Dupont De Nemours, Inc. quarterly report, Q1 FY2020

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Business context and reporting period

DuPont de Nemours, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2020. Following the 2019 separations of Dow and Corteva, DuPont’s continuing operations comprise its specialty products businesses. The Nutrition & Biosciences (N&B) business remained in continuing operations during the quarter. Comparisons with first-quarter 2019 require care: 2019 results include Dow and Corteva as discontinued operations in some reported totals, and segment EBITDA comparisons use pro forma 2019 figures.

Financial performance and position

  • Revenue: Net sales were $5.221 billion, down 4% from $5.414 billion. The decrease reflected 2% lower volume, 1% unfavorable currency and 1% portfolio impact; local price and mix were flat.
  • Profit and margins: GAAP loss from continuing operations was $610 million, or $0.83 per diluted share, versus a $74 million loss, or $0.11 per share, in Q1 2019. Net loss available to DuPont common stockholders was $616 million; the prior-year figure was net income of $521 million, including discontinued operations. Cost of sales was 63.6% of sales versus 66.9%, implying gross margin of 36.4% versus 33.1%. Operating EBITDA was $1.321 billion versus pro forma $1.430 billion; respective margins were approximately 25.3% and 26.4%.
  • Significant items: Results included $533 million of noncash goodwill impairment, $270 million of long-lived asset impairment, $404 million of restructuring and asset-related charges, and $197 million pretax gain on the Compound Semiconductor Solutions sale. Integration and separation costs were $197 million, down from $611 million.
  • Cash flow: Operating cash flow was $718 million versus $26 million. Investing used $124 million, including $481 million of capital expenditures and approximately $420 million proceeds from the business sale. Financing used $344 million. Operating cash flow less capital expenditures was approximately $237 million, a simple calculation and not a company-defined measure.
  • Liquidity and debt: Cash and cash equivalents were $1.748 billion at March 31, versus $1.540 billion at year-end; total debt was $17.543 billion versus $17.447 billion. Current assets were $10.392 billion and current liabilities $8.545 billion, for a 1.22 current ratio. The company reported $1.7 billion of commercial paper outstanding and was compliant with its debt covenant.

Material changes and segment performance

  • Electronics & Imaging sales rose 7% to $884 million, while Operating EBITDA fell 12% to $253 million.
  • N&B sales rose 1% to $1.551 billion; Operating EBITDA increased 10% to $385 million.
  • Transportation & Industrial sales fell 13% to $1.144 billion; Operating EBITDA declined 17% to $308 million, with automotive and industrial weakness linked to COVID-19.
  • Safety & Construction sales declined 1% to $1.276 billion; Operating EBITDA fell 2% to $368 million.
  • Non-Core sales fell 19% to $366 million; Operating EBITDA declined 57% to $42 million. Results reflected weaker demand, the 2019 divestiture of Sustainable Solutions, and lower HSC Group equity earnings.
  • Amortization of intangibles rose to $533 million from $256 million, mainly following the N&B tradename reclassification to definite-lived intangibles. Interest expense increased to $183 million from $151 million.

Outlook, transactions, risks and contingencies

  • COVID-19: Management said the financial impact could not be reasonably estimated. First-quarter demand benefited in personal protection, food and beverage, health and wellness, and electronics; management expected strength in some of these markets to continue into Q2. Automotive, oil and gas, and select industrial markets were expected to remain significantly pressured. DuPont delayed some capital investment and idled certain production, particularly in Transportation & Industrial.
  • Liquidity actions: In April, DuPont replaced its $750 million 364-day facility with a $1.0 billion facility and repaid a $250 million prior-facility draw. On May 1, it issued $2.0 billion of 2.169% notes due 2023, expecting to use proceeds to repay or redeem $2.0 billion of notes due November 2020. S&P had BBB+ rating with negative watch; Moody’s Baa1 stable; Fitch BBB+ stable.
  • N&B/IFF transaction: The proposed tax-efficient combination was expected to close by the end of Q1 2021, subject to approvals and other conditions. It includes a proposed $7.3 billion cash payment to DuPont, supported by financing commitments. A $1.25 billion term loan was arranged, reducing bridge commitments to $6.25 billion. The transaction’s timing, approvals, tax treatment and financing remain uncertain.
  • Restructuring and impairments: The 2020 restructuring program recorded $111 million of charges, with total expected pretax charges up to $180 million and anticipated future cash payments up to $130 million. DuPont cited potential for further asset impairments if markets weaken or recovery falters.
  • Legal and environmental matters: DuPont recorded $24 million of litigation liabilities and $77 million of environmental liabilities. Environmental remediation costs could be as much as $171 million above the accrued amount. A March 2020 jury verdict awarded $50 million against Historical EID in a PFOA personal-injury case; Historical EID planned to appeal. The filing describes multiple PFAS-related matters, indemnification arrangements and the Chemours dispute; management characterized ultimate DuPont liability in certain matters as remote, while acknowledging uncertainty.
  • Other: The board declared a Q2 dividend of $0.30 per share. The company repurchased 6.1 million shares for $232 million during Q1, with $1.018 billion remaining under its $2 billion authorization at quarter-end.

Important facts for investors to verify

  1. Track COVID-19 effects on end-market demand, production, supply chains, and DuPont’s cash generation, especially in Transportation & Industrial.
  2. Verify progress, approvals, financing and tax conditions for the N&B/IFF transaction and the proposed $7.3 billion payment.
  3. Assess whether impairment assumptions for Non-Core goodwill and long-lived assets remain supportable, and whether additional charges arise.
  4. Monitor liquidity, commercial-paper market access, debt maturities, ratings and the use of proceeds from the May 2020 note offering.
  5. Follow PFAS litigation, environmental remediation estimates, indemnification recoveries and the appeal of the $50 million verdict.
  6. Consider comparability limitations: Q1 2019 included discontinued businesses in certain totals, while 2019 segment EBITDA is pro forma; Q1 2020 GAAP results also include major impairments and restructuring charges.