E. I. du Pont de Nemours and Company (DuPont) - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1999, and the six months ended on that date. DuPont is a diversified science and technology company operating globally. A significant strategic event during this period was the ongoing divestiture of its petroleum business, Conoco Inc., which is reported as discontinued operations. The company is also in the process of acquiring Pioneer Hi-Bred International and recently acquired the automotive coatings business of Hoechst AG (Herberts).
Key Financial Metrics
Revenue and Profit (Six Months Ended June 30, 1999):
- Sales: $13.289 billion (Continuing Operations).
- Net Income: $1.580 billion (including discontinued operations).
- Income from Continuing Operations: $1.474 billion.
- Diluted Earnings Per Share (EPS): $1.38 (Net Income); $1.29 (Continuing Operations).
- Operating Cash Flow: $1.691 billion provided by continuing operations.
Balance Sheet and Liquidity (As of June 30, 1999):
- Cash and Cash Equivalents: $1.501 billion.
- Total Debt: $8.470 billion (Short-term borrowings of $3.536 billion + Long-term borrowings of $4.934 billion).
- Current Ratio: 1.2:1 (Current Assets $11.137 billion / Current Liabilities $8.914 billion).
- Stockholders' Equity: $14.740 billion.
Material Changes vs. Prior Period
Revenue Growth: Sales for the six months ended June 30, 1999, increased 5.3% to $13.289 billion compared to $12.626 billion in the prior year. Acquisitions contributed 13% to top-line growth in the second quarter, offsetting a 1% decline in worldwide volumes and a 3% decline in prices.
Profitability: Net income decreased 15.3% to $1.580 billion from $1.865 billion in the prior year. This decline was primarily driven by a significant reduction in income from discontinued operations (Conoco), which fell from $434 million to $106 million year-to-date due to lower natural gas prices and reduced ownership interest.
Debt Reduction: Total debt decreased from $11.1 billion at year-end 1998 to $8.5 billion at June 30, 1999. This reduction was largely due to Conoco repaying $4.6 billion in intercompany debt to DuPont and the retirement of commercial paper.
Segment Performance:
- Pharmaceuticals: Earnings increased 96% due to 100% ownership (up from 50%) and strong performance of "Sustiva" and "Cozaar".
- Performance Coatings & Polymers: Earnings rose 25% and sales 39%, driven by the Herberts acquisition.
- Polyester Enterprise: Reported a loss of $59 million year-to-date compared to earnings of $5 million in 1998, due to excess capacity and competitive pricing.
Guidance, Outlook, and Risks
Management Commentary: Management expects to complete the tax-free split-off of Conoco in the third quarter of 1999. The company announced restructuring plans for Crop Protection Products and Performance Coatings, anticipating annual pretax savings of approximately $200 million and $100 million, respectively. The merger with Pioneer Hi-Bred International is expected to close later in 1999.
Risks and Contingencies:
- Year 2000 Readiness: Remediation is substantially complete for most systems, though 7% of key suppliers and 29% of major customers are assessed as high risk. Over 1,900 contingency plans are in place.
- Legal Proceedings: Significant litigation remains regarding "Benlate" 50 DF fungicide, with over 760 lawsuits filed. Accruals are recorded, but adverse changes could result in additional charges.
- Conoco Tax Dispute: A dispute exists regarding tax sharing obligations with Conoco, with potential liabilities ranging from zero to $160 million.
- Market Risks: Exposure to foreign currency fluctuations, raw material costs, and global economic slowdowns.
Investor Verification Checklist
- Verify the final terms and closing date of the Conoco split-off and the impact on share count (estimated 982 million shares outstanding post-exchange).
- Monitor the progress of the Pioneer Hi-Bred International merger and regulatory approvals.
- Review the status of the "Benlate" 50 DF litigation and any updates to the company's legal accruals.
- Assess the integration of the Herberts acquisition and the realization of projected cost savings from restructuring initiatives.
- Track the Year 2000 readiness status of key suppliers and customers identified as high risk.