E. I. du Pont de Nemours and Company — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the period ended September 30, 2010. DuPont operated across Agriculture & Nutrition, Electronics & Communications, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection, Pharmaceuticals and other businesses. Results reflect broad global volume recovery, particularly in emerging markets, while Pharmaceuticals declined because of Cozaar/Hyzaar patent expirations.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $7,001 million, up 17% | $24,101 million, up 22% |
| Income before income taxes | $330 million | $3,485 million |
| Net income attributable to DuPont | $367 million, versus $409 million | $2,655 million, versus $1,314 million |
| Diluted EPS | $0.40, versus $0.45 | $2.89, versus $1.44 |
| COGS as a percentage of sales | 78%, versus 76% | 71%, versus 75% |
| Net income margin | Approximately 5.2% | Approximately 11.0% |
- Third-quarter sales growth reflected 14% higher volume, a 5% increase in local selling prices, a 1% negative currency effect and a 1% net portfolio reduction. Emerging-market sales increased 22% to $2.7 billion.
- Year-to-date segment pre-tax operating income was $4,221 million, compared with $2,542 million in 2009. Agriculture & Nutrition remained a third-quarter loss-making segment at $181 million, while Electronics & Communications, Performance Chemicals, Performance Materials and Safety & Protection reported substantial year-over-year improvement.
- Other income declined to $66 million in the third quarter from $195 million, primarily because Cozaar/Hyzaar income fell $155 million. Year-to-date other income increased to $890 million from $824 million, aided by lower exchange losses, higher affiliate earnings, asset-sale gains, insurance recoveries and tax-contingency-related interest.
- Cash provided by operating activities was only $35 million for the first nine months, versus $923 million in 2009. Capital expenditures were $899 million, producing reported free cash flow of negative $864 million, versus negative $67 million in 2009.
- Cash and cash equivalents were $4,088 million and marketable securities were $1,892 million at September 30, 2010. Management reported approximately $2.5 billion of unused credit lines.
- Total debt was approximately $12.4 billion, compared with $11.0 billion at December 31, 2009. The carrying value of long-term borrowings and capital lease obligations was $10,175 million, with $2,211 million classified as short-term.
- Total assets were $39,918 million and total equity was $9,651 million at September 30, 2010. Accounts receivable increased materially to $7,498 million from $5,030 million at year-end, primarily reflecting seasonal and sales-related working-capital requirements.
- The company contributed $500 million to its principal U.S. pension plan in the third quarter. Nine-month pension contributions totaled $704 million, contributing to weak operating cash flow.
Material changes versus the prior comparable period
- Revenue increased substantially because of higher volume and pricing across most segments. Asia Pacific sales increased 31% in the third quarter and 47% year to date.
- Third-quarter earnings declined 10% despite sales growth, principally because of lower Pharmaceuticals income, higher non-cash pension costs and growth-investment spending.
- Nine-month earnings more than doubled, primarily because of higher volume and pricing, the absence of the $340 million prior-year restructuring charge, and favorable currency effects.
- Third-quarter COGS increased faster than sales, with management citing higher raw-material, energy and freight costs. Management expected full-year 2010 raw-material, energy and freight costs to increase 5% to 6% versus 2009.
- Restructuring liabilities were $82 million for the 2009 program and $29 million for the 2008 program at September 30. The programs were expected to be substantially complete by year-end 2010, with some payments continuing into 2011.
- Net periodic pension cost increased to $139 million in the third quarter and $415 million year to date, compared with $39 million and $114 million, respectively, in 2009.
Guidance, outlook, risks and unusual items
- Management expected full-year 2010 earnings of approximately $3.06 per share, including an expected $0.13 per-share fourth-quarter charge for early debt extinguishment and a prior $0.09 per-share benefit from income-tax settlements. Pharmaceuticals full-year pre-tax income was expected to be approximately $480 million.
- Management expected full-year free cash flow of approximately $1.7 billion, based on an anticipated seasonal fourth-quarter working-capital inflow, while continuing approximately $1.4 billion of capital investment.
- In September 2010, DuPont issued $2.0 billion of notes. Net proceeds were used to redeem $1.33 billion of senior notes and repay $500 million of commercial paper. The redemptions settled October 21, 2010 and were expected to generate a $180 million pre-tax loss on debt extinguishment in the fourth quarter.
- Material contingencies include environmental remediation liabilities of $416 million, PFOA-related accruals of $19 million, Benlate accruals of $15.1 million, and Spelter, West Virginia litigation accruals of $55 million. Management stated that environmental liabilities could range up to two to three times the recorded accrual under adverse circumstances.
- Potential PFOA exposure includes ongoing regulatory monitoring, drinking-water treatment obligations, litigation and a possible medical-monitoring obligation of up to $235 million if an independent science panel determines that a probable link exists between PFOA exposure and disease. No accrual was recorded for that potential medical-monitoring obligation or personal-injury claims.
- Guarantees totaled $501 million for customers, suppliers and affiliates and $16 million for divested subsidiaries. Indemnification obligations were recorded at $99 million, while maximum future payments under certain indemnifications may be unlimited.
- Key risks include raw-material and energy inflation, global economic and currency volatility, pension costs, product-development and regulatory risks, biotechnology acceptance, intellectual-property matters, environmental and product-liability litigation, and operational or supply-chain disruptions.
Most important facts for investors to verify
- Whether fourth-quarter seasonal working-capital improvement was sufficient to achieve the approximately $1.7 billion full-year free-cash-flow outlook after the first-nine-month outflow of $864 million.
- The effect of Cozaar/Hyzaar patent expirations on Pharmaceuticals earnings and consolidated 2010 results.
- The actual fourth-quarter impact of the $180 million pre-tax debt-extinguishment loss and the company’s post-refinancing debt maturity profile.
- Developments in PFOA, environmental remediation, Spelter, Benlate and other litigation, including whether recorded accruals remain adequate.
- Whether raw-material, energy and freight inflation can be offset through pricing, productivity and cost reductions without further margin deterioration.
- Progress and costs associated with restructuring, pension funding, growth investments and Agriculture & Nutrition initiatives.