E. I. du Pont de Nemours and Company (DuPont) — 2011 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2011. The unaudited consolidated financial statements were prepared under U.S. GAAP. Comparisons are with the three months ended March 31, 2010 unless otherwise stated. All dollar amounts are in millions, except per-share data.
Business context and reporting period
DuPont reported broad-based growth across its diversified chemical, agriculture, materials, coatings, electronics, safety and protection, and pharmaceutical businesses. Management cited stronger global economic conditions, higher volumes and selling prices, particularly in developing markets. The company was also pursuing the proposed $6.3 billion acquisition of Danisco A/S, including assumed net debt.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $10,034 | $8,484 | 18% |
| Income before income taxes | $1,702 | $1,587 | 7% |
| Net income attributable to DuPont | $1,431 | $1,129 | 27% |
| Diluted EPS | $1.52 | $1.24 | 23% |
| Dividends per share | $0.41 | $0.41 | Unchanged |
| Cash used in operating activities | $(1,484) | $(1,065) | Higher use of $419 |
| Capital expenditures | $323 | $185 | 75% |
| Free cash flow | $(1,807) | $(1,250) | Higher outflow of $557 |
Margins: Cost of goods sold was 68% of sales in both periods. Net income attributable to DuPont represented approximately 14.3% of sales versus 13.3% in Q1 2010. The effective tax rate declined to 15.2% from 28.4%, principally because of tax effects associated with foreign-currency hedging and geographic earnings mix.
Liquidity and balance sheet: Cash and cash equivalents were $3,796 at March 31, 2011, compared with $4,263 at year-end 2010. Cash, cash equivalents and marketable securities totaled approximately $4.8 billion, down from $6.8 billion, primarily because of seasonal working-capital requirements in Agriculture & Nutrition. Total debt was approximately $12.3 billion, up from $10.3 billion, primarily due to Danisco financing. The company reported approximately $4.3 billion of unused credit lines.
Equity and capital allocation: DuPont paid $383 in common dividends and repurchased 5.0 million shares for $272 during the quarter. Total equity was $11,279 at March 31, 2011, versus $9,743 at December 31, 2010.
Material changes versus the prior comparable period
- Sales increased 18%, reflecting 9% higher volume, an 8% increase in local selling prices and a 1% net portfolio benefit. Developing-market sales increased 30% to approximately $3.0 billion.
- Segment pre-tax operating income increased to $2,125 from $1,803. Agriculture & Nutrition PTOI rose to $1,136 from $941, and Performance Chemicals PTOI rose to $394 from $190.
- Pharmaceuticals PTOI fell to $50 from $221, primarily because of the expiration of certain Cozaar/Hyzaar patents. Other income declined to $25 from $360, largely because of lower Cozaar/Hyzaar income and a change in net foreign-exchange gains and losses.
- Raw material, energy and freight costs increased, although pricing actions helped offset the impact. Management expected these costs to increase approximately 10% for full-year 2011 versus 2010.
- Operating cash flow and free cash flow were negative and deteriorated from the prior year, largely because of seasonal increases in receivables and other operating assets and liabilities.
- The company issued $2,000 of senior notes in March to fund the Danisco acquisition. The proceeds were classified as restricted cash and reduced the related bridge facility.
Guidance, outlook, risks and unusual items
Management raised its full-year 2011 earnings outlook to $3.65–$3.85 per share from $3.45–$3.75. The outlook excluded the planned Danisco acquisition, which management estimated could reduce 2011 earnings by $0.30–$0.45 per share. The acquisition was expected to close in the second quarter, subject to offer conditions.
The Danisco financing included $4.0 billion and $2.0 billion bridge facilities. The $2.0 billion facility required at least $2.0 billion of cash, cash equivalents and marketable securities to remain readily available. The $2.0 billion senior notes included mandatory redemption provisions at 101% of principal plus accrued interest if DuPont failed to acquire at least 80% of Danisco by October 31, 2011, or abandoned the transaction.
Credit agencies identified potential credit pressure from the acquisition: Standard & Poor’s placed the company on negative watch, and Moody’s placed its ratings under review for possible downgrade. Fitch affirmed its ratings and revised its outlook to stable.
The March 2011 Japan earthquake and tsunami resulted in inventory and plant-asset write-offs and cleanup and restoration charges, but management stated the impact was not material. Key operating risks included energy and raw-material inflation, global economic and currency volatility, supply-chain disruptions, product development and regulatory risks, environmental liabilities, litigation, biotechnology acceptance, and access to capital markets.
Environmental and litigation matters remained significant. PFOA accruals were $23, environmental liabilities were $420, and the company stated that environmental costs could range up to two to three times the accrued amount under adverse changes. The company also disclosed guarantees totaling $571, including $555 related to customers, suppliers, affiliates and equity affiliates, and $16 related to a divested subsidiary.
Most important facts for investors to verify
- Whether the Danisco acquisition closed as planned, the final purchase accounting, and the resulting effect on earnings, debt and liquidity.
- Whether the $2.0 billion of Danisco-related notes were redeemed or remained outstanding and whether the bridge facilities and commercial paper were repaid.
- Progress toward the $3.65–$3.85 full-year 2011 EPS outlook, including the projected Danisco dilution.
- Whether pricing continued to offset rising raw-material, energy and freight costs.
- Cash conversion and working-capital normalization following the seasonal Agriculture & Nutrition cash outflow.
- Developments in PFOA, environmental, Benlate, Spelter and other litigation matters, including potential liabilities not accrued.
- Changes in credit ratings, borrowing costs and available liquidity.