E. I. du Pont de Nemours and Company — Q1 2010 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three months ended March 31, 2010, compared with the three months ended March 31, 2009. DuPont operated across Agriculture & Nutrition, Electronics & Communications, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection, Pharmaceuticals and other businesses. Management attributed improved results primarily to global economic recovery, higher volumes and pricing, increased manufacturing utilization, lower raw-material and freight costs, and favorable currency effects.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $8,484 million | $6,871 million | Up 23% |
| Income before income taxes | $1,587 million | $749 million | Up $838 million |
| Net income attributable to DuPont | $1,129 million | $488 million | Up 131% |
| Diluted earnings per share | $1.24 | $0.54 | Up $0.70 |
| Dividends per share | $0.41 | $0.41 | No change |
| Cash used in operating activities | $1,065 million | $832 million | Outflow increased $233 million |
| Capital expenditures | $185 million | $358 million | Down $173 million |
| Free cash flow | $(1,250) million | $(1,190) million | Outflow increased $60 million |
Cost of goods sold and other operating charges were $5,796 million, or approximately 68% of sales, versus 75% in the prior-year quarter. The implied gross margin before other operating charges improved to approximately 32% from 25%. Net margin attributable to DuPont was approximately 13.3%, versus 7.1%.
The effective tax rate was 28.4%, compared with 34.7% in Q1 2009. Interest expense declined modestly to $103 million from $106 million. Pension expense increased substantially to $137 million from $38 million, primarily because of higher amortization of unrecognized losses and lower expected returns on plan assets.
Financial position, debt and liquidity
- Cash and cash equivalents were $2,911 million at March 31, 2010, down from $4,021 million at December 31, 2009.
- Marketable securities were $1,599 million, resulting in total cash and marketable securities of approximately $4.5 billion, down from $6.1 billion at year-end.
- Total debt was approximately $11.0 billion, consisting of $1,484 million of short-term borrowings and capital lease obligations and $9,543 million of long-term borrowings and capital lease obligations.
- Unused credit lines totaled approximately $2.5 billion. Management stated that operating cash generation, available liquidity and capital-market access should meet anticipated obligations.
- Total assets were $37,986 million and total equity was $8,423 million at March 31, 2010.
Material changes versus the prior comparable period
- Sales volume increased 19%, local selling prices increased 2%, currency contributed 3%, and portfolio changes reduced sales by 1%.
- Emerging-market sales increased 33% to approximately $2.3 billion and represented 28% of total sales, compared with 26% in Q1 2009.
- Sales and pre-tax operating income improved materially in Electronics & Communications, Performance Chemicals, Performance Coatings and Performance Materials. Performance Materials pre-tax operating income increased to $230 million from a $146 million loss.
- Agriculture & Nutrition sales increased 6% to $3.2 billion and pre-tax operating income increased 10% to $941 million.
- Pharmaceuticals pre-tax operating income declined to $221 million from $252 million because of expiration of certain Cozaar/Hyzaar patents.
- Operating cash flow remained negative because of seasonal working-capital requirements, particularly higher receivables and inventory needs in Agriculture & Nutrition.
- The company paid $374 million in common dividends and maintained its $0.41 quarterly dividend.
Guidance, outlook and management commentary
- Full-year earnings guidance was increased to $2.50–$2.70 per share from $2.15–$2.45 per share.
- Full-year free cash flow guidance was increased to greater than $1.7 billion, approximately $200 million above the prior outlook.
- Management expected Pharmaceuticals full-year pre-tax income of $360–$400 million.
- Management cited continued global economic expansion, particularly in Asia Pacific, stronger sales growth, improved pre-tax operating margins, productivity programs and cost reduction actions.
- Management expected full-year raw-material, energy and freight costs, adjusted for volume and currency, to increase approximately 5% from 2009 and planned approximately $1.6 billion of capital investment.
Risks, contingencies and unusual items
- PFOA-related matters remain significant. The company had approximately $406 million of environmental liabilities, including obligations that may be paid over 15–20 years. Management stated that adverse circumstances could result in potential environmental liabilities of two to three times the accrued amount.
- PFOA drinking-water litigation could require up to $235 million for medical monitoring if an independent science panel determines that a probable disease link exists; no accrual had been recorded for that potential obligation at March 31, 2010.
- The Spelter, West Virginia litigation had a $55 million accrual. The West Virginia Supreme Court ordered a new jury trial on the statute-of-limitations issue and conditionally reduced punitive damages to $97.7 million.
- Other litigation and regulatory matters included PFOA claims, alleged environmental violations at Chambers Works, investigations of chemical releases at the Belle facility, a TSCA self-audit, Benlate claims and a 3M patent lawsuit.
- Guarantees totaled $575 million for customers, suppliers and equity affiliates and $119 million for divested subsidiaries. Indemnification liabilities were $97 million, with certain potential future payments generally unlimited or not reasonably estimable.
- The company completed the final installment of an $84 million U.S. synthetic-rubber antitrust fine during the quarter and had no accrual for that matter at March 31, 2010.
- Key ongoing risks include raw-material and energy inflation, global economic and currency volatility, environmental and product litigation, regulatory changes affecting biotechnology and chemicals, intellectual-property challenges, supply disruptions and pension-cost volatility.
Most important facts for investors to verify
- Whether the substantial earnings improvement and higher guidance are sustained after the global-recovery comparison benefit in Q1 2010.
- Whether operating cash flow turns positive as seasonal Agriculture & Nutrition working-capital requirements reverse.
- Progress toward the greater-than-$1.7 billion full-year free-cash-flow target and the approximately $1.6 billion capital-investment plan.
- Debt maturities, refinancing requirements and the continued availability of approximately $2.5 billion of credit lines.
- Developments in PFOA, environmental, Spelter, Benlate, patent and other litigation, including potential obligations not currently accrued.
- Exposure to the anticipated approximately 5% increase in full-year raw-material, energy and freight costs.
- The effect of patent expiration on Pharmaceuticals and the timing and commercial acceptance of new agricultural, photovoltaic and Applied BioSciences products.