EIDP, Inc. (E. I. du Pont de Nemours and Company) — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; filed November 6, 2017. The August 31, 2017 merger with Dow became effective at 11:59 p.m. DuPont became a subsidiary of DowDuPont Inc. and applied push-down accounting. Accordingly, September 1–30, 2017 results are reported as Successor, while earlier 2017 and 2016 periods are Predecessor and are not directly comparable.
Business Context and Major Transactions
- DuPont’s businesses were managed as a single operating segment following the merger.
- DowDuPont intended to separate its agriculture, specialty products and materials science businesses, subject to board approval and other conditions.
- DuPont acquired Granular, Inc. on August 31, 2017, for approximately $250 million.
- On November 1, 2017, DuPont completed the FMC Transactions: FMC acquired the divested Crop Protection business and related R&D assets, while DuPont acquired FMC’s Health and Nutrition business, excluding Omega-3 products. DuPont expected approximately $1.2 billion of cash consideration, subject to adjustments.
Financial Performance and Position
| Metric | September 1–30, 2017 | January 1–August 31, 2017 | Comparable 2016 period |
|---|
| Net sales | $1.735 billion | $17.281 billion | $4.646 billion for Q3; $18.306 billion for nine months |
| Income from continuing operations after tax | $(275) million | $1.642 billion | $(66) million for Q3; $1.915 billion for nine months |
| Net income attributable to DuPont | $(293) million | $1.741 billion | $2 million for Q3; $2.248 billion for nine months |
| EPS from continuing operations | $(0.30) | $(0.08) | $1.86 for Q3; $2.17 for nine months |
| Net sales less cost of goods sold | COGS of 87.1% of sales | COGS of 59.1% of sales | 64.5% for Q3; 59.7% for nine months |
- The September Successor period included a $429 million inventory fair-value step-up amortization charge, of which $360 million affected continuing operations and $69 million affected discontinued operations.
- September continuing-operations results included $89 million of intangible amortization, $40 million of restructuring charges and $71 million of integration and separation costs.
- September net loss also reflected a $572 million after-tax currency translation loss in other comprehensive income.
- Discontinued operations produced a $20 million loss in September, compared with $29 million of income for July–August 2017 and $72 million of income for the third quarter of 2016. January–August 2017 discontinued-operations income was $119 million, including the effects of the PFOA settlement.
Cash Flow, Debt and Liquidity
| Metric | September 30, 2017 | December 31, 2016 |
|---|
| Cash and cash equivalents | $4.754 billion | $4.548 billion |
| Marketable securities | $1.826 billion | $1.362 billion |
| Cash, cash equivalents and marketable securities | $6.580 billion | $5.910 billion |
| Total debt | $15.735 billion | $8.536 billion |
| Available committed credit facilities | $6.445 billion | Not provided in the filing summary |
- Operating cash flow was negative $3.949 billion for January–August 2017 and negative $310 million for September 2017, versus negative $1.027 billion for the first nine months of 2016. The deterioration primarily reflected pension contributions, transaction costs and the PFOA settlement.
- Investing cash flow was negative $2.382 billion for January–August and positive $935 million in September. Financing cash flow was positive $5.632 billion for January–August and positive $230 million in September.
- Debt increased primarily because of the May 2017 debt offering, commercial paper, the $1.3 billion receivable repurchase facility and term-loan borrowings. The company was in compliance with its 0.6667 total-indebtedness-to-total-capitalization covenant.
- DuPont contributed $2.9 billion to its principal U.S. pension plan during January–August 2017 and expected approximately $50 million of additional pension contributions during the remainder of 2017.
- Following the merger, DuPont was required to contribute approximately $570 million to a trust for certain nonqualified benefit and deferred-compensation plans within 90 days of August 31, 2017.
Material Changes Versus Prior Comparable Period
- Reported comparisons are substantially distorted by the merger, purchase-accounting adjustments and the Successor/Predecessor presentation.
- September 2017 operating results were pressured by the $360 million continuing-operations inventory step-up amortization, new intangible amortization and merger-related integration costs.
- Nine-month 2017 continuing-operations income was $1.642 billion for the Predecessor period plus September Successor results, compared with $1.915 billion for the nine months ended September 30, 2016; the filing does not present a fully comparable combined-period measure.
- Debt and balance-sheet assets increased sharply because of the merger’s fair-value remeasurement and additional borrowing. Goodwill increased to $45.213 billion and other intangible assets to $27.668 billion at September 30, 2017.
- The company’s pension funding, debt issuance and working-capital borrowings materially changed liquidity and financing compared with year-end 2016.
Guidance, Outlook, Risks and Unusual Items
- DowDuPont targeted approximately $3 billion of merger-related cost synergies. Approved restructuring actions were expected to generate approximately $850 million of total pretax charges, including about $115 million expected in the fourth quarter of 2017; remaining charges were expected through 2019.
- Expected future cash payments associated with the synergy-related restructuring program were approximately $460 million to $540 million.
- Hurricane Maria affected Puerto Rico operations. DuPont declared force majeure at its DEMI facility and could not reasonably estimate the ultimate financial impact. DuPont also expected to bear certain repair costs for Crop Protection assets transferred to FMC, but could not estimate those costs.
- The company faced ongoing PFOA, GenX, environmental and other litigation. Environmental accruals were $455 million, with potential costs up to approximately $910 million above the accrued amount. Chemours indemnification assets totaled $256 million for specified environmental matters.
- A grand jury subpoena sought documents concerning alleged PFOA and GenX discharges from the Fayetteville Works facility. Additional investigations, penalties or litigation could result.
- The company had $323 million of direct guarantees, generally with indefinite or multi-year obligations. It stated that litigation outcomes could be material in the period recognized even though management did not expect a material adverse effect overall.
- Goodwill and intangible assets were subject to impairment risk, particularly if demand weakens or valuation assumptions change.
Investor Verification Checklist
- Verify the final purchase-price allocation for the Dow-DuPont merger, including goodwill, intangible assets, pension obligations and deferred taxes.
- Assess the comparability of Successor and Predecessor results before using year-over-year revenue, margin or EPS comparisons.
- Confirm the accounting and financial impact of the November 1, 2017 FMC Transactions, including the acquired Health and Nutrition business and cash consideration.
- Monitor restructuring charges, cash payments and progress toward the targeted $3 billion of synergies.
- Review debt maturities, the November 2017 expiration of the receivable repurchase facility, commercial-paper exposure and the required $570 million trust contribution.
- Evaluate environmental, PFOA, GenX, hurricane-related and other contingencies, including the scope and collectability of Chemours indemnification.
