E. I. du Pont de Nemours and Company (DuPont) — 2009 Q3 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2009, filed October 26, 2009. Results reflect a severe global recession, particularly in automotive, construction and industrial markets. DuPont reported through Agriculture & Nutrition, Coatings & Color Technologies, Electronic & Communication Technologies, Performance Materials, Safety & Protection, Pharmaceuticals and Other; a revised segment structure became effective October 1, 2009.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net sales | $5,961 million | $7,297 million | $19,690 million | $24,709 million |
| Net income attributable to DuPont | $409 million | $367 million | $1,314 million | $2,636 million |
| Diluted EPS | $0.45 | $0.40 | $1.44 | $2.89 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $923 million | $494 million |
| Capital expenditures | Not separately provided | Not separately provided | $990 million | $1,406 million |
| Dividends paid | Not separately provided | Not separately provided | $1,119 million | $1,123 million |
Q3 net margin was approximately 6.9%, compared with approximately 5.0% in Q3 2008. Nine-month net margin was approximately 6.7%, compared with approximately 10.7% in the prior-year period. Cost of goods sold was 76% of sales in Q3 versus 81% in Q3 2008, but 75% for the nine-month period versus 74% in 2008. SG&A was $770 million in Q3 and $2.584 billion year to date; R&D was $335 million in Q3 and $989 million year to date.
At September 30, 2009, cash and cash equivalents were $2.249 billion and marketable securities were $906 million, providing $3.155 billion of primary liquidity. Total debt was approximately $11.1 billion, consisting of $3.525 billion of short-term borrowings and capital lease obligations and $7.545 billion of long-term borrowings and capital lease obligations. DuPont had approximately $2.8 billion of credit lines available. Total assets were $36.168 billion and total equity was $8.083 billion.
Material changes versus the prior comparable period
- Q3 sales declined 18%, driven by 12% lower volumes, a 2% decrease in local selling prices, a 3% currency impact and a 1% portfolio impact. Nine-month sales declined 20%, primarily from a 17% volume decline.
- Q3 earnings attributable to DuPont increased 11%, primarily because the prior-year quarter included a $146 million after-tax hurricane charge. Lower volumes and unfavorable currency effects were offset by cost reductions, productivity gains and lower raw-material, energy and freight costs.
- Nine-month earnings fell 50%, reflecting lower volumes, unfavorable currency effects, higher pension costs and net restructuring charges of $174 million.
- Operating cash flow increased $429 million year over year to $923 million, primarily due to working-capital reductions, especially lower inventories.
- Cash declined by $1.396 billion during the first nine months, as operating and financing cash was more than offset by $2.625 billion of investing outflows, including purchases of short-term financial instruments and forward-exchange settlements.
- Debt increased approximately $1.4 billion from year-end 2008, primarily to fund seasonal working capital, capital projects and dividends.
Guidance, outlook, commentary and unusual items
- Management revised full-year 2009 earnings guidance to $1.80–$1.90 per share. The outlook assumes improving demand in key markets, lower raw-material costs and favorable currency effects in the fourth quarter.
- A restructuring program initiated in response to the recession is expected to eliminate approximately 2,000 positions. DuPont recorded a $340 million 2009 charge, partly offset by a $75 million reduction in estimated 2008 program costs. Approximately 800 employees had been separated by September 30, and the program was expected to be substantially complete in 2010.
- Management estimated the restructuring actions would generate approximately $50 million of pre-tax savings in the remainder of 2009 and approximately $250 million annually thereafter.
- DuPont reported a net loss of $113 million in Q3 for Agriculture & Nutrition, while Pharmaceuticals generated $266 million of Q3 pre-tax operating income. Performance Materials improved substantially year over year because of the absence of hurricane charges and lower costs, despite lower sales.
- Management expects $50 million–$100 million of additional insurance recoveries related to 2008 hurricane damage over the following six to nine months.
- Pension contributions of $243 million had been made through September 30, with approximately $52 million of additional contributions expected in the remainder of 2009.
Risks, contingencies and unusual exposures
- PFOA-related environmental and litigation matters remain significant. Accruals included approximately $12 million for the Leach settlement’s science panel and water-treatment obligations and approximately $0.6 million for certain regulatory and monitoring activities. Potential additional medical-monitoring obligations of up to $235 million were not accrued because management considered a probable causal finding remote.
- Environmental liabilities totaled $396 million at September 30, 2009. Management stated that adverse developments could cause potential liability to range from two to three times the accrued amount.
- DuPont had directly guaranteed $570 million of obligations for customers, suppliers, affiliates and others, plus $121 million related to divested subsidiaries. Recorded liabilities for these guarantees totaled $149 million.
- Material litigation included PFOA drinking-water cases, the Spelter, West Virginia class action with $55 million accrued, Benlate matters, elastomers antitrust proceedings and Monsanto litigation involving Pioneer seed traits.
- The global recession, industrial demand, raw-material and energy prices, currency and interest rates, regulatory changes, product development, intellectual property, environmental liabilities and litigation could materially affect future results.
- PFOA-related products represented approximately $1 billion of 2008 revenue and could be affected by future regulation or prohibition. DuPont stated its objective to cease making, using or buying PFOA by 2015 or sooner.
Facts investors should verify
- Reconcile the $1.80–$1.90 full-year EPS outlook with reported nine-month EPS of $1.44 and the disclosed restructuring and insurance assumptions.
- Assess whether improving non-agricultural demand and cost reductions can offset continued volume weakness and low capacity utilization.
- Monitor debt maturities, borrowing costs, available credit lines and liquidity after the $1.4 billion increase in debt.
- Track restructuring execution, employee reductions, cash payments and the expected $250 million annual savings.
- Evaluate developments in PFOA, environmental remediation, Spelter, Benlate, antitrust and Monsanto litigation, including unaccrued potential losses.
- Verify the sustainability of cash generation given operating cash flow of $923 million, capital expenditures of $990 million and dividends of $1.119 billion through nine months.