EIDP, Inc. 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a quarterly filing, although it includes unaudited fourth-quarter data. EIDP, Inc. is “Historical DuPont,” wholly owned by DowDuPont Inc.; its common stock is no longer publicly traded. The company reported approximately 44,000 employees, operations in about 90 countries, and a single operating segment.
Business Context
Historical DuPont operated across agriculture, packaging and specialty plastics, electronics and imaging, nutrition and health, industrial biosciences, transportation and advanced polymers, and safety and construction. The August 2017 DowDuPont merger resulted in push-down accounting and separate “Successor” and “Predecessor” periods that are not directly comparable. The company also completed the FMC transaction in November 2017, acquiring the Health and Nutrition business and divesting certain agriculture assets.
Key Financial Metrics
| Metric | 2018 | Comparable information |
|---|---|---|
| Net sales | $26.279 billion | $24.334 billion combined 2017 Successor and Predecessor periods; comparability is limited |
| Gross profit | Approximately $8.097 billion | COGS was $18.182 billion |
| COGS as a percentage of sales | 69% | 88% in September–December 2017 Successor period; 58% in January–August 2017 Predecessor period |
| Loss from continuing operations before tax | $(4.793) billion | 2017 periods: $(1.586) billion and $1.791 billion |
| Loss from continuing operations after tax | $(5.013) billion | 2017 periods: $1.087 billion and $1.642 billion |
| Net loss attributable to Historical DuPont | $(5.029) billion | 2017 periods: $1.010 billion and $1.741 billion |
| Cash from operating activities | $848 million | $4.196 billion in September–December 2017 |
| Capital expenditures | $1.311 billion | 2019 estimate: approximately $1.8 billion |
| Cash, cash equivalents and marketable securities | $4.500 billion | $8.202 billion at December 31, 2017 |
| Total debt | $7.972 billion | $13.070 billion at December 31, 2017 |
| Total assets | $101.025 billion | $112.964 billion at December 31, 2017 |
The filing does not provide a clear consolidated operating margin or adjusted earnings measure. Reported results were materially affected by merger-related accounting and unusual items, including inventory step-up amortization, depreciation and amortization from fair-value adjustments, restructuring, separation costs, and impairment charges.
Material Changes Versus Prior Periods
- Sales increased on a full-year basis, driven primarily by local pricing and portfolio gains, particularly in agriculture and transportation and advanced polymers, plus the full-year contribution of the acquired Health and Nutrition business. Latin America and Asia Pacific also contributed volume growth.
- Results deteriorated substantially because of a $4.503 billion non-cash goodwill impairment charge related to the agriculture reporting unit and an $85 million impairment charge for agriculture in-process research and development assets.
- Integration and separation costs increased to $1.375 billion in 2018 from $314 million in the September–December 2017 Successor period. Management expected these costs to remain significant in 2019.
- Inventory fair-value step-up amortization was $1.628 billion in 2018, contributing materially to COGS and limiting period-to-period margin comparability.
- The company recorded $485 million of restructuring and asset-related charges, including $322 million under the DowDuPont Cost Synergy Program and $59 million under an agriculture restructuring program.
- Cash declined primarily because of a $1.1 billion pension contribution, debt repayments and tender offer activity, distributions to DowDuPont, capital spending, working-capital requirements, and foreign-exchange effects.
- Total debt declined following the retirement of $4.409 billion principal amount of notes and repayment of $1.250 billion of bonds at maturity. Historical DuPont paid $4.849 billion, including fees and accrued interest, for the tendered notes.
Liquidity, Debt and Cash Flow
At December 31, 2018, cash, cash equivalents and marketable securities were $4.5 billion, while total debt was $7.972 billion. The company had $7.5 billion of committed credit facilities, of which approximately $5.456 billion was available, including a $3.0 billion revolving facility and $2.5 billion of unused term-loan commitments. The company reported investment-grade ratings with stable outlooks from Standard & Poor’s, Moody’s and Fitch.
Operating cash flow was $848 million, investing cash flow was $(334) million, and financing cash flow was $(3.112) billion. Financing outflows included debt retirement, $2.806 billion of distributions to DowDuPont, and repayment of bonds, partly offset by $4.849 billion of contributions from DowDuPont.
Management stated that operating cash flow, cash and securities, capital-market access, commercial paper, credit facilities, and other financing sources were expected to be adequate for working capital, capital spending, debt maturities and intercompany transfers. A new committed receivable repurchase facility of up to $1.3 billion was established in February 2019 and expires in December 2019.
Guidance, Outlook and Unusual Items
- DowDuPont targeted the materials science separation for approximately April 1, 2019 and the agriculture and specialty products separation for approximately June 1, 2019, subject to approvals and customary conditions. The materials science business was intended to become Dow, the agriculture business Corteva, and the remaining specialty products business DuPont.
- 2019 capital expenditures were expected to be approximately $1.8 billion, including approximately $500 million associated with merger synergies and separation execution.
- The Synergy Program was expected to generate total pre-tax restructuring charges of $575 million to $675 million, with actions substantially complete by the end of 2019. Remaining future cash payments were estimated at approximately $255 million to $305 million.
- The company announced an investment of more than $400 million to expand Tyvek production capacity in Luxembourg, with commercial production expected to begin in 2021.
- Management identified lower agriculture growth and margins, reduced planted area, shifts from corn to soybeans in Latin America, delayed product registrations, lower commodity prices, elevated grain inventories, currency pressure, and tariffs as factors behind the agriculture impairment.
- All reporting units were considered susceptible to future impairment because fair values had little excess over carrying values after the merger accounting adjustments.
- Environmental remediation liabilities were $381 million, with reasonably possible additional costs of up to $750 million above the accrued amount. A $193 million indemnification asset was recorded for matters expected to be recoverable from Chemours.
- Other significant risks included separation execution, access to capital markets, raw-material and energy prices, foreign exchange, weather and agriculture seasonality, regulatory and product-stewardship matters, cybersecurity, intellectual property, litigation, and environmental contingencies.
Most Important Facts to Verify
- Reconcile the $26.279 billion of 2018 sales and reported losses to any adjusted or pro forma measures, recognizing that Successor and Predecessor periods are not directly comparable.
- Assess the sustainability of agriculture forecasts and the risk of further goodwill or intangible impairments.
- Verify the timing, financing, tax treatment and liabilities allocated to the planned Dow, Corteva and DuPont separations.
- Review debt maturities, including approximately $4.504 billion of principal maturities in 2020, and the availability and conditions of credit facilities.
- Evaluate whether operating cash flow can support capital expenditures, pension and OPEB payments, restructuring costs, debt service and intercompany distributions.
- Review environmental, PFOA, GenX, litigation and Chemours indemnification exposures, including the possibility that indemnification assets may not be recoverable.
- Consider the impact of merger-related inventory step-up amortization, separation costs, restructuring charges and other nonrecurring items on underlying margins.
- Confirm that planned 2019 separations and the new receivable repurchase facility were completed or remained available after the filing date.