Fitch Affirms DuPont's IDR at 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Rating (IDR) of E.I duPont de Nemours and Company (NYSE: DD; DuPont) at 'A'. A full list of ratings is provided at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Company Profile

The ratings reflect DuPont's strong business profile, robust liquidity, and positive free cash flow (FCF) generation. DuPont benefits from global reach, end-market diversification, and leading market positions. The company's product portfolio is primarily R&D based and often patent protected, enabling sustainable market advantages and high operating profit margins. The consolidated operating EBITDA margin for the latest 12 months (LTM) ending June 30, 2015 was 16.9%.

Chemours

The spin-off of the performance chemicals segment, named The Chemours Company, occurred July 1, 2015. The $3.9 billion distribution ($3.4 billion in cash and $507 million in notes) to DuPont occurred in May 2015 and was financed by $3.9 billion of debt issued by Chemours. DuPont announced its intention to use the proceeds from the Chemours distribution to repurchase shares; $2 billion of which will occur in the second half of 2015 (2H15) with the remainder by the end of 2016.

Agriculture Growth

The Agriculture segment accounts for nearly half of DuPont's annual operating income from continuing operations. Excluding the effects of currency, the segment had modest declines in revenues and operating profits in the first half on lower corn acreage planted, reduced soybean seed sales and lower crop protection volumes. Corn planted acres declined this year after last year's record harvest. Longer term, Fitch expects the segment to show solid growth from DuPont's strong product portfolio and new product launches.

Weather conditions, food prices, and, for corn, ethanol prices, all impact planting and earnings in the short run resulting in volatility. In addition, the Agricultural segment is highly seasonal with most of the cash flow generated in the fourth quarter and most of the earnings and revenue in the first half of the year. In the long run, DuPont benefits from sizable market share and megatrends, such as population growth and decline of arable land which support growth for its products.

Substantial Foreign Operations

DuPont has operations in about 90 countries worldwide. While nearly two-thirds of 2014 net property by balance sheet valuation was located in the United States, more than 60% of revenue is from customers outside of the U.S. The company does hedge certain foreign currency-denominated revenues and occasionally hedges certain foreign currency transactions such as capital expenditures. DuPont routinely hedges its net exposure related to foreign currency-denominated monetary assets and liabilities by currency. For 1H15, net sales were down 5.5% from 1H14 given the strengthening of the U.S. dollar. As of Dec. 31, 2014, $4.5 billion of the $7 billion cash on the balance sheet was held outside of the U.S. Fitch defines readily available cash as cash on the balance sheet less amounts viewed to be required to run the business or expected to be taxed or distributed to minority interests when repatriated. Fitch estimates not readily available cash at $1 billion for DuPont.

Leverage Expectations

DuPont generally manages its capital structure within Fitch's expectations of net debt-to-EBITDA of 1.5x or lower and total debt-to-EBITDA of 2.0x or lower. Debt, net of readily available cash, has been reduced to roughly $5 billion with the proceeds of the Chemours distribution pro forma for the deconsolidation of Chemours debt.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--2015 results consistent with current guidance.

--Sales growth of 3% on average beyond 2015.

--EBITDA margins of 18% on average.

--3% annual increase in dividends as adjusted for the Chemours spin-off.

--Capital expenditures at $1.5 billion beyond 2015.

--Debt repayment as scheduled.

--Share buy-backs as the company has already announced as intended.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Total debt-to-EBITDA below 1.5x on a mid-cycle basis in combination with annual FCF over $1.5 billion.

Negative: Future developments that could lead to negative ratings actions include:

--Leveraging transactions such as debt-financed share repurchases, dilutive acquisitions, or spin-offs, resulting in total debt-to-EBITDA greater than 2x on a sustained basis;

--FFO adjusted net leverage greater than 1.5x on a sustained basis;

-Weak or negative FCF leading to incremental borrowings.

ROBUST LIQUIDITY

At June 30, 2015, cash on hand was $4.7 billion. The bulk of the company's cash flow is generated in the fourth quarter and Fitch expects Dec. 31, 2015 cash on hand to be roughly $5.1 billion. The company has $4.9 billion of unused credit lines, of which $4 billion is due in May 2019. The facilities are used to back-up commercial paper and issue letters of credit (LOCs). At Dec. 31, 2014, $349 million of LOCs were outstanding and short-term debt was $647 million at June 30, 2015.

Fitch expects DuPont to generate at least $650 million of FCF after pension funding requirements, capital expenditures and dividends. The company's defined benefit programs were in aggregate 69% funded at the end of 2014. There were no contributions to the main U.S. pension plan in 2014 and the company expects to contribute less than $50 million in 2015. Future contributions could be on the order of $500 million to $1 billion annually. Fitch would expect DuPont to offset such contributions with decreased share-buybacks or capital spending.

Near-term debt maturities are estimated at $647 million in 2015, $1.1 billion in 2016, $4 million in 2017, $1.3 billion in 2018 and $503 million in 2019.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

E. I. DuPont de Nemours and Company

--Issuer Default Rating (IDR) at 'A';

--$4 billion unsecured bank revolver at 'A';

--Senior unsecured notes at 'A';

--Senior unsecured debentures at 'A';

--Short-term IDR at 'F1';

--Commercial Paper at 'F1'.

Date of Relevant Rating Committee: Aug. 25, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989921

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989921

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150825006320/en/

Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1-312-368-3117
or
Committee Chairperson
Mark Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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