EIDP, Inc. (formerly E. I. du Pont de Nemours and Company) — 2010 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The unaudited filing covers DuPont and its consolidated subsidiaries. Results benefited from broad global economic recovery, higher volumes, price increases and stronger emerging-market demand.
Business context
DuPont operates across Agriculture & Nutrition, Electronics & Communications, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection and Pharmaceuticals. Management reported volume growth across all segments, with particularly strong conditions in Asia Pacific and other emerging markets. Emerging-market sales increased 32% year over year to $2.4 billion in the quarter and represented 28% of total sales.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $8,616 million | $6,858 million | $17,100 million | $13,729 million |
| Income before taxes | $1,568 million | $472 million | $3,155 million | $1,221 million |
| Net income attributable to DuPont | $1,159 million | $417 million | $2,288 million | $905 million |
| Diluted EPS | $1.26 | $0.46 | $2.50 | $0.99 |
| Dividends per share | $0.41 | $0.41 | $0.82 | $0.82 |
| Cash flow from operations | Not separately provided | Not separately provided | $(424) million | $45 million |
| Capital expenditures | Not separately provided | Not separately provided | $500 million | $719 million |
| Free cash flow | Not separately provided | Not separately provided | $(924) million | $(674) million |
Calculated quarterly net margin was approximately 13.5%, compared with approximately 6.1% in Q2 2009. Cost of goods sold declined to approximately 69% of sales from 73%, while SG&A was approximately 12% of sales and R&D approximately 5%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $2,215 million at June 30, 2010, compared with $4,021 million at December 31, 2009.
- Marketable securities were $1,744 million, producing combined cash and marketable securities of approximately $4.0 billion, down from approximately $6.1 billion at year-end.
- Total debt was approximately $10.2 billion, down $806 million from December 31, 2009. The carrying value of long-term and short-term borrowings and capital leases was $10,228 million.
- The company reported approximately $2.5 billion of unused credit lines and stated that available liquidity and capital-market access should meet anticipated working-capital, capital-spending, dividend and debt requirements.
- Total equity increased to $9,276 million from $7,651 million at year-end 2009, primarily reflecting earnings less dividends.
Material changes versus the prior comparable period
- Q2 sales increased 26%, driven by 21% volume growth, 5% higher local-currency prices, a 1% favorable currency effect and a 1% net portfolio reduction. Six-month sales increased 25%.
- Q2 earnings attributable to DuPont increased $742 million, principally from higher volumes and prices, the absence of the prior-year restructuring charge and a tax-related benefit.
- The 2009 quarter included $340 million of employee separation and asset-related charges; no such charge was recorded in Q2 2010.
- Other income increased to $464 million from $230 million, mainly because of higher foreign-exchange gains, asset-sale gains, insurance recoveries and interest related to prior-year tax settlements. Cozaar/Hyzaar income declined $202 million in the quarter and $234 million year to date following patent expirations.
- Operating cash flow worsened to an outflow of $424 million from an inflow of $45 million, primarily because higher sales increased receivables and working capital. Debt reduction, dividends and working-capital needs drove the decline in cash.
- Net periodic pension cost increased to $139 million in Q2 from $37 million and to $276 million year to date from $75 million, largely due to higher amortization of unrecognized losses.
- Pharmaceuticals PTOI fell to $70 million in Q2 from $272 million and to $291 million year to date from $524 million, reflecting Cozaar/Hyzaar patent expirations. All other principal operating segments reported higher quarterly PTOI.
Guidance, outlook and management commentary
- Management increased full-year 2010 earnings guidance to $3.00–$3.15 per share from $2.50–$2.70, including an estimated $0.10 per-share benefit from prior-year tax settlements.
- Full-year free cash flow guidance was greater than $1.7 billion. Management also expected approximately $1.6 billion of capital investment and continued working-capital investment.
- Full-year Pharmaceuticals pre-tax income was expected to be $460–$480 million.
- Management cited continued volume growth, productivity initiatives, stronger mid-cycle businesses and emerging-market demand, while expecting full-year raw-material, energy and freight costs to increase approximately 3% on an adjusted basis.
- Restructuring programs were expected to be substantially complete by year-end 2010, although related payments could continue into 2011. Approximately 1,200 employees had been separated under the 2009 program and approximately 1,800 under the 2008 program.
Risks, contingencies and unusual items
- Environmental remediation liabilities were $404 million at June 30, 2010. Management estimated payment periods of 15–20 years and stated that adverse developments could result in liabilities two to three times the accrued amount.
- PFOA matters remain material contingencies. The company had accrued approximately $8 million for health studies and water-treatment obligations and approximately $0.3 million for certain monitoring and treatment activities. Additional PFOA losses were considered reasonably possible but could not be reasonably estimated.
- The PFOA settlement could require up to $235 million for medical monitoring if the independent science panel finds a probable link between PFOA exposure and disease; no accrual had been recorded for that potential obligation.
- DuPont had $97 million recorded for indemnifications, including an estimated $70 million related to INVISTA matters. The principal contractual indemnification limit for specified representations and warranties is $1.4 billion.
- Guaranteed obligations totaled $598 million, including $479 million for customers, suppliers and affiliates and $119 million for divested subsidiaries. Recorded liabilities for guaranteed obligations were $114 million.
- Spelter, West Virginia litigation had an accrual of $55 million after the state supreme court reduced punitive damages to $97.7 million and ordered a new trial on statute-of-limitations issues.
- Key operating risks include raw-material and energy inflation, global economic and currency volatility, supply or business disruptions, litigation and environmental liabilities, product development and regulatory approval, biotechnology acceptance, intellectual-property protection and international-market risks.
- Investigations and enforcement matters included chemical releases at the Belle, West Virginia facility, alleged environmental violations at Chambers Works, and a TSCA voluntary-audit matter for which settlement negotiations were ongoing.
Important facts for investors to verify
- Whether full-year operating cash flow and free cash flow can recover from the first-half outflows while funding approximately $1.6 billion of capital investment, dividends and working-capital growth.
- The sustainability of earnings gains after excluding restructuring benefits, foreign-exchange gains, insurance recoveries, asset-sale gains and tax-settlement-related benefits.
- The pace and financial impact of the Cozaar/Hyzaar patent-related decline in Pharmaceuticals.
- Whether volume growth and pricing will continue to offset higher raw-material, energy and freight costs.
- Potential outcomes and timing of PFOA, environmental, Spelter, INVISTA and other litigation and regulatory matters, including exposures not currently accrued.
- The company’s ability to achieve the stated 2010 EPS and free-cash-flow guidance despite negative first-half free cash flow and higher pension costs.