DuPont de Nemours, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. DuPont now comprises the specialty products businesses following the 2019 separations of Dow and Corteva. The 2019 comparison reflects discontinued operations in certain statements and is not fully comparable; 2019 cash flows also include activity from those businesses.
Financial performance
- Revenue: Q2 net sales were $4.828 billion, down 12% year over year; first-half sales were $10.049 billion, down 8%. Q2 volume fell 10%, with the sharpest segment declines in Transportation & Industrial (28%) and Non-Core (22%). Electronics & Imaging and Nutrition & Biosciences volumes increased 7% and 1%, respectively.
- Profit and margins: Q2 continuing-operations net loss was $2.471 billion; net loss attributable to common stockholders was $2.478 billion, or $3.37 per diluted share, versus a $571 million loss and $0.76 per share in Q2 2019. The main driver was a $2.498 billion noncash goodwill impairment. First-half common-stockholder loss was $3.094 billion, or $4.20 per share, including $3.031 billion of goodwill impairments. Cost of sales was 68.2% of sales in Q2 versus 63.9% a year earlier. Company-defined Operating EBITDA was $1.135 billion, down from $1.422 billion; its margin was approximately 23.5% versus 26.0%. This measure excludes significant items and is not GAAP net income.
- Segments: Q2 Operating EBITDA increased to $418 million in Nutrition & Biosciences and $277 million in Electronics & Imaging. It declined to $49 million in Transportation & Industrial, $349 million in Safety & Construction, and $93 million in Non-Core.
- Cash flow: First-half operating cash flow was $1.520 billion, versus cash used of $51 million in the prior-year period; capital expenditures were $719 million. Investing activities used $348 million, while financing activities provided $1.050 billion.
- Liquidity and debt: June 30 cash and equivalents were $3.737 billion, up from $1.540 billion at year-end 2019. Current assets were $11.986 billion and current liabilities $8.010 billion (current ratio 1.50). Total debt was $19.167 billion, versus $17.447 billion at year-end; reported long-term debt was $15.608 billion. DuPont issued $2 billion of 2.169% notes due 2023, expected to fund repayment or redemption of $2 billion of notes due November 2020. It also established a $1 billion 364-day revolver; $1.6 billion of commercial paper was outstanding. The company reported covenant compliance.
- Capital returns: DuPont paid $0.30 per share in Q2 and declared a further $0.30 dividend for Q3. No shares were repurchased in Q2; $1.018 billion remained under the $2 billion buyback authorization at June 30.
Material changes, outlook and risks
- COVID-19 drove weaker demand in automotive, aerospace, construction, oil and gas, and other industrial markets; DuPont temporarily idled plants, mainly in Transportation & Industrial. Plant-idling charges were approximately $160 million in Q2. Demand related to personal protection, health and wellness, and electronics benefited some businesses. Management expected strength in certain markets to continue into Q3 but said the pandemic’s overall financial effects could not be reliably estimated.
- The Transportation & Industrial goodwill impairment followed weaker automotive demand and revised recovery expectations. A separate $533 million goodwill impairment was recorded in Non-Core in Q1; management warned that further market weakness or a slower recovery could trigger additional impairments.
- The planned combination of Nutrition & Biosciences with IFF was expected to close in Q1 2021, subject to shareholder, regulatory, tax-opinion, and other conditions. A $7.3 billion cash payment to DuPont is contemplated, supported by financing commitments; transaction timing, completion, tax treatment, financing, and separation execution remain risks. No general full-year earnings guidance is provided in the supplied filing text.
- Environmental remediation accruals were $79 million; the filing says ultimate costs for accrued matters could be up to $161 million above the accrual. DuPont also faces PFAS-related litigation and indemnification exposures. A jury awarded $50 million in one Historical EID personal-injury case; an appeal is planned. DuPont described the outcome of the Chemours indemnity dispute and certain other PFAS matters as remote, while proceedings continue.
- Other items include $197 million of first-half gain on sale of the Compound Semiconductor Solutions business, increased amortization expense following reclassification of Nutrition & Biosciences tradenames, and $342 million of first-half integration and separation costs. Credit ratings at July 29 included S&P BBB+ with Negative Watch.
Important facts for investors to verify
- Whether end-market demand, especially automotive and other industrial demand, recovers as assumed and whether further impairments are required.
- Cash generation, liquidity, commercial-paper refinancing, and repayment plans for the November 2020 notes amid ongoing uncertainty.
- Progress, financing terms, tax treatment, approvals, and expected timing of the IFF transaction and related N&B separation.
- Potential cash and earnings exposure from PFAS litigation, environmental remediation, indemnities, and the $50 million verdict under appeal.
- Underlying segment profitability after separating non-GAAP Operating EBITDA from impairment charges, transaction costs, idling costs, and other significant items.