DowDuPont Inc. Form 10-Q — Quarter Ended June 30, 2018
Registrant note: The supplied filing is for DowDuPont Inc., not DuPont de Nemours, Inc. Dow and DuPont merged effective August 31, 2017; Dow is the accounting acquirer, so pre-merger historical results are not directly comparable with the combined company’s 2018 results.
Business context and reporting period
This summary covers the three and six months ended June 30, 2018. DowDuPont operated across Agriculture, Materials Science and Specialty Products and intended to separate these businesses in one or more tax-efficient transactions, subject to board approval and customary conditions. For meaningful year-over-year operating comparisons, management also presents unaudited 2017 pro forma results assuming the merger occurred January 1, 2016.
Financial performance and liquidity
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Net sales | $24.245 billion; +75% reported, +17% versus 2017 pro forma sales | $45.755 billion; +69% reported, +11% versus 2017 pro forma sales |
| Net income | $1.803 billion; $1.768 billion attributable to common stockholders | $2.951 billion; $2.872 billion attributable to common stockholders |
| Diluted EPS | $0.76, versus $1.07 | $1.23, versus $1.79 |
| Operating EBITDA | $5.676 billion; 23.4% of sales | $10.547 billion; 23.1% of sales |
| Operating cash flow | Not separately provided in the supplied text | $(47) million |
| Capital expenditures | $810 million | $1.586 billion |
Cost of sales was 74.1% of sales in Q2, compared with 77.8% in Q2 2017; reported gross margin was therefore 25.9%, versus 22.2%. These reported comparisons reflect the merger-related change in business scope and are not like-for-like. Management cited volume growth, pricing and currency as drivers, alongside merger-related portfolio additions.
Cash and cash equivalents were $9.244 billion and marketable securities $507 million at June 30, down from combined cash and marketable securities of $14.394 billion at December 31, 2017. Total debt was $34.250 billion, including $4.606 billion due within one year. Current assets were $47.897 billion, current liabilities $28.110 billion and the current ratio 1.70, down from 1.91 at year-end. Six-month free cash flow, as defined by the company, was negative $1.633 billion. The company reported $12.5 billion of remaining available committed credit facilities across Dow and DuPont.
Six-month cash used in operations and investing was more than offset by financing outflows, including $2.0 billion of share repurchases and $1.755 billion of dividends paid. The company spent $2.0 billion on repurchases in the first half; $1.0 billion of the $4.0 billion authorization remained at June 30.
Material changes versus the prior comparable period
- Revenue growth was primarily merger-related on a reported basis. Against 2017 pro forma results, Q2 sales increased 17%, with volume up 10%, local price up 4% and currency up 2%.
- Q2 diluted EPS fell to $0.76 from $1.07 reported in 2017; six-month diluted EPS was $1.23 versus $1.79. The merger materially increased the weighted-average share count, and reported periods also differ in business scope.
- Merger-related costs weighed on earnings: Q2 integration and separation costs were $558 million, and six-month costs were $1.015 billion. Inventory fair-value step-up amortization was $682 million in Q2 and $1.385 billion in the first half.
- Six-month operating EBITDA was $10.547 billion versus $9.007 billion of 2017 pro forma operating EBITDA. Q2 operating EBITDA was $5.676 billion versus $4.393 billion pro forma.
- Six-month operating cash flow remained negative at $47 million. Working-capital needs, pension contributions and integration/separation costs exceeded increased cash earnings; cash and marketable securities declined substantially from year-end.
Outlook, commentary, risks and unusual items
- Management described economic indicators as generally constructive and expected above-market growth through much of the portfolio. It identified currency fluctuations, particularly in Agriculture, and higher raw-material costs across all three divisions as headwinds.
- Agriculture’s 2018 operating EBITDA outlook was revised to “up slightly” versus 2017 pro forma, subject to lower expected planted area in the U.S. and Canada, a weaker Brazil safrinha season, higher royalties and continued R&D and digital investment. Electronics & Imaging was expected to be slightly down versus 2017 pro forma. The filing does not provide a clear company-wide full-year earnings or revenue guidance figure.
- Expected 2018 capital spending was $4.2–$4.4 billion, plus approximately $600 million of additional spending for targeted synergy and separation projects by year-end. Additional synergy-program cash expenditures of approximately $920 million–$1.060 billion were expected, primarily by the end of 2019; the program was expected to finish by the end of 2019.
- Management said tariffs effective July 6, 2018 were not expected to materially affect 2018 results, citing mitigation actions and the global asset base; it would continue monitoring developments.
- The $2.0 billion restructuring estimate covers severance, asset write-downs and exit/disposal costs. Further charges were expected in 2018 and 2019; some future optimization and implementation costs could not yet be reasonably estimated.
- Significant contingencies include asbestos litigation (recorded liability $1.310 billion), environmental remediation accruals ($1.260 billion, with possible costs above accruals), Dow Silicones product-liability and commercial-creditor matters, and PFOA/GenX-related proceedings. Management considered losses in the Fayetteville Works actions remote; investigations and litigation remained ongoing. The La Porte release involved four employee fatalities; DuPont reached a $3.1 million resolution-in-principle with the EPA, subject to approval.
- The accounting for the 2017 U.S. tax law remained provisional. The company had recorded a $2.642 billion net benefit from deferred-tax remeasurement and a $1.580 billion provisional transition-tax charge; further refinement could be material. Strategic business reviews beginning in Q3 could change valuation assumptions and potentially lead to impairment charges.
- DowDuPont early adopted an accounting standard that reclassified $1.057 billion of stranded tax effects from accumulated other comprehensive loss to retained earnings; this was an equity reclassification, not operating income.
Important facts for investors to verify
- Confirm the intended issuer: the provided 10-Q is DowDuPont Inc., despite the request naming DuPont de Nemours, Inc.
- Use pro forma comparisons to assess underlying growth, and distinguish them from reported year-over-year figures affected by the merger and divestitures.
- Track cash conversion, working capital, planned capital spending, restructuring cash costs and the decline in cash balances.
- Review debt maturities, credit ratings and outlooks: Dow’s ratings were stable, while DuPont’s Moody’s outlook was negative and Fitch placed ratings on watch negative.
- Monitor separation approvals and execution, synergy delivery, potential impairment testing, tax-law measurement, and the asbestos, environmental and other litigation exposures.