E. I. du Pont de Nemours and Company — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2011, filed August 8, 2011. DuPont operates across agriculture, electronics and communications, industrial biosciences, nutrition and health, performance chemicals, coatings and materials, safety and protection, and pharmaceuticals.
The period includes the May 19, 2011 acquisition of Danisco A/S. DuPont had acquired 98.3% of Danisco by June 30 and expected to acquire the remaining shares for approximately $111 million in the third quarter.
Financial performance and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $10,264 million | $8,616 million | $20,298 million | $17,100 million |
| Income before taxes | $1,589 million | $1,568 million | $3,291 million | $3,155 million |
| Net income attributable to DuPont | $1,218 million | $1,159 million | $2,649 million | $2,288 million |
| Diluted EPS | $1.29 | $1.26 | $2.80 | $2.50 |
| Dividends per share | $0.41 | $0.41 | $0.82 | $0.82 |
| Cash used in operating activities | Not separately provided | Not separately provided | $644 million | $424 million |
| Capital expenditures | Not separately provided | Not separately provided | $741 million | $500 million |
- Q2 sales increased 19%, driven by 11% higher local selling prices, 2% volume growth, a 3% currency benefit, and a 3% portfolio benefit, principally from Danisco.
- Six-month sales increased 19%, with 10% higher local selling prices, 5% volume growth, a 2% currency benefit, and a 2% portfolio benefit.
- Approximate Q2 net margin was 11.9%, compared with 13.5% in the prior-year quarter; six-month net margin was approximately 13.0%, compared with 13.4%.
- Q2 income before taxes increased approximately 1%, while net income attributable to DuPont increased 5%. Six-month net income attributable to DuPont increased 16%.
- COGS increased to $7,191 million from $5,984 million in Q2; COGS was 70% of sales versus 69% previously. SG&A was approximately 11% of sales, versus 12% previously, and R&D was approximately 5% of sales.
- The Q2 effective tax rate was 22.7%, versus 25.5%; the six-month rate was 18.8%, versus 26.9%.
- Free cash flow, defined by the company as operating cash flow less capital expenditures, was negative $1,385 million for the six months, compared with negative $924 million.
- Cash and cash equivalents were $2,268 million at June 30, 2011, compared with $4,263 million at December 31, 2010. Cash and marketable securities totaled approximately $2.5 billion.
- Total debt was approximately $14.8 billion, compared with $10.3 billion at year-end 2010. The company had approximately $4.7 billion of unused credit lines.
- All three major rating agencies reported stable outlooks: Standard & Poor’s A/A-1, Moody’s A2/P-1, and Fitch A/F1.
Material changes versus the prior comparable period
- Danisco added $246 million of Q2 sales but contributed a $5 million net loss attributable to DuPont, excluding $10 million after-tax of additional acquisition-related interest expense.
- Danisco-related transaction costs totaled $60 million in Q2 and $82 million year to date. The quarter also included a $43 million pretax inventory fair-value step-up charge; approximately $132 million of additional COGS from the inventory step-up was expected during the remainder of 2011.
- Goodwill increased from $2,617 million to $5,550 million and other intangible assets increased from $2,704 million to $5,494 million, primarily because of Danisco.
- Operating cash flow deteriorated because of higher working-capital requirements, particularly receivables and inventories. Investing cash flow changed from a $275 million source in the prior-year period to a $5,036 million use, primarily because of the Danisco acquisition.
- Financing cash flow changed from a $1,544 million use to a $3,530 million source, reflecting debt raised for Danisco and other borrowing needs.
- Other income declined to $229 million from $464 million in Q2 and to $254 million from $824 million for the six months. The decreases reflected lower foreign-exchange gains, lower asset-sale gains, reduced insurance recoveries, lower Cozaar/Hyzaar income year to date, and the absence of a prior-year tax-contingency benefit.
- Pharmaceuticals year-to-date PTOI declined to $130 million from $291 million, primarily because of expiration of certain Cozaar/Hyzaar patents.
- New reportable segments, Industrial Biosciences and Nutrition & Health, were added following the Danisco acquisition. Q2 PTOI was $(7) million and $5 million, respectively, including acquisition-related charges and amortization.
Guidance, outlook, risks, contingencies, and unusual items
Management revised full-year 2011 reported EPS guidance to $3.53-$3.79. The outlook includes estimated Danisco acquisition-related costs of $(0.23)-$(0.34) per share and an expected $0.03 per-share third-quarter charge for a Pioneer licensing milestone. A separate subsequent-event disclosure states that the company will record a $50 million R&D charge in the third quarter related to that license agreement.
- Management cited continued global economic growth, strong demand in developing markets, pricing actions, productivity programs, and integration of Danisco as key positives.
- Principal risks include raw-material and energy-price volatility, foreign-exchange and interest-rate movements, global economic conditions, supply disruptions, product development and intellectual-property risks, regulatory changes, process safety, litigation and environmental matters, and successful integration of Danisco.
- PFOA-related accruals were $21 million. The independent science panel’s studies were expected to continue through July 2012. If a probable link between PFOA exposure and disease is found, DuPont could fund up to $235 million for medical monitoring, while personal-injury claims could continue.
- Environmental remediation liabilities were $423 million. Management stated that potential liability under adverse circumstances could range from two to three times the accrued amount, with estimated payments extending over 15 to 20 years.
- Guarantees for customers, suppliers, affiliated companies, and equity affiliates totaled $521 million, with an additional $16 million relating to divested subsidiaries. Indemnification liabilities were $105 million, and certain potential future indemnification payments are generally unlimited.
- Four additional PFOA drinking-water actions remained pending; a proposed $8.3 million settlement of two New Jersey class actions awaited court decision. The company was also negotiating several environmental enforcement matters involving its Chambers Works and Edge Moor facilities.
- Disclosure controls were assessed as effective. Danisco represented approximately 19% of total assets, and its internal-control integration was still in process.
Most important facts for investors to verify
- Whether Danisco achieves expected synergies and earnings contributions after completion of the compulsory acquisition and integration.
- The effect of the remaining Danisco inventory step-up charges, acquisition costs, amortization, and the $50 million Pioneer licensing charge on 2011 earnings.
- Whether operating cash flow and free cash flow recover from negative year-to-date levels as seasonal working-capital needs normalize.
- Debt reduction, refinancing needs, interest expense, and credit-rating effects following the Danisco financing.
- Progress on PFOA proceedings, environmental remediation, pending litigation, and the potential for liabilities above recorded accruals.
- The sustainability of pricing gains and volume growth amid raw-material, energy, freight, metals, currency, and supply-chain volatility.
- The impact of Cozaar/Hyzaar patent expirations and other pharmaceutical portfolio changes on future other income and segment profitability.