EIDP, Inc. (formerly E. I. du Pont de Nemours and Company) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Reporting Period
DuPont operated through Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials and Protection Solutions. The company was preparing for its planned all-stock merger of equals with Dow Chemical, expected to close no earlier than August 1, 2017, subject to regulatory and other conditions. The merger agreement termination date was extended to August 31, 2017.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $7,743 million | $7,405 million | +5% |
| Income from continuing operations after tax | $1,338 million | $1,229 million | +9% |
| Net income attributable to DuPont | $1,113 million | $1,226 million | -9% |
| Diluted EPS from continuing operations | $1.52 | $1.39 | +$0.13 |
| Diluted EPS | $1.27 | $1.39 | -$0.12 |
| Cash used in operating activities | $1,624 million | $1,806 million | Improved by $182 million |
| Capital expenditures | $330 million | $357 million | -$27 million |
| Cash, cash equivalents and marketable securities | $5,917 million | $5,967 million at Dec. 31, 2016 | -$50 million |
| Total debt | $10,378 million | $8,536 million at Dec. 31, 2016 | +$1,842 million |
Reported income from continuing operations represented approximately 17.3% of sales after tax, compared with approximately 16.6% in the prior-year quarter. Segment operating earnings increased to $1,991 million from $1,717 million, and the segment operating margin expanded to approximately 25.7% from 23.2%.
Net income included a $217 million after-tax loss from discontinued operations, principally reflecting the PFOA multi-district litigation settlement accrual. The company paid $331 million of dividends, or $0.38 per share.
Material Changes Versus the Prior Comparable Period
- Sales increased 5%, driven by 4% higher volume and 1% higher local prices. Growth was strongest in Electronics & Communications, Performance Materials and Agriculture.
- Segment operating earnings increased in every reportable segment. Agriculture operating earnings rose 12% to $1,236 million; Performance Materials rose 30% to $355 million; and Electronics & Communications rose 51% to $89 million.
- Cost of goods sold increased 3%, slower than sales growth, and declined to 56% of sales from 57%.
- Income taxes benefited from a lower effective tax rate of 14.3%, versus 24.8% in Q1 2016. The reduction reflected tax benefits from closed tax statutes, merger and restructuring costs, and adoption of stock-compensation accounting guidance.
- Merger and separation costs increased to $170 million from $24 million. Restructuring charges increased to $152 million from $77 million.
- Other income declined to $306 million from $372 million. Q1 2017 included a $162 million gain on the sale of the food safety diagnostic business, while Q1 2016 included a $369 million gain on the sale of DuPont (Shenzhen) Manufacturing Limited.
- Operating cash use remained negative because of seasonal working-capital requirements, although it improved from the prior year. Investing cash use increased to $1,335 million, primarily because of purchases of marketable securities. Financing cash provided increased to $1,641 million, mainly from short-term borrowings.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Dow merger and intended separations: The merger remained subject to regulatory approvals in multiple jurisdictions and other customary closing conditions. The companies expected the agriculture, specialty products and material science businesses to be separated within 18 months after closing. Management cited approximately $3 billion of expected run-rate cost synergies within 24 months after closing.
- FMC transaction: FMC agreed to acquire crop protection and R&D assets required for European Commission approval, while DuPont would acquire certain FMC Health and Nutrition assets. FMC would pay DuPont $1.2 billion in cash, subject to adjustments; the transaction was expected to close in Q4 2017, subject to the merger and regulatory approvals.
- Restructuring: The 2017 program is expected to produce total pre-tax charges of $326 million, including $293 million of asset-related charges and $33 million of severance costs. The program primarily involves closing the Cooper River manufacturing site, with most remaining accelerated depreciation expected in Q2 2017.
- PFOA litigation: The company accrued $670.7 million for the MDL settlement, with DuPont and Chemours each expected to pay half. DuPont recorded a $335 million pre-tax charge, or $224 million after tax, in discontinued operations and a $335 million Chemours indemnification asset. The settlement included participation thresholds and a walk-away right, creating execution uncertainty.
- Environmental matters: Environmental remediation liabilities were $487 million, with potential exposure estimated at up to $775 million above the accrued amount under adverse circumstances. Certain liabilities were subject to Chemours indemnification.
- Liquidity and debt: Debt increased mainly because of seasonal commercial paper and receivables-repurchase borrowings. The company reported approximately $8.9 billion of unused credit lines, including $4.0 billion under its term loan facility, and was in compliance with its debt covenant.
- Other risks: Key risks included merger or FMC transaction failure, regulatory conditions, integration and separation execution, raw-material and energy price volatility, foreign exchange, product and environmental litigation, regulatory approval of agricultural products, operational disruptions, cyber risks and potential inability to realize projected synergies.
Most Important Facts for Investors to Verify
- Whether the Dow merger and FMC transaction closed on the expected timetable and under the described regulatory conditions.
- Whether the $3 billion synergy target and planned business separations were achieved without material disruption or additional costs.
- The final cash impact and participation outcome of the $670.7 million PFOA MDL settlement, including recoveries from Chemours.
- Actual restructuring charges and savings, particularly the Cooper River closure and Q2 accelerated depreciation.
- Seasonal working-capital trends, debt reduction and liquidity after the agriculture selling season.
- Changes in environmental remediation liabilities, indemnification assets and other contingent liabilities.
- The sustainability of earnings growth after excluding asset-sale gains, tax benefits, merger costs, restructuring charges and discontinued-operations items.