EIDP, Inc. — Form 10-Q Summary
Business Context and Reporting Period
E. I. du Pont de Nemours and Company (DuPont) filed its unaudited Form 10-Q for the quarter ended March 31, 2018. Following the August 31, 2017 merger with Dow, DuPont became a wholly owned subsidiary of DowDuPont Inc. The company reports one operating segment comprising agriculture, packaging and specialty plastics, electronics and imaging, nutrition and health, industrial biosciences, transportation and advanced polymers, and safety and construction.
Because DuPont applied push-down accounting after the merger, 2018 results are labeled “Successor” and 2017 results “Predecessor.” The filing states that the periods are not directly comparable due to fair-value accounting, presentation changes, and merger-related effects.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $6.699 billion | $7.319 billion |
| Loss from continuing operations after tax | $216 million | Income of $1.178 billion |
| Net loss attributable to DuPont | $228 million | Net income of $1.113 billion |
| Cash used in operating activities | $1.975 billion | $1.624 billion |
| Capital expenditures | $355 million | $330 million |
| Cash, cash equivalents and marketable securities at period-end | $5.341 billion | Not provided on a comparable basis |
| Total debt at period-end | $13.153 billion | Not provided on a comparable basis |
Cost of goods sold was $4.847 billion, or 72.4% of sales, compared with $4.152 billion, or 56.7%, in the prior-year period. Research and development expense was $382 million, or 5.7% of sales, and selling, general and administrative expense was $959 million, or 14.3% of sales.
DuPont reported a $189 million pretax loss from continuing operations and a $27 million tax provision, producing a negative effective tax rate of 14.3%. The quarter also included a $5 million after-tax loss from discontinued operations. Comprehensive income attributable to DuPont was $744 million, principally reflecting a $957 million cumulative foreign-currency translation gain.
Cash and cash equivalents were $5.095 billion at March 31, 2018, with an additional $246 million of marketable securities and $534 million of restricted cash. Total assets were $111.888 billion and stockholders’ equity was $74.732 billion. Short-term borrowings and capital lease obligations were $3.406 billion, and long-term debt was $9.747 billion.
Material Changes Versus the Prior Comparable Period
- Sales declined 8%, primarily because U.S. and Canadian agriculture sales were affected by the timing of seed deliveries. EMEA sales increased 15% and Asia Pacific sales increased 12%, supported by volume and currency effects.
- Results were adversely affected by $703 million of amortization of merger-related inventory fair-value step-up, higher depreciation from fair-value adjustments, $315 million of intangible amortization, $255 million of integration and separation costs, and $97 million of restructuring charges.
- Q1 2017 included a $162 million pretax gain from the sale of the global food safety diagnostics business and significant benefits from the resolution of tax positions and related interest. These items did not recur in Q1 2018.
- The Divested Ag Business was reported as discontinued operations. Q1 2017 included $160 million of after-tax income from that business, while Q1 2018 included a $5 million after-tax loss.
- Cash used in operations increased to $1.975 billion, driven primarily by seasonal working-capital requirements, higher tax payments, and higher integration and separation costs. Financing cash outflows included approximately $830 million distributed to DowDuPont.
Guidance, Outlook, Risks and Unusual Items
DowDuPont expects materials science to separate by the end of the first quarter of 2019 and agriculture and specialty products to separate by June 1, 2019, subject to approvals and other conditions. The company expects total pretax restructuring charges of $430 million to $600 million under the DowDuPont Cost Synergy Program, with substantially all remaining charges expected in 2018 and related actions substantially complete by the end of 2019. Estimated future cash payments are approximately $360 million to $430 million.
DuPont adopted the new revenue recognition standard, ASC Topic 606, on January 1, 2018 using the modified retrospective method. The filing states that the income statement and cash-flow impact was not material, although balance-sheet classifications changed. The company also recorded a $48 million tax charge related to the Tax Cuts and Jobs Act and a $16 million charge related to certain inventory effects. The accounting for the tax law remained provisional, including a previously recorded $715 million transition-tax charge.
Liquidity is supported by operating cash flow, cash and securities, debt markets, credit facilities, and receivable financing. The company had $3.0 billion of unused term-loan commitments, a $3.0 billion revolving credit facility, and approximately $7.9 billion of committed and uncommitted unused credit lines. Management stated that available liquidity and capital-market access should be adequate for working capital, capital spending, debt maturities, and distributions to DowDuPont.
Principal risks include execution of the merger integration and planned separations, achieving targeted synergies, seasonal agriculture demand, raw-material and energy costs, foreign-exchange exposure, regulatory and product-stewardship matters, litigation, environmental liabilities, and access to financing. The filing also identifies ongoing PFOA and GenX-related litigation, investigations, and environmental obligations. Environmental accruals totaled $430 million, with potential exposure of up to approximately $885 million above the accrued amount, although substantial portions are subject to Chemours indemnification.
The company had $284 million of directly guaranteed obligations for customers, suppliers, and nonconsolidated affiliates. It also faced continuing investigations related to the 2014 La Porte, Texas methyl mercaptan release, which resulted in four employee fatalities and could lead to sanctions or civil or criminal penalties.
Important Facts for Investors to Verify
- Confirm the comparability of Successor and Predecessor results before attributing the sales decline or operating loss to underlying business performance.
- Assess normalized earnings excluding the $703 million inventory step-up amortization, integration and separation costs, restructuring charges, intangible amortization, foreign-exchange losses, and other unusual items.
- Monitor seasonal agriculture sales, particularly the timing of North American seed deliveries and working-capital requirements.
- Track the timing, approvals, financing implications, and liabilities associated with the planned DowDuPont business separations.
- Review the provisional Tax Cuts and Jobs Act accounting, including the transition tax and potential future adjustments.
- Evaluate liquidity after the $830 million distribution to DowDuPont, total debt of $13.153 billion, and the maturity and covenant terms of the credit facilities.
- Follow PFOA, GenX, environmental, La Porte, and other litigation matters, including the extent and enforceability of Chemours indemnifications.