EIDP, Inc. 2017 Form 10-K Summary
Business context and reporting period
E. I. du Pont de Nemours and Company (“DuPont”) filed its Form 10-K for the fiscal year ended December 31, 2017. DuPont operated globally across agriculture, packaging and specialty plastics, electronics and imaging, nutrition and health, industrial biosciences, transportation and advanced polymers, and safety and construction. It employed approximately 44,000 people, with operations in about 90 countries and manufacturing in about 50 countries.
The August 31, 2017 merger with Dow created DowDuPont Inc., with DuPont becoming a wholly owned subsidiary. Due to push-down accounting, the filing presents a “Predecessor” period for January 1–August 31 and a non-comparable “Successor” period for September 1–December 31. DuPont’s common stock was exchanged for DowDuPont stock; only DuPont preferred stock remains outstanding and listed.
Financial performance and key metrics
| Metric | Successor: Sep. 1–Dec. 31, 2017 | Predecessor: Jan. 1–Aug. 31, 2017 | 2016 |
|---|---|---|---|
| Net sales | $7.053 billion | $17.281 billion | $23.209 billion |
| Income from continuing operations after tax | $1.087 billion | $1.642 billion | $2.082 billion |
| Net income attributable to DuPont | $1.010 billion | $1.741 billion | $2.513 billion |
| Cash provided by operating activities | $4.196 billion | $(3.949) billion | $3.357 billion |
| Capital expenditures | $426 million | $687 million | $1.019 billion |
Full-year 2017 sales were approximately $24.3 billion when the two 2017 periods are combined, up approximately $1.1 billion, or 4%, from 2016. The increase was primarily volume-driven; worldwide local price and currency were broadly flat. The filing does not present a comparable full-year 2017 operating margin because the merger created non-comparable Successor and Predecessor periods.
Successor-period cost of goods sold was $6.165 billion, or 87% of sales, versus 59% in the Predecessor period and 60% in 2016. The Successor-period margin was heavily affected by $1.5 billion of inventory fair-value step-up amortization, as well as higher depreciation and amortization following the merger. Successor research and development expense was $473 million, or 7% of sales; selling, general and administrative expense was $1.101 billion, or 16% of sales.
Successor pre-tax loss from continuing operations was $1.586 billion. A provisional net tax benefit of $2.001 billion from the Tax Cuts and Jobs Act converted that loss into $1.087 billion of after-tax continuing-operation income. The tax benefit included a $2.716 billion benefit from remeasuring deferred taxes, partly offset by a $715 million transition-tax charge.
Balance sheet, debt and liquidity
| Balance-sheet item | Dec. 31, 2017 | Dec. 31, 2016 |
|---|---|---|
| Cash, cash equivalents and marketable securities | $8.202 billion | $5.910 billion |
| Total debt | $13.070 billion | $8.536 billion |
| Total assets | $112.964 billion | $39.964 billion |
| Total equity | $74.932 billion | $10.196 billion |
| Net deferred tax liability | $5.356 billion | Net deferred tax asset of $2.883 billion |
DuPont reported approximately $5.95 billion of available committed credit capacity, including $2.95 billion under a revolving facility and $3.0 billion under an unused term-loan commitment, plus approximately $731 million of unused uncommitted lines. Total debt increased primarily because of merger-related balance-sheet remeasurement and additional borrowings. The company was in compliance with its 0.6667 total-indebtedness-to-total-capitalization covenant.
Operating cash flow was strong in the Successor period, aided by seasonal agriculture cash flows and a tax refund, while the Predecessor period used cash largely because of approximately $2.9 billion in pension contributions. DuPont contributed $571 million to a change-in-control trust and held $558 million in that trust at year-end. The company expected 2018 capital expenditures of approximately $1.7 billion.
Material changes and unusual items
- The Dow-DuPont merger resulted in $74.680 billion of recorded consideration, $45.105 billion of goodwill, and $27.221 billion of other intangible assets after preliminary purchase accounting.
- DuPont acquired FMC’s Health and Nutrition business for a preliminary fair value of $1.970 billion and received approximately $1.2 billion of cash in the related transaction. The acquired business contributed $102 million of sales and a $12 million pre-tax loss from November 1 through December 31, 2017.
- DuPont divested the crop-protection business required for regulatory approval. Related results were classified as discontinued operations. The transaction produced no material gain or loss.
- Successor-period merger and separation costs were $314 million; Predecessor-period costs were $581 million. Total 2017 restructuring charges were $500 million, including $313 million under the 2017 restructuring program and $187 million under the DowDuPont synergy program.
- The synergy program is expected to generate total pre-tax restructuring charges of $430 million to $600 million and future cash payments of approximately $410 million to $480 million. Most remaining charges were expected in 2018, with actions substantially complete by the end of 2019.
- DuPont settled the PFOA multidistrict litigation for $670.7 million in total cash, with DuPont’s share recorded as a $335 million pre-tax charge, or $214 million after tax, in discontinued operations.
- The company recorded a $162 million pre-tax gain on the sale of its food-safety diagnostics business in early 2017.
- The merger materially changed the balance sheet and expense structure, making direct comparison with 2016 inappropriate. The filing also notes that preliminary purchase-price allocations remained subject to measurement-period adjustments.
Guidance, outlook, risks and contingencies
Management expected new agriculture products and the Health and Nutrition acquisition to support 2018 growth. Expected 2018 earnings headwinds included inventory step-up amortization, incremental depreciation and amortization from fair-value adjustments, and continuing separation costs. These were expected to be partly offset by synergy savings, lower pension and other post-employment benefit costs, and the lower U.S. federal tax rate.
Key risks include execution of the merger integration and intended separations, realization of the $3.3 billion DowDuPont cost-synergy commitment, access to debt markets, commodity and energy costs, foreign-exchange volatility, agriculture seasonality and weather, regulatory approval and public acceptance of biotechnology and crop-protection products, cybersecurity, environmental liabilities, litigation, intellectual-property protection, and potential goodwill or intangible-asset impairment.
Environmental remediation liabilities were accrued at $433 million, with reasonably possible additional exposure of up to approximately $920 million. DuPont recorded a $242 million Chemours indemnification asset related to certain environmental matters; recovery depends partly on Chemours’ ability and willingness to perform. DuPont also disclosed ongoing Fayetteville Works investigations and litigation involving alleged PFOA and GenX discharges, although management assessed the probability of loss in the pending actions as remote.
The company’s controls over financial reporting were deemed effective by management and its auditors. The Health and Nutrition business, acquired in November 2017, was excluded from the internal-control assessment because it represented less than 2% of consolidated assets and sales.
Important facts for investors to verify
- Do not compare Successor and Predecessor earnings, margins or cash flows without adjusting for the merger, push-down accounting, inventory step-up amortization and presentation changes.
- Verify the final purchase-price allocations for the merger and Health and Nutrition acquisition, including goodwill, intangible assets, deferred taxes and depreciation/amortization.
- Monitor the timing and cost of the intended agriculture, specialty products and materials science separations and whether the $3.3 billion synergy target is achieved.
- Assess the sustainability of liquidity after debt maturities, planned capital expenditures, separation costs, restructuring cash payments and distributions to DowDuPont.
- Track adjustments to the provisional Tax Cuts and Jobs Act accounting, including the transition tax, deferred-tax balances and future global intangible low-taxed income effects.
- Review environmental, PFOA/GenX and other litigation exposure, including the enforceability and collectability of Chemours indemnifications.
- Evaluate the effect of the large post-merger goodwill and intangible-asset balances on future impairment risk.