EIDP, Inc. (E. I. du Pont de Nemours and Company) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited U.S. GAAP financial statements. DuPont’s Performance Chemicals business is presented as discontinued operations following its 2015 spin-off to Chemours.
Business context
DuPont operated through Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials and Protection Solutions. The company was preparing for its planned all-stock merger of equals with Dow Chemical, subsequent separation of the combined company’s agriculture, specialty products and material science businesses, and related divestitures to FMC required by European regulatory clearance.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $7,424 million | $7,061 million | $15,167 million | $14,466 million |
| Income from continuing operations | $859 million | $1,027 million | $2,197 million | $2,256 million |
| Net income attributable to DuPont | $862 million | $1,020 million | $1,975 million | $2,246 million |
| Diluted EPS | $0.99 | $1.16 | $2.26 | $2.55 |
| Segment operating earnings | $1,757 million | $1,613 million | $3,748 million | $3,330 million |
| Operating cash flow | Not separately provided | Not separately provided | $(4,055) million | $(1,460) million |
- Sales growth: Q2 sales increased 5%, reflecting 6% volume growth partly offset by a 1% decline in local price. Six-month sales also increased 5%, primarily from volume.
- Margins: COGS was 56% of sales in both Q2 and the six-month period, versus 57% in the comparable 2016 periods. Segment operating margin was approximately 23.7% in Q2 versus 22.8% and 24.7% for the six months versus 23.0%.
- Profitability: Q2 continuing-operations income declined 16% despite higher sales, primarily because of merger-related costs, restructuring charges and lower other income. The effective tax rate declined to 13.0% from 23.0%. The six-month effective tax rate was 13.8% versus 24.0%.
- Cash flow: Six-month operating cash flow was negative $4.1 billion, primarily due to $2.9 billion of contributions to the principal U.S. pension plan. Investing cash flow was negative $1.9 billion, including increased purchases of short-term financial instruments; financing cash flow was positive $4.5 billion.
- Liquidity: Cash, cash equivalents and marketable securities totaled $6.2 billion at June 30, 2017, compared with $6.0 billion at December 31, 2016. The company reported approximately $7.8 billion of unused credit lines.
- Debt: Total debt was $13.6 billion, up from $8.5 billion at year-end 2016. The increase primarily reflected the May 2017 debt offering and seasonal commercial paper and receivable-repurchase borrowings. The company had $500 million drawn and $4.0 billion available under its $4.5 billion term loan facility.
- Shareholder returns: Dividends were $0.38 per share for Q2 and $0.76 per share year to date; six-month cash dividends totaled $664 million.
Material changes versus the prior comparable period
- Q2 sales increased $363 million, while six-month sales increased $701 million. Volume grew across all reportable segments in Q2; Agriculture, Electronics & Communications and Protection Solutions were key contributors.
- Segment operating earnings increased 9% in Q2 and 13% year to date, with earnings growth in every reportable segment.
- Q2 included $216 million of Dow merger and separation costs and $160 million of restructuring charges. Six-month results included $386 million and $312 million, respectively, compared with $100 million and a net restructuring benefit of $13 million in the prior-year period.
- Six-month other income declined to $285 million from $423 million. The prior year included a $369 million gain on the sale of DuPont (Shenzhen) Manufacturing Limited; 2017 included a $162 million gain on the sale of the global food safety diagnostic business.
- Net exchange losses increased to $140 million in Q2 from $15 million and to $199 million year to date from $136 million.
- Six-month net income attributable to DuPont declined 12%, and diluted EPS declined to $2.26 from $2.55, substantially affected by discontinued-operations charges related to the PFOA settlement.
- Cash used in operations increased by $2.6 billion, while debt increased by approximately $5.0 billion, primarily reflecting pension funding and related financing.
Guidance, outlook, risks and unusual items
- Merger and separations: Conditional regulatory approvals were obtained in the United States, Brazil, Canada, China and other jurisdictions. The merger was expected to close no earlier than August 1, 2017, with an agreement termination date of August 31, 2017, subject to remaining conditions and approvals.
- FMC transaction: FMC agreed to acquire specified Crop Protection assets and R&D activities, while DuPont agreed to acquire certain FMC Health and Nutrition assets. FMC was to pay DuPont $1.2 billion, subject to adjustments; closing was expected in the fourth quarter of 2017 and remained dependent on the merger and regulatory approvals.
- Synergy target: Management expected approximately $3 billion of aggregate run-rate cost synergies within 24 months after the DowDuPont merger, subject to execution and approval of the planned separations.
- Restructuring: The 2017 program generated $312 million of charges through June 30, including $279 million of asset-related charges and $33 million of severance costs. Actions were expected to be substantially complete by year-end, including closure of the Cooper River manufacturing site.
- PFOA litigation: The $670.7 million MDL settlement was effective July 6, 2017, with half payable by DuPont and half by Chemours. DuPont recorded a $335 million pre-tax charge, or $214 million after tax, in discontinued operations. The Master Settlement payment was due in the third quarter.
- Other contingencies: At June 30, 2017, PFOA-related accruals totaled $656 million, environmental liabilities totaled $490 million, and direct guarantees totaled $298 million. Management stated that litigation outcomes are uncertain and individual-period liabilities could be material.
- Principal risks: Failure or delay of the DowDuPont merger or FMC transactions, additional regulatory remedies, integration and separation disruption, commodity and currency volatility, product and environmental liabilities, regulatory approvals for agricultural products, cybersecurity and operational disruptions, and realization of projected synergies.
Investor verification checklist
- Confirm the subsequent closing status and final terms of the DowDuPont merger, FMC transaction and related divestitures.
- Reconcile reported earnings with merger costs, restructuring charges, asset-sale gains, exchange losses and the PFOA discontinued-operations charge.
- Assess post-quarter cash generation, pension funding requirements, debt maturities, short-term borrowings and available credit capacity.
- Monitor PFOA settlement payments, Chemours indemnification assets and the continuing environmental and litigation exposure.
- Evaluate whether volume-led segment growth and the reported margin improvement are sustainable after portfolio changes and planned separations.
- Review the effect of adopting new accounting standards, including revenue recognition, pensions, income taxes and leases.