DowDuPont Inc. — 2018 Form 10-K Summary
Reporting period and issuer: This is DowDuPont Inc.’s annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. The filing describes the combined Dow and DuPont holding company and its planned separation into three businesses. Although the request names DuPont de Nemours, Inc., the registrant in this filing is DowDuPont Inc.; the company expected the remaining specialty-products business to take the DuPont name after the planned separations.
Financial results and key metrics
| Metric | 2018 | 2017 | Context |
|---|---|---|---|
| Net sales | $85.977 billion | $62.484 billion | Reported growth of 38%; 2017 included Historical DuPont only from September 1. On a pro forma basis, sales rose 8% from $79.535 billion. |
| Income from continuing operations, net of tax | $4.004 billion | $1.669 billion | 2018 included substantial merger-related inventory step-up amortization, integration and separation costs, and restructuring charges. |
| Net income available to common stockholders | $3.844 billion | $1.460 billion | Diluted EPS was $1.65 versus $0.91. |
| Gross profit and margin | $20.644 billion; 24.0% | $12.693 billion; 20.3% | Calculated from reported net sales less cost of sales. |
| Operating cash flow | $4.731 billion | $(0.765) billion | Cash flow comparisons were affected by revised cash-flow classification for receivables conduit transactions. |
| Free cash flow | $0.894 billion | $(4.335) billion | Company-defined non-GAAP measure: operating cash flow less capital expenditures. |
| Cash and marketable securities | $13.616 billion | $14.394 billion | Includes $13.482 billion cash and cash equivalents and $0.134 billion marketable securities in 2018. |
| Total debt | $40.464 billion | $34.071 billion | Consolidated debt, including notes payable and current maturities; long-term debt was $37.662 billion. |
| Liquidity | Current assets $49.603 billion; current liabilities $24.715 billion | Current ratio 2.01:1 | 2017 current ratio was 1.91:1. |
Capital expenditures were $3.837 billion. The company paid $3.491 billion in common dividends and repurchased $4.421 billion of shares during 2018. The $12.7 billion DowDuPont Notes offering was used in part to retire DuPont debt, fund repurchases, and pay related expenses. Debt as a percentage of total capitalization was 29.6%, up from 25.1% in 2017.
Fourth-quarter detail
Fourth-quarter 2018 net sales were $20.099 billion, compared with $20.066 billion in fourth-quarter 2017. Income from continuing operations was $513 million in the fourth quarter of 2018; the comparable 2017 quarter reported a loss of $1.159 billion. The filing attributes quarterly results to significant items, including inventory step-up amortization, separation costs, restructuring, debt-redemption losses and tax adjustments.
Material changes versus the prior comparable period
- Reported sales growth substantially reflects the merger: 2018 includes a full year of Historical DuPont, while 2017 included only four months. Pro forma sales increased 8%, with volume up 4%, local price and mix up 3%, and currency up 1%.
- Sales increased on a pro forma basis in most segments; Electronics & Imaging declined 1%. Industrial Intermediates & Infrastructure rose 20%, Nutrition & Biosciences 14%, and Transportation & Advanced Polymers 10%.
- Operating cash flow improved from a reported outflow in 2017 to an inflow in 2018. Management also presented non-GAAP operating cash flow excluding the effect of the accounting guidance: $5.388 billion in 2018 versus $8.697 billion in 2017. These measures are not directly interchangeable.
- Interest expense increased to $1.504 billion from $1.082 billion, primarily reflecting the merger and higher debt balances.
- Integration and separation costs increased to $2.463 billion from $1.101 billion. Restructuring, goodwill impairment and asset-related charges fell to $1.105 billion from $3.280 billion; 2017 included a $1.491 billion goodwill impairment in Coatings & Performance Monomers.
Outlook, risks and unusual items
- Management expected global economic growth to continue in 2019 at a moderately slower pace than in 2018, while monitoring trade negotiations and economic activity in China. It emphasized growth investments, synergy savings, productivity and separation milestones. Segment outlooks were mixed, including expected currency headwinds and possible margin pressure in some businesses. Capital spending was expected to be approximately $4.3 billion in 2019.
- The company targeted the Dow materials-science separation for April 1, 2019, and the Corteva agriculture separation for June 1, 2019. These were targets, subject to approvals and other conditions, not completed transactions as of the report.
- The $12.7 billion DowDuPont Notes carry a special mandatory redemption provision: if the separations are abandoned or not completed by May 1, 2020, the notes generally must be redeemed at 101% of principal plus accrued interest.
- The merger synergy program had a revised $3.6 billion cost-synergy target. Approximately $1.747 billion of roughly $2 billion expected pretax restructuring charges had been recorded through year-end; additional cash restructuring costs and significant separation expenses were expected in 2019.
- Environmental remediation accruals were $1.201 billion; management disclosed that ultimate costs could be up to approximately 2.5 times the accrued amount under adverse changes. Union Carbide’s asbestos liability was $1.260 billion. The filing also discusses PFOA and GenX-related matters, product and environmental litigation, and unresolved regulatory proceedings.
- Other risks include feedstock and energy-price volatility, foreign exchange, weather and agricultural seasonality, product and process safety, cybersecurity, pension funding, impairment risk, and the execution, tax-free status and liability allocation of the planned separations. Two goodwill reporting units in Nutrition & Biosciences were identified as having limited impairment headroom.
- Management said recently enacted tariffs were not expected to have a materially adverse direct effect on 2019 results, while noting mitigation actions. The 2018 impairment charge for certain agriculture in-process research and development assets was $85 million; a separate $4.5 billion Historical DuPont agriculture goodwill impairment did not apply at the consolidated DowDuPont level.
Important facts for investors to verify
- Confirm the issuer and reporting basis: DowDuPont’s reported year-over-year results are merger-distorted; review the pro forma comparisons and segment reconciliations.
- Track actual completion, tax qualification and final liability allocation for the Dow and Corteva separations, including the notes’ May 1, 2020 redemption trigger.
- Assess the sustainability of operating cash flow and the company’s use of receivables facilities; distinguish GAAP cash flows from management’s adjusted non-GAAP presentation.
- Review debt allocation, refinancing needs, pension contributions and liquidity available to each intended standalone company after separation.
- Monitor realization and cash cost of the $3.6 billion synergy target, ongoing separation expenses, and potentially material environmental, asbestos and other litigation exposures.