DowDuPont Inc. — Form 10-Q Summary
Filing identity and period: The supplied filing is DowDuPont Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018—not a standalone DuPont de Nemours filing. Dow and DuPont merged on August 31, 2017; Dow is the accounting acquirer, so the 2017 reported comparison does not include DuPont for the full comparable period. Management therefore also provides unaudited pro forma comparisons.
Financial results
| Metric | Q3 2018 | Prior comparable period |
|---|---|---|
| Net sales | $20.123 billion | $15.354 billion reported in Q3 2017 (+31%); $18.285 billion pro forma (+10%) |
| Net income available to common stockholders | $497 million | $514 million in Q3 2017 |
| Diluted EPS | $0.21 | $0.32 in Q3 2017 |
| Operating EBITDA | $3.829 billion | $3.221 billion pro forma in Q3 2017 (+19%); non-GAAP measure excluding significant items |
| Gross margin | 23.1% (calculated from sales less cost of sales) | 20.6% in Q3 2017 (calculated) |
For the first nine months, sales were $65.878 billion, versus $42.418 billion reported and $59.469 billion pro forma in 2017. Net income available to common stockholders was $3.369 billion, versus $2.723 billion reported; diluted EPS was $1.44 versus $2.01. Operating EBITDA was $14.376 billion versus $12.228 billion pro forma. The reported nine-month revenue and earnings comparisons are affected by the merger timing and are not like-for-like.
Cash flow and investment: Nine-month operating cash flow was a use of $370 million; capital expenditures were $2.558 billion and reported free cash flow was negative $2.928 billion. Management’s non-GAAP operating cash-flow measure excluding the impact of revised receivables-conduit accounting was positive $287 million. Cash and cash equivalents were $6.939 billion at September 30, down from $13.438 billion at year-end 2017. The company made $3.0 billion of share repurchases and paid $2.625 billion of dividends during the nine months.
Debt and liquidity: Total debt was $35.168 billion, compared with $34.071 billion at December 31, 2017; cash and cash equivalents were $6.939 billion. Current assets were $45.405 billion and current liabilities $27.680 billion, a 1.64 current ratio. Dow reported $7.2 billion of available credit facilities and DuPont $5.5 billion, separately. Management stated it expects operating cash generation and access to debt markets and other liquidity sources to meet obligations.
Material changes and segment performance
- Q3 sales growth reflected higher prices (+6%), volume (+4%) and portfolio effects, primarily the merger; currency reduced sales by 1%. Versus pro forma Q3 2017, sales rose 10%, with price and mix up 5% and volume up 5%.
- Pro forma Q3 sales grew in most segments; Electronics & Imaging was flat. Operating EBITDA increased in Performance Materials & Coatings, Nutrition & Biosciences, Transportation & Advanced Polymers, and Safety & Construction. Industrial Intermediates & Infrastructure EBITDA declined 3%, while Agriculture remained loss-making, though its loss narrowed.
- Higher feedstock and raw-material costs, planned maintenance, and an unplanned U.S. Gulf Coast isocyanates outage pressured results. Sales also benefited from additional U.S. Gulf Coast capacity and increased Sadara supply.
- Q3 integration and separation costs were $666 million; nine-month costs were $1.681 billion. Nine-month inventory fair-value step-up amortization was $1.494 billion. Restructuring and asset-related charges totaled $741 million for the nine months.
- Q3 included $85 million of impairment charges for Agriculture in-process R&D assets and $41 million for China Agriculture joint-venture investments. DowDuPont reported no consolidated Agriculture goodwill impairment; DuPont’s separate filing recorded a $4.5 billion goodwill impairment that did not carry through to DowDuPont’s consolidated statements.
Outlook, risks and contingencies
- Management described global demand as strong and expected above-GDP demand growth, new-product launches, productivity and synergy savings to support future performance. It forecast 2018 capital spending of approximately $4.4–$4.7 billion.
- The company expected the approximately $2 billion Synergy Program restructuring plan to be completed by end-2019, with additional restructuring charges in 2018 and 2019. Expected future cash expenditures were approximately $840–$990 million. On November 1, 2018, it raised its cost-synergy commitment from $3.3 billion to $3.6 billion.
- Management did not expect recently enacted tariffs to have a material impact on 2018 results and said it was adjusting product and raw-material flows to mitigate effects. The filing gave a separate 2018 outlook for Electronics & Imaging: Operating EBITDA was expected to increase moderately versus 2017 pro forma results.
- DowDuPont was pursuing intended separations of its agriculture, materials science and specialty products businesses, subject to board approval and customary conditions. Registration statements for the materials science and agriculture separations had been filed by the report date.
- Notable exposures include $1.243 billion of accrued environmental remediation obligations, with possible costs above accruals; $1.290 billion of asbestos-related liabilities; and ongoing PFOA/GenX-related proceedings. The company also disclosed Sadara project-financing guarantees of up to approximately $4.4 billion, within total guarantees of $5.771 billion. Certain PFOA and Fayetteville liabilities were described as reasonably possible but not expected to be material; outcomes remain uncertain.
- U.S. tax-reform accounting remained provisional. The company had recorded a cumulative $1.591 billion transition-tax charge. It also recorded a $75 million tax charge for a Brazil deferred-tax valuation allowance in Q3.
- Credit ratings and access to credit markets are risks: Dow reported a Fitch positive rating watch; DuPont reported Moody’s negative outlook and Fitch negative rating watch. Management said the subsidiaries were in compliance with debt covenants.
Important facts for investors to verify
- Use pro forma, rather than reported, 2017 comparisons to assess underlying post-merger growth; confirm the effects of merger timing, divestitures and acquisitions.
- Track operating cash conversion, seasonal agricultural working capital, pension contributions and the effect of receivables-conduit accounting on reported cash flow.
- Assess whether price increases and synergy savings can offset raw-material, maintenance, currency and other operating-cost pressures.
- Monitor separation timing and costs, the higher $3.6 billion synergy target, planned capital spending and the announced $3 billion buyback.
- Review developments in environmental, asbestos, PFOA/GenX and other legal matters, as well as Sadara guarantees and tax-reform estimates.