E. I. du Pont de Nemours and Company (DuPont) — Form 10-Q Summary
Business context and reporting period
Unaudited consolidated results for the three and six months ended June 30, 2009, compared with the corresponding 2008 periods. DuPont reported that the global recession materially reduced demand, particularly in businesses tied to industrial production, automotive, construction and other cyclical markets. Agriculture & Nutrition and Pharmaceuticals were comparatively resilient.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $6,858 million | $8,837 million | $13,729 million | $17,412 million |
| Income before taxes | $472 million | $1,412 million | $1,221 million | $2,882 million |
| Net income attributable to DuPont | $417 million | $1,078 million | $905 million | $2,269 million |
| Diluted EPS | $0.46 | $1.18 | $0.99 | $2.49 |
| Operating cash flow | Not separately provided | Not separately provided | $45 million | $(433) million |
| Capital expenditures | Not separately provided | Not separately provided | $719 million | $892 million |
Net income margin was approximately 6.1% in Q2 2009 versus 12.2% in Q2 2008, and approximately 6.6% for the first half of 2009 versus 13.0% in the prior-year period. Cost of goods sold was 73% of sales in Q2 2009, unchanged year over year, but 74% for the first half versus 71% in 2008. SG&A and R&D were approximately 13% and 5% of sales, respectively, in both 2009 periods, compared with approximately 11% and 4% in 2008.
- Cash and cash equivalents were $2,157 million and marketable securities were $456 million at June 30, 2009, for combined liquidity of approximately $2.6 billion.
- Total debt was approximately $10.4 billion, comprising $2,803 million of short-term borrowings and $7,556 million of long-term borrowings and capital lease obligations.
- Total liabilities were $27,351 million and total equity was $7,907 million at June 30, 2009.
- Dividends paid during the first six months were $746 million; the quarterly common dividend remained $0.41 per share.
- Cash decreased by $1,488 million during the first six months, ending at $2,157 million, primarily because investing uses and dividends exceeded operating cash generation and borrowing proceeds.
Material changes versus the prior comparable period
- Q2 sales declined 22%, driven by a 19% volume reduction, a 5% unfavorable currency effect and a 1% portfolio-related reduction; a 3% increase in local selling prices was insufficient to offset these factors.
- First-half sales declined 21%, with volumes down 19% and currency reducing sales by 5%.
- Q2 net income attributable to DuPont fell 61%, and first-half earnings fell 60%, reflecting lower volumes, unfavorable currency effects, restructuring charges, higher pension costs and the absence of a favorable 2008 litigation settlement.
- Agriculture & Nutrition sales increased 3% in Q2 and 5% year to date; Pharmaceuticals pre-tax operating income increased 3% in Q2 and 5% year to date.
- Q2 sales declined 26% in Coatings & Color Technologies, 26% in Electronic & Communication Technologies, 40% in Performance Materials and 37% in Safety & Protection. Performance Materials and Safety & Protection reported Q2 pre-tax operating income of $5 million and a loss of $13 million, respectively.
- Operating cash flow improved to $45 million from a use of $433 million, primarily because of lower working-capital requirements and a $1.5 billion reduction in inventory changes, despite substantially lower earnings.
- Debt increased approximately $0.7 billion from December 31, 2008, while cash and marketable securities declined approximately $1.1 billion.
Guidance, outlook, risks and unusual items
- Management reaffirmed 2009 earnings guidance of $1.54 to $1.94 per share. The outlook assumed weak demand in most markets, gradual improvement during the remainder of 2009 and favorable Southern Hemisphere agricultural conditions.
- During Q2, DuPont recorded a $340 million restructuring charge related to a global program expected to eliminate approximately 2,000 positions. No related separation payments or employee separations had occurred by June 30, 2009. The program was expected to be substantially complete in 2010 and generate approximately $50 million of pre-tax savings in the remainder of 2009 and approximately $250 million annually thereafter.
- The company recorded a $75 million reduction in estimated costs associated with the 2008 restructuring program. Total restructuring-related liabilities were $444 million at June 30, 2009.
- Q2 results included $24 million of Hurricane Ike insurance recoveries and a $26 million reduction in the related reserve. The company expected additional insurance payments of approximately $50 million to $100 million during the second half of 2009.
- Net exchange losses were $141 million in Q2 2009 versus $44 million in Q2 2008 and reduced other income. Derivative losses not designated as hedges included a $368 million Q2 loss on foreign currency contracts, substantially offset by related monetary-position effects.
- Liquidity was supported by approximately $2.6 billion of cash and marketable securities and access to approximately $2.6 billion of credit lines. Management believed liquidity was adequate, but noted that future borrowing costs and availability could be affected by credit-market instability.
- Environmental and litigation exposures remained material. Environmental remediation liabilities were $387 million, with potential costs estimated by management to range up to two to three times the accrued amount under adverse circumstances.
- PFOA matters included a 2009 EPA consent order requiring testing and potential drinking-water treatment or alternative supplies. Accruals included approximately $0.4 million for current consent-order and monitoring activities, while additional PFOA losses could not be reasonably estimated. Products representing approximately $1 billion of 2008 revenue could be affected by future regulation or prohibition.
- Other contingencies included the Spelter, West Virginia litigation, for which DuPont had accrued $55 million; guarantees totaling $659 million; and a potential residual-value obligation of up to $68 million related to a terminating master operating lease program.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2009, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether recession-related volume declines stabilized or reversed, particularly in Performance Materials, Safety & Protection, Coatings & Color Technologies and Electronic & Communication Technologies.
- Progress, cash costs and realized savings from the 2009 restructuring program, including the planned elimination of approximately 2,000 positions.
- Cash conversion, working-capital requirements, capital spending and the sustainability of the $0.41 quarterly dividend given low first-half operating cash flow.
- Debt maturities, refinancing access, interest costs and the effect of currency and commodity volatility on earnings and cash flow.
- Actual 2009 earnings relative to the reaffirmed $1.54–$1.94 EPS outlook and the effect of unusual items included in that guidance.
- Developments in PFOA regulatory actions, related litigation, the independent science panel, and potential exposure beyond recorded accruals.
- Outcomes of the Spelter appeal, Benlate matters, INVISTA indemnification litigation, antitrust proceedings and the EPA TSCA voluntary-audit matter.