EIDP, Inc. 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
E. I. du Pont de Nemours and Company (“Historical DuPont”) reported unaudited results for the three months ended March 31, 2019. Following the 2017 DowDuPont merger, the company operated as a wholly owned subsidiary of DowDuPont and reported one operating segment comprising agriculture, packaging and specialty plastics, electronics and imaging, nutrition and health, industrial biosciences, transportation and advanced polymers, and safety and construction.
The filing was prepared during the separation of DowDuPont into Dow, Corteva and specialty products businesses. Dow’s separation was completed April 1, 2019; the Corteva separation was expected on June 1, 2019. Beginning in the second quarter, certain materials science and specialty products results were expected to be presented as discontinued operations, while Historical DuPont’s financial statements would be revised to include transferred agriculture businesses on a common-control basis.
Key Financial Metrics
| Three months ended March 31 | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $6,288 million | $6,699 million | Down 6.1% |
| Income (loss) from continuing operations before taxes | $49 million | $(189) million | Improved $238 million |
| Income (loss) from continuing operations after taxes | $89 million | $(216) million | Improved $305 million |
| Net income attributable to Historical DuPont | $85 million | $(228) million | Improved $313 million |
| Operating cash flow | $(1,422) million | $(1,975) million | Use decreased $553 million |
| Capital expenditures | $625 million | $355 million | Up $270 million |
Reported gross margin was approximately 32.6% in 2019 versus 27.6% in 2018. Net margin attributable to Historical DuPont was approximately 1.4% versus negative 3.4%. Cost of goods sold declined to $4,235 million from $4,847 million, primarily because inventory step-up amortization declined to $205 million from $703 million. R&D expense declined to $355 million from $382 million, while SG&A increased to $970 million from $959 million.
Integration and separation costs increased to $405 million from $255 million. Restructuring and asset-related charges declined to $55 million from $97 million. Sundry income increased to $157 million from $47 million, including a $66 million non-operating pension benefit, a gain on an asset sale and lower foreign-exchange losses. The effective tax rate was negative 81.6%, reflecting a $102 million tax benefit from an internal legal-entity restructuring; the comparable 2018 rate was negative 14.3%.
Liquidity, Debt and Balance Sheet
- Cash, cash equivalents and marketable securities were $3.814 billion at March 31, 2019, down from $4.500 billion at December 31, 2018.
- Total debt was $9.525 billion, up from $7.972 billion, primarily due to commercial paper and term-loan borrowings supporting seasonal working capital, capital expenditures and distributions to DowDuPont.
- Unused committed and uncommitted credit lines totaled approximately $6.3 billion. A new receivable repurchase facility provided up to $1.3 billion and had $19 million outstanding at quarter-end.
- Cash used in operations was $1.422 billion, reflecting seasonal working-capital requirements. Financing activities provided $1.226 billion, largely from increased borrowings, while investing activities used $514 million.
- Total assets were $101.837 billion and total equity was $69.835 billion at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Sales declined $411 million, driven primarily by volume declines in North America and Asia Pacific, especially agriculture and transportation and advanced polymers, and unfavorable currency effects in EMEA. Pricing gains partially offset the declines.
- Profitability improved substantially because of lower inventory step-up amortization, reduced restructuring charges, lower interest expense and lower foreign-exchange losses.
- Operating cash use improved but remained significant; capital expenditures increased and cash balances declined.
- Distributions to DowDuPont declined to $317 million from $830 million in the prior-year quarter.
- The company adopted the new lease standard on January 1, 2019. The adoption added approximately $758 million of operating lease right-of-use assets and $758 million of related lease liabilities, with no material income-statement or cash-flow impact.
Guidance, Outlook, Risks and Unusual Items
Management stated that integration and separation costs would continue to be significant in 2019. Total expected pre-tax charges under the DowDuPont Cost Synergy Program were $695 million to $755 million, with approximately $300 million to $350 million of future cash payments anticipated. The company expected related actions to be substantially complete by year-end 2019.
The company announced plans to invest more than $200 million to expand Kapton film capacity in Ohio. It also expected additional business transfers and separations, debt redemptions and changes to its financing structure. Subsequent to quarter-end, it redeemed $1.530 billion of notes, repaid $3.0 billion under its term loan facility, and funded approximately $4.6 billion of debt-related payments using cash and a $4.1 billion related-party revolving loan from Corteva at 4.275% due in five years. An estimated $18 million loss on early debt extinguishment was expected.
Key risks include execution and cost risks associated with the Dow and Corteva separations, potential business disruption, access to capital, market and currency volatility, feedstock and energy costs, weather-related agricultural demand, litigation and environmental liabilities, and potential goodwill or intangible-asset impairments. Management identified industrial biosciences, electronics and imaging, and clean technologies as higher-risk reporting units and stated that second-quarter 2019 impairment charges could be material.
Environmental liabilities accrued totaled $384 million, with possible additional exposure of up to approximately $790 million. Certain obligations were subject to indemnification by Chemours. The filing also discusses PFOA, PFAS, GenX, environmental proceedings, product liability and other litigation. Management did not expect the ultimate disposition of disclosed litigation to have a material adverse effect, although liabilities could materially affect results in the period recognized.
Important Facts for Investors to Verify
- Confirm the final timing, scope and accounting presentation of the Corteva distribution and the transfer of agriculture businesses.
- Assess post-separation debt, related-party financing, required note redemptions and available revolving-credit capacity.
- Monitor seasonal working-capital cash requirements and whether operating cash flow normalizes after the agriculture season.
- Separate recurring operating performance from the effects of inventory step-up amortization, tax benefits, pension credits, foreign-exchange results and separation costs.
- Review second-quarter goodwill and intangible-asset impairment testing and the potential effect of discontinued-operations reclassifications.
- Evaluate environmental, PFOA/PFAS, GenX and other litigation exposures, including the extent and durability of Chemours indemnification.
- Verify completion and remaining cash obligations under the restructuring and synergy programs.