Business context and reporting period
DuPont de Nemours, Inc. (NYSE: DD) reported the quarter and nine months ended September 30, 2019. Following the April 1 distribution of Dow and June 1 distribution of Corteva, DuPont consists of the specialty products business. Historical Dow and Corteva results are presented as discontinued operations; cash flows for those businesses remain included in the cash flow statements, complicating period comparisons. The company also completed a 1-for-3 reverse stock split on June 1.
Key financial metrics
Unless otherwise noted, amounts are U.S. dollars; financial statement amounts are in millions.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $5,426 | $5,683 | $16,308 | $17,137 |
| Gross margin | $1,895; 34.9% | $1,913; 33.7% | $5,660; 34.7% | $5,477; 32.0% |
| Continuing operations income (loss), net of tax | $372 | $131 | $(805) | $89 |
| Net income | $377 | $539 | $412 | $3,480 |
| EPS, diluted | $0.50 | $0.65 | $0.43 | $4.32 |
| Operating EBITDA | $1,401 | $1,455 | Not directly comparable | Not directly comparable |
| Operating cash flow | Nine months: $831; prior year: $(370) | Capital expenditures: $2,091; prior year: $2,558 |
Nine-month free cash flow, as defined by DuPont as operating cash flow less capital expenditures, was negative $1,260 million, versus negative $2,928 million a year earlier. Nine-month results include a $1,175 million noncash goodwill impairment; continuing-operations loss per diluted share was $1.10. The nine-month effective tax rate was negative 21.4%, principally due to the nondeductible impairment.
At September 30, cash and marketable securities were $2,113 million, total debt was $17,585 million, and net working capital was $4,072 million (current ratio 1.62). Debt comprised $1,975 million of short-term borrowings and finance lease obligations and $15,610 million of long-term debt. Available committed credit was $3,730 million. DuPont was compliant with its debt-to-capitalization covenant.
Material changes versus the prior comparable period
- Q3 sales fell 5% year over year: volume declined 3%, currency reduced sales 2%, and portfolio changes reduced sales 1%, partly offset by 1% higher local price. Q3 Operating EBITDA declined about 4%.
- Transportation & Industrial was weakest: Q3 sales fell 11% and Operating EBITDA fell 20%, reflecting lower automotive and electronics demand and unfavorable currency. Non-Core sales declined 12%.
- Safety & Construction Q3 EBITDA rose 1%; Nutrition & Biosciences EBITDA declined 1%; Electronics & Imaging EBITDA declined 1%.
- Gross margin percentage improved despite lower sales. Management attributed lower costs of sales, in part, to synergies, currency, lower volumes, and the absence of certain pre-separation allocated costs.
- Q3 continuing-operations income rose to $372 million from $131 million, while total net income fell to $377 million from $539 million, reflecting the reduction in discontinued-operations income after the spin-offs. Nine-month net income comparisons are especially affected by the timing of the distributions.
- Cash declined from $8,548 million at December 31, 2018 to $2,107 million on the balance sheet at September 30; cash and marketable securities totaled $2,113 million. Financing cash use included $7,315 million of cash distributed with Dow and Corteva. Long-term debt increased, including a $3,000 million term-loan draw.
Outlook, management commentary, risks and unusual items
- The filing provides no formal financial guidance. Management said operating cash generation, debt-market access, and other liquidity sources are expected to provide sufficient flexibility to meet obligations.
- DuPont agreed to sell its compound semiconductor solutions business to SK Siltron for approximately $450 million; closing was expected by year-end 2019, subject to customary conditions and regulatory approval. It completed the sale of Sustainable Solutions in Q3, recording a $28 million pretax gain.
- A new 2019 restructuring program incurred $122 million of charges through September; approximately $94 million of future cash payments were anticipated, with actions expected to be substantially complete in the second half of 2020. The company also expected about $200 million of additional pension and post-employment benefit contributions by year-end.
- The annual goodwill and intangible-asset impairment test was scheduled for October 1, 2019; results were not known in the filing. The company noted that further impairments could result if projections or assumptions deteriorate.
- Environmental remediation accruals totaled $75 million; the reasonably possible amount above accrual could reach $175 million. DuPont also reported $33 million of retained or assumed environmental liabilities, with a reasonably possible range up to $112 million above that amount.
- Material legal exposures include PFAS-related matters and Chemours’ suit seeking to limit its obligations under its separation agreement or recover some or all of a $3.91 billion dividend. DuPont said it believed ultimate liability in the Chemours suit and specified PFAS matters was remote; outcomes remain uncertain. Non-PFAS stray liabilities were considered probable but not reasonably estimable, so no accrual was recorded.
- Key risks include separation-related tax and indemnification obligations, potential challenges to the tax-free status of the distributions, litigation and environmental liabilities, reliance on Dow and Corteva agreements and intellectual-property licenses, foreign exchange and trade exposure, weak demand, raw-material costs, and potential further impairments. The filing reported stable investment-grade ratings and effective disclosure controls.
Important facts for investors to verify
- Review the post-spin continuing-operations basis and the treatment of Dow and Corteva, especially when comparing nine-month earnings and cash flows.
- Assess whether operating trends in Transportation & Industrial and Non-Core stabilize, and whether reported price gains and cost synergies can offset volume and currency headwinds.
- Monitor results of the October 1 impairment test and the assumptions behind the $1,175 million goodwill write-down.
- Track cash generation, capital spending, debt maturities, refinancing needs, and execution of the share-repurchase program against liquidity and leverage.
- Follow the SK Siltron sale, restructuring cash costs, pension contributions, and the timing and amount of environmental, PFAS, tax, and indemnification exposures.