Business context and reporting period
This is DowDuPont Inc.’s Form 10-K for the year ended December 31, 2017, not a standalone DuPont filing. Dow and DuPont completed their all-stock merger on August 31, 2017; Dow was the accounting acquirer. Accordingly, 2017 reported results include Dow for the full year and DuPont only from September 1 onward. Comparisons with 2016, which reflects Dow alone, are not like-for-like. The company operated through eight reportable segments and described plans to separate its agriculture, materials science and specialty products businesses, subject to board approval.
Key financial metrics
| Metric | 2017 | 2016 | Context |
|---|---|---|---|
| Net sales | $62.484 billion | $48.158 billion | Reported growth of 30%; merger and other portfolio actions contributed 19 percentage points, volume 5 points and local price 6 points. |
| Income from continuing operations, net of tax | $1.669 billion | $4.404 billion | 2017 diluted EPS from continuing operations was $0.95; net income available to common stockholders was $1.460 billion, or $0.91 per diluted share. |
| Operating cash flow | $8.695 billion | $5.600 billion | 2017 included customer advance payments, a pension-related tax refund and a Nova patent award receipt, among other items. |
| Capital expenditures | $3.570 billion | $3.804 billion | Management defined free cash flow as operating cash flow less capital expenditures: $5.125 billion in 2017 versus $1.796 billion in 2016. |
| Cost of sales | $50.414 billion | $37.640 billion | Cost of sales was 80.7% of sales, versus 78.2% in 2016; 2017 included merger-related inventory step-up charges. |
| Cash and marketable securities | $14.394 billion | $6.607 billion | Includes $13.438 billion of cash and cash equivalents and $956 million of marketable securities at year-end. |
| Total debt | $34.071 billion | $21.363 billion | Includes $1.948 billion of notes payable, $2.067 billion of long-term debt due within a year and $30.056 billion of long-term debt. |
| Current ratio | 1.91:1 | 1.88:1 | Year-end net working capital was $23.765 billion. |
For a more comparable combined-company view, unaudited pro forma net sales were $79.535 billion in 2017, up 12% from $70.894 billion in 2016. Pro forma Operating EBITDA, a non-GAAP segment measure excluding significant items, was $16.166 billion versus $14.114 billion. These pro forma figures are not reported GAAP results and are not necessarily indicative of actual results had the merger occurred earlier.
Net sales increased across all reported segments, but growth rates were substantially affected by merger inclusion and portfolio changes. On a pro forma basis, Packaging & Specialty Plastics Operating EBITDA declined to $4.698 billion from $5.129 billion, while Performance Materials & Coatings rose to $2.121 billion from $1.228 billion and Industrial Intermediates & Infrastructure rose to $2.282 billion from $1.672 billion.
Material changes and unusual items
- Reported net income fell to $1.592 billion from $4.404 billion. The comparison is affected by the merger accounting, different entity scope and significant nonrecurring items; reported 2017 includes DuPont’s post-merger loss from continuing operations.
- 2017 restructuring, goodwill impairment and asset-related charges totaled $3.280 billion. Notable items included a $1.491 billion goodwill impairment in Coatings & Performance Monomers, a $622 million impairment of a Brazil biopolymers facility and $317 million of other impairments.
- Cost of sales included approximately $1.469 billion of merger- and acquisition-related inventory fair-value step-up charges. A separate $888 million charge related to payment of certain Dow non-qualified pension plan obligations and associated costs.
- Integration and separation costs were $1.101 billion, compared with $349 million in 2016. The company recorded $874 million of 2017 restructuring charges under its synergy program.
- The company recorded a $1.086 billion net tax benefit in the fourth quarter related to the U.S. Tax Cuts and Jobs Act. This reflected provisional estimates, including a $2.666 billion benefit from deferred-tax remeasurement and a $1.580 billion transition-tax charge; the tax accounting was incomplete at year-end.
- Portfolio-related gains included $635 million on the sale of a portion of Dow AgroSciences’ Brazil corn seed business and $227 million on the sale of the EAA business. These were partly offset by a $469 million loss related to the Bayer CropScience arbitration, which was paid and subsequently concluded.
- Fourth-quarter 2017 included a $1.159 billion loss from continuing operations, with substantial impairment, restructuring and merger-related charges. Full-year results also included a $77 million after-tax loss from discontinued operations tied to the DuPont agriculture divestiture.
Outlook, management commentary and risks
Management cited strengthening global economic conditions, merger synergies, new product introductions and growth investments as key opportunities. On February 1, 2018, the company raised its cost-synergy commitment from $3.0 billion to $3.3 billion and updated its intended separation timetable: materials science targeted by the end of the first quarter of 2019, and agriculture and specialty products by June 1, 2019. These transactions remained subject to board approval and other conditions. The company expected approximately $2 billion of pretax restructuring charges under the synergy program, with substantial completion targeted by the end of 2019.
For 2018, management generally expected segment Operating EBITDA to increase meaningfully in Agriculture, Packaging & Specialty Plastics, Nutrition & Biosciences, Transportation & Advanced Polymers and Safety & Construction; moderately in Industrial Intermediates & Infrastructure and Electronics & Imaging; and to be essentially flat in Performance Materials & Coatings. These expectations were exposed to pricing, input-cost, maintenance, portfolio and execution factors. Planned 2018 capital spending was approximately $4.2 billion to $4.4 billion, plus about $600 million for targeted synergy and separation projects.
Principal risks include successfully integrating the businesses and achieving synergies; delays, costs, tax treatment or abandonment of intended separations; access to debt markets and subsidiary credit ratings; volatile feedstock and energy costs, product pricing and industry capacity; regulatory approvals for agricultural products; severe weather and operational disruption; cybersecurity and intellectual-property risks; pension obligations; and litigation and environmental contingencies. Environmental remediation accruals were $1.311 billion, with the filing noting that ultimate costs could be materially higher. The company also reported asbestos liabilities, PFOA-related matters and investigations and lawsuits concerning the Fayetteville Works facility; outcomes and exposures remain uncertain.
Liquidity was held primarily at Dow and DuPont subsidiaries; DowDuPont itself had not incurred or guaranteed their debt obligations. At year-end, subsidiaries reported $12.330 billion of available committed credit facilities. Management said it expected liquidity and financial flexibility to meet obligations. The board authorized a $4 billion share repurchase program; $1 billion had been spent by year-end, with $3 billion remaining. The company paid a $0.38-per-share fourth-quarter dividend.
Most important facts for investors to verify
- Use the pro forma combined-company data, not reported 2017 growth alone, when assessing underlying year-over-year performance; confirm the pro forma adjustments and exclusions.
- Track realization, timing and cash costs of the $3.3 billion synergy commitment and the revised separation timetable, including whether board and regulatory conditions are met.
- Assess whether cash generation can support debt maturities, planned capital spending, pensions, dividends and repurchases; note that cash flow benefited from merger-related and other unusual receipts.
- Review the assumptions behind the $1.491 billion goodwill impairment and the Brazil facility and other asset impairments, as well as the remaining goodwill and purchase-accounting estimates.
- Monitor final accounting for the Tax Cuts and Jobs Act and potential changes to the provisional tax benefit, transition-tax estimate and foreign cash repatriation consequences.
- Follow environmental, asbestos, PFOA, Fayetteville Works and other litigation developments, including the adequacy of recorded reserves and any indemnification recoveries.
The independent auditors issued an unqualified opinion on the consolidated financial statements, and management and the auditors concluded internal control over financial reporting was effective as of December 31, 2017.