CTA-PB

Business Context and Reporting Period

Company: E. I. du Pont de Nemours and Company (DuPont)
Filing Type: Form 10-Q (Quarterly Report)
Period Covered: Three and six months ended June 30, 1995
Filing Date: August 11, 1995

DuPont reported record earnings for the second quarter and first half of 1995, driven by strong revenue growth, productivity improvements, and a significant reduction in shares outstanding following a stock redemption from Seagram.

Key Financial Metrics

Note: Total Debt calculated as Short-Term Borrowings ($7,842M) + Long-Term Borrowings ($5,850M) as of June 30, 1995.

Material Changes vs. Prior Period

• Earnings Growth: Net income increased 18% year-over-year for Q2 ($938M vs $792M) and 32% for the first six months ($1.9B vs $1.4B). EPS rose 47% in Q2 and 46% for the six-month period.
• Share Count Reduction: Average shares outstanding dropped significantly due to the April 1995 redemption of 156 million shares from Seagram. This accretion contributed $0.23 per share to the reported EPS.
• Revenue Expansion: Sales increased 9% in Q2 and 12% for the first half. The Chemicals segment saw a 13% sales increase, while Polymers grew 14%.
• Liquidity and Leverage: The debt ratio surged from 37% at year-end 1994 to 64% at June 30, 1995, due to borrowings used to finance the Seagram stock redemption. The current ratio declined from 1.5:1 to 0.85:1.
• Segment Performance:
  • Chemicals: Earnings up 70% ($172M) driven by white pigments and specialty chemicals.
  • Fibers: Earnings up 18% ($208M), led by aramids.
  • Polymers: Earnings up 26% ($230M) due to engineering polymers and elastomers.
  • Petroleum: Earnings flat ($198M); upstream results down 14% due to exploration costs, offset by downstream gains.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Capital Expenditures: Planned CapEx for 1995 reduced from $3.6 billion to $3.3 billion.
• Debt Reduction: Management expects the debt ratio to return to the target range of 35-40% by year-end 1996, aided by planned asset sales of approximately $2 billion.
• Credit Ratings: Moody's lowered senior long-term debt rating to Aa3 (from Aa2); S&P lowered senior debt and preferred stock to AA- (from AA). Outlook remains negative, though management does not expect material impact on borrowing costs.

Risks and Contingencies

• Benlate Litigation: Over 660 lawsuits filed regarding crop damage from "Benlate" DF 50 fungicide. DuPont recorded a $29 million after-tax charge in Q2 1995. Recent jury verdicts have been mixed (one $23.9M award, one no liability, one $2.5M liability with new trial granted).
• Polybutylene Plumbing: Approximately 100 homeowner lawsuits and class actions regarding leaks in plumbing systems. DuPont has settled Texas cases ($34M cap) and a nationwide class action settlement is pending (potential commitment up to $120M).
• Environmental: Various EPA and state agency actions regarding waste management and chemical releases, with potential penalties ranging from $45,000 to $125,000.

Investor Verification Checklist

• Debt Servicing: Verify the company's ability to service the increased debt load ($13.7B total) and the timeline for reducing the debt ratio to 35-40%.
• Asset Sales: Confirm the progress and valuation of the planned $2 billion in asset sales intended to finance the Seagram redemption.
• Benlate Exposure: Monitor the outcome of the Hawaii appeal and the status of the pending nationwide class action settlement for polybutylene plumbing.
• Share Count: Understand the impact of the Seagram warrants (exercisable at $89, $101, and $114 per share) on future dilution.
• Cash Flow: Review the trend in working capital outflows, which reduced operating cash flow despite higher net income.