E. I. du Pont de Nemours and Company (DuPont) — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited consolidated results. The filing identifies the registrant as E. I. du Pont de Nemours and Company. Results include Danisco from its May 19, 2011 acquisition date.
Business context and reporting period
DuPont reported nine reportable segments following the Danisco acquisition, including newly established Industrial Biosciences and Nutrition & Health segments. Management cited strong titanium dioxide demand, higher pricing, Agriculture growth in Latin America, and portfolio expansion as key drivers. Developing-market sales represented 39% of quarterly sales and 33% of year-to-date sales.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $9,238 million | $7,001 million | $29,536 million | $24,101 million |
| Income before taxes | $569 million | $330 million | $3,860 million | $3,485 million |
| Net income attributable to DuPont | $452 million | $367 million | $3,101 million | $2,655 million |
| Diluted EPS | $0.48 | $0.40 | $3.28 | $2.89 |
| Dividends per share | $0.41 | $0.41 | $1.23 | $1.23 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $431 million | $35 million |
| Free cash flow | Not separately provided | Not separately provided | $(780) million | $(864) million |
Q3 net sales increased 32%, driven by 15% higher local selling prices, a 4% currency benefit, a 12% portfolio benefit principally from Danisco, and 1% higher volume. Nine-month sales increased 23%, with 11% higher local prices, 4% higher volume, a 3% currency benefit, and a 5% portfolio benefit.
Q3 COGS was 77% of sales, down from approximately 78% in the prior year. Nine-month COGS was 72% of sales, broadly unchanged. Approximate net income margins were 4.9% for Q3 2011 versus 5.2% in Q3 2010, and 10.5% for the first nine months versus 11.1% in the prior-year period. The filing does not present a separately defined operating margin.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $2.75 billion at September 30, 2011, compared with $4.26 billion at December 31, 2010. Marketable securities were $229 million, providing approximately $3.0 billion of cash and marketable securities.
- Total debt was approximately $15.5 billion, up from $10.3 billion at year-end 2010. The increase primarily funded Danisco and seasonal working capital.
- Current liabilities were $11.37 billion and long-term borrowings were $12.20 billion. Total equity was $12.02 billion.
- DuPont reported approximately $4.6 billion of unused credit lines and investment-grade ratings with stable outlooks from Standard & Poor’s, Moody’s, and Fitch.
- Capital expenditures were $1.21 billion for the first nine months, versus $899 million in 2010. Dividends paid were $1.15 billion, and share repurchases totaled $672 million.
Material changes versus the prior comparable period
- Danisco was acquired for $6.417 billion plus $617 million of net debt assumed. The acquisition added $1.0 billion of sales during the second and third quarters but contributed $(50) million of net income attributable to DuPont, excluding additional acquisition-related interest expense.
- Danisco-related charges included $175 million of pretax inventory fair-value step-up expense through nine months, $85 million of transaction costs, and $36 million of restructuring charges in Q3.
- Debt increased by approximately $5.2 billion, while cash and marketable securities decreased by approximately $3.8 billion from year-end.
- Other income declined to $415 million for nine months from $890 million, primarily because of lower Cozaar/Hyzaar income, higher foreign-exchange losses, and the absence of certain prior-year gains and recoveries.
- Pharmaceuticals PTOI declined to $200 million for nine months from $402 million, reflecting expiration of certain Cozaar/Hyzaar patents.
- Performance Chemicals was a major earnings contributor, with nine-month PTOI of $1.49 billion versus $756 million, principally from higher selling prices. Performance Materials experienced lower volume and Q3 PTOI declined to $231 million from $281 million.
Guidance, outlook, risks, and unusual items
Management revised full-year 2011 reported EPS guidance to $3.64–$3.74. The outlook assumes slower global growth, some destocking, and the recognition that part of Latin American Agriculture sales shifted into Q3 because of an early planting season. The outlook included estimated acquisition-related costs of $0.23–$0.25 per share, a $0.05 per-share Imprelis charge, and a $0.03 per-share Pioneer licensing charge.
- Danisco integration restructuring charges were expected to total approximately $50–$65 million in Q3 and Q4 2011, with approximately $50 million of additional costs to achieve synergies through 2013. Expected annual pretax cost savings were at least $130 million beginning in 2013.
- Imprelis herbicide sales were suspended in August 2011 after claims and lawsuits alleging tree damage. DuPont recorded a $75 million Q3 charge; additional losses could not be reasonably estimated, and the company intended to seek insurance recovery for costs exceeding $100 million.
- Environmental remediation liabilities were $427 million. Management stated that potential liability could range from two to three times the accrued amount under adverse changes in circumstances.
- PFOA-related accruals were $21 million. A potential medical-monitoring obligation of up to $235 million and further personal-injury exposure were not accrued because the outcome of the independent science panel remained uncertain.
- DuPont had $550 million of directly guaranteed obligations for equity affiliates, customers, suppliers, and other affiliated companies, plus $16 million for divested subsidiaries.
- Forward-looking risks included raw-material and energy prices, currency and commodity volatility, litigation and environmental matters, regulatory changes, business disruptions, intellectual-property protection, and successful integration of acquired businesses.
Investor verification checklist
- Verify Danisco’s sustainable revenue and earnings contribution after nonrecurring inventory step-up, transaction, restructuring, amortization, and financing costs.
- Monitor debt reduction, interest expense, credit ratings, liquidity availability, and refinancing requirements.
- Assess whether negative free cash flow reflects temporary acquisition and working-capital effects or a continuing cash-generation issue.
- Track Imprelis claims, insurance recoveries, litigation developments, and any additional charges.
- Review PFOA, environmental remediation, indemnification, and other contingent liabilities for changes in accruals or estimated exposure.
- Evaluate the sustainability of pricing gains, titanium dioxide margins, Agriculture timing effects, and demand risks from destocking and slower global growth.
- Confirm delivery of Danisco integration savings of at least $130 million annually beginning in 2013.