DowDuPont Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. The filing is for DowDuPont Inc., the parent of Dow and DuPont; Dow was the accounting acquirer. The 2017 reported comparison reflects Dow only, so pro forma combined figures provide a more comparable view. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $21.51 billion, up 63% from $13.23 billion reported in 2017. Against pro forma 2017 revenue of $20.47 billion, sales increased 5%. The reported increase chiefly reflects adding DuPont’s results; pro forma growth reflects price, currency and portfolio effects, partly offset by lower volume.
- Profit: Net income was $1.148 billion; $1.104 billion was attributable to DowDuPont common stockholders. Diluted EPS was $0.47 versus $0.72 reported in 2017. EPS comparisons are affected by the merger and a substantially larger weighted-average share count (2.334 billion versus 1.222 billion); the filing’s pro forma 2017 diluted EPS was $0.81.
- Margins: Gross margin, calculated as sales less cost of sales, was approximately 24.2%, versus 22.9% reported in 2017. Operating EBITDA, a non-GAAP segment measure excluding significant items, was $4.871 billion, or about 22.6% of sales; pro forma 2017 EBITDA was $4.614 billion, or about 22.5% of pro forma sales.
- Cash flow and investment: Operating cash flow was negative $2.137 billion; capital expenditures were $776 million, producing negative free cash flow of $2.913 billion under the company’s definition. The company attributed operating cash use to working capital, tax payments, pension contributions and integration/separation costs, which outweighed cash earnings. Cash capital expenditures were $776 million.
- Liquidity and debt: Cash and cash equivalents were $10.281 billion and marketable securities $257 million at March 31. Total debt was $34.461 billion, including $2.411 billion of notes payable and $2.707 billion due within one year. Current assets were $49.733 billion and current liabilities $26.617 billion (current ratio 1.87). Committed credit facilities totaled $19.680 billion, of which $13.582 billion was available. Cash and marketable securities include $8.512 billion held by foreign subsidiaries.
- Capital returns: The company paid a $0.38-per-share dividend and repurchased $1 billion of stock in the quarter. It said it intended to repurchase approximately another $1 billion in the second quarter.
Material changes versus the prior comparable period
- On a pro forma basis, sales rose 5%; price and product mix increased 3%, currency added 4%, and volume declined 2%. Operating EBITDA increased from $4.614 billion pro forma to $4.871 billion.
- Agriculture was notably weaker: sales fell 25% and Operating EBITDA fell 39% versus pro forma 2017, reflecting weather-delayed planting, lower expected planted area and unfavorable crop mix. Materials Science sales increased 17% and Specialty Products sales increased 11% versus pro forma 2017.
- Reported net income increased from $915 million to $1.148 billion, but reported periods are not like-for-like because DuPont is included only from the August 2017 merger date. The 2017 period also included a $469 million Bayer arbitration loss.
- Integration and separation costs increased to $457 million from $109 million. Cost of sales included $703 million of merger-related acquired-inventory step-up amortization. Restructuring charges were $262 million in the income statement; the related note identifies $260 million of Synergy Program charges and a small net adjustment to a prior plan.
- Cash and cash equivalents declined from $13.438 billion at year-end 2017 to $10.281 billion. Total debt increased to $34.461 billion from $34.071 billion.
Outlook, management commentary and risks
- Management described global economic conditions as broadly supportive and expected strength to continue into the second quarter. It cited input-cost volatility and weather-related softness in agriculture as headwinds. No specific earnings or revenue guidance was provided.
- 2018 capital spending was expected to be approximately $4.2–$4.4 billion, plus about $600 million for targeted cost-synergy and business-separation projects. The cost-synergy program was expected to be substantially complete by the end of 2019; estimated total pretax restructuring charges were approximately $2 billion, with $1.05–$1.19 billion of related future cash expenditures expected, primarily by the end of 2019.
- The company intended to separate its agriculture, materials science and specialty products businesses in one or more tax-efficient transactions, subject to board approval and customary conditions. The announced names were Corteva Agriscience, Dow and DuPont. Timing and execution, required approvals, tax treatment, integration and separation costs, and delivery of expected synergies remain uncertainties.
- Tax accounting for the 2017 Tax Cuts and Jobs Act remained provisional. The company recorded a $71 million tax charge in the quarter related to adjustments under the Act; it said estimates could change as analysis is completed.
- Contingencies: Recorded environmental remediation obligations were $1.298 billion; management said ultimate costs for accrued matters could reach up to 2.5 times the accrual. Union Carbide’s asbestos liability was $1.339 billion, with additional costs potentially material, though the full range could not be estimated. Dow Silicones recorded $263 million for implant-related claims and $79 million for potential additional commercial-creditor interest. The filing also describes ongoing PFOA and GenX-related matters, subpoenas concerning the Fayetteville Works facility, and investigations relating to the 2014 La Porte release that caused four employee fatalities. Management characterized loss likelihood for the Fayetteville actions as remote; other matter-specific exposures and indemnification arrangements are described in the filing.
- Other risks include feedstock and energy prices, supply-demand conditions, currency and market movements, operational disruptions, litigation and environmental obligations, and the possibility that intended separations or integration plans are delayed or do not achieve expected benefits.
Most important facts for investors to verify
- Use pro forma comparisons, not reported 2017 figures alone, when assessing underlying growth and segment performance; confirm the effects of merger accounting, divestitures and acquired-inventory step-up.
- Track operating cash flow and working-capital needs, especially seasonal Agriculture receivables and inventory, alongside planned capital spending and additional separation/synergy investment.
- Review debt maturities and refinancing needs: disclosed maturities include $7.437 billion in 2019 and $6.339 billion in 2020.
- Assess progress, approvals, costs and timing for the three intended business separations and the expected synergy program, including associated cash charges.
- Monitor updates to provisional tax-reform accounting and material environmental, asbestos, product-liability and other litigation exposures, including the extent of recoveries under indemnification agreements.