EIDP, Inc. Form 10-Q Summary
Business context and reporting period
E. I. du Pont de Nemours and Company (“DuPont”) reported results for the quarter and six months ended June 30, 2018. DuPont became a subsidiary of DowDuPont Inc. following the August 31, 2017 merger with Dow. The filing uses “Successor” accounting after the merger and “Predecessor” accounting for earlier periods; management cautions that the periods are not directly comparable because of purchase accounting, presentation changes and the merger-related fair-value step-up.
DuPont operates as one reportable segment with principal product lines including agriculture, packaging and specialty plastics, electronics and imaging, nutrition and health, industrial biosciences, transportation and advanced polymers, and safety and construction. The company’s common stock is owned by DowDuPont; DuPont’s preferred stock remains outstanding.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Net sales | $8,545 million | $15,244 million |
| Income from continuing operations after tax | $514 million | $298 million |
| Net income attributable to DuPont | $513 million | $285 million |
| Income from continuing operations before tax | $655 million | $466 million |
| Effective tax rate | 21.5% | 36.1% |
| Cost of goods sold as a percentage of sales | 66.3% | 69.0% |
| Research and development as a percentage of sales | 4.6% | 5.1% |
| SG&A as a percentage of sales | 13.8% | 14.0% |
Compared with the reported 2017 periods, sales increased 22.6% in the quarter and 6.7% for the first six months. The filing states that quarterly growth was led by U.S. and Canadian agriculture sales, including recovery from weather-related planting delays, while first-half growth was driven mainly by higher volume and currency benefits in EMEA and Asia Pacific.
Profitability declined substantially: income from continuing operations after tax fell from $722 million to $514 million in the quarter and from $1,900 million to $298 million for the first half. Results were pressured by $682 million of inventory step-up amortization in the second quarter and $1.4 billion in the first half, higher depreciation from merger-related fair-value adjustments, amortization of acquired intangibles, integration and separation costs, and restructuring charges. The 2017 periods also included significant discontinued-operation income and a gain on the sale of the global food safety diagnostics business.
Cash used in operating activities was $1,591 million in the first half of 2018, compared with $4,055 million in the prior-year period. Cash provided by investing activities was $34 million, compared with $1,932 million of cash used in 2017. Cash used in financing activities was $1,211 million, compared with $4,531 million provided in 2017, including approximately $1,658 million of distributions to DowDuPont.
| Balance-sheet metric | June 30, 2018 | December 31, 2017 |
|---|---|---|
| Cash, cash equivalents and marketable securities | $4,795 million | $8,202 million |
| Total debt | $13,429 million | $13,070 million |
| Cash and cash equivalents | $4,421 million | $7,250 million |
| Total assets | $108,010 million | $112,964 million |
| Stockholders’ equity | $72,767 million total equity | $74,932 million total equity |
Liquidity included approximately $6.8 billion of committed and uncommitted unused credit lines. The company had $3.0 billion of unused commitments under its $4.5 billion term loan facility and access to a $3.0 billion revolving credit facility. A $1.3 billion receivable repurchase facility, expiring in December 2018, had $1.15 billion outstanding at June 30, 2018.
Material changes versus the prior comparable period
- The merger-related successor basis substantially reduced comparability and introduced inventory, property, plant and equipment, intangible-asset and debt fair-value adjustments.
- Revenue increased, but reported earnings declined because of $1.4 billion of first-half inventory step-up amortization and other merger-related charges.
- Integration and separation costs were $327 million in the quarter and $582 million in the first half of 2018. The prior-year periods included comparable costs within SG&A rather than as a separate line item.
- The company recorded $91 million of restructuring and asset-related charges in the quarter and $188 million in the first half, primarily under the DowDuPont Cost Synergy Program.
- Cash and marketable securities declined by approximately $3.4 billion, primarily because of seasonal agricultural working-capital needs and distributions to DowDuPont, while total debt increased by approximately $359 million.
- Discontinued operations generated a $5 million after-tax loss in the first half of 2018, compared with $90 million of income in the prior-year period.
- DuPont adopted the revenue recognition standard under Topic 606 using the modified retrospective method and adopted other accounting guidance affecting pension-cost presentation, restricted cash and hedging.
Guidance, outlook, commentary and risks
- DowDuPont expected the materials science separation around April 1, 2019, and the agriculture and specialty products separations around June 1, 2019, subject to approvals and customary conditions. The planned successor brands were Dow, Corteva Agriscience and DuPont.
- The Synergy Program is expected to generate total pre-tax restructuring charges of $430 million to $600 million, with approximately $330 million to $400 million of future cash payments. Substantially all remaining charges were expected in 2018, with related actions substantially complete by the end of 2019.
- DuPont announced an investment of more than $400 million to expand Tyvek capacity in Luxembourg, with commercial production expected to begin in 2021.
- Management did not expect tariffs effective July 6, 2018 to have a material impact on 2018 results, based on mitigation actions and the company’s global asset base.
- The company was evaluating a discretionary third-quarter 2018 contribution to its principal U.S. pension plan; any contribution was expected to be less than half of the $2.9 billion contributed in 2017.
- Management identified potential impairment risk for goodwill and indefinite-lived intangible assets because carrying values and fair values were closely aligned at the merger date. Strategic reviews beginning in the third quarter could change assumptions and result in a potential third-quarter impairment.
- Environmental remediation liabilities totaled $426 million, with possible additional exposure of up to $860 million above the accrued amount. Chemours indemnification assets covered $236 million of certain environmental liabilities.
- Legal and regulatory matters include PFOA litigation and environmental claims, Fayetteville Works investigations and lawsuits concerning GenX and other perfluorinated compounds, and investigations related to the 2014 La Porte plant release. Management generally did not expect material adverse effects, but acknowledged that ultimate liabilities could be material in the period recognized.
- The company had not completed its accounting for the Tax Cuts and Jobs Act. It recorded $55 million of related tax charges in the first half of 2018, in addition to a $16 million charge related to inventory effects.
Most important facts for investors to verify
- Assess the comparability of Successor and Predecessor results before interpreting reported growth or margin changes.
- Separate recurring operating performance from merger-related inventory step-up amortization, intangible amortization, restructuring, integration costs and unusual tax items.
- Monitor cash generation, seasonal agricultural working-capital movements, distributions to DowDuPont and the increase in total debt.
- Review the timing, approvals, financing implications and separation liabilities associated with the planned DowDuPont business separations.
- Track potential goodwill and indefinite-lived-intangible impairment following the strategic business reviews.
- Evaluate environmental, PFOA, GenX and other litigation exposures, including the extent and collectability of Chemours indemnifications.
- Confirm final Tax Cuts and Jobs Act accounting, future pension contributions and the expiration or refinancing of short-term and committed financing facilities.