Dupont De Nemours, Inc. quarterly report, Q3 FY2017

Business context and reporting period

This is DowDuPont Inc.’s Form 10-Q for the quarter ended September 30, 2017, filed November 6, 2017. The merger of Dow and DuPont closed August 31, 2017. Dow was the accounting acquirer, so reported historical results before the merger are Dow’s; DuPont results enter consolidated reporting only from the merger date. Accordingly, reported year-over-year comparisons are not like-for-like. The filing also presents unaudited pro forma results that assume the merger occurred January 1, 2016; these are estimates, not U.S. GAAP results or forecasts.

Financial results and position

Unless stated otherwise, amounts are in millions of dollars. Third-quarter and nine-month income-statement comparisons are to the corresponding 2016 periods.

Reported sales increased 23% in Q3 and 21% year to date, but the increase reflects the merger and other portfolio effects as well as underlying performance. On the company’s pro forma basis, sales rose 8% in Q3 to $18,285 and 12% year to date to $59,469. Pro forma Operating EBITDA was $3,221 in Q3 versus $3,022, and $12,228 for nine months versus $10,929. These non-GAAP measures exclude significant items and should not be equated with reported earnings.

Reported gross margin was approximately 20.7% in Q3 versus 21.2% and 21.9% for nine months versus 23.0%, based on net sales less cost of sales. Net income and EPS comparisons are affected by merger accounting, share-count changes, taxes and unusual items.

At September 30, cash and cash equivalents were $13,148 and marketable securities were $1,826, totaling $14,974. Total debt was $36,901, including $5,176 of notes payable, $1,906 due within one year and $29,819 of long-term debt. Current assets were $54,801 and current liabilities $27,278; working capital was $27,523 and the current ratio 2.01. Debt resides primarily at Dow and DuPont subsidiaries, and DowDuPont does not guarantee their debt obligations. Consolidated total assets were $198,527 and equity $104,534; merger accounting materially increased goodwill and intangible assets.

Material changes versus the prior period

• Reported Q3 common-stockholder income fell to $514 from $719 and diluted EPS to $0.32 from $0.63; nine-month common-stockholder income fell to $2,723 from $4,011. The comparison is substantially affected by the merger and prior-year items, so pro forma results offer a more comparable—but still adjusted—view.
• Q3 results included a $267 tax charge associated with changes in tax attributes following the merger, $360 of expense from acquired inventory fair-value step-up, $354 of integration and separation costs, and $179 of restructuring charges. Sundry income included a $227 gain on the EAA business divestiture.
• Nine-month 2017 results included a $469 loss from the Bayer CropScience arbitration and a $137 gain from the Nova patent matter. The 2016 comparison included a $2,445 gain from the Dow Corning ownership restructure and $1,235 of urethane litigation settlement charges.
• Balance-sheet growth versus year-end 2016 primarily reflects the merger. Cash and marketable securities increased, as did debt, inventories, goodwill and intangible assets. Merger-related preliminary purchase accounting recognized $45,501 of goodwill and $27,844 of DuPont intangible assets.

Outlook, commentary, risks and unusual items

Management described demand as positive across most key markets and major economies, while highlighting agriculture, particularly Brazil, as a headwind. Management’s stated priorities include earnings and cash-flow growth, integration and cost synergies, preparing the intended business separations, and developing the resulting businesses. The filing provides no quantified earnings or sales guidance.

On November 1, 2017, the board approved a cost-synergy restructuring program with estimated pretax charges of about $2 billion: $875–$975 million for severance and benefits, $450–$800 million for asset-related charges, and $400–$450 million for contract terminations. About $1 billion was expected in Q4 2017, with remaining charges through 2019. Expected future cash payments were estimated at $1,275–$1,425 million. Estimates may change, including with final merger purchase accounting.

Other subsequent announcements included completion of the FMC transactions on November 1, with approximately $1.2 billion cash consideration to DuPont, and an initial $4 billion share repurchase authorization and a $0.38-per-share fourth-quarter dividend announced November 2. These occurred after quarter-end. The new Freeport ethylene and polyethylene facilities started up in September and were expected to reach full run rates in Q4.

Key risks include achieving merger integration and synergy targets; timing, approvals, tax treatment and execution of intended separations; financing access and credit ratings; volatile feedstock, energy and commodity costs; severe weather and operational disruptions; agriculture seasonality and Brazil conditions; goodwill impairment; pension obligations; and environmental, product-liability and other litigation exposure. Notable disclosed exposures include $1,339 of environmental remediation accruals, $1,398 of asbestos-related liabilities, and a Sadara project-financing guarantee of up to approximately $4.4 billion. The company noted that environmental costs could be as much as twice the accrued amount. The Coatings & Performance Monomers reporting unit had $2,509 of goodwill and was subject to a planned Q4 impairment test.

Most important facts for investors to verify

• Use pro forma results cautiously: verify the adjustments and whether reported or pro forma performance best reflects the combined business; reported Q3 sales include only one month of DuPont.
• Track the realization, timing and cash costs of the approximately $2 billion restructuring program, and compare actual synergies with management’s expectations.
• Monitor final purchase-price allocation, goodwill and intangible valuations, and the Q4 2017 goodwill impairment test for Coatings & Performance Monomers.
• Assess debt maturities, subsidiary-level liquidity and ratings, including the $8,439 of scheduled 2019 debt maturities shown in the filing and the status of credit facilities.
• Review material litigation and environmental developments, including asbestos, PFOA/GenX-related matters, the disputed Nova damages, and the adequacy and recoverability of related accruals and indemnities.
• Confirm execution and financial effects of regulatory divestitures, the FMC transactions, intended business separations, and the announced repurchase and dividend plans.