Business Context and Reporting Period
Company: E. I. du Pont de Nemours and Company (DuPont)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1999
Business Overview: DuPont operates globally in agriculture, nutrition, nylon, coatings, polymers, pharmaceuticals, pigments, chemicals, and fibers. The company is in the process of divesting its petroleum business (Conoco Inc.), which is reported as discontinued operations, with a tax-free split-off expected by the third quarter of 1999.
Key Financial Metrics
| Metric (in millions) | Q1 1999 | Q1 1998 |
|---|---|---|
| Sales (Continuing Ops) | $6,295 | $6,194 |
| Net Income | $663 | $906 |
| Income from Continuing Ops | $628 | $637 |
| Diluted EPS (Net Income) | $0.58 | $0.79 |
| Cash from Continuing Ops | $147 | $152 |
| Total Debt | $13,798 | $11,124 |
| Cash and Equivalents | $1,003 | $1,059 |
| Current Ratio | 0.7:1 | 0.8:1 |
Note: Total debt increased significantly due to commercial paper issuance to finance acquisitions and working capital.
Material Changes vs. Prior Period
- Revenue: Sales increased 2% to $6.3 billion, driven by a 4% volume increase (including acquisitions) offset by a 2% decrease in average prices.
- Profitability: Net income declined 27% to $663 million, primarily due to a significant drop in income from discontinued operations (Conoco) which fell from $269 million to $35 million due to lower oil/gas prices and reduced ownership interest.
- Continuing Operations: Income from continuing operations remained relatively flat ($628 million vs. $637 million). Underlying income (excluding nonrecurring items) decreased 4% to $749 million.
- Acquisitions: Significant cash outflow of $1.6 billion for the acquisition of Herberts (automotive coatings) in February 1999. This included $40 million in charges for purchased in-process R&D.
- Debt: Total debt rose by $2.7 billion to $13.8 billion, largely to fund the Herberts acquisition and seasonal working capital builds.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Strategic Shifts: DuPont is transitioning from a chemicals/energy focus to a chemicals, biology, and knowledge-based company. This includes a planned $7.7 billion merger with Pioneer Hi-Bred International (expected Q3 1999) and the creation of a tracking stock for Life Sciences businesses.
- Conoco Divestiture: The company expects to complete the tax-free split-off of Conoco by Q3 1999. Conoco recently paid $4.0 billion toward debt owed to DuPont, which DuPont intends to use for general corporate purposes and debt reduction.
- Year 2000 Readiness: Approximately 94% of critical systems are Y2K capable. Total expected expenditures are $350-$400 million (excluding Herberts). Management does not expect Y2K costs to materially impact financial condition.
Risks and Contingencies
- Legal Proceedings: Over 750 lawsuits remain regarding "Benlate" 50 DF fungicide crop damage claims. While DuPont maintains the product did not cause damage, accruals are recorded, and adverse changes could result in future charges.
- Environmental: Significant costs associated with complying with environmental laws and remediation of sites (e.g., Antioch Works, Belle plant).
- Market Volatility: Results are sensitive to foreign currency fluctuations, raw material costs, and global economic growth.
Investor Verification Checklist
- Conoco Split-Off Timing: Verify the completion of the tax-free split-off of Conoco Inc. by Q3 1999 and the impact on future earnings.
- Pioneer Merger Integration: Monitor the regulatory approval and closing of the $7.7 billion Pioneer Hi-Bred merger and the associated $3.5 billion cash outlay.
- Benlate Litigation Exposure: Review updates on the 65+ pending crop damage lawsuits and potential changes to legal accruals.
- Debt Levels: Assess the sustainability of the $13.8 billion debt load and the company's ability to service fixed charges (currently 5.8x coverage).
- Herberts Integration: Evaluate the financial performance of the newly acquired Herberts business, which will be fully consolidated starting Q2 1999.