by these patents varies based on country, scope of individual patent coverage, as well as the availability of legal remedies in each country. This significant patent estate may be leveraged to align with the company’s strategic priorities within and across segments. At December 31, 2015, the company owned over 21,300 patents with various expiration dates over the next 20 years. In addition to its owned patents, the company owns over 12,400 patent applications.
The company owns or licenses many trademarks that have significant recognition at the consumer retail level and/or business to business level. Ownership rights in trademarks do not expire if the trademarks are continued in use and properly protected.
Research and Development
DuPont conducts research and development (R&D) programs across multiple fields including agriculture, biology, chemistry, engineering, and materials science in support of the company's strategic priorities of Agriculture & Nutrition, Bio-based Industrials, and Advanced Materials. DuPont accelerates market introductions and increases the impact of its offerings through collaboration with partners in the commercial sector (customers and value chain partners) and by working with governments, academia, and local communities around the world. DuPont’s R&D objectives are to leverage the company's unique world-class science and technology capabilities with its deep understanding of markets and value chains to drive revenue and profit growth for the company thereby delivering sustainable returns to our shareholders. DuPont's R&D investment is focused on delivering value to its customers while extending its leadership across the high-value, science-driven segments of the agriculture and food value chains, strengthening its lead as provider of differentiated, high-value advanced industrial materials, and building transformational new bio-based industrial businesses. Each business in the company undertakes R&D activities to support its objectives. In addition, the company directs R&D to support science-intensive new growth opportunities additive to the existing business portfolios. The R&D portfolio is managed by senior business and R&D leaders to ensure consistency with the corporate and business strategies and to capitalize on the application of emerging science. Additional information with respect to R&D related to Agriculture is included on page 4.
The company continues to protect its R&D investment through its intellectual property strategy. See discussion under "Intellectual Property".
Additional information with respect to R&D, including the amount incurred during each of the last three fiscal years, is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 26 of this report.
Environmental Matters
Information related to environmental matters is included in several areas of this report: (1) Environmental Proceedings beginning on page 18, (2) Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on pages 41, 46-48 and (3) Notes 1 and 16 to the Consolidated Financial Statements.
Available Information
The company is subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, the company is required to file reports and information with the Securities and Exchange Commission (SEC), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
The public may read and copy any materials the company files with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are also accessible on the company's website at http://www.dupont.com by clicking on the section labeled "Investors", then on "Filings & Reports" and then on "SEC Filings." These reports are made available, without charge, as soon as is reasonably practicable after the company files or furnishes them electronically with the SEC.
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Part I
ITEM 1. BUSINESS, continued
Executive Officers of the Registrant
Information related to the company's Executive Officers is included in Item 10, Directors, Executive Officers and Corporate Governance, beginning on page 51 of this report.
9
Part I
ITEM 1A. RISK FACTORS
Risks relating to the Mergers
As described in Item 1, Part 1 Business, on December 11, 2015, DuPont and The Dow Chemical Company (Dow) agreed, subject to the terms and conditions of the Merger Agreement, to effect a strategic combination of their respective businesses by: (i) forming Diamond-Orion HoldCo, Inc., a corporation, organized under the laws of the State of Delaware and jointly owned by DuPont and Dow (HoldCo), (ii) Dow merging with a newly formed, wholly owned direct subsidiary of HoldCo, with Dow surviving such merger as a direct wholly owned subsidiary of HoldCo (the Dow Merger), and (iii) DuPont merging with a newly formed, wholly owned direct subsidiary of HoldCo, with DuPont surviving such merger as a direct, wholly owned subsidiary of HoldCo (the DuPont Merger and, together with the Dow Merger, the Mergers). Following the consummation of the Mergers, DuPont and Dow intend to pursue, subject to the receipt of approval by the board of directors of HoldCo, the separation of the combined company’s agriculture business, specialty products business and material science business through a series of one or more tax-efficient transactions (collectively, the Business Separations).
The risk factors below should be read in conjunction with the risk factors related to the company’s operations set forth below and other information contained in this report. HoldCo will file a registration statement on Form S-4 with the SEC that will include a joint proxy statement/prospectus relating to the Mergers. DuPont urges you to read the registration statement on Form S-4 once it becomes available because it will contain important information about the Mergers, including relevant risk factors.
The consummation of the Mergers is contingent upon the satisfaction of a number of conditions, including stockholder and regulatory approvals, that are outside of DuPont’s and/or Dow’s control and that DuPont and/or Dow may be unable to obtain. The process to obtain regulatory approvals could prevent, or substantially delay, the consummation of the Mergers and DuPont cannot predict if regulators will impose additional conditions on HoldCo that may have an adverse effect on the combined company’s business or results of operations. As a result, one or more conditions to closing of the Mergers may not be satisfied and the Mergers may not be completed.
The ability to consummate the Mergers is subject to risks and uncertainties, including, but not limited to, the risks that the conditions to the Mergers are not satisfied, or if possible, waived including, among others (i) the adoption of the Merger Agreement by the stockholders of the common stock of each of DuPont and Dow; (ii) the receipt of certain domestic and foreign approvals under competition laws; (iii) DuPont and Dow reasonably determining that the DuPont Merger and the Dow Merger do not constitute an acquisition of a 50% or greater interest in DuPont and Dow, respectively, under the principles of Section 355(e) of the Internal Revenue Code; and (iv) the absence of governmental restraints or prohibitions preventing the consummation of either of the Mergers. The obligation of each of DuPont and Dow to consummate the Mergers is also conditioned on, among other things, the receipt of a tax opinion from the tax counsel as to the tax-free nature of each of the Mergers. DuPont cannot provide any assurance that the Mergers will be completed or that there will not be a delay in the completion of the Mergers. Additionally, if the Merger Agreement is terminated, DuPont may incur substantial fees in connection with the termination of the transaction and DuPont will not recognize the anticipated benefits of the Mergers. Regulatory authorities may refuse to permit the Mergers or may impose restrictions or conditions on the Mergers that may harm the combined company if the Mergers are completed. Failure to consummate the Mergers substantially as contemplated in the Merger Agreement on or before March 15, 2017 or if certain antitrust-related conditions to the closing have not been satisfied and the parties therefore elect to extend, June 15, 2017, could have a material adverse effect on the company’s stock price and results of operations.
10
Part I
ITEM 1A. RISK FACTORS, continued
There can be no assurance that the expected benefits of the Mergers, including the Business Separations, will occur or be fully or timely realized.
The success of the Mergers will depend, in part, on the combined company’s ability to successfully combine the businesses of DuPont and Dow. If the combined company is not able to successfully combine the businesses of DuPont and Dow in an efficient and effective manner, including if the intended Business Separations are delayed or ultimately not consummated, the anticipated benefits, synergies operational efficiencies and cost savings may not be realized fully or at all, or may take longer to realize than expected, and the value of common stock, the revenues, levels of expenses and results of operations of the combined company may be adversely affected.
The combination of two independent businesses is a complex, costly and time consuming process, and the management of the combined company may face significant challenges in implementing such integration, including, without limitation:
• | the diversion of management’s attention from ongoing business concerns and performance shortfalls at one or both of the companies as a result of the devotion of management’s attention to the Mergers; |
• | ongoing diversion of the attention of management from the operation of the combined company’s business as a result of the intended business separations; |
• | difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects; |
• | challenges of managing a larger combined company addressing differences in business culture and retaining key personnel; |
• | the possibility of faulty assumptions underlying expectations regarding the integration process, including with respect to the intended Business Separations; |
• | unanticipated issues in integrating information technology, communications programs, financial procedures and operations, and other systems, procedures and policies; |
• | unanticipated changes in applicable laws and regulations; |
• | managing tax costs or inefficiencies associated with integrating the operations of the combined company and the intended Business Separations; |
• | coordinating geographically separate organizations; and |
• | unforeseen expenses or delays associated with the Mergers. |
Some of these factors will be outside of the control of management and any one of them could result in increased costs and diversion of management’s time and energy, as well as decreases in the amount of expected revenues which could materially impact the company’s business, financial conditions and results of operations. Difficulties in the integration process and other disruptions resulting from the Mergers, could adversely affect the combined company’s relationships with employees, suppliers, customers, distributors, licensors, and other stakeholders and could harm the reputations of DuPont, Dow and the combined company.
If the combined company is not able to adequately address integration challenges, the combined company may be unable to integrate successfully DuPont’s and Dow’s operations, effect the intended business separations or to realize the anticipated benefits of the transactions. In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower and may take longer to achieve than anticipated.
DuPont will be subject to business uncertainties and contractual restrictions until the Mergers are consummated.
Uncertainty about the effect of the Mergers on employees, suppliers, customers, distributors, licensors and licensees as well as regulatory permits, licenses, contracts and other agreements, particularly for which the Mergers could be deemed a “change-in-control” under the applicable terms and conditions may have an adverse effect on DuPont, Dow and consequently on the combined company. Changes to existing business relationships, including termination or modification, could negatively affect each of DuPont’s and/or Dow's revenues, earnings and cash flow, as well as the market price of its common stock. These uncertainties may impair each party’s ability to attract, retain and motivate key personnel until the consummation of the Mergers, and could cause suppliers, customers and others that deal with the parties to seek to change existing business relationships with them. Retention of employees could be challenging during the pendency of the Mergers due to uncertainty about their future roles. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the businesses, the combined company’s business following the consummation of the Mergers could be negatively impacted. Further, no assurance can be given that the combined company will be able to attract or retain key management personnel and other key employees of DuPont and Dow to the same extent that DuPont and Dow have previously been able to attract or retain their employees.
11
Part I
ITEM 1A. RISK FACTORS, continued
In addition, the Merger Agreement restricts each of DuPont and Dow, without the consent of the other party, from making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and expenditures, paying dividends in excess of certain thresholds, repurchasing or issuing securities outside of existing share repurchase and equity award programs, and taking other specified actions until the earlier of the completion of the mergers or the termination of the merger agreement. These restrictions may prevent or delay pursuit of strategic corporate or business opportunities that may arise prior to the consummation of the Mergers. Adverse effects arising during the pendency of the Mergers could be exacerbated by any delays in consummation of the Mergers or termination of the Merger Agreement.
DuPont expects to incur substantial transaction-related costs in the connection with the Mergers.
DuPont expects to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the transaction. The substantial majority of these costs will be non-recurring expenses relating to the Mergers and the intended Business Separations, including costs relating to integration and separation planning. These costs could adversely affect the financial condition and results of operation of DuPont prior to the Mergers and of the combined company following the Mergers.
Risks Related to the Company’s Operations
The company's operations could be affected by various risks, many of which are beyond its control. Based on current information, the company believes that the following identifies the most significant risk factors that could affect its businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
The company’s operations outside the United States are subject to risks and restrictions, which could negatively affect our results of operations, financial condition, and cash flows.
The company’s operations outside the United States are subject to risks and restrictions, including fluctuations in currency values and foreign-currency exchange rates; exchange control regulations; changes in local political or economic conditions; import and trade restrictions; import or export licensing requirements and trade policy and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. Although DuPont has operations throughout the world, sales outside the U.S. in 2015 were principally to customers in Eurozone countries, China, Brazil, and Japan. Further, the company’s largest currency exposures are the European Euro, Brazilian Real, the Chinese Yuan, and the Japanese Yen. Market uncertainty or an economic downturn in these geographic areas could reduce demand for the company’s products and result in decreased sales volume, which could have a negative impact on DuPont’s results of operations. In addition, changes in exchange rates may affect the company’s results from operations, financial condition and cash flows in future periods. The company actively manages currency exposures that are associated with net monetary asset positions, committed currency purchases and sales, foreign currency-denominated revenues and other assets and liabilities created in the normal course of business.
Volatility in energy and raw materials costs could have a significant impact on the company's sales and earnings.
The company's manufacturing processes consume significant amounts of energy and raw materials, the costs of which are subject to worldwide supply and demand as well as other factors beyond the control of the company. Significant variations in the cost of energy, which primarily reflect market prices for oil, natural gas, and raw materials affect the company's operating results from period to period. Legislation to address climate change by reducing greenhouse gas emissions and establishing a price on carbon could create increases in energy costs and price volatility.
When possible, the company purchases raw materials through negotiated long-term contracts to minimize the impact of price fluctuations. Additionally, the company enters into over-the-counter and exchange traded derivative commodity instruments to hedge its exposure to price fluctuations on certain raw material purchases. The company takes actions to offset the effects of higher energy and raw material costs through selling price increases, productivity improvements and cost reduction programs. Success in offsetting higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market served. If the company is not able to fully offset the effects of higher energy and raw material costs, it could have a significant impact on the company's financial results.
12
Part I
ITEM 1A. RISK FACTORS, continued
The company's results of operations and financial condition could be seriously impacted by business disruptions and security breaches, including cybersecurity incidents.
Business and/or supply chain disruptions, plant and/or power outages and information technology system and/or network disruptions, regardless of cause including acts of sabotage, employee error or other actions, geo-political activity, weather events and natural disasters could seriously harm the company's operations as well as the operations of its customers and suppliers. Failure to effectively prevent, detect and recover from security breaches, including attacks on information technology and infrastructure by hackers; viruses; breaches due to employee error or actions; or other disruptions could result in misuse of the company's assets, business disruptions, loss of property including trade secrets and confidential business information, legal claims or proceedings, reporting errors, processing inefficiencies, negative media attention, loss of sales and interference with regulatory compliance. Like most major corporations, the company is the target of industrial espionage, including cyber-attacks, from time to time. The company has determined that these attacks have resulted, and could result in the future, in unauthorized parties gaining access to at least certain confidential business information. However, to date, the company has not experienced any material financial impact, changes in the competitive environment or business operations that it attributes to these attacks. Although management does not believe that the company has experienced any material losses to date related to security breaches, including cybersecurity incidents, there can be no assurance that it will not suffer such losses in the future. The company actively manages the risks within its control that could lead to business disruptions and security breaches. As these threats continue to evolve, particularly around cybersecurity, the company may be required to expend significant resources to enhance its control environment, processes, practices and other protective measures. Despite these efforts, such events could have a material adverse effect on the company's business, financial condition or results of operations.
Unpredictable seasonal and weather factors could impact sales and earnings from the company’s Agriculture segment.
The agriculture industry is subject to seasonal and weather factors, which can vary unpredictably from period to period. Weather factors can affect the presence of disease and pests on a regional basis and, accordingly, can positively or adversely affect the demand for crop protection products, including the mix of products used. The weather also can affect the quality, volume and cost of seeds produced for sale as well as demand and product mix. Seed yields can be higher or lower than planned, which could lead to higher inventory and related-write-offs and affect ability to supply.
Inability to discover, develop and protect new technologies and enforce the company's intellectual property rights could adversely affect the company's financial results.
The company competes with major global companies that have strong intellectual property estates, including intellectual property rights supporting the use of biotechnology to enhance products, particularly agricultural and bio-based products. Speed in discovering, developing and protecting new technologies and bringing related products to market is a significant competitive advantage. Failure to predict and respond effectively to this competition could cause the company's existing or candidate products to become less competitive, adversely affecting sales. Competitors are increasingly challenging intellectual property positions and the outcomes can be highly uncertain. If challenges are resolved adversely, it could negatively impact the company's ability to obtain licenses on competitive terms, commercialize new products and generate sales from existing products.
Intellectual property rights, including patents, plant variety protection, trade secrets, confidential information, trademarks, tradenames and other forms of trade dress, are important to the company's business. The company endeavors to protect its intellectual property rights in jurisdictions in which its products are produced or used and in jurisdictions into which its products are imported. However, the company may be unable to obtain protection for its intellectual property in key jurisdictions. Further, changes in government policies and regulations, including changes made in reaction to pressure from non-governmental organizations, could impact the extent of intellectual property protection afforded by such jurisdictions.
The company has designed and implemented internal controls to restrict access to and distribution of its intellectual property. Despite these precautions, the company's intellectual property is vulnerable to unauthorized access through employee error or actions, theft and cybersecurity incidents, and other security breaches. When unauthorized access and use or counterfeit products are discovered, the company reports such situations to governmental authorities for investigation, as appropriate, and takes measures to mitigate any potential impact. Protecting intellectual property related to biotechnology is particularly challenging because theft is difficult to detect and biotechnology can be self-replicating. Accordingly, the impact of such theft can be significant. See Part I, Item 1 for additional details on the company's intellectual property.
13
Part I
ITEM 1A. RISK FACTORS, continued
Market acceptance, government policies, rules, regulations and competition could affect the company's ability in certain markets to generate and sustain sales or affect profitability from products based on biotechnology.
The company is using biotechnology to create and improve products, particularly in its Agriculture and Industrial Biosciences segments. The company is also using biotechnology in the development of certain products and pre-commercial programs in Other. These products enable cost and process benefits, better product performance and functionality, and improve environmental outcomes in a broad range of products, technologies and processes such as seeds, enzymes, animal nutrition, detergents, food ingredients, ethanol production and industrial applications. The company's ability to generate and sustain sales from such products could be impacted by market acceptance, including perception of benefits and costs relative to products based on conventional technologies, as well as governmental policies, laws and regulations that affect the development, manufacture and commercialization of products, particularly the testing and planting of seeds containing biotechnology traits and the import of grains, food and food ingredients and other products derived from those seeds.
In order to maintain its right to produce or sell existing products or to commercialize new products containing biotechnology traits, particularly seed products, the company must be able to demonstrate its ability to satisfy the requirements of regulatory agencies. Sales into and use of seeds with biotechnology traits in jurisdictions where cultivation has been approved could be affected if key import markets have not approved the import of grains, food and food ingredients and other products derived from those seeds. If import of grains, food and food ingredients and other products derived from those seeds containing such biotechnology traits occurs in these markets, it could lead to disruption in trade and potential liability for the company.
In addition, the company’s regulatory compliance could be affected by the detection of low level presence of biotechnology traits in conventional seed or products produced from such seed. Furthermore, the detection of biotechnology traits not approved in the country of cultivation may affect the company’s ability to supply product and could affect exports of products produced from such seeds and even result in crop destruction or product recalls.
DuPont’s ability to obtain and maintain regulatory approval for some of its products in the Agriculture segment could limit sales or affect profitability in certain markets.
In most jurisdictions, the company must test the safety, efficacy and environmental impact of its Agricultural products to satisfy regulatory requirements and obtain the necessary approvals. In certain jurisdictions the company must periodically renew its approvals which may require it to demonstrate compliance with then-current standards. The regulatory environment is lengthy, complex and in some markets unpredictable, with requirements that can vary by product, technology, industry and country. The regulatory environment may be impacted by the activities of non-governmental organizations and special interest groups and stakeholder reaction to actual or perceived impacts of new technology, products or processes on safety, health and the environment. Obtaining and maintaining regulatory approvals requires submitting a significant amount of information and data, which may require participation from technology providers. Regulatory standards and trial procedures are continuously changing. The pace of change together with the lack of regulatory harmony could result in unintended noncompliance.
Responding to these changes and meeting existing and new requirements may involve significant costs or capital expenditures or require changes in business practice that could result in reduced profitability. The failure to receive necessary permits or approvals could have near- and long-term effects on the company’s ability to produce and sell some current and future products.
The company might not realize all of the expected benefits from cost and productivity initiatives to the extent and as anticipated.
In connection with its ongoing review of costs, working capital performance and capital spending, in December 2015, the company announced a global cost savings and restructuring plan designed to reduce costs in 2016 by $730 million as compared with 2015. Also in connection with this review, the company has elected to defer certain projects including the design, testing and deployment of a multi-year, phased implementation of an enterprise resource planning (ERP) system to integrate, simplify and standardize processes and systems for information technology, sourcing and finance functions. The company has no current intention to abandon the ERP implementation. However, depending on the length of the deferment and future implementation plans, the company’s current investment could become impaired and significant additional investment could be required. Failure to effectively implement cost and productivity initiatives, including the 2016 global cost savings and restructuring plan as planned could adversely affect the company’s financial results.
14
Part I
ITEM 1A. RISK FACTORS, continued
Failure to effectively manage acquisitions, divestitures, alliances and other portfolio actions could adversely impact our future results.
From time to time, the company evaluates acquisition candidates that may strategically fit its business and/or growth objectives. If the company is unable to successfully integrate and develop acquired businesses, the company could fail to achieve anticipated synergies and cost savings, including any expected increases in revenues and operating results, which could have a material adverse effect on the company’s financial results. The company continually reviews its portfolio of assets for contributions to the company’s objectives and alignment with its growth strategy. However, the company may not be successful in separating underperforming or non-strategic assets and gains or losses on the divestiture of, or lost operating income from, such assets may affect the company’s earnings. Moreover, the company might incur asset impairment charges related to acquisitions or divestitures that reduce its earnings.
The company's business, including its results of operations and reputation, could be adversely affected by process safety and product stewardship issues.
Failure to appropriately manage safety, human health, product liability and environmental risks associated with the company's products, product life cycles and production processes could adversely impact employees, communities, stakeholders, the environment, the company's reputation and its results of operations. Public perception of the risks associated with the company's products and production processes could impact product acceptance and influence the regulatory environment in which the company operates. While the company has procedures and controls to manage process safety risks, issues could be created by events outside of its control including natural disasters, severe weather events, acts of sabotage and substandard performance by the company's external partners.
As a result of the company's current and past operations, including operations related to divested businesses, the company could incur significant environmental liabilities.
The company is subject to various laws and regulations around the world governing the environment, including the discharge of pollutants and the management and disposal of hazardous substances. As a result of its operations, including its past operations and operations of divested businesses, the company could incur substantial costs, including remediation and restoration costs. The costs of complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. The ultimate costs under environmental laws and the timing of these costs are difficult to predict. The company's accruals for such costs and liabilities may not be adequate because the estimates on which the accruals are based depend on a number of factors including the nature of the matter, the complexity of the site, site geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other Potentially Responsible Parties (PRPs) at multi-party sites and the number and financial viability of other PRPs.
At December 31, 2015, the company had recognized a liability of $492 million related to the matters. Since considerable uncertainty exists, under adverse changes in circumstances, the potential liability may range up to $1.0 billion above the amount accrued at December 31, 2015. As described in Note 3 to the Consolidated Financial Statements, DuPont and Chemours entered a Separation Agreement in connection with the spin-off of Chemours on July 1, 2015. Pursuant to the Separation Agreement, the company is indemnified by Chemours for certain environmental matters that have an estimated liability of $291 million as of December 31, 2015 and a potential exposure that ranges up to approximately $610 million above the amount accrued. As such, the company has recorded an indemnification asset of $291 million corresponding to the company’s accrual balance related to these matters at December 31, 2015. If based on the actions, results of operations or financial position of Chemours, it were no longer probable that the Chemours’ indemnification obligations would be satisfied, then the company could not continue to recognize the related indemnification asset adversely impacting DuPont’s financial position.
Additional details on the company’s risks associated with environmental laws, regulations and environmental liabilities can be found in Part I, Item 1, Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 46 of this report and Note 16 to the Consolidated Financial Statements.
15
Part I
ITEM 1A. RISK FACTORS, continued
The company's results of operations could be adversely affected by litigation and other commitments and contingencies.
The company faces risks arising from various unasserted and asserted litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. The company has noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. The company also has noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities alleging harm to the general public. Various factors or developments can lead to changes in current estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on the company. An adverse outcome in any one or more of these matters could be material to the company's financial results.
In the ordinary course of business, the company may make certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses and issue guarantees of third party obligations. If the company were required to make payments as a result, they could exceed the amounts accrued, thereby adversely affecting the company's results of operations.
Pursuant to the Separation Agreement, Chemours indemnifies DuPont against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the distribution. The term of this indemnification is indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. If based on the actions, results of operations or financial position of Chemours, it were no longer probable that the Chemours’ indemnification obligations would be satisfied, then the company could not continue to recognize the related indemnification asset adversely impacting DuPont’s financial position.
16
Part I
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The company's corporate headquarters are located in Wilmington, Delaware. The company's manufacturing, processing, marketing and research and development facilities, as well as regional purchasing offices and distribution centers are located throughout the world. Additional information with respect to the company's property, plant and equipment and leases is contained in Notes 10, 16 and 21 to the Consolidated Financial Statements.
The company has investments in property, plant and equipment related to global manufacturing operations. Collectively there are approximately 290 principal sites in total. The number of sites used by their applicable segment(s) by major geographic area around the world is as follows:
Number of Sites | ||||||||||||||
Agriculture | Electronics & Communications | Industrial Biosciences | Nutrition & Health | Performance Materials | Safety & Protection | Total 1 | ||||||||
Asia Pacific | 23 | 10 | 1 | 13 | 13 | 9 | 69 | |||||||
EMEA2 | 26 | 3 | 7 | 26 | 6 | 4 | 72 | |||||||
Latin America | 22 | — | 1 | 10 | 1 | 3 | 37 | |||||||
U.S. & Canada | 61 | 17 | 7 | 16 | 12 | 11 | 124 | |||||||
132 | 30 | 16 | 65 | 32 | 27 | 302 | ||||||||
1. | Sites that are used by multiple segments are included more than once in the figures above. |
2. | Europe, Middle East, and Africa (EMEA). |
The company's plants and equipment are well maintained and in good operating condition. The company believes it has sufficient production capacity to meet demand in 2016. Properties are primarily owned by the company; however, certain properties are leased. No title examination of the properties has been made for the purpose of this report and certain properties are shared with other tenants under long-term leases.
DuPont recognizes that the security and safety of its operations are critical to its employees, community and to the future of the company. As such, the company has merged chemical site security into its safety core value where it serves as an integral part of its long standing safety culture. Physical security measures have been combined with process safety measures (including the use of inherently safer technology), administrative procedures and emergency response preparedness into an integrated security plan. The company has conducted vulnerability assessments at operating facilities in the U.S. and high priority sites worldwide and identified and implemented appropriate measures to protect these facilities from physical and cyber-attacks. DuPont is working with carriers, including railroad, shipping and trucking companies, to secure chemicals in transit.
17
Part I
ITEM 3. LEGAL PROCEEDINGS
The company is subject to various litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. Information regarding certain of these matters is set forth below and in Note 16 to the Consolidated Financial Statements.
Litigation
Imprelis® Herbicide Claims Process
Information related to this matter is included in Note 16 to the Consolidated Financial Statements under the heading Imprelis®.
PFOA: Environmental and Litigation Proceedings
For purposes of this report, the term PFOA means collectively perfluorooctanoic acid and its salts, including the ammonium salt and does not distinguish between the two forms. Information related to this matter is included in Note 16 to the Consolidated Financial Statements under the heading PFOA.
Environmental Proceedings
LaPorte Plant, LaPorte, Texas
The U.S. Environmental Protection Agency (EPA) conducted a multimedia inspection at the LaPorte facility in January 2008. DuPont, EPA and the Department of Justice (DOJ) began discussions in the Fall 2011 relating to the management of certain materials in the facility's waste water treatment system, hazardous waste management, flare and air emissions. These negotiations continue.
LaPorte Plant, LaPorte, Texas - Crop Protection
On November 15, 2014 there was a release of methyl mercaptan at the company’s LaPorte facility. The release occurred at the site’s Crop Protection unit resulting in four employee fatalities inside the unit. DuPont is continuing its investigation into the incident. Several governmental agencies also are conducting their own investigations. DuPont is cooperating with these agency reviews. In May 2015, the Occupational Safety & Health Administration (OSHA) cited the company for eight serious and one repeat violation with an associated penalty of $99,000. The company is contesting OSHA’s findings.
LaPorte Plant, LaPorte, Texas - OSHA Process Safety Management (PSM) Audit
In 2015, OSHA conducted a PSM audit of the Crop Protection and Fluoroproducts units at the LaPorte Plant. In July 2015, OSHA cited the company for three willful, one repeat and four serious PSM violations and placed the company in its Severe Violator Enforcement Program. OSHA has proposed a penalty of $273,000. The company is contesting OSHA’s findings.
Sabine Plant, Orange, Texas
In June 2012, DuPont began discussions with DOJ and EPA related to a multimedia inspection that EPA conducted at the Sabine facility in March 2009. The discussions involve the management of materials in the facility's waste water treatment system, hazardous waste management, flare and air emissions, including leak detection and repair.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant's Common Equity and Related Stockholder Matters
The company's common stock is listed on the New York Stock Exchange, Inc. (symbol DD) and certain non-U.S. exchanges. The number of record holders of common stock was approximately 62,000 at January 29, 2016.
Holders of the company's common stock are entitled to receive dividends when they are declared by the Board of Directors. While it is not a guarantee of future conduct, the company has continuously paid a quarterly dividend since the fourth quarter 1904. Dividends on common stock and preferred stock are usually declared in January, April, July and October. When dividends on common stock are declared, they are usually paid mid-March, June, September and December. Preferred dividends are paid on or about the 25th of January, April, July and October. The Stock Transfer Agent and Registrar is Computershare Trust Company, N.A.
The company's quarterly high and low trading stock prices and dividends per common share for 2015 and 2014 are shown below.
Market Prices1 | ||||||||||
2015 | High | Low | Per Share Dividend Declared | |||||||
Fourth Quarter | $ | 75.72 | $ | 47.43 | $ | 0.38 | 2 | |||
Third Quarter | 61.93 | 47.11 | 0.38 | 2 | ||||||
Second Quarter | 75.80 | 63.55 | 0.49 | |||||||
First Quarter | 80.65 | 70.19 | 0.47 | |||||||
2014 | ||||||||||
Fourth Quarter | $ | 75.82 | $ | 64.55 | $ | 0.47 | ||||
Third Quarter | 72.92 | 63.70 | 0.47 | |||||||
Second Quarter | 69.75 | 64.35 | 0.45 | |||||||
First Quarter | 67.95 | 59.35 | 0.45 | |||||||
1. | Historical market prices do not reflect any adjustment for the impact of the spin-off of Chemours. |
2. | Per share dividend declared includes impact of the spin-off of Chemours. |
Issuer Purchases of Equity Securities
In January 2014, the company's Board of Directors authorized a $5 billion share buyback plan. There is no required completion date for purchases under this plan.
In the first quarter 2015, DuPont announced its intention to buy back shares of about $4 billion using the distribution proceeds received from Chemours. In connection with the completion of the spin-off of Chemours, the Board of Directors authorized the use of the distribution proceeds to buy back shares of the company's common stock as follows: $2 billion to be purchased and retired by December 31, 2015 with the remainder to be purchased and retired by December 31, 2016 . In August 2015, the company entered an accelerated share repurchase (ASR) agreement. Under the terms of the ASR agreement, the company paid $2 billion to the financial institution and received and retired 35 million shares at an average price of $57.16 per share.
DuPont’s objective continues to be to complete the remaining $2 billion stock buyback by year end December 31, 2016. However, as a result of the planned merger of equals with Dow, the company expects it will have limited opportunities to enter the market prior to the shareholder vote on the merger. After the vote, the company plans to make repurchases.
See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 37 of this report and Note 17 to the Consolidated Financial Statements for additional information.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES, continued
The following table summarizes information with respect to the company's purchase of its common stock during the three months ended December 31, 2015:
Month | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Value of Shares that May Yet Be Purchased Under the Programs(1) (Dollars in millions) | ||||
December: | ||||||||
ASR(2) | 6,208,599 | $57.16 | 6,208,599 | |||||
Total | 6,208,599 | 6,208,599 | $ | 4,647 | ||||
1. | Represents approximate value of shares that may yet be purchased under the 2014 and 2015 plans. |
2. | Shares purchased in December 2015 include the final share delivery amount under the August ASR agreement. |
Stock Performance Graph
The following graph presents the cumulative five-year total shareholder return for the company's common stock compared with the S&P 500 Stock Index and the Dow Jones Industrial Average.
12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | |||||||||||||
DuPont | $ | 100 | $ | 95 | $ | 96 | $ | 144 | $ | 168 | $ | 164 | ||||||
S&P 500 Index | 100 | 102 | 118 | 157 | 178 | 181 | ||||||||||||
Dow Jones Industrial Average | 100 | 108 | 119 | 155 | 170 | 171 | ||||||||||||
The graph assumes that the values of DuPont common stock, the S&P 500 Stock Index and the Dow Jones Industrial Average were each $100 on December 31, 2010 and that all dividends were reinvested.
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ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share) | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||
Summary of operations1 | |||||||||||||||
Net sales | $ | 25,130 | $ | 28,406 | $ | 28,998 | $ | 27,610 | $ | 25,883 | |||||
Employee separation / asset related charges, net | $ | 810 | $ | 476 | $ | 112 | $ | 457 | $ | 53 | |||||
Income from continuing operations before income taxes | $ | 2,591 | $ | 4,313 | $ | 2,566 | $ | 1,290 | $ | 1,715 | |||||
Provision for income taxes on continuing operations | $ | 696 | $ | 1,168 | $ | 360 | $ | 122 | $ | 59 | |||||
Net income attributable to DuPont | $ | 1,953 | $ | 3,625 | $ | 4,848 | $ | 2,755 | $ | 3,559 | |||||
Basic earnings per share of common stock from continuing operations | $ | 2.10 | $ | 3.42 | $ | 2.36 | $ | 1.21 | $ | 1.73 | |||||
Diluted earnings per share of common stock from continuing operations | $ | 2.09 | $ | 3.39 | $ | 2.34 | $ | 1.20 | $ | 1.71 | |||||
Financial position at year-end | |||||||||||||||
Working capital2 | $ | 7,402 | $ | 8,517 | $ | 10,541 | $ | 7,173 | $ | 6,452 | |||||
Total assets | $ | 41,166 | $ | 50,490 | $ | 52,142 | $ | 50,339 | $ | 49,062 | |||||
Borrowings and capital lease obligations | |||||||||||||||
Short-term | $ | 1,165 | $ | 1,422 | $ | 1,721 | $ | 1,275 | $ | 817 | |||||
Long-term | $ | 7,642 | $ | 9,233 | $ | 10,699 | $ | 10,429 | $ | 11,691 | |||||
Total equity | $ | 10,200 | $ | 13,378 | $ | 16,286 | $ | 10,299 | $ | 9,208 | |||||
General | |||||||||||||||
For the year | |||||||||||||||
Purchases of property, plant & equipment and investments in affiliates | $ | 1,705 | $ | 2,062 | $ | 1,940 | $ | 1,890 | $ | 1,910 | |||||
Depreciation1 | $ | 978 | $ | 1,006 | $ | 1,027 | $ | 1,065 | $ | 941 | |||||
Research and development expense1 | $ | 1,898 | $ | 1,958 | $ | 2,037 | $ | 2,001 | $ | 1,843 | |||||
Weighted-average number of common shares outstanding (millions) | |||||||||||||||
Basic | 894 | 915 | 926 | 933 | 928 | ||||||||||
Diluted | 900 | 922 | 933 | 942 | 941 | ||||||||||
Dividends per common share | $ | 1.72 | $ | 1.84 | $ | 1.78 | $ | 1.70 | $ | 1.64 | |||||
At year-end | |||||||||||||||
Employees (thousands)3 | 52 | 54 | 55 | 61 | 61 | ||||||||||
Closing stock price | $ | 66.60 | $ | 73.94 | $ | 64.97 | $ | 44.98 | $ | 45.78 | |||||
Common stockholders of record (thousands) | 63 | 66 | 70 | 74 | 78 | ||||||||||
1. | Information has been restated to reflect the impact of discontinued operations, as applicable. See Note 1, Basis of Presentation, to the Consolidated Financial Statements for further information. |
2. | Working capital has been restated to exclude the assets and liabilities related to the Performance Chemicals segment. The assets and liabilities related to the Performance Chemicals business are presented as assets of discontinued operations and liabilities of discontinued operations, respectively, in the Consolidated Balance Sheets for all periods presented. At December 31, 2012, working capital included approximately $2 billion of net assets related to the Performance Coatings business, of which approximately $1.3 billion was previously considered to be noncurrent and was classified as held for sale as of December 31, 2012. Working capital at December 31, 2013 includes cash received from the sale of the Performance Coatings business. See Note 3 to the Consolidated Financial Statements for further information. |
3. | Number of employees excludes employees associated with the Performance Chemicals segment for all periods presented. |
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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, timing of anticipated benefits from restructuring actions, outcome of contingencies, such as litigation and environmental matters, expenditures, financial results, and timing of, as well as expected benefits, including synergies, from the proposed merger with The Dow Chemical Company (Dow) and intended post-merger separations, 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:
• | Risks related to the agreement between DuPont and Dow to effect an all-stock merger of equals, including the completion of the proposed transaction on anticipated terms and timing, the ability to fully and timely realize the expected benefits of the proposed transaction and risks related to the intended business separations contemplated to occur after the completion of the proposed transaction; |
• | Volatility 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, including realization of associated indemnification assets, if any; |
• | Failure to appropriately manage process safety and product stewardship issues; |
• | Ability to obtain and maintain regulatory approval for its products especially in the Agriculture segment; |
• | Failure to realize all of the expected benefits from cost and productivity initiatives to the extent and as anticipated; |
• | 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, fluctuation in currency rates, interest rates and commodity prices; |
• | Failure 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, natural disasters and weather events and patterns which could affect demand as well as availability of product, particularly in the Agriculture segment; |
• | 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. |
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 10.
Overview
DuPont Dow Merger of Equals On December 11, 2015, DuPont and Dow announced entry into an Agreement and Plan of Merger (the Merger Agreement), under which the companies will combine in an all-stock merger of equals. The merger transaction is expected to close in the second half of 2016, subject to customary closing conditions, including regulatory approvals and approvals by both DuPont and Dow shareholders. The combined company will be named DowDuPont.
DuPont and Dow intend to pursue, subject to the receipt of approval by the board of directors of DowDuPont, the separation of the combined company’s agriculture business, specialty products business and material science business through a series of one or more tax-efficient transactions (collectively, the Business Separations.)
In connection with the planned merger, the company incurred $10 million in transaction related costs, which were recorded in selling, general and administrative expenses in the Consolidated Income Statement for the year ended December 31, 2015.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See the discussion entitled Dow DuPont Merger of Equals under Part 1, Item 1 Business of this report, Part 1, Item 1A, Risk Factors, and Note 2 to the Consolidated Financial Statements for further details and a discussion of some of the risks related to the transaction.
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 research and development (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 DuPont’s near term focus is to deliver earnings growth while positioning the businesses to compete successfully over the long term; continue to improve capital allocation and working capital performance; and complete the proposed merger of equals with Dow.
DuPont has dramatically refined its portfolio to focus investment in areas of significant opportunity and secular growth; enhanced its innovation platform to deliver substantial revenues from new products; increased focus on efficiency, cost discipline, and accountability; and expanded markets geographically. The company is better connecting its laboratories and the marketplace, and striving for faster, more effective execution in delivering innovative solutions for customers.
The goal is to increase agility and responsiveness to market conditions, a necessity to win in a globally competitive environment, and drive growth across three strategic priorities: extending leadership in agriculture and nutrition, strengthening and growing advanced materials capabilities, and leveraging science to develop a world leading bio-based industrial business.
The company is committed to maintaining a strong balance sheet and to return excess cash to shareholders unless there is a compelling opportunity to invest for growth.
Results Net sales of $25.1 billion, were down 12 percent versus prior year, principally reflecting 7 percent negative impact from currency, 3 percent lower volume and 2 percent negative impact from portfolio changes. Income from continuing operations after income taxes declined from $3.1 billion to $1.9 billion, reflecting lower segment operating earnings, the absence of prior year gains on businesses and other assets, and higher restructuring charges, partially offset by costs savings associated with the 2014 redesign initiative and restructuring plan. Total pre-tax segment operating earnings of $4.2 billion, were 16 percent below last year, principally due to the negative impact of currency of about $785 million and lower volumes driven by weakness in agriculture markets, partially offset by costs savings associated with the 2014 operational redesign initiative and restructuring plan.
Analysis of Operations
2016 Global Cost Savings and Restructuring Plan On December 11, 2015, DuPont announced a 2016 global cost savings and restructuring plan designed to reduce $730 million in costs in 2016 compared with 2015, which represents a reduction of operating costs on a run-rate basis of about $1.0 billion by end of 2016. As part of the plan, the company committed to take structural actions across all businesses and staff functions globally to operate more efficiently by further consolidating businesses and aligning staff functions more closely with them. In connection with the restructuring actions, the company recorded a pre-tax charge to earnings of $798 million in the fourth quarter 2015, comprised of $656 million of severance and related benefit costs, $109 million of asset related charges, and $33 million of contract termination costs. Future cash expenditures related to this charge are anticipated to be approximately $680 million, primarily related to the payment of severance and related benefits. The restructuring actions associated with this charge are expected to impact approximately 10 percent of DuPont’s workforce and to be substantially complete in 2016. The company anticipates additional charges could occur in relation to the restructuring actions, which it cannot reasonably estimate at this time.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Redesign Initiative and 2014 Restructuring Plan 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. As a result, during the years ended December 31, 2015 and 2014 pre-tax (benefits) charges of $(21) million and $541 million, respectively, were recorded. Cost reductions from the 2014 operational redesign are essentially complete and for full year 2015, the company delivered incremental cost savings of approximately $0.40 per share year over year. Additional details related to this plan can be found in Note 4 to the Consolidated Financial Statements.
Separation of Performance Chemicals In October 2013, DuPont announced its intention to separate its Performance Chemicals segment through a U.S. tax-free spin-off to shareholders, subject to customary closing conditions. In July 2015, DuPont completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (Chemours).
Divestiture of Performance Coatings In August 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
NET SALES | $ | 25,130 | $ | 28,406 | $ | 28,998 | |||
2015 versus 2014 The table below shows a regional breakdown of 2015 consolidated net sales based on location of customers and percentage variances from prior year:
Percent Change Due to: | |||||||||||||
(Dollars in billions) | 2015 Net Sales | Percent Change vs. 2014 | Local Price and Product Mix | Currency | Volume | Portfolio and Other | |||||||
Worldwide | $ | 25.1 | (12 | ) | — | (7 | ) | (3 | ) | (2 | ) | ||
U.S. & Canada | 10.8 | (6 | ) | (2 | ) | (1 | ) | (2 | ) | (1 | ) | ||
EMEA1 | 6.0 | (17 | ) | 2 | (15 | ) | (2 | ) | (2 | ) | |||
Asia Pacific | 5.6 | (9 | ) | (2 | ) | (3 | ) | (2 | ) | (2 | ) | ||
Latin America | 2.7 | (23 | ) | 2 | (15 | ) | (9 | ) | (1 | ) | |||
1. | Europe, Middle East, and Africa (EMEA). |
Net sales of $25.1 billion were down 12 percent versus prior year reflecting a 7 percent negative impact from weaker currencies, particularly the Brazilian Real and the European Euro, 3 percent lower volume and a 2 percent negative impact from the absence of sales from divested businesses. Lower volume principally reflects a 6 percent decline in Agriculture that was primarily driven by lower seed volume and reduced demand for insect control products in Latin America, and a 7 percent decline in volumes for Electronics & Communications, primarily driven by competitive pressures impacting sales of Solamet® paste. These declines more than offset volume growth for Performance Materials, Nutrition & Health, and Industrial Biosciences. Portfolio and other reflects the impact of the prior year sales of Glass Laminating Solutions/Vinyls within the Performance Materials segment and Sontara® within the Safety & Protection segment. The impact from local prices and product mix was about even with prior year as 3 percent higher Agriculture prices were offset primarily by lower prices in Performance Materials and Electronics & Communications. Net sales in developing markets were $8.2 billion, 33 percent of total company net sales versus 34 percent in 2014, representing a slight decline principally due to lower Agriculture volume in Latin America. Developing markets include China, India, countries located in Latin America, Eastern and Central Europe, Middle East, Africa and South East Asia.
2014 versus 2013 The table below shows a regional breakdown of 2014 consolidated net sales based on location of customers and percentage variances from 2013:
Percent Change Due to: | |||||||||||||
(Dollars in billions) | 2014 Net Sales | Percent Change vs. 2013 | Local Price and Product Mix | Currency | Volume | Portfolio and Other | |||||||
Worldwide | $ | 28.4 | (2 | ) | — | (1 | ) | — | (1 | ) | |||
U.S. & Canada | 11.4 | (3 | ) | — | — | (2 | ) | (1 | ) | ||||
EMEA1 | 7.3 | 2 | 1 | — | 2 | (1 | ) | ||||||
Asia Pacific | 6.2 | (2 | ) | (1 | ) | (2 | ) | 3 | (2 | ) | |||
Latin America | 3.5 | (7 | ) | (1 | ) | (3 | ) | (2 | ) | (1 | ) | ||
1. | Europe, Middle East, and Africa (EMEA). |
Net sales of $28.4 billion were 2 percent below prior year including a 1 percent reduction from portfolio changes, primarily in the Performance Materials Segment, and a 1 percent negative currency impact reflecting the stronger U.S. dollar versus most currencies. Local prices were flat as 1 percent higher Agriculture prices were offset by lower prices in Electronics & Communication, primarily from lower metals prices. In developing markets, sales declined 1 percent to $9.7 billion. Sales in developing markets represented 34 percent of total company sales in 2014 and 2013.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
COST OF GOODS SOLD | $ | 15,112 | $ | 17,023 | $ | 17,642 | |||
As a percent of net sales | 60 | % | 60 | % | 61 | % | |||
2015 versus 2014 Cost of goods sold (COGS) decreased $1.9 billion, or 11 percent, principally reflecting declines from currency due to the strengthening of the U.S. dollar verses global currencies, productivity improvements, impacts of portfolio changes, lower volume and lower raw material costs. COGS as a percent of sales was unchanged from prior year at 60 percent as the benefit of productivity improvements offset the negative impact of currency which decreased sales by 7 percent and COGS by 4 percent.
2014 versus 2013 COGS decreased 4 percent to $17.0 billion and decreased as a percentage of sales by 1 percent, principally due to portfolio changes, lower pension and OPEB costs and lower costs for metals and other raw materials.
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
OTHER OPERATING CHARGES | $ | 459 | $ | 645 | $ | 1,222 | |||
As a percent of net sales | 2 | % | 2 | % | 4 | % | |||
2015 versus 2014 Other operating charges decreased $186 million, or 29 percent, principally reflecting $130 million reduction in the estimated liability related to Imprelis® herbicide claims, cost savings from the company's operational redesign initiative partially offset by lower insurance recoveries year over year related to Imprelis® herbicide claims.
2014 versus 2013 Other operating charges decreased $577 million to $645 million, and decreased as a percentage of sales by 2 percent, principally due to the absence of prior year charges for Imprelis® herbicide claims and current year insurance recoveries.
See Note 16 to the Consolidated Financial Statements for more information related to the the Imprelis® matter.
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | $ | 4,615 | $ | 4,891 | $ | 5,342 | |||
As a percent of net sales | 18 | % | 17 | % | 18 | % | |||
2015 versus 2014 The $276 million decrease was primarily due to the strengthening of the U.S. dollar versus global currencies, cost savings from the company's operational redesign initiative, and lower selling and commission expense, mainly within the Agriculture segment, partially offset by an increase in pension and OPEB costs. Selling, general and administrative expenses as a percentage of net sales increased by 1 percent, primarily due to lower sales and higher pension and OPEB costs.
2014 versus 2013 The $451 million decrease was largely attributable to lower pension and OPEB costs and lower sales commissions within the Agriculture segment. Selling, general and administrative expenses as a percentage of net sales decreased by 1 percent, primarily due to lower pension and OPEB costs.
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
RESEARCH AND DEVELOPMENT EXPENSE | $ | 1,898 | $ | 1,958 | $ | 2,037 | |||
As a percent of net sales | 8 | % | 7 | % | 7 | % | |||
2015 versus 2014 The $60 million decrease was primarily due to the strengthening of the U.S. dollar versus global currencies, cost savings from the company's operational redesign initiative, partially offset by higher pension and OPEB costs. Research and development expense as a percent of sales increased due to lower sales.
2014 versus 2013 The $79 million decrease was primarily attributable to lower pension and OPEB costs and lower spending for Agriculture and Electronic & Communications programs.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
OTHER INCOME, NET | $ | (697 | ) | $ | (1,277 | ) | $ | (371 | ) |
2015 versus 2014 The $580 million decrease was primarily due to the absence of prior year gains on sales of businesses and other assets, including a $391 million gain on the sale of GLS/Vinyls, within the Performance Materials segment, and a $240 million gain on the sale of copper fungicides and land management businesses, both within the Agriculture segment, partially offset by gains on sales of businesses and assets in 2015, primarily in the Agriculture and Performance Materials segments. In addition, pre-tax exchange gains decreased $166 million compared to prior year driven by lower gains on foreign currency exchange contracts. See Note 5 and 20 to the Consolidated Financial Statements for further discussion of the company's policy of hedging the foreign currency-denominated monetary assets and liabilities. These decreases were partially offset by $145 million gain associated with the company's settlement of a legal claim related to the Safety & Protection segment and $85 million increase in equity in earnings of affiliates, primarily due to the absence of $65 million for charges associated with the restructuring actions of a joint venture within the Performance Materials segment recorded in 2014.
2014 versus 2013 The $906 million increase was primarily due to $710 million of gains on sales of businesses and other assets, including a $391 million gain on the sale of GLS/Vinyls, within the Performance Materials segment, and a $240 million gain on the sale of copper fungicides and land management businesses, both within the Agriculture segment. There were additional net exchange gains of $297 million, partially offset by $65 million for charges associated with the restructuring actions of a joint venture within the Performance Materials segment and the absence of the $26 million re-measurement gain on equity method investment in 2013.
Additional information related to the company's other income, net is included in Note 5 to the Consolidated Financial Statements.
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
INTEREST EXPENSE | $ | 342 | $ | 377 | $ | 448 | |||
The $35 million decrease in 2015 was primarily due to lower average borrowings partially offset by slightly higher average interest rates compared to prior year.
The $71 million decrease in 2014 was due to lower average borrowings as average interest rates were essentially unchanged in each year.
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
EMPLOYEE SEPARATION/ASSET RELATED CHARGES, NET | $ | 810 | $ | 476 | $ | 112 | |||
The $810 million in charges recorded during 2015 in employee separation / asset related charges, net consist of a $793 million charge related to the 2016 restructuring plan discussed below, a $38 million impairment charge discussed below, partly offset by a $21 million net benefit related to the 2014 restructuring plan. The $21 million net benefit was recorded to adjust the estimated costs associated with the 2014 restructuring program due to lower than estimated individual severance costs and workforce reductions achieved through non-severance programs, offset by the identification of additional projects in certain segments.
On December 11, 2015, DuPont announced a 2016 global cost savings and restructuring plan designed to reduce $730 million in costs compared to 2015. As part of the plan, the company committed to take structural actions across all businesses and staff functions globally to operate more efficiently by further consolidating businesses and aligning staff functions more closely with them. As a result, during the year ended December 31, 2015, a pre-tax charge of $798 million was recorded, consisting of $793 million of employee separation / asset related charges, net and $5 million in other income, net. The charges consisted of $656 million in severance and related benefit costs, $109 million in asset related charges, and $33 million in contract termination charges. Future cash expenditures related to this charge are anticipated to be approximately $680 million, primarily related to the payment of severance and related benefits. The restructuring actions associated with this charge are expected to impact approximately 10 percent of DuPont’s workforce and to be substantially complete in 2016.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
The $476 million in charges recorded during 2014 in employee separation / asset related charges, net related to the 2014 global, multi-year initiative to redesign its global organization and operating model to 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. As a result, during the year ended December 31, 2014, a pre-tax charge of $541 million was recorded, consisting of $476 million in employee separation / asset related charges, net and $65 million in other income, net. The charges consisted of $301 million severance and related benefit costs, $17 million of other non-personnel costs, and $223 million of asset related costs, including $65 million of costs associated with the restructuring actions of a joint venture within the Performance Materials segment. The actions associated with this charge and all related payments are substantially complete.
The $112 million in charges recorded during 2013 in employee separation / asset related charges, net consisted of a net $17 million restructuring benefit and a $129 million asset impairment charge discussed below. The net $17 million restructuring benefit consisted of a $26 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 $26 million benefit was due to the achievement of work force reductions through non-severance programs associated with the 2012 restructuring program.
Asset Impairments
During 2015, the company recorded an impairment charge of $38 million in the Other segment, the majority relating to an impairment of a cost basis investment.
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.
Additional details related to the restructuring programs and asset impairments discussed above can be found in Note 4 to the Consolidated Financial Statements.
Below is a summary of the net impact related to items recorded in employee separation / asset related charges, net:
(Dollars in millions) | 2015 (Charges) and Credits | 2014 (Charges) and Credits | 2013 (Charges) and Credits | ||||||
Agriculture | $ | (164 | ) | $ | (134 | ) | $ | 1 | |
Electronics & Communications | (78 | ) | (84 | ) | (131 | ) | |||
Industrial Biosciences | (52 | ) | (13 | ) | 1 | ||||
Nutrition & Health | (50 | ) | (15 | ) | 6 | ||||
Performance Materials | (58 | ) | (34 | ) | (6 | ) | |||
Safety & Protection | (49 | ) | (52 | ) | 4 | ||||
Other | (40 | ) | (22 | ) | 1 | ||||
Corporate expenses | (319 | ) | (122 | ) | 12 | ||||
Total Charges | $ | (810 | ) | $ | (476 | ) | $ | (112 | ) |
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
PROVISION FOR INCOME TAXES ON CONTINUING OPERATIONS | $ | 696 | $ | 1,168 | $ | 360 | |||
Effective income tax rate | 26.9 | % | 27.1 | % | 14.0 | % | |||
In 2015, the company recorded a tax provision on continuing operations of $0.7 billion, reflecting a $0.5 billion decrease from 2014. The decrease was largely due to the impact associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations, the absence of 2014 gains on sales of businesses and other assets in the Performance Materials and Agriculture segments, as well as increased tax benefits on employee separation/asset related charges.
In 2014, the company recorded a tax provision on continuing operations of $1.2 billion, reflecting a $0.8 billion increase from 2013, largely due to the impact associated with the company’s policy of hedging the foreign currency-denominated monetary
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
assets and liabilities of its operations, gains on sales of businesses and other assets in the Performance Materials and Agriculture segments, and the impact of Imprelis® charges in 2013 versus additional insurance recoveries in 2014. These impacts were partially offset by increased tax benefits on employee separation/asset related charges. The higher effective tax rate principally reflects the impact of foreign exchange losses on net monetary assets for which no corresponding tax benefit is realized, in addition to the impact of the Venezuelan bolivar devaluation which is also nondeductible.
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) | 2015 | 2014 | 2013 | ||||||
INCOME FROM CONTINUING OPERATIONS AFTER INCOME TAXES | $ | 1,895 | $ | 3,145 | $ | 2,206 | |||
Income from continuing operations after income taxes for 2015 was $1.9 billion compared to $3.1 billion in 2014 and $2.2 billion in 2013. The changes between periods were due to the reasons noted above.
Corporate Outlook
Current difficult global economic conditions in agriculture and slower growth in emerging markets are expected to continue challenging the company’s sales growth in 2016. The company expects headwinds from currency due to the continued strengthening of the U.S. dollar which is expected to be most significant in the first half of 2016. Growth in emerging markets is expected to slow, leading to a shift in the company’s earnings mix to higher tax jurisdictions. The company expects income from continuing operations in 2016 will benefit from $730 million reduction in costs as a result of the 2016 global cost savings and restructuring plan. These cost reductions will be weighted toward the second half of 2016 reflecting implementation of specific actions during the first and second quarters. In addition, the company expects income from continuing operations in 2016 to be impacted by transaction related costs associated with the proposed merger with Dow. See additional information regarding 2016 outlook under "Segment Reviews" beginning on page 30.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a description of recent accounting pronouncements.
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Segment Reviews
Segment operating earnings is defined as income (loss) from continuing operations before income taxes excluding significant pre-tax benefits (charges), non-operating pension and other postretirement employee benefit costs, exchange gains (losses), corporate expenses and interest. Non-operating pension and other postretirement employee benefit costs includes all of the components of net periodic benefit cost from continuing operations with the exception of the service cost component. Reclassifications of prior year data have been made to conform to current year classifications. See Note 22 to the Consolidated Financial Statements for details related to significant pre-tax benefits (charges) excluded from segment operating earnings. All references to prices are on a U.S. dollar (USD) basis, including the impact of currency, unless otherwise noted.
A reconciliation of segment operating earnings to income from continuing operations before income taxes for 2015, 2014 and 2013 is included in Note 22 to the Consolidated Financial Statements.
DuPont Sustainable Solutions, within the company's Safety & Protection segment, is comprised of two business units: clean technologies and consulting solutions. Effective January 1, 2016, the clean technologies business unit will become part of the Industrial Biosciences segment with the focus on working with customers to improve the performance, productivity and sustainability of their products and processes. The company will explore a range of options to maximize the growth of the consulting solutions business unit which effective January 1, 2016 will be reported within Other. Sustainable solutions net sales accounted for about 2 percent of the company's total consolidated net sales for the years ended December 31, 2015, 2014 and 2013, respectively. Segment results and 2016 segment outlook information are not reflective of the 2016 reporting change.
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AGRICULTURE
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Net sales | $ | 9,798 | $ | 11,296 | $ | 11,728 | |||
Operating earnings | $ | 1,646 | $ | 2,352 | $ | 2,480 | |||
Operating earnings margin | 17 | % | 21 | % | 21 | % | |||
2015 | 2014 | |||
Change in net sales from prior period due to: | ||||
Local Price and Product Mix | 3 | % | 1 | % |
Currency | (9 | )% | (2 | )% |
Volume | (6 | )% | (3 | )% |
Portfolio and Other | (1 | )% | — | % |
Total change | (13 | )% | (4 | )% |
2015 versus 2014 Full year 2015 segment net sales of $9.8 billion decreased $1.5 billion, or 13 percent, primarily due to the negative impact of currency and lower seed and crop protection volumes, primarily in Brazil and North America, which were partly offset by higher local corn seed prices. In Brazil, lower corn seed volume reflects the impact of a reduction in summer planted hectares of corn and fall armyworm resistance impacting performance of certain corn hybrids. In North America, lower soybean volume reflects between 1 and 2 points of share loss and lower soybean planted area; lower corn planted area was partially offset by higher local corn seed prices. Lower crop protection volume is primarily due to low expected insect pressure, the adoption of insect protected soybean varieties, higher inventories, and a challenging macro environment. Insect control volumes were also impacted by the shutdown of the LaPorte manufacturing facility in Texas.
2015 operating earnings and operating earnings margin decreased primarily due to the negative impact of currency of $538 million, lower sales, and an approximately $120 million negative impact of the shutdown of the LaPorte manufacturing facility and the absence of prior year impacts from performance-based compensation adjustments, partially offset by cost reductions and continued productivity improvements.
2014 versus 2013 Full year 2014 segment net sales of $11.3 billion decreased $0.4 billion, or 4 percent, primarily due to lower corn seed volumes in Brazil and North America and the negative impact of currency, which was partly offset by an increase in crop protection volumes and higher local corn seed prices. In Brazil, corn seed market share and price were lower reflecting the impact of fall armyworm resistance and a reduction in planted hectares of corn. Higher volumes in insecticides were driven by continued growth in Rynaxypyr® insecticide and from successful launches of Cyazypyr® insecticide and new seed treatments in several markets.
2014 operating earnings decreased primarily due to lower corn seed volumes and the negative impact of currency which were partially offset by higher crop protection volumes, lower performance-based compensation expense of approximately $110 million, higher local seed prices and lower seed input costs. Operating earnings margin was about the same in each period.
Outlook Farmer net returns for row crops continue to trend down as land and rent prices have lagged the transition on lower commodity prices as grain stocks remain at elevated levels. The company expects the economic environment in the agriculture sector to remain challenged with corn and soybean commodity prices at the low end of normal until demand accelerates or there is a disruption in global production. Volatile currency markets are expected to continue to present headwinds given the size of DuPont Agriculture's businesses in Europe and Latin America. As farmers look to relative economics between crop alternatives, the company expects a slight year over year increase in Brazil Safrinha and North America corn area, provided weather cooperates during planting. Pioneer's order book in North America suggests a modest improvement in corn demand at the expense of soybeans in a highly competitive seed market. In crop protection, continued weak demand for foliar-applied insecticides in Brazil and elevated distributor inventories will continue to present challenges.
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For the first half of 2016, which reflects the majority of the northern hemisphere season, the company expects Agriculture sales to be mid-single digits percent lower with operating earnings in the low-teens percent below 2015 as local price gains and the benefit of cost actions are more than offset by lower insecticide and soybean volumes and currency. Crop protection's volume forecast assumes a continued impact from the shutdown of the LaPorte manufacturing facility. Volumes will be more challenged in the first quarter, due to the strong start in North America corn seed which benefited the fourth quarter of 2015, and due to crop protection in Brazil.
Full year 2016 segment net sales are expected to be down mid-single digits percent and full year operating earnings are expected to be about flat as local price gains and cost actions are offset by currency headwinds and lower volumes.
ELECTRONICS & COMMUNICATIONS
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Net sales | $ | 2,070 | $ | 2,381 | $ | 2,534 | |||
Operating earnings | $ | 359 | $ | 336 | $ | 314 | |||
Operating earnings margin | 17 | % | 14 | % | 12 | % | |||
2015 | 2014 | |||
Change in net sales from prior period due to: | ||||
Local Price and Product Mix | (4 | )% | (7 | )% |
Currency | (2 | )% | (1 | )% |
Volume | (7 | )% | 2 | % |
Portfolio and Other | — | % | — | % |
Total change | (13 | )% | (6 | )% |
2015 versus 2014 Full year 2015 segment net sales of $2.1 billion decreased $0.3 billion, or 13 percent, primarily due to competitive pressures impacting Solamet® paste and lower pricing from the pass-through of lower metals prices and the negative impact of currency, partially offset by volume growth in Tedlar® film photovoltaics and products for the consumer electronics market.
2015 operating earnings and operating earnings margin increased as cost reductions and continued productivity improvements more than offset lower sales.
2014 versus 2013 Full year 2014 segment net sales of $2.4 billion decreased $0.2 billion, or 6 percent, as volume growth in several product lines was more than offset by pass-through of lower metals prices and by competitive pressures impacting Solamet® paste.
2014 operating earnings and operating earnings margin increased due to volume growth and productivity improvements. These were partly offset by the absence of $20 million of OLED technology licensing income realized during 2013.
Outlook In 2016 the company expects the photovoltaic market to remain strong with module installations forecasted to increase mid-teens percent driving strong growth in Tedlar® film in photovoltaics. Segment results are expected to continue to be negatively impacted by declines in Solamet® paste with the impact lessening in the second half of the year due to more favorable year-over-year comparisons and expected new product introductions. The company anticipates consumer electronics markets will have a weaker start to the year but strengthen in the second half as channel inventories are worked off.
Full year 2016 segment net sales are expected to be about flat as strong volume growth in Tedlar® film for photovoltaics is offset by lower sales of Solamet® paste and lower metals pricing. Full year operating earnings are expected to be in the low-twenty percent range higher from increased volume and cost reductions and continued productivity improvements.
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INDUSTRIAL BIOSCIENCES
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Net sales | $ | 1,171 | $ | 1,244 | $ | 1,211 | |||
Operating earnings | $ | 203 | $ | 192 | $ | 151 | |||
Operating earnings margin | 17 | % | 15 | % | 12 | % | |||
2015 | 2014 | |||
Change in net sales from prior period due to: | ||||
Local Price and Product Mix | (3 | )% | 1 | % |
Currency | (6 | )% | — | % |
Volume | 3 | % | 2 | % |
Portfolio and Other | — | % | — | % |
Total change | (6 | )% | 3 | % |
2015 versus 2014 Full year 2015 segment net sales of $1.2 billion decreased 6 percent, primarily due to the negative impact of currency, lower prices and demand for biomaterials, partially offset by volume growth in enzymes, principally for home and personal care, food markets and ethanol production.
2015 operating earnings and operating earnings margin increased primarily due to cost reductions and continued productivity improvements, partially offset by lower sales.
2014 versus 2013 Full year 2014 segment net sales of $1.2 billion increased 3 percent, primarily due to increased enzyme demand, principally for ethanol production, food and animal nutrition, driven by new product offerings. In 2014, ethanol industry fundamentals were adjusting to a lower energy cost environment but demand for the company's novel enzymes and other functional bio products designed to increase production rates, yield and efficiency remained steady.
2014 operating earnings and operating earnings margin increased from higher volumes and improved product mix as discussed above.
Outlook Full year 2016 segment net sales are expected to increase in the low-single digits percent, driven by volume improvement, pricing and the impact of new product introductions in bioactives, including increased penetration in food markets. Full year operating earnings are expected to be about flat, reflecting cost savings and productivity improvements offset by higher product costs and currency.
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NUTRITION & HEALTH
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Net sales | $ | 3,256 | $ | 3,529 | $ | 3,473 | |||
Operating earnings | $ | 373 | $ | 369 | $ | 286 | |||
Operating earnings margin | 11 | % | 10 | % | 8 | % | |||
2015 | 2014 | |||
Change in net sales from prior period due to: | ||||
Local Price and Product Mix | — | % | 1 | % |
Currency | (9 | )% | (2 | )% |
Volume | 2 | % | 3 | % |
Portfolio and Other | (1 | )% | — | % |
Total change | (8 | )% | 2 | % |
2015 versus 2014 Full year 2015 segment net sales of $3.3 billion decreased 8 percent, primarily due to the negative impact of currency. Volume growth in probiotics, ingredient systems, texturants and cultures was partially offset by lower volumes in specialty proteins due to competitive challenges.
2015 operating earnings and operating earnings margin increased as cost reductions and continued productivity improvements and volume gains were mostly offset by the negative impact from currency of $53 million and the absence of the prior year $18 million gain from the termination of a distribution agreement.
2014 versus 2013 Full year 2014 segment net sales of $3.5 billion increased 2 percent, as volume growth in specialty proteins, cultures and probiotics, was partially offset by a negative impact from currency.
2014 operating earnings and operating earnings margin increased from improved product mix, volume growth, productivity improvements and a gain of $18 million from the termination of a distribution agreement, partially offset by the negative impact from currency.
Outlook In 2016, market conditions are expected to remain challenging with currency headwinds persisting, primarily in Europe and Latin America. Full year 2016 segment net sales are expected to be down low-single digits percent as volume growth, driven by investments in probiotics and cultures, is more than offset by the negative impact of currency. Full year operating earnings are expected to be up high-teens percent benefiting from cost reductions and productivity improvements, further expanding operating margins.
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PERFORMANCE MATERIALS
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Net sales | $ | 5,305 | $ | 6,059 | $ | 6,166 | |||
Operating earnings | $ | 1,216 | $ | 1,267 | $ | 1,249 | |||
Operating earnings margin | 23 | % | 21 | % | 20 | % | |||
2015 | 2014 | |||
Change in net sales from prior period due to: | ||||
Local Price and Product Mix | (4 | )% | 1 | % |
Currency | (6 | )% | (1 | )% |
Volume | 1 | % | 2 | % |
Portfolio and Other | (3 | )% | (4 | )% |
Total change | (12 | )% | (2 | )% |
2015 versus 2014 Full year 2015 segment net sales of $5.3 billion decreased $0.8 billion, or 12 percent, primarily due to the negative impact of currency, lower ethylene pricing and the portfolio impact of the sale of Glass Laminating Solutions/Vinyls (GLS/Vinyls) in June 2014 (see Note 3 to the Consolidated Financial Statements for additional information). Partially offsetting the declines are increased ethylene volumes due to the prior year scheduled outage at the ethylene unit in Orange, Texas and increased demand for Performance Polymers offerings in automotive markets, primarily in the U.S. and Europe in the second half of 2015.
2015 operating earnings decreased as cost reductions and continued productivity improvements were more than offset by the negative impact of currency of $132 million and lower selling prices. 2015 operating earnings includes $49 million of benefits, comprised of a net benefit from a joint venture, the sale of a business and the realization of tax benefits associated with a manufacturing site. Operating earnings margin increased due primarily to cost reductions and continued productivity improvements.
2014 versus 2013 Full year 2014 segment net sales of $6.1 billion decreased $0.1 billion, or 2 percent, due primarily to the impact of the sale of GLS/Vinyls and decreased ethylene volumes as a result of the second quarter scheduled outage at the Orange, Texas ethylene unit. This was partially offset by increased demand in automotive markets, primarily in China, Europe and North America.
2014 operating earnings and operating earnings margin increased due primarily to increased automotive demand, partially offset by the portfolio impact of the sale of GLS/Vinyls.
Outlook Full year 2016 segment net sales are expected to be down in the low-single digits percent and full year operating earnings are expected to be down about 10 percent as volume growth will be more than offset by lower ethylene price and the negative impact of currency.
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SAFETY & PROTECTION
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Net sales | $ | 3,527 | $ | 3,892 | $ | 3,880 | |||
Operating earnings | $ | 704 | $ | 772 | $ | 664 | |||
Operating earnings margin | 20 | % | 20 | % | 17 | % | |||
2015 | 2014 | |||
Change in net sales from prior period due to: | ||||
Local Price and Product Mix | — | % | (1 | )% |
Currency | (4 | )% | — | % |
Volume | (1 | )% | 3 | % |
Portfolio and Other | (4 | )% | (2 | )% |
Total change | (9 | )% | — | % |
2015 versus 2014 Full year 2015 segment net sales of $3.5 billion decreased $0.4 billion, or 9 percent, primarily due to the negative impact of currency, the portfolio impact of the Sontara® divestiture, and lower volume. Decreased demand for Sustainable Solution offerings, Nomex® thermal resistant fiber and Kevlar® high strength materials was driven by a weakened oil and gas industry and military spending delays, partially offset by volume growth for Tyvek® protective material, including medical packaging.
2015 operating earnings decreased $68 million, or 9 percent, as cost reductions and continued productivity improvements were more than offset by the negative impact of currency of $53 million and lower sales. 2015 operating earnings margin was flat from prior year as cost reductions and continued productivity improvements were offset by lower sales.
2014 versus 2013 Full year 2014 segment net sales of $3.9 billion were essentially equal to prior year, as increased demand for Nomex® thermal resistant fiber and Kevlar® high strength materials was offset by impact of portfolio changes and lower sales for clean technologies offerings.
2014 operating earnings and operating earnings margin increased, due primarily to the above mentioned increase in volumes, productivity improvements and lower product costs, partially offset by lower sales from clean technologies offerings, a negative currency impact, and the portfolio impact of the Sontara® divestiture.
Outlook Full year 2016 segment net sales are expected to be up by the low single digits percent with volume growth partially offset by the negative impact of currency. Full year operating earnings are expected to be up by the mid teens percent, on cost reductions and productivity improvements, leading to operating margin expansion for the year.
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Liquidity & Capital Resources
December 31, | ||||||
(Dollars in millions) | 2015 | 2014 | ||||
Cash, cash equivalents and marketable securities | $ | 6,206 | $ | 7,034 | ||
Total debt | 8,807 | 10,655 | ||||
Pursuant to its cash discipline policy, the company seeks first to maintain a strong balance sheet and second, to return excess cash to shareholders unless the opportunity to invest for growth is compelling. The company continually reviews its sources of liquidity and debt portfolio and occasionally may make adjustments to one or both to ensure adequate liquidity and an optimum debt maturity schedule.
The company's credit ratings impact its access to the debt capital markets and cost of capital. The company remains committed to a strong financial position and strong investment-grade rating. The company's long-term and short-term credit ratings are as follows:
Long-term | Short-term | Outlook | |
Standard & Poor's | A- | A-2 | Credit Watch Negative |
Moody’s Investors Service | A3 | P-2 | Negative |
Fitch Ratings | A | F1 | Rating Watch Negative |
In May 2015, Moody's Investor Service (Moody's) downgraded the company's long-term rating to A3 from A2, and the short-term rating to P-2 from P-1. In October 2015, Standard and Poor's Rating Services (Standard and Poor's) downgraded the company's long-term rating to A- from A, and the short-term rating to A-2 from A-1. In December 2015 following the announcement of the Merger Agreement with Dow, Standard and Poor's and Fitch Ratings placed the outlook on the company's long-term and the short-term rating on negative watch and Moody’s placed the company on negative outlook.
The company believes its ability to generate cash from operations and access to capital markets will be adequate to meet anticipated cash requirements to fund working capital, capital spending, dividend payments, share repurchases, debt maturities and other cash needs and that its current strong financial position, liquidity and credit ratings continue to provide access as needed to the capital markets. While the company expects that capacity for its commercial paper could be reduced as a result of its current short-term credit ratings, the company's liquidity needs can continue to be met through a variety of sources, including cash provided by operating activities, cash and cash equivalents, marketable securities, commercial paper, syndicated credit lines, bilateral credit lines, long-term debt markets, bank financing, committed receivable repurchase facilities and asset sales.
The company has access to approximately $4.9 billion in unused credit lines, which includes a $4 billion revolving credit facility to support its commercial paper program, with several major financial institutions. These unused credit lines provide additional support to meet short-term liquidity needs and general corporate purposes including letters of credit.
In February 2016, in line with seasonal agricultural working capital requirements, the company entered into a committed receivable repurchase agreement of up to $1 billion (the repurchase facility) that expires on November 30, 2016. Under the facility, the company may sell a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segment to participating institutions and simultaneously agree to repurchase at a future date. See further discussion of this facility in Item 9B, Other Information and Note 24 to the Consolidated Financial Statements.
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The company's cash, cash equivalents and marketable securities at December 31, 2015 and 2014 are $6.2 billion and $7.0 billion, respectively. Cash, cash equivalents and marketable securities held outside of the U.S. of $4.2 billion and $4.5 billion at December 31, 2015 and 2014, respectively, are generally utilized to fund local operating activities and capital expenditure requirements and are expected to support non-U.S. liquidity needs for the next 12 months and the foreseeable future thereafter. The company expects domestic liquidity needs, for at least the next 12 months and the foreseeable future thereafter, will be met through existing cash, cash equivalents and marketable securities held in the U.S. and the various sources of liquidity discussed above. Therefore, the company believes that it has sufficient sources of domestic liquidity to support its assumption that undistributed earnings at December 31, 2015 can be considered reinvested indefinitely.
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Cash provided by operating activities | $ | 2,316 | $ | 3,712 | $ | 3,179 | |||
Cash provided by operating activities decreased $1.4 billion in 2015 compared to 2014 primarily due to the absence of Chemours in the second half of 2015 compared with a full year of results in 2014 for an impact of approximately $1.0 billion and a lower cash earnings contribution from continuing operations of approximately $0.3 billion.
Cash provided by operating activities increased $0.5 billion in 2014 compared to 2013 due to lower year over year income tax payments associated with the sale of businesses and higher insurance recoveries and lower claims payments related to Imprelis® (See Note 16 to the Consolidated Financial Statements for additional information).
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Cash (used for) provided by investing activities | $ | (1,828 | ) | $ | (337 | ) | $ | 2,945 | |
Cash used for investing activities in 2015 increased by $1.5 billion compared to 2014. The change was primarily due to lower proceeds received from the sale of businesses in 2015 compared to 2014 and increase purchases of marketable securities in 2015 compared to 2014. This was partially offset by lower purchases of property, plant and equipment, mainly due to the absence of Chemours in the second half of 2015 which accounted for $0.3 billion. See Note 20 for further discussion of marketable securities outstanding at December 31, 2015 and 2014.
Cash used for investing activities in 2014 decreased $3.3 billion compared to 2013. The change was primarily due to lower proceeds received from the sale of businesses in 2014 compared to 2013.
Purchases of property, plant and equipment totaled $1.6 billion, $2.0 billion and $1.9 billion in 2015, 2014, and 2013, respectively. The company expects 2016 purchases of property, plant and equipment to about $1.1 billion.
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Cash used for financing activities | $ | (1,823 | ) | $ | (5,074 | ) | $ | (1,474 | ) |
The $3.3 billion decrease in cash used for financing activities in 2015 was primarily due to the distribution of Chemours borrowings to the company as part of the separation, partially offset by a reduction in short term borrowings, and an increase in the repurchase of common stock.
The $3.6 billion increase in cash used for financing activities in 2014 was primarily due to lower borrowings and higher payments for the repurchase of common stock.
Dividends paid to common and preferred shareholders were $1.5 billion, $1.7 billion, and $1.7 billion in 2015, 2014, and 2013, respectively. Dividends per share of common stock were $1.72, $1.84, and $1.78 in 2015, 2014, and 2013, respectively. In January 2016, the Board of Directors declared a first quarter common stock dividend of $0.38 per share. With the first quarter 2016 dividend, the company has paid quarterly consecutive dividends since the company’s first dividend in the fourth quarter 1904.
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In the first quarter 2015, DuPont announced its intention to buy back shares of about $4 billion using the distribution proceeds received from Chemours. In connection with the completion of the spin-off of Chemours, the Board of Directors authorized the use of the distribution proceeds to buy back shares of the company's common stock as follows: $2 billion to be purchased and retired by December 31, 2015 with the remainder to be purchased and retired by December 31, 2016. In August 2015, the company entered an accelerated share repurchase (ASR) agreement. Under the terms of the August 2015 ASR agreement, the company paid $2 billion to the financial institution and received and retired 35 million shares at an average price of $57.16 per share. See Part I, Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and Note 17 to the Consolidated Financial Statements for additional information.
DuPont’s objective continues to be to complete the remaining $2 billion stock buyback by year end December 31, 2016. However, as a result of the planned merger of equals with Dow, the company expects it will have limited opportunities to enter the market prior to the shareholder vote on the merger. After the vote, the company plans to make repurchases.
In January 2014, the company's Board of Directors authorized a $5 billion share buyback plan. In February and August 2014, the company entered into two separate ASR agreements. The February 2014 ASR agreement was completed in the second quarter of 2014, under which the company purchased and retired 15.1 million shares for $1 billion. The August 2014 ASR agreement was completed in the fourth quarter of 2014, under which the company purchased and retired 10.4 million shares for $700 million. In addition to the ASR agreements, in 2014, the company repurchased and retired 4.7 million shares in the open market for a total cost of $300 million. In 2015, the company repurchased and retired 4.6 million shares in the open market for a total cost of $353 million. As a result, the company has completed $2.4 billion of repurchases as of December 31, 2015. The remainder of the $5 billion share buyback will be purchased in future periods as there is no required completion date for purchases under the 2014 plan.
In December 2012, the company's Board of Directors authorized a $1 billion share buyback plan. In 2013, the company entered into an 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 and retirement 20.4 million shares of common stock.
See Note 17 Consolidated Financial Statements for additional information relating to the above share buyback plans.
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Cash provided by operating activities | $ | 2,316 | $ | 3,712 | $ | 3,179 | |||
Purchases of property, plant and equipment | (1,629 | ) | (2,020 | ) | (1,882 | ) | |||
Free cash flow | $ | 687 | $ | 1,692 | $ | 1,297 | |||
Free cash flow is a measurement not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, the company's free cash flow definition may not be consistent with the methodologies used by other companies. The company defines free cash flow as cash provided by operating activities less purchases of property, plant and equipment, and therefore indicates operating cash flow available for payment of dividends, other investing activities and other financing activities. Free cash flow is useful to investors and management to evaluate the company's cash flow and financial performance, and is an integral financial measure used in the company's financial planning process.
For further information relating to the change in cash provided by operating activities, see discussion above under cash provided by operating activities.
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Critical Accounting Estimates
The company's significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. Management believes that the application of these policies on a consistent basis enables the company to provide the users of the financial statements with useful and reliable information about the company's operating results and financial condition.
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts, including, but not limited to, receivable and inventory valuations, impairment of tangible and intangible assets, long-term employee benefit obligations, income taxes, restructuring liabilities, environmental matters and litigation. Management's estimates are based on historical experience, facts and circumstances available at the time and various other assumptions that are believed to be reasonable. The company reviews these matters and reflects changes in estimates as appropriate. Management believes that the following represents some of the more critical judgment areas in the application of the company's accounting policies which could have a material effect on the company's financial position, liquidity or results of operations.
Long-term Employee Benefits
Accounting for employee benefit plans involves numerous assumptions and estimates. Discount rate and expected return on plan assets are two critical assumptions in measuring the cost and benefit obligation of the company's pension and other long-term employee benefit plans. Management reviews these two key assumptions annually as of December 31st. These and other assumptions are updated periodically to reflect the actual experience and expectations on a plan specific basis as appropriate. As permitted by GAAP, actual results that differ from the assumptions are accumulated on a plan by plan basis and to the extent that such differences exceed 10 percent of the greater of the plan's benefit obligation or the applicable plan assets, the excess is amortized over the average remaining service period of active employees.
About 80 percent of the company's benefit obligation for pensions and essentially all of the company's other long-term employee benefit obligations are attributable to the benefit plans in the U.S. In the U.S. the discount rate is developed by matching the expected cash flow of the benefit plans to a yield curve constructed from a portfolio of high quality fixed-income instruments provided by the plan's actuary as of the measurement date. For non-U.S. benefit plans, the company utilizes prevailing long-term high quality corporate bond indices to determine the discount rate, applicable to each country, at the measurement date.
Within the U.S., the company establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. Strategic asset allocations in other countries are selected in accordance with the laws and practices of those countries. Where appropriate, asset-liability studies are also taken into consideration. The long-term expected return on plan assets in the U.S. is based upon historical real returns (net of inflation) for the asset classes covered by the investment policy, expected performance, and projections of inflation and interest rates over the long-term period during which benefits are payable to plan participants. Consistent with prior years, the long-term expected return on plan assets in the U.S. reflects the asset allocation of the plan and the effect of the company's active management of the plans' assets.
In determining annual expense for the principal U.S. pension plan, the company uses a market-related value of assets rather than its fair value. The market-related value of assets is calculated by averaging market returns over 36 months. Accordingly, there may be a lag in recognition of changes in market valuation. As a result, changes in the fair value of assets are not immediately reflected in the company's calculation of net periodic pension cost. The following table shows the market-related value and fair value of plan assets for the principal U.S. pension plan:
(Dollars in billions) | 2015 | 2014 | 2013 | ||||||
Market-related value of assets | $ | 15.1 | $ | 15.9 | $ | 15.5 | |||
Fair value of plan assets | 14.4 | 15.8 | 16.1 | ||||||
For plans other than the principal U.S. pension plan, pension expense is determined using the fair value of assets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
The company changed the method it used to estimate the 2016 service cost and interest cost components of net periodic benefit cost for the U.S. benefit plans. For these plans, the company has historically estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve and cash flow for measurement of the benefit obligation at the beginning of the period. The company will utilize a full yield curve approach in the estimation of these 2016 components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The company made this change as it believes it is a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. The company considers this a change in estimate, and, accordingly, will account for it prospectively starting in 2016. This change does not affect the measure of the total benefit obligation. See information with the respect to the impact of the change in method on 2016 pension expense under "Long-term Employee Benefits" beginning on page 45.
The following table highlights the potential impact on the company's pre-tax earnings due to changes in certain key assumptions with respect to the company's pension and other long-term employee benefit plans, based on assets and liabilities at December 31, 2015:
Pre-tax Earnings Benefit (Charge) (Dollars in millions) | 1/2 Percentage Point Increase | 1/2 Percentage Point Decrease | ||||
Discount rate | $ | 72 | $ | (74 | ) | |
Expected rate of return on plan assets | 88 | (88 | ) | |||
In October 2014, the Society of Actuaries released final reports of new mortality tables and a mortality improvement scale for measurement of retirement program obligations in the U.S. The company adopted these tables in measuring the 2014 long-term employee benefit obligations. This adoption increased the benefit obligation at December 31, 2014 by approximately $1.7 billion. The effect of this adoption was amortized into net periodic benefit cost beginning in 2015. In October 2015, the Society of Actuaries released an updated mortality improvement scale reflecting a decline in longevity projection from the October 2014 release. This release was adopted by the company in measuring the 2015 long-term employee benefit obligations in the U.S. This adoption decreased the benefit obligation at December 31, 2015 by approximately $0.4 billion. The effect of this adoption will be amortized into net periodic benefit cost beginning in 2016.
Additional information with respect to pension and other long-term employee benefits expenses, liabilities and assumptions is discussed under "Long-term Employee Benefits" beginning on page 45 and in Note 18 to the Consolidated Financial Statements.
Environmental Matters
DuPont accrues for remediation activities when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. The company has recorded a liability of $492 million as of December 31, 2015; these accrued liabilities exclude claims against third parties and are not discounted. As remediation activities vary substantially in duration and cost from site to site, it is difficult to develop precise estimates of future site remediation costs. The company's estimates are based on a number of factors, including the complexity of the geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other Potentially Responsible Parties (PRPs) at multi-party sites and the number of and financial viability of other PRPs. Therefore, considerable uncertainty exists with respect to environmental remediation costs and, under adverse changes in circumstances, the potential liability may range up to $1.0 billion above the amount accrued as of December 31, 2015.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Legal Contingencies
The company's results of operations could be affected by significant litigation adverse to the company, including product liability claims, patent infringement and antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. The company records accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates. In making determinations of likely outcomes of litigation matters, management considers many factors. These factors include, but are not limited to, the nature of specific claims including unasserted claims, the company's experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter's current status. Considerable judgment is required in determining whether to establish a litigation accrual when an adverse judgment is rendered against the company in a court proceeding. In such situations, the company will not recognize a loss if, based upon a thorough review of all relevant facts and information, management believes that it is probable that the pending judgment will be successfully overturned on appeal. A detailed discussion of significant litigation matters is contained in Note 16 to the Consolidated Financial Statements.
Indemnification Assets
Pursuant to the Separation Agreement discussed in Note 3 to the Consolidated Financial Statements, the company is indemnified by Chemours against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the distribution. The term of this indemnification is indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. In connection with the recognition of liabilities related to these indemnified matters, the company records an indemnification asset when recovery is deemed probable. In assessing the probability of recovery, the company considers the contractual rights under the Separation Agreement and any potential credit risk. Future events, such as potential disputes related to recovery as well as solvency of Chemours, could cause the indemnification assets to have a lower value than anticipated and recorded. The company evaluates the recovery of the indemnification assets recorded when events or changes in circumstances indicate the carrying values may not be fully recoverable.
Income Taxes
The breadth of the company's operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes the company will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. The resolution of these uncertainties may result in adjustments to the company's tax assets and tax liabilities. It is reasonably possible that net reductions to the company’s global unrecognized tax benefits could be in the range of $225 million to $250 million within the next 12 months with the majority due to the settlement of uncertain tax positions with various tax authorities.
Deferred income taxes result from differences between the financial and tax basis of the company's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies. For example, changes in facts and circumstances that alter the probability that the company will realize deferred tax assets could result in recording a valuation allowance, thereby reducing the deferred tax asset and generating a deferred tax expense in the relevant period. In some situations these changes could be material.
At December 31, 2015, the company had a deferred tax asset balance of $3.4 billion, net of valuation allowance of $1.5 billion. Realization of these assets is expected to occur over an extended period of time. As a result, changes in tax laws, assumptions with respect to future taxable income, and tax planning strategies could result in adjustments to these assets. See Note 6 to the Consolidated Financial Statements for additional details related to the deferred tax asset balance.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Valuation of Assets
The assets and liabilities of acquired businesses are measured at their estimated fair values at the dates of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired, including identified intangibles, is recorded as goodwill. The determination and allocation of fair value to the assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment, including estimates based on historical information, current market data and future expectations. The principal assumptions utilized in the company's valuation methodologies include revenue growth rates, operating margin estimates, royalty rates, and discount rates. Although the estimates were deemed reasonable by management based on information available at the dates of acquisition, those estimates are inherently uncertain.
Assessment of the potential impairment of property, plant and equipment, goodwill, other intangible assets, investments in affiliates and other assets is an integral part of the company's normal ongoing review of operations. Testing for potential impairment of these assets is significantly dependent on numerous assumptions and reflects management's best estimates at a particular point in time. The dynamic economic environments in which the company's diversified businesses operate, and key economic and business assumptions with respect to projected selling prices, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time in which such impairments are recognized. In addition, the company continually reviews its diverse portfolio of assets to ensure they are achieving their greatest potential and are aligned with the company's growth strategy. Strategic decisions involving a particular group of assets may trigger an assessment of the recoverability of the related assets. Such an assessment could result in impairment losses.
Based on the results of the company's annual goodwill impairment test, completed in the third quarter 2015, we determined that the fair value of each of the reporting units substantially exceeded its carrying value, and therefore there were no indications of impairment. The company's methodology for estimating the fair value of its reporting units is using the income approach based on the present value of future cash flows. The income approach has been generally supported by additional market transaction analyses. There can be no assurance that the company's estimates and assumptions regarding forecasted cash flow and revenue and operating income growth rates made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. The company believes the current assumptions and estimates utilized are both reasonable and appropriate.
In the fourth quarter 2015, the company elected to defer further testing and deployment of a multi-year, phased implementation of an enterprise resource planning (ERP) system. At December 31, 2015, the company has capitalized costs associated with the ERP system of approximately $435 million which have not yet been placed in service. It remains probable that the ERP system will be completed and placed in service.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Off-Balance Sheet Arrangements
Certain Guarantee Contracts
Information with respect to the company's guarantees is included in Note 16 to the Consolidated Financial Statements. Historically, the company has not had to make significant payments to satisfy guarantee obligations; however, the company believes it has the financial resources to satisfy these guarantees.
Contractual Obligations
Information related to the company's significant contractual obligations is summarized in the following table:
Payments Due In | |||||||||||||||
(Dollars in millions) | Total at December 31, 2015 | 2016 | 2017 – 2018 | 2019 – 2020 | 2021 and beyond | ||||||||||
Long-term debt obligations1 | $ | 8,777 | $ | 1,115 | $ | 1,353 | $ | 1,506 | $ | 4,803 | |||||
Expected cumulative cash requirements for interest payments through maturity | 3,213 | 371 | 649 | 435 | 1,758 | ||||||||||
Capital leases1 | 13 | 1 | 2 | 2 | 8 | ||||||||||
Operating leases | 1,238 | 248 | 411 | 303 | 276 | ||||||||||
Purchase obligations2 | |||||||||||||||
Information technology infrastructure & services | 157 | 56 | 68 | 33 | — | ||||||||||
Raw material obligations3 | 1,524 | 561 | 468 | 296 | 199 | ||||||||||
Utility obligations | 196 | 118 | 33 | 25 | 20 | ||||||||||
Human resource services | 40 | 30 | 9 | 1 | — | ||||||||||
License agreements4 | 1,545 | 351 | 474 | 370 | 350 | ||||||||||
Other | 165 | 79 | 47 | 25 | 14 | ||||||||||
Total purchase obligations | 3,627 | 1,195 | 1,099 | 750 | 583 | ||||||||||
Other liabilities1,5,6 | |||||||||||||||
Workers' compensation | 91 | 16 | 39 | 17 | 19 | ||||||||||
Asset retirement obligations | 49 | 2 | 6 | 3 | 38 | ||||||||||
Environmental remediation | 492 | 125 | 134 | 82 | 151 | ||||||||||
Legal settlements | 14 | 1 | 4 | 4 | 5 | ||||||||||
Other7 | 165 | 53 | 23 | 15 | 74 | ||||||||||
Total other long-term liabilities | 811 | 197 | 206 | 121 | 287 | ||||||||||
Total contractual obligations8 | $ | 17,679 | $ | 3,127 | $ | 3,720 | $ | 3,117 | $ | 7,715 | |||||
1. | Included in the Consolidated Financial Statements. |
2. | Represents enforceable and legally binding agreements in excess of $1 million to purchase goods or services that specify fixed or minimum quantities; fixed, minimum or variable price provisions; and the approximate timing of the agreement. |
3. | Includes raw material obligations related to supply agreements with Koch Industries, Inc. (INVISTA). |
4. | Primarily represents remaining minimum payments under DuPont Pioneer license agreements. |
5. | Pension and other long-term employee benefit obligations have been excluded from the table above. Expected 2016 funding for the principal U.S. pension plan and non-U.S. plans with plan assets is disclosed below within Long Term Employee Benefits. Contributions beyond 2016 are expected to be made, however, the amount of contributions are dependent on the future economic environment, investment returns on pension trust assets, as well as rules and regulations of the respective country in which the plans operate. The company’s remaining pension plans with no plan assets and other long-term employee benefits plans are paid from operating cash flows. The benefit payments for these plans are excluded from the table above as the timing and amounts of benefit payments are uncertain. The estimated benefit payments in 2016 for these plans are disclosed below within Long Term Employee Benefits. Refer to Note 18 to the Consolidated Financial Statements for further information regarding the pension and other long-term employee benefit plans. |
6. | The company's contractual obligations do not reflect an offset for recoveries associated with indemnifications by Chemours in accordance with the Separation Agreement. Refer to Note 3 and 16 to the Consolidated Financial Statements for additional detail related to the indemnifications. |
7. | Primarily represents employee-related benefits other than pensions and other long-term employee benefits. |
8. | Due to uncertainty regarding the completion of tax audits and possible outcomes, the timing of certain payments of obligations related to unrecognized tax benefits cannot be made and have been excluded from the table above. See Note 6 to the Consolidated Financial Statements for additional detail. |
The company expects to meet its contractual obligations through its normal sources of liquidity and believes it has the financial resources to satisfy these contractual obligations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Long-term Employee Benefits
The company has various obligations to its employees and retirees. The company maintains retirement-related programs in many countries that have a long-term impact on the company's earnings and cash flows. These plans are typically defined benefit pension plans, as well as medical, dental and life insurance benefits for pensioners and survivors and disability benefits for employees (other long-term employee benefits). Approximately 80 percent of the company's worldwide benefit obligation for pensions and essentially all of the company's worldwide other long-term employee benefit obligations are attributable to the U.S. benefit plans. Pension coverage for employees of the company's non-U.S. consolidated subsidiaries is provided, to the extent deemed appropriate, through separate plans. The company regularly explores alternative solutions to meet its global pension obligations in the most cost effective manner possible as demographics, life expectancy and country-specific pension funding rules change. Where permitted by applicable law, the company reserves the right to change, modify or discontinue its plans that provide pension, medical, dental, life insurance and disability benefits.
The majority of employees hired in the U.S. on or after January 1, 2007 are not eligible to participate in the pension and post-retirement medical, dental and life insurance plans, but receive benefits in the defined contribution plans.
Benefits under defined benefit pension plans are based primarily on years of service and employees' pay near retirement. Pension benefits are paid primarily from trust funds established to comply with applicable laws and regulations. Unless required by law, the company does not make contributions that are in excess of tax deductible limits. The actuarial assumptions and procedures utilized are reviewed periodically by the plans' actuaries to provide reasonable assurance that there will be adequate funds for the payment of benefits. No contributions were made to the principal U.S. pension plan in 2015 and the company expects to contribute $230 million to this plan in 2016.
Funding for each pension plan other than the principal U.S. pension plan is governed by the rules of the sovereign country in which it operates. Thus, there is not necessarily a direct correlation between pension funding and pension expense. In general, however, improvements in plans' funded status tends to moderate subsequent funding needs. The company contributed $164 million to its pension plans other than the principal U.S. pension plan in 2015.
U.S. pension benefits that exceed federal limitations are covered by separate unfunded plans and these benefits are paid to pensioners and survivors from operating cash flows. The company's remaining pension plans with no plan assets are paid from operating cash flows. The company made benefit payments of $144 million to its unfunded plans in 2015.
The company's other long-term employee benefits are unfunded and the cost of the approved claims is paid from operating cash flows. Pre-tax cash requirements to cover actual net claims costs and related administrative expenses were $237 million, $233 million and $207 million for 2015, 2014 and 2013, respectively. Changes in cash requirements reflect the net impact of higher per capita health care costs, demographic changes, plan amendments and changes in participant premiums, co-pays and deductibles.
In 2016, the company expects to contribute about the same as 2015 for pension plans other than the principal U.S. pension plan, its remaining plans with no plan assets and its other long-term employee benefit plans.
The company's income can be significantly affected by pension and defined contribution benefits as well as other long-term employee benefits. The following table summarizes the extent to which the company's income over each of the last 3 years was affected by pre-tax charges related to long-term employee benefits:
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Long-term employee benefit plan charges 1 | $ | 616 | $ | 715 | $ | 1,153 | |||
1. | The long-term employee benefit plan charges include discontinued operations of $(245), $96 and $113 for 2015, 2014 and 2013, respectively. |
The above charges for pension and other long-term employee benefits are determined as of the beginning of each year. The decrease in long-term employee benefit expense in 2015 is due to a curtailment gain partially offset by a decrease in discount rate. The decrease in long-term employee benefit expense in 2014 is primarily related to higher discount rates and better than expected pension asset returns. See "Long-term Employee Benefits" under the Critical Accounting Estimates section beginning on page 40 of this report for additional information on determining annual expense.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
The company's key assumptions used in calculating its pension and other long-term employee benefits are the expected return on plan assets, the rate of compensation increases and the discount rate (see Note 18 to the Consolidated Financial Statements). For 2016, long term employee benefits expense from continuing operations is expected to decrease by about $230 million due to the adoption of the full yield curve approach and a higher discount rate which will be partially offset by a lower expected return on plan assets for the US pension plan from 8.5% to 8.0%. The adoption of the full yield curve approach will reduce 2016 expense by $210 million as a result of a $10 million and $200 million reduction in service and interest cost components, respectively. The estimated 2016 long term employee benefit expense from continuing operations does not include the impact of any settlement losses or curtailment gains resulting from actions associated with the 2016 global cost savings and restructuring program, as it cannot be estimated at this time.
Environmental Matters
The company operates global manufacturing, product handling and distribution facilities that are subject to a broad array of environmental laws and regulations. Such rules are subject to change by the implementing governmental agency, and the company monitors these changes closely. Company policy requires that all operations fully meet or exceed legal and regulatory requirements. In addition, the company implements voluntary programs to reduce air emissions, minimize the generation of hazardous waste, decrease the volume of water use and discharges, increase the efficiency of energy use and reduce the generation of persistent, bioaccumulative and toxic materials. Management has noted a global upward trend in the amount and complexity of proposed chemicals regulation. The costs to comply with complex environmental laws and regulations, as well as internal voluntary programs and goals, are significant and will continue to be significant for the foreseeable future.
Pre-tax environmental expenses charged to current operations are summarized below:
(Dollars in millions) | 2015 | 2014 | 2013 | ||||||
Environmental operating costs | $ | 380 | $ | 380 | $ | 375 | |||
Increase in remediation accrual | 118 | 95 | 90 | ||||||
$ | 498 | $ | 475 | $ | 465 | ||||
About 75 percent of total pre-tax environmental expenses charged to current operations in 2015 resulted from operations in the U.S. Based on existing facts and circumstances, management does not believe that year over year changes, if any, in environmental expenses charged to current operations will have a material impact on the company's financial position, liquidity or results of operations. Annual expenditures are not expected to vary significantly from the range of such expenditures experienced in the past few years. Longer term, expenditures are subject to considerable uncertainty and may fluctuate significantly.
Environmental Operating Costs
As a result of its operations, the company incurs costs for pollution abatement activities including waste collection and disposal, installation and maintenance of air pollution controls and wastewater treatment, emissions testing and monitoring, and obtaining permits. The company also incurs costs related to environmental related research and development activities including environmental field and treatment studies as well as toxicity and degradation testing to evaluate the environmental impact of products and raw materials.
Remediation Accrual
Changes in the remediation accrual balance are summarized below:
(Dollars in millions) | |||
Balance at December 31, 2013 | $ | 458 | |
Remediation payments | (75 | ) | |
Increase in remediation accrual | 95 | ||
Balance at December 31, 2014 | $ | 478 | |
Remediation payments | (104 | ) | |
Increase in remediation accrual | 118 | ||
Balance at December 31, 2015 | $ | 492 | |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Considerable uncertainty exists with respect to environmental remediation costs, and, under adverse changes in circumstances, the potential liability may range up to $1.0 billion above the amount accrued as of December 31, 2015. However, based on existing facts and circumstances, management does not believe that any loss, in excess of amounts accrued, related to remediation activities at any individual site will have a material impact on the financial position, liquidity or results of operations of the company.
Pursuant to the Separation Agreement discussed in Note 3 to the Consolidated Financial Statements, the company is indemnified by Chemours for certain environmental matters, included in the liability of $492 million, that have an estimated liability of $291 million as of December 31, 2015 and a potential exposure that ranges up to approximately $610 million above the amount accrued. As such, the company has recorded an indemnification asset of $291 million corresponding to the company's accrual balance related to these matters at December 31, 2015.
As of December 31, 2015, the company has been notified of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or similar state laws at about 500 sites around the U.S., including approximately 100 sites for which DuPont does not believe it has liability based on current information. Active remediation is under way at approximately 140 of these sites. In addition, the company has resolved its liability at approximately 190 sites, either by completing remedial actions with other PRPs or by participating in "de minimis buyouts" with other PRPs whose waste, like the company's, represented only a small fraction of the total waste present at a site. The company received notice of potential liability at one new site during 2015 compared with three and five similar notices in 2014 and 2013, respectively.
Environmental Capital Expenditures
In 2015, the company spent approximately $20 million on environmental capital projects either required by law or necessary to meet the company's internal environmental goals. The company currently estimates expenditures for environmental-related capital projects to be about $40 million in 2016. In the U.S., additional capital expenditures are expected to be required over the next decade for treatment, storage and disposal facilities for solid and hazardous waste and for compliance with the Clean Air Act (CAA). Until all CAA regulatory requirements are established and known, considerable uncertainty will remain regarding estimates for future capital expenditures. However, management does not believe that the costs to comply with these requirements will have a material impact on the financial position or liquidity of the company.
Climate Change
The company believes that climate change is an important global issue that presents risks and opportunities. Expanding upon significant global greenhouse gas (GHG) emissions and other environmental footprint reductions made in the period 1990-2010, as of 2014 the company reduced its environmental footprint, achieving reductions of 9 percent in GHG emissions intensity and 8 percent in water consumption versus a 2010 baseline. In addition, as of 2014, the company achieved an 11 percent reduction in energy intensity from non-renewable resources versus a 2010 baseline. The company continuously evaluates opportunities for existing and new product and service offerings in light of the anticipated demands of a low-carbon economy.
The company is actively engaged in efforts to develop constructive public policies to reduce GHG emissions and encourage lower carbon forms of energy. Such policies may bring higher operating costs as well as greater revenue and margin opportunities. Legislative efforts to control or limit GHG emissions could affect the company's energy source and supply choices as well as increase the cost of energy and raw materials derived from fossil fuels. Such efforts are also anticipated to provide the business community with greater certainty for the regulatory future, help guide investment decisions, and drive growth in demand for low-carbon and energy-efficient products, technologies, and services. Similarly, demand is expected to grow for products that facilitate adaptation to a changing climate.
There are existing efforts to address GHG emissions at the national and regional levels. Several of the company's facilities in the European Union (EU) are regulated under the EU Emissions Trading Scheme. China has begun pilot programs for carbon taxes and trading of GHG emissions in selected areas. The current unsettled policy environment in the U.S., where many company facilities are located, adds an element of uncertainty to business decisions, particularly those relating to long-term capital investments.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
In 2010, the U.S. Environmental Protection Agency (EPA) launched a phased-in scheme to regulate GHG emissions first from large stationary sources under the existing CAA permitting requirements administered by state and local authorities. Large capital investments may be required to install Best Available Control Technology on major new or modified sources of GHG emissions. In 2015, the EPA promulgated regulations for carbon dioxide emissions from new and reconstructed/modified Electric Generating Units (EGU's). In 2015, the EPA also promulgated new regulations for carbon dioxide emissions from existing EGUs that would be based on individual state emission reduction programs. These regulations are currently being challenged in the U.S. federal court. If the regulations survive these challenges, they may affect the long term price and supply of electricity and natural gas and demand for products that contribute to energy efficiency and renewable energy. The precise impact of the aforementioned regulations is uncertain due to the flexibility provided to the states in developing their programs and anticipated legal challenges to this regulatory approach. A comprehensive national policy that addresses climate change by relying on market-based mechanisms to drive reductions in greenhouse gases is likely to be more economically efficient than the facility-by-facility controls that would result from implementation of recently promulgated rules under EPA’s existing authorities.
At the international level, significant differences in regional or national approaches could present challenges in a global marketplace, highlighting the need for coordinated global policy actions. An effective global climate policy framework will help drive the market changes that are needed to stimulate and efficiently deploy new innovations in science and technology, while maintaining open and competitive global markets.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company’s global operations are exposed to financial market risks relating to fluctuations in foreign currency exchange rates, commodity prices, and interest rates. The company has established a variety of programs including use of derivative instruments and other financial instruments to manage the exposure to financial market risks as to minimize volatility of financial results. In the ordinary course of business, the company enters into derivative instruments to hedge its exposure to foreign currency, interest rate and commodity price risks under established procedures and controls. For additional information on these derivatives and related exposures, see Note 20 to the Consolidated Financial Statements. Decisions regarding whether or not to hedge a given commitment are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market volatility and economic trends. Foreign currency exchange contracts are also used, from time to time, to manage near-term foreign currency cash requirements.
Foreign Currency Exchange Rate Risks
The company has significant international operations resulting in a large number of currency transactions that result from international sales, purchases, investments and borrowings. The primary currencies for which the company has an exchange rate exposure are the European Euro (EUR), Brazilian Real, Chinese Yuan, and Japanese Yen. The company uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of its operations. In addition to the contracts disclosed in Note 20 to the Consolidated Financial Statements, from time to time, the company will enter into foreign currency exchange contracts to establish with certainty the USD amount of future firm commitments denominated in a foreign currency.
Certain foreign entities of the company held USD denominated marketable securities, mainly US government securities, at December 31, 2015. The USD/EUR is the primary foreign exchange exposure for these nonfunctional currency denominated marketable securities. These marketable securities are classified as “available-for-sale” and as such, fluctuations in foreign exchange are recorded in accumulated other comprehensive loss (AOCI) within the Consolidated Statements of Equity. These fluctuations are subsequently reclassified from AOCI to earnings in the period in which the marketable securities are sold.
The following table illustrates the fair values of outstanding foreign currency contracts and nonfunctional currency denominated marketable securities at December 31, 2015 and 2014, and the effect on fair values of a hypothetical adverse change in the foreign exchange rates that existed at December 31, 2015 and 2014. The sensitivities for foreign currency contracts and nonfunctional currency denominated marketable securities are based on a 10 percent adverse change in foreign exchange rates.
Fair Value Asset/(Liability) | Fair Value Sensitivity | |||||||||||
(Dollars in millions) | 2015 | 2014 | 2015 | 2014 | ||||||||
Foreign currency contracts | $ | (6 | ) | $ | 192 | $ | (738 | ) | $ | (870 | ) | |
Marketable securities | 788 | — | (110 | ) | — | |||||||
Since the company's risk management programs are highly effective, the potential loss in value for each risk management portfolio described above would be largely offset by changes in the value of the underlying exposure.
Concentration of Credit Risk
The company maintains cash and cash equivalents, marketable securities, derivatives and certain other financial instruments with various financial institutions. These financial institutions are generally highly rated and geographically dispersed and the company has a policy to limit the dollar amount of credit exposure with any one institution.
As part of the company's financial risk management processes, it continuously evaluates the relative credit standing of all of the financial institutions that service DuPont and monitors actual exposures versus established limits. The company has not sustained credit losses from instruments held at financial institutions.
The company's sales are not materially dependent on any single customer. As of December 31, 2015, no one individual customer balance represented more than five percent of the company's total outstanding receivables balance. Credit risk associated with its receivables balance is representative of the geographic, industry and customer diversity associated with the company's global businesses.
The company also maintains strong credit controls in evaluating and granting customer credit. As a result, it may require that customers provide some type of financial guarantee in certain circumstances. Length of terms for customer credit varies by industry and region.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are included herein, commencing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 SEC. 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 December 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.
There has been no change in the company's internal control over financial reporting that occurred during the fourth quarter of 2015 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. The company has completed its evaluation of its internal controls and has concluded that the company's system of internal controls over financial reporting was effective as of December 31, 2015 (see page F-2).
ITEM 9B. OTHER INFORMATION
On February 3, 2016, the company entered into a committed receivable repurchase agreement of up to $1 billion (the repurchase facility) that expires on November 30, 2016. Under the repurchase facility, the company may sell a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segment to participating institutions and simultaneously agree to repurchase at a future date. The repurchase facility is considered a secured borrowing with the customer notes receivables, inclusive of those that are sold and repurchased, equal to 105% of the outstanding amounts borrowed utilized as collateral. Borrowings under the repurchase facility will have an interest rate of LIBOR + 0.75%.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the sections entitled, "Election of Directors," "Governance of the Company-Committees of the Board," "Governance of the Company-Committee Membership," "Section 16(a) Beneficial Ownership Reporting Compliance," and “Stockholder Nominations for Election of Directors.”
The company has adopted a Code of Ethics for its CEO, CFO, and Controller that may be accessed from the company's website at www.dupont.com by clicking on "Investors" and then "Corporate Governance." Any amendments to, or waiver from, any provision of the code will be posted on the company's website at the above address.
Executive Officers of the Registrant
The following is a list, as of February 4, 2016, of the company's Executive Officers:
Age | Executive Officer Since | |
Chair of the Board of Directors and Chief Executive Officer: | ||
Edward D. Breen | 59 | 2015 |
Other Executive Officers: | ||
Benito Cachinero-Sánchez | 57 | 2011 |
Senior Vice President - Human Resources | ||
James C. Collins | 53 | 2014 |
Executive Vice President | ||
C. Marc Doyle | 46 | 2015 |
Executive Vice President | ||
Nicholas C. Fanandakis | 59 | 2009 |
Executive Vice President and Chief Financial Officer | ||
Stacy L. Fox | 62 | 2014 |
Senior Vice President and General Counsel | ||
Douglas Muzyka | 61 | 2014 |
Senior Vice President and Chief Science & Technology Officer | ||
The company's Executive Officers are elected or appointed for the ensuing year or for an indefinite term and until their successors are elected or appointed.
Edward D. Breen joined the DuPont Board of Directors in February 2015, was named Interim Chair of the Board and Chief Executive Officer (CEO) in October 2015, and assumed his current role as Chair of the Board and CEO in November 2015. Mr. Breen served as Chairman and CEO of Tyco International plc (Tyco) from July 2002 until September 2012. Prior to joining Tyco, Mr. Breen held several senior management positions at Motorola from 2000 to 2002, including as President and Chief Operating Officer. From December 1997 to January 2000, he served as Chairman, President and Chief Executive Officer of General Instrument Corporation. Between 1994 and 1997, Mr. Breen was President of the Broadband Networks Group for General Instrument, President of Eastern Operations for the Communications Division and served as Executive Vice President of Terrestrial Systems. Mr. Breen currently serves as Chairman of Tyco and a Director of Comcast Corporation. He also serves as a member of the advisory board of New Mountain Capital LLC, a private equity firm.
Benito Cachinero-Sánchez joined DuPont in April 2011 as Senior Vice President - Human Resources. Prior to joining DuPont, he was Corporate Vice President of Human Resources at Automatic Data Processing (ADP). Prior to ADP, he was Vice President, Human Resources for the Medical Devices & Diagnostics Group of Johnson & Johnson.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE, continued
James C. Collins joined DuPont in 1984 as an engineer. He has held positions in engineering, supervision and plant management at a variety of manufacturing sites. In 1993, he joined the Agriculture Sales & Marketing Group where he served in a variety of roles across the globe supporting DuPont’s seed and crop protection businesses. From 2004 to 2010, he was responsible for DuPont Crop Protection as Vice President and General Manager and then President. In January 2011, he was appointed Vice President for Acquisition & Integration of Danisco, and was named President of DuPont Industrial Biosciences in May of that year. Beginning in September 2013, he assumed additional business and functional responsibilities as Senior Vice President. In December 2014, he was named Executive Vice President and had responsibility for the Electronics & Communications, Industrial Biosciences, Performance Materials segments as well as regional management for Europe, Middle East, Africa and Canada and Corporate Communications. Effective January 2016, Mr. Collins has responsibility for the Agriculture businesses.
C. Marc Doyle joined DuPont in 1995 as a research scientist within DuPont Central Research & Development. He has held positions in business development, marketing and business management, including strategic planning manager, global displays business manager and regional business director of the Asia Pacific region for the Microcircuit Materials business. In February 2008, he became the Global Business Director for DuPont Photovoltaic Solutions within the DuPont Electronics & Communications business. He was named Global Market and Product Director for DuPont Protection Technologies in September 2011. In this role, Mr. Doyle had been responsible for the Kevlar® and Nomex® product lines globally. In June 2013 he was named President of DuPont Protection Technologies. In July 2015 he was named Senior Vice President and assumed responsibility for the Safety & Protection businesses. Effective January 2016, he has been named Executive Vice President and assumed responsibility for the Electronics & Communications, Protection Solutions, Industrial Biosciences, Nutrition & Health, Sustainable Solutions and Performance Materials businesses.
Nicholas C. Fanandakis joined DuPont in 1979 as an accounting and business analyst. Since then, Mr. Fanandakis served in a variety of plant, marketing, and product management and business director roles. Mr. Fanandakis served as Vice President and General Manager—DuPont Chemical Solutions Enterprise from 2003 until February 2007 when he was named Vice President—Corporate Plans. In January 2008, Mr. Fanandakis was named Group Vice President—DuPont Applied BioSciences. In November 2009, he was named Senior Vice President and Chief Financial Officer. In August 2010, he was named Executive Vice President and Chief Financial Officer.
Stacy L. Fox joined DuPont in October 2014 as Senior Vice President and General Counsel. Effective January 2016, she also has responsibility for Corporate Communications. Prior to joining DuPont she served as Deputy Emergency Manager of the City of Detroit. Prior to that role, she was Senior Vice President of Strategy and General Counsel of Sunoco, Inc. She also served as a member of the Board of Directors of Sunoco Partners LLC. Earlier, she served as Executive Vice President of Corporate Transactions and Legal Affairs for Visteon. Ms. Fox is also a founder and principal of the Roxbury Group.
Douglas Muzyka joined the company in 1985 as a research scientist and held a variety of research and research management roles. In 1994, he was named Director of Technology and New Business Development for DuPont Nylon, Asia Pacific. In 1998, he was named Global Business Director for the Nylon Industrial Specialties business. In 2001, Mr. Muzyka was then named President and General Manager of DuPont Mexico. In January 2003, he was named President and Chief Executive Officer of DuPont Canada Inc. and in September 2003, concurrently Vice President and General Manager - DuPont Nutrition & Health. In July 2006, he assumed the role of President - DuPont Greater China. In September 2010, he was named Senior Vice President and Chief Science and Technology Officer. Effective January 2016, he also has responsibility for engineering technologies and regional leadership.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the sections entitled, "Compensation Discussion and Analysis," "Compensation of Executive Officers," "Directors' Compensation," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report."
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the section entitled "Ownership of Company Stock."
Securities authorized for issuance under equity compensation plans as of December 31, 2015
(Shares in thousands, except per share)
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights2 | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans3 | ||||||
Equity compensation plans approved by security holders | 22,928 | 1 | $ | 54.89 | 39,815 | ||||
Equity compensation plans not approved by security holders | 14 | 4 | — | — | 5 | ||||
Total | 22,942 | $ | 54.89 | 39,815 | |||||
1. | Includes stock-settled time-vested and performance-based restricted stock units granted and stock units deferred under the company's Equity and Incentive Plan, Stock Performance Plan, Variable Compensation Plan and the Stock Accumulation and Deferred Compensation Plan for Directors. Performance-based restricted stock units reflect the maximum number of shares to be awarded at the conclusion of the performance cycle (200 percent of the original grant). The actual award payouts can range from 0 to 200 percent of the original grant. |
2. | Represents the weighted-average exercise price of the outstanding stock options only; the outstanding stock-settled time-vested and performance-based restricted stock units and deferred stock units are not included in this calculation. |
3. | Reflects shares available pursuant to the issuance of stock options, restricted stock, restricted stock units or other stock-based awards under the amended Equity and Incentive Plan approved by the shareholders in April 2011 (see Note 19 to the company's Consolidated Financial Statements). The maximum number of shares of stock reserved for the grant or settlement of awards under the Equity and Incentive Plan (Share Limit) shall be 110,000 and shall be subject to adjustment as provided therein; provided that each share in excess of 30,000 issued under the Equity and Incentive Plan pursuant to any award settled in stock, other than a stock option or stock appreciation right, shall be counted against the foregoing Share Limit as four and one-half shares for every one share actually issued in connection with such award. (For example, if 32,000 shares of restricted stock are granted under the Equity and Incentive Plan, 39,000 shall be charged against the Share Limit in connection with that award.) |
4. | Includes 14 deferred stock units resulting from base salary and short-term incentive (STIP) deferrals under the Management Deferred Compensation Plan (MDCP). Under the MDCP, a select group of management or highly compensated employees can elect to defer the receipt of their base salary, STIP or Long Term Incentive (LTI) award. LTI deferrals are included in footnote 1 to the above chart. The company does not match deferrals under the MDCP. There are seven core investment options under the MDCP for base salary and STIP deferrals, including deferred stock units with dividend equivalents credited as additional stock units. In general, deferred stock units are distributed in the form of DuPont common stock and may be made in the form of lump sum at a specified future date prior to retirement or a lump sum or annual installments after separation from service. Shareholder approval of the MDCP was not required under the rules of the New York Stock Exchange. |
5. | There is no limit on the number of shares that can be issued under the MDCP and no further shares are available for issuance under the other equity compensation arrangements described in footnote 4 to the above chart. |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the sections entitled, "Governance of the Company-Review and Approval of Transactions with Related Persons" and "Governance of the Company-Corporate Governance Guidelines," "Governance of the Company-Committees of the Board," "Governance of the Company-Committee Membership" and "Election of Directors."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the section entitled "Ratification of Independent Registered Public Accounting Firm."
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | Financial Statements, Financial Statement Schedules and Exhibits: |
1. | Financial Statements (See the Index to the Consolidated Financial Statements on page F-1 of this report). |
2. | Financial Statement Schedules |
Schedule II—Valuation and Qualifying Accounts
(Dollars in millions)
Year Ended December 31, | 2015 | 2014 | 2013 | ||||||
Accounts Receivable—Allowance for Doubtful Receivables | |||||||||
Balance at beginning of period | $ | 235 | $ | 262 | $ | 237 | |||
Additions charged to cost and expenses | 58 | 58 | 70 | ||||||
Deductions from reserves1 | (68 | ) | (85 | ) | (45 | ) | |||
Balance at end of period | $ | 225 | $ | 235 | $ | 262 | |||
Inventory—Obsolescence Reserve | |||||||||
Balance at beginning of period | $ | 180 | $ | 212 | $ | 250 | |||
Additions charged to expenses | 391 | 386 | 304 | ||||||
Deductions from reserves2 | (334 | ) | (418 | ) | (342 | ) | |||
Balance at end of period | $ | 237 | $ | 180 | $ | 212 | |||
Deferred Tax Assets—Valuation Allowance | |||||||||
Balance at beginning of period | $ | 1,704 | $ | 1,711 | $ | 1,861 | |||
Net (benefits) charges to income tax expense | (71 | ) | (47 | ) | 29 | ||||
(Deductions) additions to other comprehensive income (loss) | (104 | ) | 40 | (179 | ) | ||||
Balance at end of period | $ | 1,529 | $ | 1,704 | $ | 1,711 | |||
1. Deductions include write-offs, recoveries and currency translation adjustments.
2. Deductions include disposals and currency translation adjustments.
Financial Statement Schedules listed under SEC rules but not included in this report are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto incorporated by reference.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, continued
3. | Exhibits |
The following list of exhibits includes both exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by reference to other filings:
Exhibit Number | Description | |
3.1 | Company's Restated Certificate of Incorporation (incorporated by reference to Exhibit 99.2 to the company’s Annual Report on Form 8-K (Commission file number 1-815) dated June 1, 2015). | |
3.2 | Company’s Bylaws, as last amended effective October 22, 2015 (incorporated by reference to Exhibit 3.2 to the company’s Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended September 30, 2015). | |
4 | The company agrees to provide the Commission, on request, copies of instruments defining the rights of holders of long-term debt of the company and its subsidiaries. | |
10.1* | The DuPont Stock Accumulation and Deferred Compensation Plan for Directors, as last amended effective January 1, 2009 (incorporated by reference to Exhibit 10.1 to the company's Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2013). | |
10.2* | Company’s Supplemental Retirement Income Plan, as last amended effective December 18, 1996 (incorporated by reference to Exhibit 10.2 to the company's Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2011). | |
10.3* | Company’s Pension Restoration Plan, as last amended effective June 29, 2015 (incorporated by reference to Exhibit 10.3 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2015). | |
10.4* | Company’s Rules for Lump Sum Payments, as last amended effective May 15, 2014 (incorporated by reference to Exhibit 10.4 to the company’s Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2015). | |
10.5* | Company’s Stock Performance Plan, as last amended effective January 25, 2007 (incorporated by reference to Exhibit 10.5 to the company's Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2011). | |
10.6* | Company’s Equity and Incentive Plan, as amended October 23, 2014 (incorporated by reference to Exhibit 10.06 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended September 30, 2014). | |
10.7* | Form of Award Terms under the company’s Equity and Incentive Plan (incorporated by reference to Exhibit 10.7 to the company’s Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2013). | |
10.8* | Company’s Retirement Savings Restoration Plan, as last amended effective May 15, 2014 (incorporated by reference to Exhibit 10.08 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2014). | |
10.9* | ||