Business Context and Reporting Period
This Form 8-K, filed on August 16, 1999, by E. I. du Pont de Nemours and Company (DuPont), reports the completion of two major capital transactions: an exchange offer and a cash purchase offer. These actions finalized the separation of DuPont's petroleum business, Conoco Inc., from the parent company. The filing includes unaudited pro forma financial statements for the year ended December 31, 1998, and the six months ended June 30, 1999, to illustrate the financial impact of these transactions.
Key Financial Metrics
Transaction Details
- Exchange Offer: DuPont exchanged 436,543,573 shares of Conoco Class B common stock for 147,980,872 shares of DuPont common stock held by U.S. persons. The exchange ratio was 2.95 Conoco shares for 1 DuPont share.
- Cash Offer: DuPont purchased 8,000,000 shares of its own common stock from non-U.S. persons at $80.76 per share, totaling $646 million.
- Outstanding Shares: Following these transactions, DuPont has approximately 975 million shares of common stock outstanding.
Pro Forma Financial Results (Year Ended Dec 31, 1998)
| Metric | Historical | Pro Forma |
|---|---|---|
| Sales | $24,767 million | $24,767 million |
| Income from Continuing Operations | $1,648 million | $1,677 million |
| Earnings Per Share (Basic) | $1.45 | $1.71 |
| Earnings Per Share (Diluted) | $1.43 | $1.69 |
Pro Forma Financial Results (Six Months Ended June 30, 1999)
| Metric | Historical | Pro Forma |
|---|---|---|
| Sales | $13,289 million | $13,289 million |
| Income from Continuing Operations | $1,474 million | $1,456 million |
| Earnings Per Share (Basic) | $1.30 | $1.49 |
| Earnings Per Share (Diluted) | $1.29 | $1.47 |
Balance Sheet Impact (As of June 30, 1999)
- Total Assets: Reduced from $37,315 million (historical) to $33,743 million (pro forma) due to the removal of Conoco assets.
- Total Liabilities: Increased from $22,101 million to $22,842 million, reflecting new borrowings of $741 million to fund the cash offer and transaction expenses.
- Stockholders' Equity: Reduced from $14,740 million to $10,427 million, primarily due to the recording of treasury stock.
Material Changes Versus Prior Period
The primary material change is the complete divestiture of DuPont's ownership in Conoco. Historically, Conoco's operations were reported as discontinued operations. The pro forma statements adjust for the separation, resulting in:
- Share Count Reduction: A significant decrease in weighted average shares outstanding (from 1,129 million to 973 million basic shares for 1998), driving a substantial increase in earnings per share.
- Interest Expense: Pro forma interest expense for the six months ended June 30, 1999, increased by $33 million due to assumed borrowings to fund the cash offer and transaction costs.
- Gain on Disposition: The exchange offer generated a net gain based on the difference between the market value ($11,405 million) and carrying value ($3,572 million) of the Conoco shares distributed.
Guidance, Outlook, and Risks
Management Commentary and Outlook
DuPont expects the merger with Pioneer Hi-Bred International, Inc., agreed upon in March 1999, to close in 1999. Management projects that in 2000, the first full year of combined operations, fully diluted earnings per share will be reduced by approximately 7% due to increased interest expense and purchase price amortization. Preliminary analysis suggests 1999 pro forma earnings would show even more dilution if the merger were assumed to have occurred on January 1, 1999.
Risks and Contingencies
- Pro Forma Limitations: The pro forma financial statements are unaudited and do not purport to represent actual results had the transactions occurred on the dates presented. They exclude future operating benefits expected from the Pioneer merger.
- Transaction Costs: The cash offer and exchange offer incurred direct expenses of $95 million, funded through additional borrowings.
- Market Volatility: The valuation of the exchange offer was based on the closing price of Conoco stock on August 6, 1999.
Investor Verification Checklist
- Verify the final share count of approximately 975 million outstanding shares post-transaction.
- Confirm the $646 million cash outflow for the repurchase of non-U.S. shares and the resulting increase in short-term borrowings.
- Review the $11,405 million market value assigned to Conoco Class B shares versus the $3,572 million carrying value to understand the gain on disposition.
- Monitor the progress of the Pioneer Hi-Bred merger and its anticipated 7% dilution impact on 2000 earnings.
- Check subsequent filings for the actual integration of Pioneer and the realization of operating synergies not reflected in the 1999 pro forma data.