DuPont de Nemours, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Following the 2019 distributions of Dow and Corteva, DuPont’s continuing operations comprise its specialty products businesses. Reportable segments are Electronics & Imaging, Nutrition & Biosciences, Transportation & Industrial, Safety & Construction, and Non-Core. The 2019 comparison periods include discontinued operations where indicated and are not fully comparable. DuPont had agreed to combine Nutrition & Biosciences with IFF, with closing then expected in Q1 2021, subject to approvals and other conditions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $5,096 | $5,426 | $15,145 | $16,308 |
| Income (loss) from continuing operations, net of tax | $(72) | $372 | $(3,153) | $(805) |
| Net income (loss) attributable to DuPont common stockholders | $(79) | $372 | $(3,173) | $322 |
| Diluted EPS | $(0.11) | $0.50 | $(4.31) | $0.43 |
| Operating EBITDA | $1,300 | $1,401 | $3,756 | $4,253 |
Sales declined 6% in Q3 and 7% year to date. Q3 sales volume fell 6% overall; Electronics & Imaging grew 7% in sales, while Transportation & Industrial fell 14%, Safety & Construction 6%, and Non-Core 23%. For the nine months, Electronics & Imaging sales rose 7%, while Transportation & Industrial declined 20% and Non-Core 24%. Operating EBITDA is a company-defined measure adjusted for significant items; the 2019 nine-month comparator is pro forma.
Cost of sales was 66.6% of sales in Q3 versus 65.1% a year earlier, and 66.0% for the nine months versus 65.3%. Temporary manufacturing-plant idling charges to match supply with demand were about $60 million in Q3 and $220 million year to date. Management cited productivity actions and reduced spending as offsets to lower volumes and other cost pressures.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $2.794 billion, compared with $831 million in 2019. Capital expenditures were $922 million, down from $2.091 billion.
- At September 30, cash and cash equivalents were $4.008 billion; current assets were $12.606 billion and current liabilities $6.984 billion, for a reported current ratio of 1.80. A further approximately $6.2 billion of N&B note proceeds was restricted in escrow and is not freely available cash.
- Total debt was $24.196 billion, compared with $17.447 billion at December 31, 2019. The increase reflected the N&B notes offering and DuPont’s May debt offering, partly offset by lower commercial paper. The company reported $390 million of commercial paper outstanding and compliance with its 0.60 debt-to-total-capitalization covenant.
- N&B Inc. issued $6.25 billion of notes, with approximately $6.2 billion net proceeds placed in escrow for the planned transaction-related $7.3 billion special cash payment. If the IFF transaction does not close by the specified deadline or is terminated, the notes are subject to mandatory redemption provisions.
Material changes and unusual items
- Nine-month 2020 results included $3.214 billion of goodwill impairment charges, versus $1.175 billion in the 2019 period. The largest 2020 charge was $2.498 billion in Transportation & Industrial; Non-Core recorded $716 million year to date, including $183 million in Q3.
- Q3 also included $370 million of Non-Core asset impairment charges. Impairments reflected weaker markets, including aerospace and photovoltaics, divestiture-related changes, and held-for-sale classifications. Further impairments remain possible if market recovery disappoints.
- Q3 sundry income included a $393 million pre-tax benefit from the TCS/HSC disposal, including settlement of a supply dispute. The sale brought $550 million cash at closing, subject to claw-back provisions, with another $175 million payable over three years. Nine-month sundry income also included a $197 million pre-tax gain on the sale of Compound Semiconductor Solutions.
- Amortization of intangibles rose to $530 million in Q3 from $247 million and to $1.591 billion for the nine months from $755 million, principally due to the N&B tradename reclassification. Integration and separation costs remained significant: $127 million in Q3 and $469 million year to date.
- The Q3 effective tax rate was 460.0%, chiefly reflecting non-deductible goodwill impairment and goodwill allocation; the nine-month rate was (3.3)%. These rates are not representative of a normalized tax burden.
Management outlook, risks and contingencies
Management reported stronger demand in electronics, water filtration, health and wellness, and personal protection, with improvement in automotive and residential construction versus Q2. It expected further improvement in some markets in Q4, while anticipating continued pandemic-related weakness in aerospace, commercial construction, oil and gas, and selected industrial markets. DuPont delayed selected capital investments. The filing provides no specific full-year earnings or sales guidance and says the pandemic’s overall financial impact cannot be reliably estimated.
Environmental remediation liabilities were accrued at $79 million; management said reasonably possible costs could be up to $172 million above that accrual. The filing describes extensive PFAS-related litigation and indemnification arrangements. A 2020 jury verdict awarded $50 million against Historical EID in an individual PFAS case; DuPont stated that it would be appealed. DuPont also said an adverse final judgment in the Chemours suit was considered remote, while the dispute and arbitration continued.
DuPont’s credit ratings included BBB+ from S&P with a Negative Watch outlook, Baa1/Stable from Moody’s, and BBB+/Stable from Fitch. COVID-19, market recovery, supply-chain disruption, transaction execution and tax treatment, litigation, environmental matters, and potential asset impairments are among the disclosed risks.
Most important facts for investors to verify
- Whether the IFF transaction closed as expected, its final terms and tax treatment, and how the escrowed proceeds and N&B debt were ultimately handled.
- Whether operating demand and margins recovered in Q4, particularly in automotive, aerospace, construction, oil and gas, and other industrial markets.
- Whether further goodwill or asset impairments occurred, given the substantial 2020 charges and sensitivity to market assumptions.
- How debt, restricted cash, ratings outlooks, and refinancing or mandatory-redemption provisions evolved after quarter-end.
- Developments in PFAS litigation, indemnification disputes, and environmental exposures relative to recorded accruals.