E.I. du Pont de Nemours and Company — Fiscal 2009 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended December 31, 2009, including fourth-quarter results. DuPont operated globally in agriculture, chemicals, coatings, materials, electronics, safety and protection, and pharmaceuticals, with approximately 58,000 employees and operations in about 80 countries. Approximately 60% of sales were generated outside the United States. During the fourth quarter, the company reorganized its reporting structure into seven segments: Agriculture & Nutrition, Electronics & Communications, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection, and Pharmaceuticals.
Financial performance and liquidity
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $26.1 billion | $30.5 billion | Down 14% |
| Income before income taxes | $2.184 billion | $2.391 billion | Down 9% |
| Net income attributable to DuPont | $1.755 billion | $2.007 billion | Down 13% |
| Diluted EPS | $1.92 | $2.20 | Down 13% |
| Cash provided by operating activities | $4.741 billion | $3.129 billion | Up $1.612 billion |
| Free cash flow | $3.433 billion | $1.151 billion | Up $2.282 billion |
| Capital expenditures | $1.308 billion | $1.978 billion | Down $670 million |
Cost of goods sold and other operating charges declined to $19.708 billion, or 75% of sales versus 77% in 2008. The decrease reflected lower raw-material, energy and freight costs and the absence of 2008 hurricane-related charges, partly offset by lower capacity utilization and unfavorable currency effects. SG&A was $3.440 billion, or 13% of sales, and R&D was $1.378 billion, or 5% of sales. The effective tax rate increased to 19.0% from 15.9%.
At December 31, 2009, working capital was $7.898 billion, total assets were $38.185 billion and total equity was $7.651 billion. Total debt was approximately $11.0 billion, comprising $1.506 billion of short-term borrowings and $9.528 billion of long-term borrowings and capital lease obligations. Cash, cash equivalents and marketable securities totaled $6.137 billion, and unused credit lines were approximately $2.6 billion. Credit ratings were A/A-1 from Standard & Poor’s, A2/P-1 from Moody’s and A/F1 from Fitch, with negative outlooks reported.
The company paid approximately $1.5 billion in dividends during 2009; the common dividend was $1.64 per share. No common shares were repurchased during 2009.
Material changes versus the prior comparable period
- Worldwide volume declined 12%, with local selling prices up 1% and currency effects reducing sales by 3%. Emerging-market sales declined 9% to approximately $8 billion but increased to 31% of total sales.
- Sales and segment pre-tax operating income increased in Agriculture & Nutrition to $8.3 billion and $1.224 billion, respectively.
- Electronics & Communications sales fell 13% to $1.9 billion and segment operating income declined to $87 million from $251 million.
- Performance Chemicals sales fell 18% to $5.0 billion and operating income declined to $547 million from $687 million.
- Performance Coatings sales fell 21% to $3.4 billion, but operating income improved to $69 million from an $8 million loss, primarily due to cost reductions and restructuring benefits.
- Performance Materials sales fell 26% to $4.8 billion, while operating income increased to $287 million from $128 million due to lower input costs, lower fixed costs, insurance recoveries and the absence of 2008 hurricane charges.
- Safety & Protection sales fell 25% to $2.8 billion and operating income declined to $260 million from $661 million.
- Cozaar/Hyzaar licensing income was $1.032 billion. A fourth-quarter $63 million charge reduced income and receivables for increased rebates and sales deductions.
Guidance, outlook and unusual items
- Management forecast 2010 sales growth of approximately 10% and diluted EPS of $2.15 to $2.45.
- The company announced a 2010–2012 plan targeting $1 billion of fixed-cost productivity actions, $1 billion of working-capital productivity programs, 10% compound annual sales growth and 20% compound annual EPS growth through 2012.
- 2010 capital expenditures were targeted at approximately $1.6 billion, with fixed-cost productivity programs of approximately $400 million and free cash flow targeted above $1.5 billion.
- Cozaar/Hyzaar earnings were expected to decline by approximately $690 million to $740 million pre-tax in 2010 following U.S. patent and exclusivity expirations.
- Pre-tax non-cash pension costs were expected to increase by approximately $410 million in 2010, partly offset by a one-time $160 million benefit from changes to vacation-benefit accounting.
- The 2009 restructuring program recorded a $340 million charge and targeted approximately 2,000 position eliminations. Approximately 1,150 positions had been eliminated by year-end, with expected pre-tax savings of approximately $180 million in 2010 and $250 million annually thereafter.
- Pension and other long-term employee benefit obligations remained significant. The funded status deficit was approximately $5.6 billion for pensions and $4.1 billion for other benefits.
Risks, contingencies and other matters
- Key operating risks include global economic weakness, raw-material and energy-price volatility, foreign-exchange movements, low manufacturing utilization, supply disruptions, regulatory changes, product development failures and intellectual-property disputes.
- Environmental remediation liabilities were $396 million at year-end; management stated that adverse developments could increase potential liability to two or three times the accrued amount.
- PFOA-related regulatory, environmental and litigation matters remain material. Products representing approximately $1 billion of 2009 revenue could be affected by future regulation or prohibition, although the company reported substantial reductions in PFOA emissions and product content.
- The Monsanto litigation concerning Pioneer seed traits could affect future commercialization plans, although management stated that it did not expect a material adverse effect on commercial results.
- Guarantees totaled approximately $803 million, including $684 million for customers, suppliers and affiliates and $119 million for divested subsidiaries. Recorded liabilities for guarantee performance risk were $146 million.
- Total contractual obligations were approximately $18.9 billion, including debt, interest, leases, purchase obligations and other long-term liabilities.
- A January 2010 Venezuelan currency devaluation was expected to produce an exchange loss of approximately $40 million to $50 million in first-quarter 2010.
Most important facts for an investor to verify
- Whether the projected 2010 recovery in industrial, automotive, construction, electronics and materials markets materialized.
- The sustainability of Agriculture & Nutrition earnings and the extent of crop-protection pricing and commodity-cost pressure.
- The impact of Cozaar/Hyzaar patent expirations on recurring earnings and cash flow.
- Actual pension expense, funding requirements and sensitivity to discount rates and asset returns.
- Progress and realized savings from the 2008 and 2009 restructuring programs.
- Developments in PFOA, environmental remediation, Monsanto seed-trait litigation and other legal contingencies.
- Debt maturities, refinancing needs and whether liquidity remains adequate after dividends, capital spending and working-capital investment.
- The filing’s audited financial statements and notes, particularly segment reporting, guarantees, contractual obligations, derivatives and contingent liabilities.