DuPont de Nemours, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2019. Unless noted, financial amounts are in millions of dollars.
Business context and reporting period
DuPont completed the separation of its materials science business, Dow, on April 1, 2019, and its agriculture business, Corteva, on June 1, 2019. The remaining company is focused on specialty products. On June 1, DowDuPont changed its name to DuPont de Nemours and effected a 1-for-3 reverse stock split; comparative share data and 2018 results were adjusted as described in the filing. Dow and Corteva results are presented as discontinued operations, but their cash flows have not been segregated from the cash-flow statements. Consequently, year-over-year comparisons span major changes in the company’s scope and cost structure.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $5,468 | $5,857 | $10,882 | $11,454 |
| Gross margin | $1,972; 36.1% | $1,772; 30.3% | $3,765; 34.6% | $3,564; 31.1% |
| Continuing operations, net of tax | $(1,103) | $31 | $(1,177) | $(42) |
| Net income (loss) available to DuPont common stockholders | $(571) | $1,769 | $(50) | $2,862 |
| Diluted earnings (loss) per share | $(0.76) | $2.27 | $(0.07) | $3.69 |
Q2 sales fell 7%: volume declined 5%, currency reduced sales 3%, and portfolio changes reduced sales 1%, partly offset by 2% higher local price. For the first half, sales fell 5%, with volume down 4% and currency down 3%, partly offset by 3% higher local price. Management attributed lower cost of sales and improved gross margin percentage partly to cost synergies, currency, lower volumes, and the removal of costs previously allocated to the separated businesses.
Q2 included a $1,175 non-cash goodwill impairment charge ($933 in Nutrition & Biosciences and $242 in Non-Core), as well as a $63 equity-method investment impairment. Integration and separation costs were $347 in Q2 and $958 in the first half. Discontinued operations contributed net income of $566 in Q2 and $1,212 in the first half; these amounts largely reflect the timing of the separations and should not be treated as ongoing earnings of the post-separation DuPont.
Segments and material changes
- Q2 Operating EBITDA was $1,422, equal to the prior-year pro forma amount. First-half pro forma Operating EBITDA was $2,852 versus $2,828. These are non-GAAP segment measures adjusted for significant items; the first-half comparison is pro forma.
- Safety & Construction reported Q2 sales of $1,341, down 2%, and Operating EBITDA of $382, up 29% from $296. Pricing, synergies and productivity gains supported results.
- Transportation & Industrial sales fell 10% to $1,269 and Operating EBITDA fell 11% to $357, reflecting a 12% volume decline, particularly in automotive and electronics markets.
- Non-Core sales fell 16% to $442 and Operating EBITDA fell 20% to $99, with weak demand in polysilicon-related markets and lower electronics paste sales.
- Electronics & Imaging sales fell 7% to $858 and Operating EBITDA fell 15% to $246. Nutrition & Biosciences sales fell 4% to $1,558, while Operating EBITDA rose 2% to $391.
- A June 1 reporting realignment created the Non-Core segment and moved several businesses into it; comparative segment data was retrospectively realigned.
Cash flow, debt and liquidity
- First-half operating cash flow was a use of $51, compared with a use of $47 a year earlier. Capital expenditures were $1,800, producing reported free cash flow of $(1,851), versus $(1,633) in 2018.
- Cash, cash equivalents and marketable securities were $1,669 at June 30, down from $8,577 at year-end 2018. The cash decline reflects, among other items, cash distributed with Dow and Corteva and separation-related financing and distributions.
- Total debt was $17,229, versus $12,639 at year-end. This included $1,610 of commercial paper and a $3,000 term loan drawn in May. DuPont reported $3,732 available under committed revolving credit facilities and was in compliance with its debt-to-capitalization covenant.
- Net working capital was $4,166 and the current ratio was 1.65, compared with $12,502 and 4.22 at year-end; the filing attributes much of the balance-sheet change to the distributions. Management said operating cash generation and access to debt markets and other liquidity sources were expected to support obligations.
Outlook, risks and unusual items
The filing provides no specific company-wide revenue or earnings guidance. Management expected restructuring actions under the 2019 program to be substantially complete by mid-2020, with total pre-tax charges of $85–$130 and future cash payments of approximately $55–$85. The earlier cost-synergy program was considered substantially complete, with approximately $124 of additional cash expenditures anticipated. DuPont also expected approximately $240 of pension and other post-employment benefit contributions by year-end 2019.
Key risks include the costs and execution of the separations; ongoing supply, service, intellectual-property, tax and indemnification arrangements with Dow and Corteva; possible claims challenging the tax-free treatment or solvency of the distributions; market weakness, tariffs, currency movements and raw-material costs; and potential additional impairment charges. The company reported environmental remediation accruals of $78 and said costs could be as much as $170 above the accrued amount. It also described significant PFAS-related litigation and indemnification matters, including Chemours’ suit challenging its obligations under a prior separation agreement; management stated that ultimate liability in that suit was remote. These are management assessments, not assurances of outcome.
Disclosure controls were assessed as effective. The filing noted ongoing work to separate or replicate processes and systems following the distributions.
Important facts for investors to verify
- How post-separation sales, margins and segment EBITDA trend once comparisons are made on a consistent continuing-operations basis.
- Whether cash conversion improves and how debt, commercial paper, liquidity facilities and planned shareholder returns evolve.
- Whether the goodwill impairment assumptions remain supportable and whether further impairment is recorded, particularly in Nutrition & Biosciences and Non-Core.
- The ultimate cost, allocation and collectability of environmental, PFAS, tax and other separation-related indemnities and contingencies.
- Actual restructuring charges and cash payments compared with the disclosed estimates, and whether planned synergies are realized.