E.I. du Pont de Nemours and Company — FY2010 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2010. DuPont operated globally in more than 90 countries, with approximately 60,000 employees and about 65% of sales generated outside the United States. Reportable segments were Agriculture & Nutrition, Electronics & Communications, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection, and Pharmaceuticals.
The source includes fourth-quarter information but is an annual Form 10-K rather than a quarterly filing. The company’s Pharmaceuticals segment primarily reflected royalty and profit-sharing income from Cozaar®/Hyzaar®.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $31,505 million | $26,109 million | +21% |
| Income before income taxes | $3,711 million | $2,184 million | +70% |
| Net income attributable to DuPont | $3,031 million | $1,755 million | +73% |
| Diluted EPS | $3.28 | $1.92 | +$1.36 |
| Cash provided by operations | $4,559 million | $4,741 million | -$182 million |
| Free cash flow | $3,051 million | $3,433 million | -$382 million |
| Total debt | $10,270 million | Approximately $11,034 million | Down approximately $0.7 billion |
| Cash, equivalents and marketable securities | $6,801 million | $6,137 million | +$664 million |
| Working capital | $9,670 million | $7,898 million | +$1,772 million |
COGS and other operating charges were $23,146 million, or 73% of sales, compared with 75% in 2009. SG&A was 12% of sales versus 13%, and R&D was 5% of sales in both years. The implied net income margin attributable to DuPont was approximately 9.6%, compared with approximately 6.7% in 2009; the implied pre-tax margin was approximately 11.8%, compared with 8.4%.
Capital expenditures were $1,508 million, and dividends paid were $1,501 million. The common dividend remained $1.64 per share. Year-end total assets were $40,410 million and total equity was $9,743 million.
Material changes versus the prior comparable period
- Sales growth was driven by 17% higher volume and 5% higher local selling prices, partly offset by a 1% unfavorable portfolio impact. Volume increased across all segments and regions.
- Sales in developing markets increased 27% to $10.2 billion and represented 32% of total sales, versus 31% in 2009.
- All major operating segments improved sales and pre-tax operating income. Particularly large earnings gains occurred in Electronics & Communications, Performance Chemicals, Performance Materials, and Safety & Protection as industrial and automotive markets recovered.
- Cost efficiency improved as higher utilization and selling prices more than offset a 6% increase in raw material, energy and freight costs.
- 2010 included a net $34 million reduction in estimated restructuring costs, compared with a $210 million net charge in 2009. The 2009 restructuring program was substantially completed by year-end 2010.
- Pharmaceuticals income declined materially: Cozaar/Hyzaar income fell to $483 million from $1,032 million following patent and exclusivity expirations, including the end of U.S. exclusivity in April 2010.
- Pension and other long-term employee benefit expense increased to $1,030 million from $620 million. The company contributed $782 million to pension plans, including a voluntary $500 million contribution to its principal U.S. plan.
- The company issued $2.0 billion of senior notes, redeemed or repaid debt, and recorded a $179 million pre-tax charge for early debt extinguishment.
- DuPont repurchased and retired 5.4 million shares for $250 million during 2010.
Guidance, outlook, commentary and unusual items
- For 2011, management expected sales of $33 billion to $34 billion and earnings of $3.45 to $3.75 per share, excluding the planned Danisco acquisition.
- The 2011 outlook assumed continued global economic growth, higher industrial production, favorable North American agriculture, and further developing-market penetration.
- Management expected raw material, energy and freight costs to increase 4% to 5%, non-cash pension costs to rise by approximately $60 million, and fixed-cost productivity actions to offset about $300 million of costs.
- 2011 capital expenditures were targeted at approximately $1.8 billion, with working-capital productivity improvements of $300 million. The estimated effective tax rate was approximately 20% to 21%.
- DuPont agreed in January 2011 to acquire Danisco for $6.3 billion, including $5.8 billion in cash and assumed net debt of $500 million. The transaction was expected to close in the second quarter of 2011 and could reduce 2011 earnings by $0.30 to $0.45 per share, while management expected it to be cash- and earnings-accretive in 2012.
- Liquidity included approximately $2.6 billion of unused credit lines. Credit ratings were investment grade, but Moody’s placed ratings under review for possible downgrade and Standard & Poor’s placed the company on negative credit watch after the Danisco announcement.
- Environmental remediation liabilities were $407 million. Management noted that adverse developments could cause potential environmental liabilities to range from two to three times the accrued amount.
- PFOA-related matters included $18 million of accruals, and products representing approximately $1 billion of 2010 revenue could be affected by future regulation or prohibition.
- The company reported effective disclosure controls and internal control over financial reporting, with no material unresolved staff comments.
Principal risks and contingencies
- Volatility in energy, raw material, freight, commodity, foreign-exchange and interest-rate costs could pressure margins and cash flow.
- Product development, regulatory approvals, intellectual-property protection, market acceptance and competition could affect growth initiatives, including agricultural biotechnology and bio-based products.
- Global operations expose DuPont to economic and political conditions, trade restrictions, tariffs, currency controls, tax changes and weaker customer or supplier financial conditions.
- Litigation and environmental matters include PFOA, Benlate®, Superfund and RCRA remediation, product liability, patent, antitrust and contract claims. Outcomes could materially affect results in the period recognized.
- Pension obligations exceeded plan assets, with pension benefit obligations of $23.9 billion and plan assets of $18.4 billion at year-end. Results remain sensitive to discount rates, asset returns and other actuarial assumptions.
- Guarantees and indemnifications could require payments beyond recorded liabilities. Direct guarantees totaled $544 million for affiliates, customers and suppliers, plus $16 million for divested subsidiaries.
- The Danisco acquisition would require approximately $3.0 billion of existing cash and additional debt, increasing leverage and potentially affecting credit ratings.
Most important facts for investors to verify
- Verify the final 2011 results against the stated sales and EPS outlook, including the impact and financing of the Danisco acquisition.
- Track the decline and eventual termination of Cozaar/Hyzaar income and the company’s ability to replace that contribution through operating growth.
- Assess whether pricing and productivity actions continue to offset raw material, energy and freight inflation.
- Review debt maturities, bridge financing, credit-rating actions and leverage after the Danisco transaction.
- Monitor pension funding requirements, actuarial assumptions and the effect of rising benefit expense.
- Review developments in PFOA, environmental remediation, Benlate and other litigation, including exposures beyond recorded accruals.
- Confirm cash conversion, working-capital productivity and capital-expenditure discipline relative to management’s targets.