Business Context and Reporting Period
Company: E. I. du Pont de Nemours and Company (DuPont)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: DuPont operates globally in approximately 70 countries with diverse segments including Agriculture & Nutrition, Nylon, Performance Coatings & Polymers, Pharmaceuticals, Pigments & Chemicals, Pioneer (seeds), Polyester, Specialty Fibers, and Specialty Polymers. The company recently completed the acquisition of the remaining 80% of Pioneer Hi-Bred International, Inc. and is integrating the Herberts acquisition.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2000 | Nine Months Ended Sept 30, 2000 |
|---|---|---|
| Sales | $6,445 million | $21,952 million |
| Income from Continuing Operations | $562 million | $2,053 million |
| Net Income | $562 million | $2,053 million |
| Diluted EPS (Continuing Ops) | $0.53 | $1.94 |
| Cash Provided by Continuing Operations | N/A (Quarterly not provided) | $3,144 million |
| Net Debt (Debt less Cash/Marketable Securities) | $9.4 billion (as of Sept 30, 2000) | N/A |
| Current Ratio | 1.2:1 | N/A |
| Earnings to Fixed Charges | 5.3 times | N/A |
Material Changes vs. Prior Period
- Revenue: Consolidated sales for the third quarter were flat at $6.4 billion compared to $6.459 billion in 1999. Segment sales increased 4% due to volume growth and price increases, offset by a strong U.S. dollar.
- Profitability: Income from continuing operations rose to $562 million from $181 million in the prior year quarter. This increase is largely driven by the absence of significant one-time restructuring charges recorded in Q3 1999 ($534 million) related to the Nylon Enterprise and Agriculture & Nutrition segments.
- EPS Comparison: Diluted EPS for continuing operations was $0.53 in Q3 2000 versus $0.17 in Q3 1999. However, underlying earnings (excluding one-time items) were $0.51 per share in Q3 2000, down from $0.59 in Q3 1999.
- Segment Performance:
- Pioneer: Reported a loss of $152 million (Q3) due to full ownership consolidation and seasonal operating losses, compared to a $26 million loss in 1999 when only 20% was owned.
- Nylon Enterprise: Earnings declined 15% due to higher feedstock costs despite a 5% revenue increase.
- Pharmaceuticals: Earnings declined to $41 million from $58 million due to higher selling and R&D expenses.
- Cash Flow: Cash provided by continuing operations for the nine months ended Sept 30, 2000, was $3.144 billion, up from $2.985 billion in the prior year period.
Guidance, Outlook, and Risks
- Outlook: Management is cautious about top-line growth in Q4 due to slowing global economies. The company expects significantly lower Q4 results from the Pharmaceuticals segment as it phases out sales promotion programs. The best underlying earnings expected for full-year 2000 is $2.85 per share (low end of the previously announced range).
- Capital Allocation: DuPont expanded its share repurchase program to $2.5 billion. In Q3 2000, the company spent $212 million to purchase and retire 4.5 million shares. Capital spending is targeted at approximately $2 billion for the year.
- Accounting Changes: Adoption of SFAS No. 133 (Accounting for Derivatives) on Jan 1, 2001, is expected to result in a one-time net-of-tax loss of approximately $140 million ($0.13 per share), primarily related to stock warrants (WebMD).
- Risks and Contingencies:
- Benlate Litigation: Approximately 144 cases pending regarding crop damage claims. Recent jury awards in Texas (totaling ~$90 million in punitive damages) are being appealed. Management does not anticipate a material adverse effect on consolidated liquidity but notes potential significance to the Crop Protection segment.
- Pioneer IP Litigation: Pioneer is appealing a jury verdict regarding a licensing agreement with Monsanto for insect-resistant corn. An adverse outcome could impair the value of the intangible asset recorded for the licensing agreement.
- Raw Material Costs: Earnings growth is sensitive to increases in petroleum-based feedstocks, natural gas, and paraxylene.
Investor Verification Checklist
- Underlying Earnings Trend: Verify the decline in underlying earnings per share ($0.51 in Q3 2000 vs. $0.59 in Q3 1999) despite the headline EPS increase driven by the absence of prior-year restructuring charges.
- Pioneer Integration: Assess the impact of full consolidation of Pioneer on seasonal losses and the outlook for the seed business given the IP litigation with Monsanto.
- Pharmaceuticals Phase-out: Confirm the impact of phasing out promotional programs on Q4 and 2001 sales, estimated at a $100 million per quarter reduction.
- Derivative Accounting Impact: Review the projected $140 million one-time charge upon SFAS 133 adoption in 2001 and its effect on future earnings volatility.
- Benlate Reserve Adequacy: Monitor the status of pending Benlate litigation and the sufficiency of current reserves against potential adverse verdicts.