E.I. du Pont de Nemours & Co.

--1983
Harvard Business School Case 284062
Case Software # XLS-897

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Exhibit 1 E.I. Du Pont de Nemours Company (dollar figures in millions, except per-share data)

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Sales $2,999 $3,159 $3,079 $3,455 $3,632 $3,618 $3,848 $4,366 $5,964 $6,910 $7,222 $8,361 $9,435 $10,584 $12,572 $13,652 $22,810 $33,331

EBIT $767 $727 $574 $764 $709 $590 $644 $768 $1,100 $733 $574 $961 $1,141 $1,470 $1,646 $1,209 $2,631 $3,545

Interest expense $2 $4 $7 $7 $10 $11 $15 $20 $34 $62 $126 $145 $169 $139 $143 $111 $476 $739

Profit after tax $407 $389 $314 $372 $356 $329 $356 $414 $586 $404 $271 $459 $545 $797 $965 $744 $1,081 $894

Profit after tax/sales (%) 13.6 12.3 10.2 10.8 9.8 9.1 9.3 9.5 9.8 5.8 3.8 5.5 5.8 7.5 7.7 5.4 4.7 2.7

Aftertax return on total capital (%) 18.5 16.6 13.0 14.2 12.8 11.1 10.9 12.1 15.1 9.0 6.6 9.7 11.1 13.7 15.1 10.9 7.5 6.6

Return on equity (%) 18.6 16.8 13.0 14.6 13.3 11.8 11.5 12.7 16.3 10.7 7.1 11.4 12.6 16.7 18.2 13.1 10.3 8.2

Earnings per share ($) 2.96 2.83 2.24 2.66 2.54 2.29 2.44 2.83 4.01 2.73 1.81 3.30 3.69 5.18 6.23 4.73 5.81 3.75

Dividends per share ($) 2.00 1.92 1.67 1.83 1.75 1.677 1.67 1.82 1.92 1.83 1.42 1.75 1.92 2.42 2.75 2.75 2.75 2.40

Average stock price ($) 81.04 80.88 54.42 54.25 44.46 38.29 47.92 54.77 58.13 43.92 35.96 46.42 40.04 39.34 42.63 40.32 45.88 37.19

Average stock price/earnings per share 27.4 28.6 24.3 20.4 17.5 16.7 19.6 19.4 14.5 16.1 19.9 15.0 10.9 7.3 6.6 8.4 10.0 9.8

Market value/book value 5.40 5.28 3.26 3.07 2.38 1.98 2.40 2.61 2.49 1.81 1.46 1.76 1.41 1.26 1.22 1.09 1.04 0.83

S&P 400 P/E 16.8 15.2 17.0 17.3 17.5 16.5 18.0 18.0 13.4 9.4 10.8 10.4 9.6 8.2 7.1 8.4 8.5 10.4

S&P 400 market value/book value 2.13 1.96 2.00 2.12 2.07 1.69 1.95 2.10 1.89 1.34 1.31 1.46 1.33 1.20 1.17 1.26 1.22 1.16

Source: Du Pont annual reports, Standard and Poor's Corporation

Note: Aftertax return on total capital = [EBIT * (1-tax rate)] / [all debt + equity] Average stock price is average of year's high and low values Per share data restated to be comparable with number of shares outstanding as of December 31, 1982.
Exhibit 2 Selected Funds Needs Data 1965-1982 (dollar figures in millions)

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Capital expenditures ($) 327 531 454 332 391 471 454 522 727 1,008 1,036 876 704 714 864 1,297 2,389 3,195
Change in working capitala ($) (163) 121 102 154 135 (39) 63 278 561 (122) 20 243 341 438 17 2,046 (987)
Capital Structure
Short-term debt ($) 0 0 31 57 45 56 0 0 169 320 540 259 229 258 230 393 445 319
(%) 0.0 0.0 1.2 2.1 1.6 1.9 0.0 0.0 4.2 6.5 10.3 4.6 4.0 4.2 3.5 5.5 2.6 1.9
Long-term debt ($) 34 58 95 150 141 160 236 240 250 793 889 1,282 1,236 1,058 1,067 1,068 6,403 5,702
(%) 1.5 2.4 3.7 5.5 4.9 5.3 7.1 6.8 6.2 16.2 16.9 23.0 21.4 17.4 16.1 14.9 37.0 33.8
Equity ($) 2,190 2,317 2,409 2,540 2,685 2,790 3,095 3,267 3,593 3,782 3,835 4,032 4,315 4,761 5,312 5,690 10,458 10,850
(%) 98.5 97.6 95.1 92.4 93.5 92.8 92.9 93.2 89.6 77.3 72.8 72.4 74.6 78.4 80.4 79.6 60.4 64.3
Total capital ($) 2,224 2,375 2,535 2,747 2,871 3,006 3,331 3,507 4,012 4,895 5,264 5,573 5,780 6,077 6,609 7,151 17,306 16,871
(%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Debt/Capital % 1.5 2.4 4.9 7.6 6.5 7.2 7.1 6.8 10.4 22.7 27.2 27.6 25.4 21.6 19.6 20.4 39.6 35.7
Interest coverage 383.5 181.8 82 109.1 70.9 53.6 42.9 38.4 32.4 11.8 4.6 6.6 6.8 10.6 11.5 10.9 5.5 4.8
Bond rating (senior debt) AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AA AA
Imputed rating (only on ratios) AAA AAA AAA AAA AAA AAA AAA AAA AAA AA BBB/A BBB/A

Source: Du Pont annual reports

a
Working capital investment is defined as networking capital excluding cash, marketable securities, and short-term debt.

AAA AA A BBB BB B Ratios are important

They are not the only thing
Industrial Corporations: Temporary deviations may be ignored given crdible assurance
Interest coverage 18.25x 8.57x 6.56x 3.82x 3.27x 1.76x Semi-permanent situation in 1981-82
Total debt/capitalization (%) 17.04 23.70 30.41 38.62 48.07 58.77 Qualitative factors like size, competitive strength, management quality
Rating is not a mechanical process
Judgement
nagement quality
Exhibit 3 Financial Data for Selected Chemical Companies ($ millions)

Du Pont Dow Chemical Monsanto Celanese

1980 1982 1980 1982 1980 1982 1980 1982
Sales 13,652 33,331 10,626 10,618 6,574 6,325 3,348 3,062
10-year compound annual sales 14.2 22.5 18.7 16.0 12.8 11.0 12.4 7.4
growth rate
10-year compound annual growth 7.5 2.9 19.9 5.7 8.3 9.9 8.9 7.3a
rate
Net income ($) 744 894 805 399 149 352 122 (34)
Net income/sales (%) 5.4 2.7 7.6 3.8 2.3 5.6 3.6 (1.1)
Return on total capital (%) 10.9 6.6 7.2 7.9 5.3 8.3 9.3 (0.3)
Return on equity (%) 13.1 8.2 18.1 9.6 5.5 10.1 11.2 (1.2)
Dividend payout ratio (%) 58.1 64.0 36.2 101.7 86.6 45.2 42.7 42.7a
Stock price/EPS (ratio) 8.4 9.9 7.6 13.7 13.7 8.3 6.3 6.7a
Market value/book value (%) 109 82.9 138 93.4 72 84.7 67 75.7
Debt/total capital (%) 20.4 35.7 48.5 42.7 33.4 24.5 40.7 42.9
Interest coverage (ratio) 10.9 4.8 2.2 1.6 2.8 7.1 4.5 3.8a
Bond rating (senior debt) AAA AA A A AA AA A BBB

Source: Moody's Investors Service

a
Celanese 10-year compound annual EPS growth rate, dividend payout ratio, stock price/EPS and interest coverage use
1981 instead of 1982. Market value/book value and stock price/EPS are based on average of year's high and low stock
prices.
Exhibit 4 Bond Rating Medians for 1979-1981

AAA AA A BBB BB B

Industrial Corporations:
Interest coverage 18.25x 8.57x 6.56x 3.82x 3.27x 1.76x
Total debt/capitalization (%) 17.04 23.70 30.41 38.62 48.07 58.77
Electric Utilities:
Interest coverage over 4.00x 3.25-4.25x 2.50-3.50x under 3.00x
Total debt/capitalization (%) under 45 42-47 45-55 over 55
Telephone Companies:
Interest coverage over 4.50x 3.70-4.70x 2.80-4.00x under 3.00x
Total debt/capitalization (%) under 40 40-48 48-58 58-64

Source: Standard and Poor's Corporation

Exhibit 6 Financial Projections, 1983-1987 ($ millions)

1983 1984 1985 1986 1987

Sources of Funds:
Net income 1,009 1,196 1,444 1,591 1,753
Depreciation 2,101 2,111 2,212 2,396 2,667

Funds from operations 3,110 3,307 3,656 3,987 4,420

Assets sold 600 600 600 0 0

Decrease in cash 199 (200) (200) (150) (150)
Other sources 74 135 135 135 135

Source before new financing 3,983 3,842 4,191 3,972 4,405

Uses of Funds:
Dividends 571 658 794 896 964
Capital expenditures 2,767 3,386 4,039 4,202 4,667
Increase in net working capital 973 414 594 587 650
Other 10 10 10 10 10

Total Uses 4,321 4,468 5,437 5,695 6,291

Net financing requirement 338 626 1,246 1,723 1,886

Source: Analysts' forecasts and casewriter's estimates

Note: Net working capital excludes cash, marketable securities, and short-term debt.

Assumptions:
● Sales are average of analysts' forecasts; average annual sales growth rate is 10%

● EBIT recover to 8.1% of sales by 1985

● Net working capital (excluding cash) equals 13% of sales
● Dividend payout ratio is 55%, and no dividend reductions are allowed
● Net fixed assets equal 40% of sales
● Depreciation is 15% of net fixed assets in the previous year
Exhibit 7 Aggregate Securities Issues and Interest Rates for U.S. Firms ($ millions)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Gross New Bond Issues by Industrials:

AAA debt ($) 1,650 2,875 700 800 275 1,550 1,750 1,852 543
AA debt ($) 2,415 3,310 2,030 1,125 700 1,800 2,900 2,458 3,347
A debt ($) 2,060 5,355 2,205 960 1,310 1,500 4,220 3,887 3,075
BBB debt ($) 440 420 1,010 445 210 0 345 0 1,357

Common and Preferred Stock Issues:

Cash offerings ($) 9,200 13,000 13,100 11,100 7,400 11,900 13,300 14,100 14,600 17,100 28,600 34,400 38,700
Net ($) 6,800 13,500 13,000 9,100 4,300 10,500 10,300 6,800 (1,400) (1,900) 18,200 12,000 16,400
Cash offerings by industrials ($) 3,500 3,200 3,100 1,500 1,000 2,400 2,800 2,300 2,900 3,600 10,400 11,900 9,600

Maturity Distribution of New Debt Issues:

Medium term (%) 43 30 16 21 30 44 55 62

Long term (%) 57 70 84 79 70 56 45 38

Interest Rates:

90-day commercial paper (%) 7.89 5.12 4.63 8.11 10.06 6.41 5.28 5.45 7.74 10.72 12.37 15.15 11.91
New issue AAA debt (%) 8.39 7.39 7.10 7.42 8.57 8.70 8.15 7.88 8.63 9.39 11.74 14.30 14.14
New issue AAA-AA spread (%) 0.26 0.12 0.10 0.10 0.20 0.27 0.17 0.09 0.14 0.22 0.44 0.50 0.38
New issue AAA-BBB spread (%) 1.35 1.07 0.71 0.75 1.67 2.57 1.44 0.79 0.81 1.12 1.95 2.09 1.87
S&P 500 price/earnings ratio 16.5 18.0 18.0 13.4 9.4 10.8 10.4 9.6 8.2 7.1 8.4 8.5 10.4

Source: Salomon Brothers, Incorporated, Bankers Trust Company, and Standard and Poor's Corporation.
Exhibit 8 Projected Financial Results Under Two Financial Policy Alternatives

1987 with 20%

1983 1984 1985 1986 1987 Lower EBIT

40% Debt Scenario

Debt/total capitalization (%) 36.0 37.1 39.7 40.0 40.0 40.0

Interest coverage 3.67 3.88 3.95 3.89 3.86 3.09
Earnings per share ($) 4.20 4.98 6.02 6.31 6.62 4.83
Dividends per share ($) 2.38 2.74 3.31 3.56 3.64 --
Return on total capital (%) 7.9 8.6 9.3 9.3 9.2 7.4
Return on equity (%) 9.0 10.1 11.5 11.5 11.4 8.3
New equity issues ($ millions) 0 0 0 704 816 816
Number of shares sold (millions) 0 0 0 11.7 13.0 13.0
Ratio based imputed rating BBB BBB BBB BBB BBB BB/BBB
Qualitative uplift to the rating A A A A A BBB/A Risk of loss of financial

25% Debt Scenario

Debt/total capitalization (%) 33.8 31.4 28.2 25.0 25.0 25.0

Interest coverage 3.91 4.60 5.57 6.23 6.17 4.94
Earnings per share ($) 4.13 4.77 5.41 5.46 5.60 4.27
Dividends per share ($) 2.29 2.49 2.71 2.72 2.72 --
Return on total capital (%) 7.9 8.6 9.3 9.3 9.2 7.4
Return on equity (%) 8.8 9.8 10.7 10.4 10.2 7.8
New equity issues ($ million) 398 686 1,306 1,783 1,271 1,271 Adverse stock marekt re
Number of shares sold (millions) 9.5 14.3 28.8 36.2 25.2 25.2
Ratio based imputed rating BBB BBB A A A/AA A Financial flexibility is as
Qualitative uplift to the rating A A AA AA AA AA AAA is unlikely

Source: Analysts' forecasts and casewriter's estimates, based on predictions of Exhibit 7.

Note: Interest coverage is defined as EBIT/interest. Assumes new shares sold at a P/E ratio of 10.
 AAA AA A BBB BB B

Industrial Corporations:
Interest 18.25x 8.57x 6.56x 3.82x 3.27x 1.76x
Total deb 17.04 23.70 30.41 38.62 48.07 58.77

Risk of loss of financial flexibility in bad times

Adverse stock marekt reaction

Financial flexibility is assured

AAA is unlikely