EIDP, Inc. Form 10-Q Summary
Business context and reporting period
E. I. du Pont de Nemours and Company (DuPont) reported unaudited results for the quarter and nine months ended September 30, 2018. Following the August 31, 2017 merger with Dow, DuPont is a wholly owned subsidiary of DowDuPont Inc.; its common stock is no longer publicly traded, while preferred stock remains outstanding.
The 2018 periods are presented as “Successor” periods using push-down fair-value accounting, while 2017 periods are split between Successor and Predecessor periods. Management states that these periods are not directly comparable. DuPont reported as one operating segment, with principal product lines including agriculture, packaging and specialty plastics, electronics and imaging, nutrition and health, industrial biosciences, transportation and advanced polymers, and safety and construction.
Financial highlights
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 |
|---|---|---|
| Net sales | $5.294 billion | $20.538 billion |
| Loss from continuing operations | $4.960 billion | $4.662 billion |
| Net loss attributable to DuPont | $4.960 billion | $4.675 billion |
| Effective tax rate on continuing operations | (0.2)% | (4.0)% |
| Cash used in operating activities | Not separately provided | $2.561 billion |
| Capital expenditures | Not separately provided | $911 million |
Third-quarter cost of goods sold was $3.686 billion, or 70% of sales. Research and development expense was $367 million, or 7% of sales, and selling, general and administrative expense was $823 million, or 16% of sales. Nine-month cost of goods sold was $14.202 billion, or 69% of sales; R&D was $1.145 billion, or 6%; and SG&A was $2.964 billion, or 14%.
- Third-quarter results included a $4.503 billion noncash, nondeductible goodwill impairment charge related to the agriculture reporting unit.
- Third-quarter restructuring and asset-related charges were $182 million, including an $85 million IPR&D impairment, a $41 million impairment of a China agriculture affiliate investment, and $61 million of DowDuPont synergy-program charges.
- Nine-month integration and separation costs were $926 million, including $344 million in the third quarter.
- Inventory step-up amortization was $1.494 billion for the nine months and $109 million in the third quarter.
Cash flow, balance sheet, debt and liquidity
| Balance-sheet item | September 30, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $3.536 billion | $7.250 billion |
| Cash, cash equivalents and marketable securities | $3.800 billion | $8.202 billion |
| Total debt | $14.568 billion | $13.070 billion |
| Total assets | $101.724 billion | $112.964 billion |
| Total equity | $66.974 billion | $74.932 billion |
Cash, cash equivalents and restricted cash declined to $4.042 billion from $7.808 billion at year-end 2017. The decline primarily reflected seasonal working-capital needs, a $1.1 billion discretionary U.S. pension contribution, and approximately $2.481 billion of distributions to DowDuPont. Debt increased primarily from commercial paper, the receivables repurchase facility, and a new term-loan borrowing used mainly to fund seasonal working capital.
DuPont had approximately $6.1 billion of committed and uncommitted unused credit lines. Its $4.5 billion term-loan facility had $2.0 billion outstanding and $2.5 billion of unused commitments; its $3.0 billion revolving credit facility was extended to June 2020. The company was in compliance with the applicable total-indebtedness-to-total-capitalization covenant.
Material changes versus the prior comparable period
- Reported comparisons are limited because 2018 Successor results follow the merger and fair-value step-ups, while 2017 results are divided between Successor and Predecessor periods.
- Nine-month 2018 sales were $20.538 billion versus $19.016 billion when the September 2017 Successor and January-August 2017 Predecessor periods are combined; however, the filing cautions that the periods are not directly comparable.
- Nine-month 2018 results shifted to a $4.675 billion net loss attributable to DuPont from $1.741 billion of attributable net income in the corresponding combined 2017 periods, primarily because of the agriculture goodwill impairment and merger-related accounting and separation costs.
- Sales growth was attributed primarily to volume growth in Latin America and Asia Pacific, particularly crop protection, as well as local pricing gains. Nine-month EMEA sales increased 16% and Asia Pacific sales increased 11%, according to management.
- Cash used in operations was $2.561 billion in the first nine months of 2018, compared with $3.949 billion used in the January-August 2017 Predecessor period, which included substantially higher pension contributions.
Guidance, outlook, commentary and risks
- DowDuPont expected the materials science separation around April 1, 2019, and agriculture and specialty products separations around June 1, 2019, subject to approvals and customary conditions. The planned businesses were expected to use the names Dow, Corteva Agriscience, and DuPont.
- The company expected total pre-tax DowDuPont synergy-program restructuring charges of $460 million to $715 million, with most remaining charges expected in 2018 and related actions substantially complete by the end of 2019. Future cash payments were estimated at approximately $330 million to $410 million.
- Management did not expect tariffs effective July 6, 2018 to have a direct material impact on 2018 results after mitigation actions, but stated that tariffs could pressure farmer margins and contribute to crop-mix changes.
- The agriculture impairment reflected lower projected sales and margins in North and Latin America, unfavorable Brazilian-real currency effects, reduced planted area, a shift from corn to soybeans, delayed product registrations, lower commodity prices, elevated grain inventories, and pricing pressure. Management warned that additional impairment charges could occur, including because other reporting units have limited fair-value cushion following the merger.
- Tax accounting for the Tax Cuts and Jobs Act remained provisional. The company had recorded a $715 million provisional transition-tax charge and continued to refine the related calculations.
- Environmental accruals totaled $417 million. Management disclosed that remediation costs could be up to $825 million above accrued amounts, although liabilities covered by Chemours indemnification totaled approximately $228 million of the accrual.
- DuPont remained involved in PFOA, GenX, environmental, product-liability, and other litigation. Management did not expect the described matters to have a material adverse effect, but acknowledged that liabilities could be material in the period recognized.
- The company expected the adoption of the new lease standard in the first quarter of 2019 to materially increase lease-related assets and liabilities, with no material expected effect on operating results or cash flows.
Important facts investors should verify
- Whether agriculture sales, margins, cash flows, and product registrations improve sufficiently to avoid further goodwill or intangible-asset impairments.
- The final tax effects of the Tax Cuts and Jobs Act, including the transition tax, GILTI treatment, foreign repatriations, and valuation allowances.
- The timing, approvals, tax treatment, financing consequences, and stranded costs associated with the planned DowDuPont separations.
- Actual cash requirements for restructuring, integration, pension obligations, debt maturities, and distributions to DowDuPont.
- Exposure and indemnification coverage relating to PFOA, GenX, environmental remediation, and other contingent liabilities, including Chemours’s ability and obligation to perform.
- The effect of the 2019 lease-accounting adoption and the expiration or refinancing of the $1.3 billion receivables repurchase facility in December 2018.